MC
CAN MO
ANN
ORTGAG
NUAL RE
GE CORP
EPORT 2
PORATI
2012
ION
2012 ANNUA
AL REPORT / M
MCAN MORTGA
AGE CORPORAT
TION
DESCRIP
PTION OF BU
USINESS
MCAN is a
provinces an
also qualifie
public company
nd territories in
es as a mortgage
y listed on the To
Canada. MCAN
e investment corp
oronto Stock Ex
N is a Loan Com
poration (“MIC”
xchange (“TSX”)
mpany under the
”) under the Inco
) under the symb
e Trust and Loan
ome Tax Act (Ca
bol MKP and is
n Companies Ac
anada) (the “Tax
a reporting issue
ct (the “Trust Ac
x Act”).
er in all
ct”) and
Our objectiv
family resid
investments
Insurance C
by the provi
ve is to generat
dential, residentia
s, real estate and
Corporation (“CD
isions of the Tax
te a reliable stre
al construction, n
securitization in
DIC”) deposit ins
x Act applicable
eam of income
non-residential c
nvestments. We
surance up to a m
e to a MIC.
by investing ou
construction and
e employ leverag
maximum of fiv
ur funds in a po
d commercial loa
ge by issuing ter
ve times capital (
ortfolio of mortg
ans), as well as o
rm deposits eligi
(on a non-consol
gages (including
other types of lo
ible for Canada D
lidated basis) as
g single
ans and
Deposit
limited
The term de
income for
Such divide
eposits are sour
tax purposes 50
ends are received
rced through a n
0% of capital ga
d by our shareho
network of indep
ains dividends a
lders as capital g
pendent financia
and 100% of non
gains dividends
al agents. As a
n-capital gains d
and interest inco
a MIC, we are e
dividends that w
ome, respectivel
entitled to dedu
we pay to shareh
y.
ct from
holders.
TABLE O
OF CONTEN
NTS
PRESIDEN
MANAGEM
CONSOLID
NOTES TO
DIRECTOR
CORPORA
NT AND CEO’S
MENT’S DISCU
DATED FINANC
O CONSOLIDAT
RS, OFFICERS A
ATE INFORMAT
MESSAGE TO
USSION AND A
CIAL STATEM
TED FINANCIA
AND MANAGE
TION .................
SHAREHOLDE
ANALYSIS OF O
MENTS ...............
AL STATEMEN
EMENT .............
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ERS ..................
OPERATIONS .
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NTS ....................
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....... 42
....... 48
....... 81
....... 82
2012 ANN
NUAL REPORT /
/ MCAN MORTG
GAGE CORPOR
RATION
MESSAG
E TO SHARE
EHOLDERS
In 2012, MC
$197 millio
impaired co
at Decembe
0.67% in th
increased an
CAN Mortgage C
n in growth, rep
orporate mortgag
er 31, 2011. Imp
he prior year. A
nd we have impr
Corporation (the
presenting a 26%
ges a percentage
paired mortgage
As a result of th
roved our earnin
e “Company”, “M
% increase in the
of the total corp
s as a percentag
he growth and r
ngs stability and r
MCAN” or “we”
e corporate asse
porate portfolio d
ge of total mortg
rebalancing of o
risk profile.
”) continued to g
et portfolio. Por
decreased to 1.1
gages were 0.51
our corporate a
grow its corpora
rtfolio quality co
16% at Decembe
1% at December
asset portfolio, o
ate assets as it de
ontinued to imp
er 31, 2012 from
r 31, 2012, dow
our core earning
elivered
prove as
m 2.24%
wn from
gs have
Net income
$1.68 in the
capital raise
(“MCAP”)
the effects o
the present p
for 2012 of $21
e prior year due
ed through the
contributed sign
of the dilution fr
price level.
1.5 million decre
to the reduced
rights offering
nificantly to MC
rom the rights of
eased from $27.1
earnings from s
in August 2012
CAN’s operating
ffering through t
1 million in the p
securitization an
2. Equity inco
results this year
the gain in share
prior year. Earn
nd the dilution e
ome from our in
r. MCAN shareh
e price from the
nings per share w
effects of the $2
nvestment in M
holders were ab
rights offering s
were $1.22 comp
0 million of new
MCAP Commerc
le to recapture s
share price of $1
pared to
w share
cial LP
some of
11.85 to
In 2012, we
buyout of c
purchase lef
a consolida
origination
to produce
administrati
e saw significant
certain partners
ft MCAN and C
ated MCAP. Fo
capability and a
improved resul
ion at December
t activity in our
in MCAP Serv
adcap Limited P
ollowing the bu
assets under adm
ts in 2012, prod
r 31, 2012.
equity investme
vice Corporation
Partnership (a su
uyout, MCAP p
ministration. With
ducing over $10
ent in MCAP. D
n, resulting in a
ubsidiary of the C
purchased the i
h a consolidated
0 billion in orig
During the seco
a $14 million in
Caisse de dépôt
interests of Re
d leadership team
gination for the
ond quarter we p
ncrease in our e
et placement du
esMor Trust Co
m and refined str
e year and $36
participated in M
equity investmen
u Québec) as par
ompany, increas
rategy, MCAP w
billion in assets
MCAP’s
nt. This
rtners in
sing its
went on
s under
While our
securitizatio
distributable
portfolios, t
investment in M
on activities and
e earnings to M
o contribute to th
MCAP produced
d the tax effect
MCAN for the y
he future income
d improved inc
of expensing o
year. We expect
e and dividends
come for accoun
rigination and c
t MCAP’s secur
of MCAN.
nting purposes
closing costs re
uritization activit
in 2012, the gr
sulted in MCAP
ty, over the dur
rowth in incom
P producing neg
ration of the m
me from
gligible
mortgage
On March 2
Xceed Mort
specialized,
mortgage m
expected to
under Sectio
26, 2013, MCAN
tgage Corporatio
single family
market and, in re
be funded with
on 182 of the Bu
N announced the
on (“Xceed”) for
insured and un
ecent years, has
h a combination
usiness Corporat
signing of a def
r $1.75 per share
ninsured residen
been focused on
of cash and com
tions Act (Ontari
finitive agreemen
e, for a total con
ntial mortgage le
n winding down
mmon shares, an
io).
nt to acquire all
nsideration of ap
ender, focused
n its legacy secu
and will be effec
of the issued an
pproximately $53
primarily on th
uritization portfo
cted pursuant to
nd outstanding sh
3.0 million. Xce
he insured area
olio. The transa
a plan of arran
hares of
eed is a
of the
action is
ngement
This transac
platform tha
liquid assets
significant p
basis, provid
ction provides M
at is expected to
s, including Can
proportion of Xc
ding it with capa
MCAN with a u
o deliver increm
nada Mortgage a
ceed’s assets at c
acity to achieve i
unique opportun
mental asset grow
and Housing Co
closing. In addit
its growth objec
nity to acquire a
wth and potenti
orporation (“CM
tion, the acquisit
ctives.
an established m
ial for increased
MHC”) insured m
tion provides new
mortgage origina
d income for M
mortgages, are e
w equity for MC
ation and under
CAN. Cash an
expected to repr
CAN on a cost ef
rwriting
nd other
resent a
ffective
In 2013, w
optimizing
pipeline of n
of the first q
second half
corporate as
e plan to grow
the yield perfor
new and existing
quarter of 2013.
f of the year. W
ssets, which we e
the profitability
rmance of corpo
g unfunded mort
The equity com
We expect our co
expect to have a
y of the Compa
orate assets as w
tgage commitme
mponent of the X
orporate net inve
a positive impact
any by continui
we utilize the re
ents should resul
Xceed transaction
estment income
t on our taxable i
ing the growth
emaining capaci
lt in the full inve
n is expected to
to increase as a
income.
of the corporat
ity from the 201
estment of the b
provide capital
a result of the in
te balance shee
12 rights offerin
alance sheet by
for asset growth
ncreased investm
et while
ng. Our
the end
h in the
ment in
Although re
expect them
residential c
profitability
egulatory change
m to contribute t
construction loa
y which should e
es are expected
o a significant d
ans. Market con
nhance the over
to result in som
disruption to res
ditions are expe
all return of our
me downward pr
sidential markets
ected to contribu
corporate asset
ressure on price
s. We expect to
ute to improved
portfolio in 201
points in our co
o see tighter und
d credit spreads
3.
ore markets, we
derwriting stand
s and constructio
e do not
dards on
on loan
William Jan
President an
ndrisits
nd Chief Executi
ive Officer
- 2 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 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, 2012 and December 31, 2011 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. This MD&A has been prepared as at March 26, 2013.
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 and assumptions 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; and
the completion of MCAN’s proposed acquisition of Xceed Mortgage Corporation (“Xceed”) (discussed below under “Recent
Developments”)
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:
technology changes;
• 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
litigation risk;
relationships with our mortgage originators;
•
filings with the applicable Canadian regulatory authorities; and
the expected timing and completion of MCAN’s proposed acquisition of Xceed is subject to Xceed shareholder approval,
court and regulatory approvals, and other customary closing conditions; accordingly, there can be no certainty that the
transaction will be completed or that anticipated benefits will be realized
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.
- 3 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 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 ................................................................................................................................................................ 16
SUMMARY OF FOURTH QUARTER RESULTS ....................................................................................................................... 21
SELECTED QUARTERLY FINANCIAL DATA ......................................................................................................................... 25
SECURITIZATION PROGRAMS ................................................................................................................................................. 26
DESCRIPTION OF CAPITAL STRUCTURE ............................................................................................................................... 28
RIGHTS OFFERING ..................................................................................................................................................................... 28
DIVIDEND POLICY AND RECORD ........................................................................................................................................... 28
OFF-BALANCE SHEET ARRANGEMENTS .............................................................................................................................. 29
CONTRACTUAL OBLIGATIONS ............................................................................................................................................... 29
TRANSACTIONS WITH RELATED PARTIES ........................................................................................................................... 29
RECENT DEVELOPMENTS ........................................................................................................................................................ 30
CAPITAL MANAGEMENT .......................................................................................................................................................... 30
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS .................................................................................................. 32
LIQUIDITY .................................................................................................................................................................................... 32
RISK FACTORS ............................................................................................................................................................................ 33
RISK MANAGEMENT ................................................................................................................................................................. 36
PEOPLE ......................................................................................................................................................................................... 38
REGULATORY COMPLIANCE................................................................................................................................................... 38
INTERNAL AUDIT ....................................................................................................................................................................... 38
CRITICAL ACCOUNTING POLICIES AND ESTIMATES ........................................................................................................ 38
FUTURE CHANGES IN ACCOUNTING POLICY ..................................................................................................................... 40
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING ........ 41
- 4 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SELECTED FINANCIAL INFORMATION
Table 1: Income Statement Highlights
(in thousands except for per share amounts and %)
2012
2011
2010
Change from 2011
(%)
($)
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
$
31,135
$
25,650
$
27,380
$ 5,485
21.4%
2,778
(8,682)
(5,904)
25,231
8,993
16,238
(5,255)
21,493
$
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
(3,052)
(8,910)
(11,962)
(6,477)
2,133
(8,610)
(3,000)
(5,610)
(52.3%)
(3,907.9%)
(197.5%)
(20.4%)
31.1%
(34.7%)
133.0%
(20.7%)
$
$
Average mortgage portfolio yield - corporate
Term deposit average interest rate
5.81%
2.44%
6.53%
2.36%
7.59%
2.10%
Average mortgage portfolio yield - securitized
Financial liabilities from securitization - average
interest rate
4.00%
4.23%
4.32%
3.54%
3.66%
3.64%
Basic and diluted earnings per share
Taxable income per share
Dividends per share
$
$
$
1.22
1.17
1.42
$
$
$
1.68
1.42
1.81
$
$
$
1.85
1.79
1.19
$
$
$
(0.46)
(0.25)
(0.39)
Return on average shareholders’ equity
13.03%
18.52%
21.97%
(11.0%)
3.4%
(5.4%)
(3.3%)
(27.4%)
(17.6%)
(21.5%)
(29.6%)
Table 2: Balance Sheet Highlights
(in thousands except for per share amounts and %)
December 31
2012
December 31
2011
December 31
2010
Change from 2011
(%)
($)
Balance Sheet Highlights
Assets
Corporate
Securitization
Total assets
Mortgages - corporate
Mortgages - securitized
Liabilities
Corporate
Securitization
Total liabilities
$
950,686
2,035,935
$ 2,986,621
$
753,799
3,140,359
$ 3,894,158
$
538,118
3,147,907
$ 3,686,025
$
196,887
(1,104,424)
$ (907,537)
$
$
739,812
936,947
$
640,351
$ 1,499,016
$
420,322
$ 1,910,995
$
99,641
$ (562,069)
790,526
$
2,018,314
$ 2,808,840
618,277
$
3,117,416
$ 3,735,693
438,732
$
3,122,214
$ 3,560,946
172,249
$
(1,099,102)
$ (926,853)
26.1%
(35.2%)
(23.3%)
15.5%
(37.5%)
27.9%
(35.3%)
(24.8%)
Shareholders’ equity
$
177,781
$
158,465
$
125,079
$
19,316
12.2%
Capital Ratios
Tax Assets to Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Credit Quality
Impaired mortgage ratio
Total mortgage arrears
Share Information (end of period)
Number of common shares outstanding at year-end
Book value per common share
Common share price - close
Market capitalization
5.70
21.74%
21.84%
4.91
22.21%
22.26%
4.39
22.10%
22.06%
16.1%
(2.1%)
(1.9%)
0.51%
63,489
$
0.67%
76,279
$
0.63%
91,828
$
(8,833)
(23.9%)
(11.6%)
18,729
9.49
14.01
262,393
16,862
9.40
$
$
13.40
$ 225,951
$
$
$
14,448
8.66
13.86
200,249
$
$
$
0.71
0.61
36,442
11.1%
7.6%
4.6%
16.1%
$
$
$
$
- 5 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
HIGHLIGHTS
Corporate assets were $951 million at December 31, 2012, up $197 million from $754 million at December 31, 2011.
We completed a rights offering during 2012, issuing 1.7 million new common shares for net proceeds of $20 million.
The rights offering created $115 million of new asset capacity based on our target assets to capital ratio of 5.75, which
is measured on a tax basis.
As at December 31, 2012, we had $16 million of remaining asset capacity.
Impaired corporate mortgages as a percentage of the corporate portfolio were 1.16% at December 31, 2012, down from
2.24% at December 31, 2011. Impaired mortgages as a percentage of total mortgages were 0.51% at December 31,
2012, down from 0.67% in the prior year.
Net income was $21.5 million in 2012 ($1.22 per share), down from $27.1 million in 2011 ($1.68 per share). Our return
on equity was 13.0% for the year compared to 18.5% in 2011.
Total mortgage arrears decreased to $63 million at December 31, 2012 from $76 million at December 31, 2011.
Dividends per share were $1.42 in 2012, down from $1.81 in 2011.
We declared a 2013 first quarter dividend of $0.31 per share to be paid on March 28, 2013 to shareholders of record as
of March 15, 2013. This dividend comprises the regular quarterly dividend of $0.28 per share and an extra dividend of
$0.03 per share.
We entered into a definitive agreement on March 26, 2013 to acquire all of the issued and outstanding shares of Xceed.
The proposed transaction is expected to close on or about June 24, 2013.
OUTLOOK
Residential housing markets in Canada continue to benefit from stable economic conditions. The Canadian economy is supported
by employment and economic growth that should support housing markets in 2013. Changes to mortgage underwriting standards
that took effect in 2012 may reduce housing demand and prices in some markets; however, consumers continue to benefit from
low residential mortgage rates that remain at attractive levels and contribute to housing affordability. The prospect of future
increases in mortgage rates also provides incentive for potential home buyers to purchase in the near term.
We expect housing markets to slow throughout 2013 as a result of adjusting market conditions, although we expect to take
advantage of opportunities in mortgage markets during this transition. Regulatory changes to underwriting standards are expected
to impact the number of eligible home buyers that are able to borrow under government-backed mortgage insurance programs.
This reduction will create growth opportunities for MCAN in the uninsured mortgage market. We expect spreads to increase
such that, on a risk-adjusted basis, we expect this asset class to provide superior returns.
Although regulatory changes are expected to result in some downward pressure on price points in our core markets, we do not
expect them to contribute to a significant disruption to residential markets. We expect to see tighter underwriting standards on
residential construction loans and the cancellation of construction projects within our core markets as developers concentrate on
managing inventory. We expect these market conditions to improve credit spreads and construction loan profitability.
Furthermore, we expect to observe more opportunities for short-term bridge/mezzanine lending which will enhance the overall
return of our corporate asset portfolio in 2013.
Our investment in MCAP Commercial LP (“MCAP”) continues to provide a stable source of residential mortgage and
construction origination. MCAP continues to strengthen its origination capability, providing support to MCAN.
We continue to monitor mortgage markets for investment opportunities and will adjust our investment strategy accordingly. We
concentrate our origination efforts on the entry-level/affordable segment within our core markets in an effort to minimize the
potential impacts of any weakness in home values. We expect to be active in the uninsured single family mortgage market, and
we expect this segment to improve its risk-adjusted returns as a result of recently announced regulatory changes.
NON-GAAP MEASURES
We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). We
use a number of financial measures to assess our performance. Some of these measures are not calculated in accordance with
IFRS, are not defined by IFRS, and do not have standardized meanings that would ensure consistency and comparability between
companies using these measures. The non-GAAP measures used in this MD&A are defined as follows:
- 6 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Return on Average Shareholders’ Equity
Return on average shareholders’ equity is a profitability measure that presents the annualized net income available to
shareholders’ equity as a percentage of the capital deployed to earn the income. We calculate return on equity using average
shareholders’ equity, including all components of shareholders’ equity.
Taxable Income
Taxable income is a profitability measure that presents MCAN’s income for tax purposes. We typically pay out all taxable
income to shareholders through dividends.
Average Interest Rate
The average interest rate is a profitability measure that presents the average annualized yield of an asset or liability.
Tier 1 and Total Capital Ratios and Risk Weighted Assets
These measures provided in this MD&A are in accordance with guidelines issued by the Office of the Superintendent of Financial
Institutions (“OSFI”) and are located on Table 21 of this MD&A and Note 33 to the consolidated financial statements.
PERFORMANCE CHARTS
The following graph compares MCAN’s cumulative total shareholder return (assuming an investment of $100 on December 31,
2007) on its common shares during the period from January 1, 2008 to December 31, 2012, 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
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
31/12/2007
31/12/2008
31/12/2009
31/12/2010
31/12/2011
31/12/2012
MCAN
S&P/TSX Composite Index
S&P/TSX Financial Services Index
MCAN
S&P/TSX Composite Total Return Index
S&P/TSX Capped Financial Index
Jan 1
2008
100
100
100
Dec 31
2008
101.71
67.00
64.18
Dec 31
2009
172.69
90.48
93.55
Dec 31
2010
192.74
106.41
101.51
Dec 31
2011
210.17
97.14
97.61
Dec 31
2012
Compound
Annual Growth
242.97
104.13
114.34
19.43%
0.81%
2.72%
Note: Dividends declared on MCAN’s common shares are assumed to be reinvested at the closing price on the payment date.
- 7 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Figure 2: Dividend Growth
Regular Dividend Per Share
Extra Dividend Per Share
$1.81
$0.73
$1.42
$0.33
$1.44
$0.43
$1.19
$0.15
$1.18
$0.34
$1.00
$0.08
$0.96
$0.84
$0.92
$0.96
$1.01
$1.04
$1.08
$1.09
2006
2007
2008
2009
2010
2011
2012
Table 3: Ten Year Financial Summary
(in thousands, except per share amounts)
December 31
2012 (IFRS)
2011 (IFRS)
2010 (IFRS)
2009 (CGAAP)
2008 (CGAAP)
2007 (CGAAP)
2006 (CGAAP)
2005 (CGAAP)
2004 (CGAAP)
2003 (CGAAP)
Net
Income
$ 21,493
27,103
26,658
24,742
30,348
14,843
15,211
14,116
11,601
8,247
Earnings
Per Share
1.22
$
1.68
1.85
1.73
2.14
1.12
1.23
1.18
1.12
0.84
Dividends
Per Share
1.42
$
1.81
1.19
1.44
0.96
1.00
1.18
0.97
1.11
0.68
Assets 1
$ 950,686
753,799
538,118
506,683
570,154
557,425
498,107
434,369
454,365
369,477
Shareholders’
Equity
$ 177,781
158,465
125,079
122,879
116,609
103,007
84,611
81,164
74,965
61,741
Market
Capitalization
262,393
$
225,951
200,249
194,766
129,438
140,416
141,052
116,918
103,374
83,747
1 2012, 2011 and 2010 consist of corporate assets only as reported under IFRS. 2009 and earlier years consist of total assets under Canadian Generally Accepted
Accounting Principles (“CGAAP”).
- 8 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
RESULTS OF OPERATIONS
MCAN reported net income of $21.5 million for the year ended December 31, 2012, down from $27.1 million in the prior year.
Earnings per share were $1.22 compared to $1.68 in the prior year. The decrease was primarily due to higher provisions for
credit losses, lower securitization income and higher operating expenses, partially offset by an increase in spread income, higher
equity income from MCAP, and an increased recovery of income taxes.
Table 4: Net Income - For the Years Ended December 31
(in thousands)
2012
2011
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Interest on financial investments and other loans
Interest on cash and cash equivalents
Financial Expenses
Term deposit interest and expenses
Mortgage expenses
Provision for 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
$
$
$
$
$
41,395
6,906
2,236
2,061
1,422
544
54,564
17,157
3,712
2,560
23,429
31,135
14,372
4,763
1,547
9,407
30,089
26,888
423
27,311
2,778
(8,682)
(5,904)
25,231
8,993
16,238
(5,255)
21,493
1.22
1.17
1.42
$
$
$
$
$
32,593
5,007
1,593
1,281
1,342
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
Mortgage interest income increased by $8.8 million from the prior year as a result of a $180 million increase in the average
mortgage portfolio (from $511 million in 2011 to $691 million in 2012), partially offset by a decrease in the average mortgage
yield to 5.81% in 2012 from 6.53% in 2011. The decrease in yield was a result of lower average yields in the uninsured single
family and construction portfolios. The construction loan portfolio is primarily floating rate, however, certain loans carry a
minimum interest rate. The proportion of minimum rate loans declined from 2011, which led to the decrease in yield. The
decrease in the uninsured single family mortgage yield was a result of the maturity in the current year of certain high-yielding
- 9 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
mortgages that contributed to the higher yield in 2011. Mortgage interest income includes $1.2 million of realized discount
income from MCAN’s acquired mortgage portfolios compared to $2.0 million in 2011.
Equity income from our ownership in MCAP increased by $1.9 million from the prior year, primarily due a significant volume of
mortgage securitizations in the current year and increases to income resulting from mortgages measured at fair value. The prior
year had significant gains from sales of mortgages.
Fees consist of other mortgage fees of $2.0 million (2011- $1.3 million) and fee income from a profit sharing arrangement related
to mortgage portfolios acquired by MCAP of $190,000 (2011 - $303,000). Other mortgage fees include extension, renewal and
letter of credit fees earned on our corporate mortgage portfolio.
Marketable securities income increased by $780,000 from the prior year, primarily due to $943,000 of gains from the sales of
securities during 2012 compared to $nil in 2011.
Term deposit interest and expenses increased by $4.9 million from 2011 as a result of a $171 million increase in the average term
deposit balance (from $507 million in 2011 to $678 million in 2012) and an increase in the average term deposit rate to 2.44% in
2012 from 2.36% in 2011.
Mortgage expenses, consisting primarily of mortgage servicing expenses, increased by $305,000 from 2011 as a result of a
significantly larger average portfolio, although the average mortgage servicing rate decreased in 2012.
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 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.
Net investment income from securitized assets before fair market value adjustments was $2.8 million in 2012 compared to $5.8
million in the prior year. Including fair market value adjustments on derivative financial instruments, net investment income on
securitized assets was negative $5.9 million in 2012 compared to positive $6.1 million in the prior year.
Mortgage interest income decreased by $6.3 million from the prior year, primarily due to a $518 million decrease in the average
mortgage portfolio over 2011. In addition, the average yield decreased from 4.23% in 2011 to 4.00% in 2012. As the securitized
mortgages repay, we reinvest the collected principal in certain permitted investments (which include financial investments and
short-term investments) until the maturity of the CMB issuance.
Interest on financial investments decreased by $951,000 from 2011 as a result of a decrease in the average portfolio, while
interest on short-term investments increased by $733,000 from the prior year as a result of an increase in the average portfolio.
Other securitization income was $9.4 million in 2012 compared to $9.0 million in the prior year, consisting primarily of interest
rate swap receipts of $7.4 million (2011 - $8.6 million). As part of the CMB program, we enter into “pay floating, receive fixed”
interest rate swaps to hedge interest rate risk. In addition, we earned $1.3 million of refinancing and renewal income (2011 -
$132,000) and $978,000 from the sale of mortgage-backed securities (“MBS”) (2011 - $261,000).
Interest on financial liabilities from securitization decreased by $3.0 million from 2011, primarily due to a lower average balance
as a result of the maturity of certain CMB issuances in 2012. In addition, the average interest rate decreased to 3.54% in 2012
from 3.66% in 2011.
The negative fair market value adjustment to derivative financial instruments of $8.7 million (2011 - positive $228,000) 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 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.
Our existing financial liabilities from securitization mature as follows: 2013 - $1.1 billion, 2014 - $872 million, 2015 - $45
million.
- 10 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 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 5: Net Interest Income - For the Year Ended December 31, 2012
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate3
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
$ 67,779
-
24,523
690,931
-
21,457
3,496
808,186
26,658
$ 834,844
$
-
582,187
-
-
1,195,262
1,063,934
-
2,841,383
10,605
$ 2,851,988
$
67,779
582,187
24,523
690,931
1,195,262
1,085,391
3,496
3,649,569
37,263
$ 3,686,832
$
544
-
2,061
41,395
-
1,309
113
45,422
-
$ 45,422
$
-
1,547
-
-
14,372
4,763
-
20,682
-
$ 20,682
$
544
1,547
2,061
41,395
14,372
6,072
113
66,104
-
$ 66,104
0.80%
-
4.56%
5.81%
-
6.90%
3.20%
5.69%
-
5.50%
-
0.89%
-
-
4.00%
1.77%
-
2.59%
-
2.55%
$ 660,180
Liabilities and Shareholders’ Equity
Term deposits
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
-
31,747
-
$ 691,927
$
-
$
660,180
$ 17,157
$
-
$ 17,799
2.44%
-
2,824,402
5,597
-
2,824,402
37,344
164,906
-
-
-
26,888
-
-
26,888
-
-
-
-
-
3.54%
-
-
$ 2,829,999
$ 3,686,832
$ 17,157
$ 26,888
$ 44,687
2.44%
3.54%
Net Interest Income2
$ 28,265
$
(6,206)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
3.37%
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 MCAP, other securitization income, fee income,
mortgage expenses and provision for credit losses.
3The average rate as presented may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-
recurring items are excluded from the calculation of the average rate.
The income/expense associated with the securitized assets and liabilities in the tables above represents MCAN’s 30% weighted
average share of CMB program economics.
Although net interest income from securitization assets and liabilities shown above is presented as a negative amount, net interest
income from securitization assets 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 receipt income was $7.4 million in 2012.
- 11 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 6: Net Interest Income - For the Year Ended December 31, 2011
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate3
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 MCAP, other securitization income, fee income,
mortgage expenses and provision for credit losses.
3The average rate as presented may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-
recurring items are excluded from the calculation of the average rate.
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 securitization assets and liabilities shown above is presented as a negative amount, net interest
income from securitization assets 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 receipt income was $8.6 million in 2011.
Table 7: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Years Ended December 31
(in thousands except %)
Average
Assets1
2012
Interest
Income
Average
Rate2
Average
Assets1
2011
Interest
Income
Average
Rate2
Single family
Construction and single family uninsured
(completed inventory loans)
Commercial
Average mortgages - corporate portfolio
$ 345,049
$ 21,509
5.74%
$ 256,803
$ 16,616
6.52%
280,039
65,843
$ 690,931
15,826
4,060
$ 41,395
6.05%
5.96%
5.81%
228,826
25,716
$ 511,345
14,602
1,375
$ 32,593
6.66%
5.39%
6.53%
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.
2The average rate as presented may not necessarily be equal to “Income/Expense” divided by “Average Assets”, as non-recurring
items are excluded from the calculation of the average rate.
- 12 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 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 December 31
Individual provision (recovery)
Single family uninsured
Residential construction
Commercial uninsured
Collective provision
Single family uninsured
Residential construction
Commercial
Corporate mortgages - total
Financial investments and other loans
Other provisions
Total provision for credit losses
Corporate mortgage portfolio data:
Provision for credit losses
Net write-offs
Net write-offs (basis points)
2012
195
300
58
553
185
583
359
1,127
(20)
900
2,007
2,560
1,680
1,323
19.1
$
$
$
$
$
$
$
2011
(144)
-
58
(86)
719
142
286
1,147
(3)
-
1,144
1,058
1,061
275
5.4
$
$
$
$
$
$
$
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, and is calculated at
each balance sheet date. 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 the respective corporate mortgage portfolio classes over
those periods.
During 2012, we recorded a $900,000 increase to a provision relating to our pro-rata share of estimated losses pursuant to an
indemnity on the underlying assets of a residential construction loan securitization program. The provision, which was $1.1
million as at December 31, 2012, relates to an impaired residential construction loan that we have indemnified. This amount
represents our estimated loss at this date based on property values given current market conditions. There are no other impaired
mortgages associated with the indemnification of this securitization program.
During the first quarter of 2012, MCAN and another participant lender foreclosed on one of MCAN’s impaired residential
construction loans with a carrying value of $6.8 million (net of a $1 million individual allowance). The realization of the
previously recorded individual allowance was recognized as a mortgage write-off upon foreclosure. The current year also had a
$103,000 write-off related to a commercial loan, while the balance of write-offs in both years related to uninsured single family
mortgages.
Corporate mortgage arrears were $39 million as at December 31, 2012, up from $29 million as at December 31, 2011. The
increase from the prior year includes a $13 million increase in single family mortgage arrears, partially offset by a $5 million
decrease in construction loan arrears. Securitized mortgage arrears of $24 million decreased significantly from $48 million as at
December 31, 2011, partly due to a decrease in the total portfolio balance. There were no other assets in arrears at year end. We
continue to proactively monitor loan arrears and take prudent steps to collect overdue accounts.
- 13 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Net Impaired Mortgages and Allowances
Table 9: Net Impaired Mortgages and Allowances
(in thousands except %)
As at December 31
Corporate portfolio
Residential construction
Single family
Commercial
Securitized portfolio
Single family
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
2012
2011
$
$
1,760
6,856
-
8,616
-
8,616
$
$
9,945
3,759
427
14,131
86
14,217
$ 1,676,759
$ 2,139,367
0.51%
1.17%
3,723
713
4,436
$
$
0.67%
2.24%
2,919
1,160
4,079
$
$
The decrease in impaired mortgages during 2012 related primarily to the foreclosure of the impaired construction loan noted
above. This was partially offset by an increase in impaired corporate single family mortgages.
Operating Expenses
(in thousands)
For the Years Ended December 31
Salaries and benefits
General and administrative
2012
3,953
5,040
8,993
$
$
2011
3,234
3,626
6,860
$
$
Operating expenses increased by $2.1 million from the prior year, primarily due to higher salaries and benefits from an increase
in the number of employees and increased corporate expenses.
Income Taxes
(in thousands)
For the Years Ended December 31
Current tax provision (recovery)
Deferred tax provision (recovery)
2012
(1,519)
(3,736)
(5,255)
$
$
2011
(2,072)
(183)
(2,255)
$
$
The recovery of current taxes in both years was primarily due to the payment of the higher than usual dividends on March 31,
2011 and March 31, 2012 of $14.5 million and $10.1 million, respectively. These dividends were deductible from 2010 and 2011
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, these dividends
were not deductible in the calculation of year-end current taxes payable for accounting purposes since they had not yet been paid
as of that date. The payment of these dividends during the first quarters of 2011 and 2012 decreased current taxes payable
significantly from the previous year end balances and, as a result of this decrease, created a recovery of current taxes.
The substantial recovery of deferred taxes in 2012 was primarily due to the significant negative fair market value adjustment to
derivative financial instruments during the year.
MCAN’s taxable income was $21 million ($1.17 per share) in 2012 and $23 million ($1.42 per share) in 2011. As a MIC, we
typically pay out all of our taxable income to shareholders through dividends.
- 14 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The key differences between 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 MCAP for accounting and tax purposes.
The table below provides a reconciliation between net income for accounting purposes and taxable income. The adjustments
below represent the difference between the individual components for accounting and tax purposes.
(in thousands)
For the Years Ended December 31
Net income for accounting purposes
Adjustments:
Provision for (recovery of) income taxes
Equity income from MCAP
Provision for credit losses
Fair market value adjustment - derivative financial instruments
Capital gains
Amortization of upfront CMB costs
Securitization program cash outflows
Other items
Taxable income
Cash Flows
2012
2011
$
21,493
$
27,103
(5,255)
(6,739)
1,627
8,682
(1,085)
3,083
(1,013)
(275)
20,518
$
(2,255)
(3,734)
866
1,123
(1,438)
3,159
(1,320)
(625)
22,879
$
Operating activities used cash flows of $444 million in 2012 and provided $389 million in 2011. We had substantial cash
outflows in the current year from the repayment of financial liabilities from securitization, partially offset by net mortgage and
term deposit inflows. In the prior year, significant net term deposit and mortgage inflows contributed to the balance.
Investing activities provided cash flows of $518 million in 2012 and used $429 million in 2011. The current year net inflow was
primarily due to the maturity of financial investments held as CMB reinvestment assets, while the prior year net outflow was a
result of the acquisition of financial investments and short-term investments as CMB reinvestment assets.
Financing activities used cash flows of $2 million in 2012 and provided $5 million in 2011. Inflows from the issuance of
common shares decreased in the current year, partially offset by a decrease in outflows from the payment of dividends.
Summary of Three Year Results of Operations
In 2010 financial performance was solid, with earnings per share of $1.85. Discount income and income related to the CMB
program 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 in 2011 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 2010. Equity income from MCAP was
significantly higher in 2011 than in recent years.
In 2012, earnings per share decreased to $1.22, primarily due to significant negative fair market value adjustments. Income from
the CMB program began to decline as a result of the maturity of certain CMB issuances. Income from corporate assets increased
in line with the portfolio size, while equity income from MCAP remained strong.
- 15 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
FINANCIAL POSITION
Total assets were $2.99 billion as at December 31, 2012, consisting of $951 million of corporate assets and $2.04 billion of
securitization assets. Corporate assets increased by $197 million during 2012, which included increases of $99 million in
mortgages, $73 million in cash and cash equivalents and $21 million in our equity investment in MCAP. The decrease in
securitization assets was a result of the maturity of certain CMB issuances throughout 2012, as the remaining mortgages and
reinvestment assets were used to repay CMB financial liabilities from securitization at the time of maturity.
Table 10: Assets
(in thousands)
As at December 31
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Foreclosed real estate
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
Corporate Assets
2012
2011
$
123,825
20,390
739,812
4,355
18,067
3,164
36,386
4,687
950,686
378,443
936,947
714,631
4,666
1,248
2,035,935
$ 2,986,621
$
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
Cash and cash equivalents, which include cash balances with banks and overnight term deposits, increased by $73 million during
the year. These investments provide liquidity to meet maturing term deposit and new mortgage commitments and met our
liquidity requirements at December 31, 2012, as discussed in the “Liquidity” section.
Marketable securities, consisting of corporate bonds, real estate investment trusts and exchange-traded funds, decreased by $10
million during 2012. Marketable securities provide MCAN with additional liquidity at yields in excess of cash and cash
equivalents.
The corporate mortgage portfolio increased by $99 million during the year, which included increases of $91 million in
construction loans and $16 million in commercial loans and a decrease of $6 million in uninsured single family mortgages.
- 16 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Figure 3: Total Corporate Mortgage Portfolio (in thousands)
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
2012
2011
TOTAL
$739,812
$640,351
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 continuted moderation in
sales volumes in 2013. 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.
The composition of our corporate mortgage portfolio is as follows:
Figure 4: Corporate Mortgage Portfolio Composition by Product Type (in thousands)
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$-
2012
2011
- 17 -
Single family uninsured
$290,465
$296,695
(46.3%)
(39.3%)
Single family insured
$76,104
$77,558
(12.1%)
(10.3%)
Construction
$299,348
$208,151
(40.4%)
(32.6%)
Commercial
$73,895
$57,947
(10.0%)
(9.0%)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Figure 5: Corporate Mortgage Portfolio
Geographic Distribution (2012)
Figure 6: Corporate Mortgage Portfolio
Geographic Distribution (2011)
Other:
13.4%
BC:
15.5%
Ontario:
44.5%
Other:
11.6%
BC:
17.8%
Ontario:
39.6%
Alberta:
26.6%
Alberta:
31.0%
As at December 31, 2012, we held discounted mortgages with a net discount of $5.9 million (December 31, 2011 - $9.1 million).
We retain 50% of any recoveries of that amount, and we pay the remaining 50% to MCAP. 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 2013 (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.
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
2011
2012
Years Ended December 31
2011
2012
$
32,679
439
104,800
13,068
$ 150,986
$
70,729
-
101,972
19,133
$ 191,834
$ 141,457
19,740
330,454
38,957
$ 530,608
$ 249,641
-
226,280
42,523
$ 518,444
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 $6 million during 2012, primarily due to advances on a commercial real estate equity
investment and the acquisition of a retained interest.
Our equity investment in MCAP, in which we hold a 23.4% equity interest, increased by $21 million during 2012. During the
second quarter of 2012, we provided $14 million in additional capital to MCAP. MCAP 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
MCAP, and the remainder to other third party servicers. As at December 31, 2012, MCAP had $36 billion of assets under
administration.
- 18 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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. The $33 million increase in short-term investments during 2012 related primarily
to commercial paper held in trust as CMB reinvestment assets.
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.
The $562 million decrease in securitized mortgages is a result of the repayment of securitized mortgages (and subsequent
reinvestment into short-term investments and financial investments) and the maturity of certain CMB issuances throughout 2012,
as the remaining mortgages and reinvestment assets are used to repay CMB financial liabilities from securitization at the time of
maturity.
The composition of our securitized mortgage portfolio is as follows:
Figure 7: Securitized Mortgage Portfolio Composition by Product Type (in thousands)
$1,499,016
$47,941
$1,451,075
Commercial insured
Single family insured
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
$936,947
$47,734
$889,213
2012
2011
Figure 8: Securitized Mortgage Portfolio
Geographic Distribution (2012)
Figure 9: Securitized Mortgage Portfolio
Geographic Distribution (2011)
Other:
13.9%
BC:
14.2%
Alberta:
23.7%
Other:
12.2%
Ontario:
48.2%
BC:
14.5%
Alberta:
23.3%
Ontario:
50.0%
Financial investments consist of insured MBS held as reinvestment assets for the CMB program and a receivable associated with
MCAN’s participation in the Insured Mortgage Purchase Program (“IMPP”). For further information on the IMPP, refer to the
“Securitization Programs” discussion. Financial investments decreased by $565 million during 2012, consisting of a decrease of
$558 million in insured MBS held as reinvestment assets and a $7 million decrease in the IMPP receivable. The decrease in
insured MBS held as reinvestment assets was primarily due to the maturity of certain CMB issuances throughout 2012, as the
remaining mortgages and reinvestment assets were used to repay CMB financial liabilities from securitization at the time of
maturity.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Derivative financial instruments at December 31, 2012 consisted of interest rate swaps relating to the CMB program. We have
entered into “pay-floating, receive-fixed” swaps to hedge against interest rate risk on reinvested CMB principal collections. The
decrease of $8.7 million to derivative financial instruments during 2012 consisted of net interest rate swap receipts of $7.4 million
and an unrealized loss of $1.3 million.
Table 12: Liabilities and Shareholders’ Equity
(in thousands)
As at December 31
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
2012
2011
$
777,077
2,114
1,842
9,493
790,526
$
601,577
3,321
5,436
7,943
618,277
2,015,046
3,268
2,018,314
2,808,840
3,111,357
6,059
3,117,416
3,735,693
155,005
510
19,985
2,281
177,781
$ 2,986,621
132,817
510
23,491
1,647
158,465
$ 3,894,158
Term deposit liabilities increased by $176 million during the year. To fund our corporate operations, we issue term deposits that
are eligible for Canada Deposit Insurance Corporation (“CDIC”) deposit insurance. We do not use capital markets (including
asset-backed commercial paper) for liquidity.
The decrease in financial liabilities from securitization related primarily to the maturity of $1.1 billion of CMB liabilities during
2012. In addition, there was a partial repayment of the liability associated with MCAN’s participation in the IMPP (refer to
“Securitization Programs” discussion) during the year. 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, 2012 mature as follows: 2013 -
$1.1 billion, 2014 - $872 million, 2015 - $45 million.
Share capital increased by $22 million during the year, which was primarily raised through the rights offering, in addition to the
dividend reinvestment plan. The rights offering raised net proceeds of $20 million, with 1.7 million new common shares issued.
For further information on share capital, refer to Note 22 to the consolidated financial statements.
Retained earnings decreased by $3.5 million, consisting of net income of $22 million less dividends of $25 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 / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SUMMARY OF FOURTH QUARTER RESULTS
We reported net income for the quarter ended December 31, 2012 of $7.3 million ($0.40 per share), up from $5.2 million ($0.30
per share) in the prior year.
Table 13: Net Income for the Quarters Ended December 31
(in thousands)
2012
2011
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Interest on financial investments and other loans
Interest on cash and cash equivalents
Financial Expenses
Term deposit interest and expenses
Mortgage expenses
Provision for 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
$
$
$
$
$
10,006
4,253
677
392
198
180
15,706
4,687
948
421
6,056
9,650
3,099
819
478
2,455
6,851
5,923
91
6,014
837
(2,115)
(1,278)
8,372
2,470
5,902
(1,440)
7,342
0.40
0.06
0.28
$
$
$
$
$
8,845
3,262
689
399
81
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
Mortgage interest income increased by $1.2 million as a result of a $147 million increase in the average mortgage portfolio from
$581 million to $728 million, partially offset by a 0.71% decrease in the average mortgage yield from 6.21% in 2011 to 5.50% in
2012. Mortgage interest income includes $19,000 (2011 - $600,000) of discount income on MCAN’s acquired mortgage
portfolios, which contributed to the decrease in the mortgage yield over the prior year.
Equity income from our ownership interest in MCAP increased by $1.0 million from 2011, primarily due to a significant volume
of mortgage securitizations in the current year and increases to income resulting from mortgages measured at fair value. The
prior year had significant gains from sales of mortgages.
Fees were comparable to the prior year. Fees consist of fee income from a profit sharing arrangement relating to mortgage
portfolios acquired by MCAP of $107,000 (2011 - $85,000) and other mortgage fees of $570,000 (2011 - $602,000).
- 21 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Marketable securities income was comparable to the prior year. The average balance decreased in the current year, however there
was a recovery of $159,000 in the current year on the sale of a security that had previously been written down.
Term deposit interest and expenses increased by $1.3 million in 2012, primarily due to a $184 million increase in the average
outstanding balance from $547 million in 2011 to $731 million in 2012. The average term deposit interest rate increased from
2.42% in 2011 to 2.44% in 2012.
For details of the provision for credit losses, refer to Table 17.
Net Investment Income - Securitization Assets
Mortgage interest income decreased by $1.6 million as a result of a $573 million decrease in the average mortgage portfolio from
2011.
Interest on financial investments decreased by $685,000 as a result of a decrease in the average portfolio from 2011.
Interest on short-term investments increased by $245,000 in the current year as a result of an increase in the average portfolio
from 2011.
Other securitization income decreased by $138,000. Interest rate swap receipts decreased by $371,000, while we earned
$261,000 from gains of sales of MBS in the prior year. In the current year, we earned $615,000 of refinancing and renewal
gains.
There was a negative fair market value adjustment to derivative financial instruments of $2.1 million (2011 - negative $3.2
million) for the quarter relating to the CMB interest rate swaps.
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, 2012
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate3
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
$ 89,379
-
19,740
727,834
-
24,217
3,397
864,567
55,441
$ 920,008
$
-
757,653
-
-
986,676
836,755
-
2,581,084
7,293
$ 2,588,377
$
89,379
757,653
19,740
727,834
986,676
860,972
3,397
3,445,651
62,734
$ 3,508,385
$
180
-
392
10,006
-
177
21
10,776
-
$ 10,776
$
$
-
819
-
-
3,099
819
-
4,737
-
4,737
$
180
819
392
10,006
3,099
996
21
15,513
-
$ 15,513
0.80%
-
4.69%
5.50%
-
5.80%
2.45%
5.02%
-
4.71%
-
1.49%
-
-
3.72%
1.67%
-
2.70%
-
2.67%
$ 731,117
Liabilities and Shareholders’ Equity
Term deposits
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
-
28,075
-
$ 759,192
$
-
$
731,117
$
4,687
$
-
$
4,887
2.44%
-
2,569,614
4,213
-
2,569,614
32,288
175,366
-
-
-
5,923
-
-
5,923
-
-
-
-
-
3.37%
-
-
$ 2,573,827
$ 3,508,385
$
4,687
$
5,923
$ 10,810
2.44%
3.37%
Net Interest Income2
$
6,089
$
(1,186)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
3.06%
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 MCAP, other securitization income, fee income,
mortgage expenses and provision for credit losses.
- 22 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
3The average rate as presented may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-
recurring items are excluded from the calculation of the average rate.
The income/expense associated with the securitized assets and liabilities in the tables above represents MCAN’s 30% weighted
average share of CMB program economics.
Although net interest income from securitization assets and liabilities shown above is presented as a negative amount, net interest
income from securitization assets 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 receipt income was $1.9 million in the fourth
quarter of 2012.
Table 15: Net Interest Income - For the Quarter Ended December 31, 2011
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate3
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%
Liabilities and Shareholders’ Equity
Term deposits
$ 546,863
$
-
$
546,863
$
3,424
$
-
$
3,424
2.42%
-
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net Interest Income2
-
14,678
-
3,111,397
6,315
-
3,111,397
20,993
157,830
-
-
-
-
7,448
-
-
7,448
-
-
-
-
-
3.63%
-
-
$ 561,541
$ 3,117,712
$ 3,837,083
$
3,424
$
7,448
$ 10,872
2.42%
3.63%
$
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 MCAP, other securitization income, fee income,
mortgage expenses and provision for credit losses.
3The average rate as presented may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-
recurring items are excluded from the calculation of the average rate.
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 securitization assets and liabilities shown above is presented as a negative amount, net interest
income from securitization assets 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 $2.3 million in the fourth quarter
of 2011.
- 23 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 16: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Quarters Ended
(in thousands except %)
December 31, 2012
Interest
Income
Average
Rate2
Average
Assets1
December 31, 2011
Interest
Income
Average
Rate2
Average
Assets1
Single family
Construction and single family uninsured
(completed inventory loans)
Commercial
Average mortgages - corporate portfolio
$ 351,602
$
4,573
5.02%
$ 304,932
$
4,712
6.29%
311,188
65,044
$ 727,834
4,449
984
$ 10,006
6.00%
5.77%
5.50%
235,122
40,790
$ 580,844
$
3,642
491
8,845
6.33%
4.88%
6.21%
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.
2The average rate as presented may not necessarily be equal to “Income/Expense” divided by “Average Assets”, as non-recurring
items are excluded from the calculation of the average rate.
Table 17: Provisions for Credit Losses and Write-Offs
(in thousands except basis points)
For the Quarters Ended December 31
2012
2011
Individual provision (recovery)
Single family uninsured
Residential construction
Commercial uninsured
Collective provision
Single family uninsured
Residential construction
Commercial
Corporate mortgages - total
Financial investments and other loans
$
$
$
$
145
(150)
116
111
24
119
171
314
(4)
310
$
$
$
$
(138)
-
58
(80)
119
147
197
463
5
468
Total provision for credit losses
$
421
$
388
Corporate mortgage portfolio data:
Provision for 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
$
$
425
83
4.6
$
$
383
2
0.1
2012
1,011
1,459
2,470
$
$
2011
882
887
1,769
$
$
Operating expenses increased by $701,000 as a result of higher salaries and benefits from an increase in the number of employees
and increased corporate expenses.
- 24 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Income Taxes
(in thousands)
For the Quarters Ended December 31
Current tax provision (recovery)
Deferred tax provision (recovery)
2012
2011
$
$
(1,604)
164
(1,440)
$
$
1,612
(1,606)
6
The current tax (recovery) provision in the respective years was consistent with the (deficiency) excess of taxable income versus
dividends paid. The provision for deferred taxes in the current year related to our equity investment in MCAP, while the recovery
of deferred taxes in the prior year related to 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
Q1/12
Q2/12
Q3/12
Q4/12
Q1/11
Q2/11
Q3/11 Q4/11
$ 5,616
$ 9,997
$
5,872
$
9,650
$ 5,308
$ 6,165
$ 5,420
$ 8,757
1,026
457
458
837
1,469
1,844
1,086
1,431
(3,238)
(1,460)
(1,869)
(2,115)
(3,238)
1,722
4,934
(3,190)
(2,212)
(1,003)
(1,411)
(1,278)
(1,769)
3,566
6,020
(1,759)
3,404
2,141
8,994
2,351
4,461
2,031
8,372
2,470
3,539
1,672
9,731
1,793
11,440
1,626
6,998
1,769
1,263
6,643
2,430
5,902
1,867
7,938
9,814
5,229
(3,104)
$ 4,367
323
$ 6,320
(1,034)
$ 3,464
(1,440)
$ 7,342
(5,222)
$ 7,089
733
$ 7,205
2,228
$ 7,586
6
$ 5,223
$
0.26
$
0.37
$
0.19
$
0.40
$
0.49
$
0.44
$
0.45
$
0.30
Taxable income
Taxable income per share
$ 6,116
0.36
$
$ 8,150
0.48
$
$ 4,809
0.27
$
$ 1,443
0.06
$
$ 4,389
0.30
$
$ 5,532
0.34
$
$ 4,495
0.27
$
$ 8,463
0.51
$
Dividends per share
Regular
Extra
Total
$
$
0.27
0.33
0.60
$
$
0.27
-
0.27
$
$
0.27
-
0.27
$
$
0.28
-
0.28
$
$
0.27
0.73
1.00
$
$
0.27
-
0.27
$
$
0.27
-
0.27
$
$
0.27
-
0.27
Net investment income from our corporate portfolio has been stable and consistent for the past eight quarters. The fourth quarters
of 2011 and 2012 and the second quarter of 2012 were higher than usual as a result of significant equity income from MCAP.
Net investment income before fair market value adjustments from our securitization portfolio declined during 2012 as a result of
the maturity of CMB issuances during the year. The fair market value adjustment is driven by changes in the forward interest rate
curve and accordingly may be volatile.
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 / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SECURITIZATION PROGRAMS
We participate in the National Housing Act (“NHA”) MBS program, which involves the securitization of insured mortgages to
create MBS. Pursuant to the NHA MBS program, investors of MBS receive monthly cash flows consisting of interest and
scheduled and unscheduled principal payments. CMHC makes principal and interest payments in the event of any NHA MBS
default by the issuer, thus fulfilling the timely payment obligation to investors. To date, we have sold MBS as part of the CMB
program, the IMPP and a market MBS program, which are discussed below.
CMB Program
We participate in the CMB program, which involves the sale of MBS to the Canada Housing Trust (“CHT”). On the sale of MBS
to CHT, we receive proceeds for the sale, incur a liability in the amount of such proceeds received and are obligated to pay
interest on this liability, which does not amortize over the term of the issuance and is payable in full at maturity. The securitized
mortgages and reinvestment assets are held as collateral against the CMB liabilities. During 2012, we repaid $1.1 billion of CMB
issuance liabilities at their scheduled maturities, which represented MCAN’s first CMB liability repayments to date. As CMB
issuance liabilities continue to mature, we expect net investment income from securitization assets prior to fair market value
adjustments to decrease.
Over the term of a CMB issuance, we are entitled to interest income received from the securitized mortgages. As the securitized
mortgages repay, we reinvest the collected principal in certain permitted investments and are also entitled to interest income from
the reinvested assets. We also recognize servicing expenses on the mortgages and pay certain upfront costs.
We participate in the CMB program with MCAP. We participate 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, 2012 was
30% (December 31, 2011 - 28%). MCAP has indemnified MCAN for the remaining 70% of CMB program obligations
(December 31, 2011 - 72%).
The sales of MBS to CHT failed to meet derecognition criteria, since we did not transfer substantially all risks and rewards on
sale. The primary risk retained was mortgage prepayment risk, while the primary reward retained was the excess of mortgage
interest income and reinvestment asset interest over securitization liability interest. Interest rate risk is largely mitigated by the
interest rate swaps discussed below, and credit risk is minimal as all mortgages securitized through the NHA MBS program are
insured. We accounted for these transactions as collateralized borrowings and recorded cash received as a financial liability from
securitization.
As a result of the failure to meet derecognition criteria on the sale of the securitized mortgages to CHT, we recognize 100% of the
mortgages, reinvestment assets and securitization liabilities on the consolidated balance sheets until the maturity of a CMB
issuance. We recognize our 30% share of mortgage interest income, principal reinvestment income, interest expense on the
securitization liabilities 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 volatility to the consolidated statements of income since there is no offset to fair value changes in the
interest rate swaps.
In March 2010, OSFI released a final advisory with respect to the impact of IFRS rules regarding securitization on regulatory
capital ratios, which 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 market MBS 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
alternative structures and arrangements that may permit our continued participation in the CMB program.
- 26 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Other MBS Programs
Insured Mortgage Purchase Program
We participated in the IMPP, which involved the sale of MBS to CMHC by MCAN. Although we have no continuing economic
involvement in the IMPP, we earned an up-front fee for our participation. We participated in the IMPP on behalf of MCAP, who
is entitled to 100% of the ongoing economics and cash flows of the IMPP.
We purchased certain mortgages from MCAP that were subsequently securitized into MBS as part of the IMPP. These mortgage
sales from MCAP to MCAN failed to meet derecognition criteria, since MCAP retained substantially all risks and rewards as part
of the aforementioned entitlement to all economics and cash flows. As a result of this, at the time of sale we recognized a
corresponding financial investment (representing a receivable from MCAP) and financial liability from securitization
(representing the securitization proceeds received from CMHC). We are the counterparty for the ongoing cash flows between
MCAP and CMHC in its role as the IMPP counterparty.
Similar to the CMB program, we have no direct obligations relating to the renewals or refinances of the underlying IMPP
mortgages. As the originator and servicer of these mortgages, MCAP has control over the direction of the renewed or refinanced
mortgages. We do not have the right to create new MBS with these matured mortgages upon renewal, early renewal or refinance,
however they may potentially be used to create new MBS as part of the market MBS program that we initiated in 2011 discussed
below. Since the inception of the market MBS program, 0.2% ($524,000) of mortgages in new MBS pool issuances through this
program have been renewed or refinanced mortgages from the IMPP. We do not rely on renewed or refinanced mortgages from
the IMPP to create new MBS pools that are sold through the market MBS program.
Market MBS Program
In 2011, we commenced the market MBS program, under which we sell MBS into the market and the net economics and cash
flows from the underlying mortgages (“interest-only strips”) to a third party. To date, all interest-only strip sales have been made
to MCAP. We met derecognition criteria on the sale of the mortgages (i.e. upon creation of MBS and subsequent sales of MBS
and interest-only strips to third parties) since we transferred substantially all risks and rewards on sale, and accordingly they were
removed from the consolidated balance sheet at that time. The primary risk associated with the market MBS program is liquidity
risk, specifically the obligation to fund 100% of any cash shortfall related to the Timely Payment Guarantee (discussed below) as
part of the market MBS program. The primary reward associated with the market MBS program is the excess of mortgage
interest income over MBS interest. The risks and rewards are both transferred to the purchaser of the interest-only strips pursuant
to contractual agreements entered into with such purchaser.
In 2012, we recognized $978,000 of income (2011 - $261,000) related to the sale of MBS and the interest-only strips associated
with the underlying mortgages. We have no continuing economic involvement with the MBS and the interest-only strips on the
underlying mortgages. We only earn income from this program at the time of sale of the MBS and interest-only strips.
The market MBS program has provided MCAN with an opportunistic source of income. To December 31, 2012, we have not
been required to include the securitized mortgages in the calculation of our regulatory assets, nor have we had to allocate any
regulatory capital to this program. Our ability to continue to generate future income under this MBS program is dependent upon
our ability to acquire insured mortgages from MCAP or other mortgage originators as well as our ability to sell the MBS and
interest-only strips on a profitable basis.
Recently announced regulatory changes that impact the Canadian mortgage market and potential interpretations being sought
under existing guidance in respect of the capital treatment of securitization of mortgages may impact the extent of MCAN’s
participation in the securitization of mortgages and its earnings from that business. We will continue to identify and assess
alternatives and opportunities in this line of business in order to maximize returns for our shareholders.
Timely Payment Guarantee
Consistent with all issuers of MBS, we are required to remit 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, any outstanding principal must be paid to the MBS investors.
If mortgage payments have not been collected from mortgagors or mortgagors are unable to renew their mortgages at their
scheduled maturity, we will be required to use our own financial resources to fund our pro-rata share of these obligations until
mortgage arrears are collected or proceeds are received from the mortgage insurers following the sale of the mortgaged
properties.
CMB Program
As part of the CMB program, MCAP is responsible for its pro-rata share of the Timely Payment Guarantee obligations noted
above based on its contracted economic participation. If MCAP is not able to provide funds to cover any cash shortfalls, we will
be required to use our own financial resources to fund its pro-rata share of these obligations until mortgage arrears are collected or
- 27 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
proceeds are received from the mortgage insurers following the sale of the mortgaged properties. To date, we have not had to use
our own financial resources to fund any CMB program cash shortfalls from MCAP.
Insured Mortgage Purchase Program
As part of the IMPP, MCAP is obligated to fund 100% of any cash shortfalls associated with the Timely Payment Guarantee as
noted above. If MCAP is not able to provide funds to cover any cash shortfalls, we will be required to use our own financial
resources to fund its 100% share of this obligation until mortgage arrears are collected or proceeds are received from the
mortgage insurers following the sale of the mortgaged properties. To date, we have not had to use our own financial resources to
fund any IMPP cash shortfalls from MCAP.
Market MBS Program
As part of the market MBS program, the purchaser of the interest-only strip is obligated to fund 100% of any cash shortfalls
associated with the Timely Payment Guarantee as noted above. If the interest-only strip purchaser is not able to provide funds to
cover any cash shortfalls, we will be required to use our own financial resources to fund its 100% share of this obligation until
mortgage arrears are collected or proceeds are received from the mortgage insurers following the sale of the mortgaged
properties. To date, we have not had to use our own financial resources to fund any market MBS program cash shortfalls from
interest-only strip purchasers.
DESCRIPTION OF CAPITAL STRUCTURE
Our authorized share capital consists of an unlimited number of common shares with no par value. At December 31, 2012, there
were 18,728,500 common shares outstanding. At March 26, 2013, there were 18,766,567 common shares outstanding. For
additional information related to share capital, refer to Note 22 to the consolidated financial statements.
RIGHTS OFFERING
We successfully completed a rights offering that expired on August 22, 2012. The rights offering was fully subscribed and raised
net proceeds of $20 million, with 1,699,157 new common shares issued. This resulted in additional asset capacity of $115
million based on our target assets to capital ratio of 5.75 as measured on a tax basis.
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. These
dividends are taxable in the shareholders’ hands as interest income. In addition, as a MIC, we 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.
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
2012
$ 0.27
0.33
0.27
0.27
0.28
$ 1.42
$ 1.37
0.05
$ 1.42
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
$
$
$
$
The Board of Directors of the Company (the “Board”) declared a first quarter dividend of $0.31 per share to be paid March 28,
2013 to shareholders of record as of March 15, 2013. The dividend comprises the regular quarterly dividend of $0.28 per share
and a $0.03 per share extra dividend, and consists of a $nil per share capital gains component and a $0.31 per share taxable
component.
- 28 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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, 2012, outstanding commitments for future fundings of
mortgages intended for our corporate portfolio were $248 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 MCAP 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, 2012
Term deposits
Operating lease
Mortgage fundings
CMB obligations
Less than
one year
One to
five years
Over five
years
Total
$
$
467,957
277
198,336
473
667,043
$
$
309,120
205
49,251
201
358,777
$
$
-
-
-
-
-
$
777,077
482
247,587
674
$ 1,025,820
TRANSACTIONS WITH RELATED PARTIES
In 2012, we purchased certain corporate services from MCAP in the amount of $566,000 (2011 - $497,000). We also purchased
certain mortgage origination and administration services from MCAP in the amount of $2.8 million (2011 - $2.9 million). During
2012, we received $3.0 million of mortgage fees from MCAP (2011 - $2.2 million). The fees received from MCAP include
commitment, extension, renewal, and letter of credit fees. We use MCAP systems, including networks, subsystems and general
ledger. We also receive technology support from MCAP.
In 2012, we paid fees in the amount of $1.7 million to MCAP relating to a profit sharing arrangement on a portfolio of discounted
mortgages (2011 - $2.7 million). We received $190,000 of fees from MCAP relating to a profit sharing arrangement on a
portfolio of discounted mortgages (2011 - $303,000).
In 2012, we earned $978,000 from the sale of interest-only strips to MCAP (2011 - $261,000), discussed above in “Securitization
Programs.”
We have established an Executive Share Purchase Plan (the “Share Purchase Plan”) whereby the Board can approve loans to key
personnel for the purpose of purchasing MCAN’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 2012, MCAN advanced $305,000 of new
loans under the Share Purchase Plan (2011 - $299,000). As at December 31, 2012, $1.9 million of loans were outstanding
(December 31, 2011 - $1.8 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 MCAN. 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 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, 2012, 20,000 units had vested (December 31, 2011 - 10,000).
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, 2012 related to the DSU Plan was $137,000 (2011 - $181,000). As at
December 31, 2012, the accrued DSU Plan liability was $446,000 (December 31, 2011 - $309,000), included in accounts payable
and accrued liabilities.
- 29 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
RECENT DEVELOPMENTS
On March 26, 2013, we announced the signing of a definitive agreement (the “Arrangement Agreement”) to acquire all of the
issued and outstanding shares of Xceed for $1.75 per share, for a total consideration of approximately $53.0 million. Xceed is a
specialized, single family insured and uninsured residential mortgage lender, focused primarily on the insured area of the
mortgage market and, in recent years, has been focused on winding down its legacy securitization portfolio. The transaction is
expected to be funded with a combination of cash and common shares of MCAN, and will be effected pursuant to a plan of
arrangement under Section 182 of the Business Corporations Act (Ontario).
Under the terms of the Arrangement Agreement, Xceed shareholders will, for each share held, receive at their election, subject to
adjustment: (i) 0.118 Common Shares or (ii) $1.75 in cash, or a combination thereof, subject to a maximum of approximately
$30.3 million in aggregate cash being paid. Assuming the maximum cash consideration is elected to be received by Xceed
shareholders, upon completion of the transaction, existing Xceed shareholders will own approximately 7.54% of MCAN on a
fully diluted basis.
The expected timing and completion of the proposed acquisition is subject to Xceed shareholder approval, court and regulatory
approvals, and other closing conditions. Xceed shareholders are expected to vote on the transaction at the end of May 2013. If
all necessary approvals are obtained, we expect to complete the proposed transaction on or about June 24, 2013. The terms and
conditions of the Arrangement Agreement will be summarized in Xceed’s management information circular and proxy circular
delivered to Xceed shareholders. The Arrangement Agreement will be available under MCAN’s profile on SEDAR at
www.sedar.com.
Assuming all necessary approvals are obtained and the transaction is completed, the acquisition of Xceed is expected to provide
multiple benefits to MCAN, including: (i) an established mortgage origination and underwriting platform from which to deliver
incremental asset growth and potential for increased income; (ii) new equity on a cost effective basis which will provide MCAN
with the capacity to achieve its growth objectives; (iii) opportunities for long-term and sustainable earnings derived from a
combination of Xceed’s CMHC origination and underwriting capabilities and MCAN’s existing operations and superior access to
capital; (iii) the ability to further lever MCAN’s single family residential capabilities; (iv) support for MCAN’s existing growth
plans through Xceed’s origination and underwriting infrastructure and technology capabilities; (v) enhanced portfolio
management resulting from Xceed’s database management and reporting capabilities; and (vi) CMHC approved lender status
(subject to regulatory approval) which will provide MCAN with the opportunity to expand the scope of its operations.
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. Securitization assets and liabilities are both excluded from the
calculation of the Tax Act ratio.
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%.
Assets securitized through the CMB program prior to June 30, 2010 are excluded from the calculation of regulatory ratios.
- 30 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Our Tax Act and regulatory ratios are as follows:
Table 21: Regulatory Capital
(amounts in thousands, except %)
As at December 31
Tax Act Ratios
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
2012
2011
$
953,235
168,477
5.66
4.66
$
766,065
156,116
4.91
3.91
$
155,005
510
19,985
(229)
175,271
1,032
(229)
803
$
132,817
510
23,491
(229)
156,589
560
(229)
331
$
176,074
$
156,920
$ 1,002,759
806,140
$
$
$
818,112
704,954
21.74%
21.84%
5.70
22.21%
22.26%
5.21
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 MCAN 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 all 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”) has issued a revised capital framework referred to as Basel III. The Basel III rules will be phased in from
2013 to 2019. In December 2012, OSFI released its final Capital Adequacy Requirements (“CAR”) guideline to reflect (and
require Canadian financial institutions to adhere to) certain changes to the global capital rules represented by Basel III.
Of particular relevance to the Company, under the CAR guideline:
OSFI requires all federally regulated financial institutions to meet the minimum Common Equity Tier 1 (“CET 1”),
Total Tier 1 and Total Capital requirements set out therein. In 2013, those minimum capital ratios are 3.5% for CET 1,
4.5% for Total Tier 1 and 8% for Total Capital and by 2015 those minimum capital ratios increase to 4.5%, 6% and 8%,
respectively (with the phase-in of certain regulatory adjustments and phase-out of non-qualifying capital instruments
over a 10 year horizon). Those regulatory adjustments include the deduction of certain non-significant investments in
the capital of banking, financial and insurance entities above a certain threshold. Those adjustments are expected to
impact the Company’s capital calculations and, in particular, the inclusion of its equity investment in MCAP in such
calculations.
Capital, for purposes of the assets-to-capital multiple, can be calculated on the transitional basis (phasing-in regulatory
adjustments between 2013 and 2018 and phasing-out non-qualifying capital instruments over a 10 year horizon
commencing in 2013). As at December 31, 2012, we did not have any non-qualifying capital instruments.
Commencing in 2016, OSFI will also require all federally regulated financial institutions to maintain a capital
conservation buffer. The buffer will be phased-in over time and reach its final level of 2.5% in 2019.
- 31 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
In addition to the minimum capital requirements and capital conservation buffer to be maintained by all federally
requlated institutions, OSFI expects all such institutions to attain target capital ratios equal to or greater than the 2019
minimum capital ratios and the 2019 capital conservation buffer well in advance of the phase-in period. Accordingly,
OSFI expects all such institutions to achieve a CET 1 ratio of 7% by the first quarter of 2013, and a Total Tier 1 ratio of
8.5% and a Total Capital ratio of 10.5% by the first quarter of 2014 (in each case, calculated on an “all in” basis giving
effect to all regulatory adjustments that will be required by 2019 and including the 2019 capital conservation buffer).
Failure to achieve such targets will serve as triggers for supervisory intervention.
We expect to be able to meet OSFI’s requirements and expectations under the CAR guideline without materially adversely
affecting the Company’s business plan.
We maintain prudent capital planning practices to ensure that we are adequately capitalized and continue to satisfy minimum
standards and internal targets. 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. In addition, we
perform stress testing on our internal forecasts for capital adequacy on a quarterly basis and the results of such testing are reported
to the Board. Based on our 2012 ICAAP and recent quarters’ stress testing, 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 Risk Committee of the Board
(“RCB”) on a quarterly basis. The table below shows the composition of our liquidity ratios over the last two years.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 22: Liquidity Ratios
(in thousands except %)
As at December 31
Tier 1 liquidity
Cash and cash equivalents
Tier 2 liquidity
Marketable securities
Eligible mortgage-backed securities
Tier 3 liquidity
CMHC-insured 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
2012
2011
$ 123,825
$
51,309
20,390
7,137
27,527
19,458
30,149
-
30,149
19,001
$ 170,810
$ 100,459
$ 141,958
$
88,953
107%
120%
92%
113%
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.
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 damage to our 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 counter
party 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Reputational Risk
Reputational risk is the exposure to negative consequences from the occurrence of other risks. The loss of reputation can greatly
affect shareholder value. Reputation refers to the perception of the Company by various stakeholders, including investors,
customers, employees, service providers and regulators. Perceptions may be impacted by various events including financial
performance, specific adverse occurrences, unfavourable media coverage and changes or actions of the Company’s leadership.
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.
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 32 to the consolidated financial statements.
Economic Conditions
The Canadian economy experienced a slowdown in growth and employment levels in 2012, however it is expected to normalize
in 2013. Low interest rates continue to support housing markets, however regulatory changes which occurred in the latter half of
2012 appear to have had a negative impact on housing markets. We expect to see a decline in housing activity (new home sales
and re-sales) in the first half of 2013. Although fundamentals within the economy are expected to improve in the second half of
2013, we do not believe that the improvement will be sufficient to avoid an overall decline in housing activity in 2013.
Interest rates are expected to remain low throughout 2013, however a decline in general economic conditions may result in an
increase in default rates within the mortgage market. This potential decline in credit quality of borrowers and our mortgage
portfolio may negatively impact our net income.
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
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.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 MCAP and other third parties.
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.
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 IFRS, 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 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”) which is comprised of management and a formal quarterly review
involving the RCB. A Dashboard Report, which identifies, assesses, ranks and provides trending analysis on all material risks to
the Company, is provided to the RCB 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 our risk appetite, which is approved by the Board at least annually,
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
quarterly market reports provided to the RCB. 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
market values for single family mortgages, with independent assessments of value obtained as individual mortgages exceed 90
days in arrears.
We assign 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 Gross Domestic Product, employment,
housing market conditions as well as the current position in the economic cycle.
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, 2012, we had recorded $713,000 (December 31, 2011 - $1.2 million) of individual allowances on our mortgage
portfolio (refer to Note 9 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 RCB 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
CMHC-insured single family mortgages) of at least 100% of term deposits maturing within 100 days. 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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.
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 as they come due.
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 RCB. 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 120% of term deposits maturing within 100 days at December 31, 2012. For further details on our liquid assets
and our ability to meet liability obligations, refer to Note 32 to the consolidated financial statements.
We have established and maintain liquidity policies and procedures 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.
Table 23: Liquidity Analysis
(in thousands)
Sources of liquidity
Cash and cash equivalents
Marketable securities
Mortgages - corporate
Foreclosed real estate
Financial investments
Other loans
Uses of liquidity
Term deposits
Other liabilities
Within
3 Months
3 Months
To 1 Year
1 to 5
Years
Over 5
Years
December 31
2012
December 31
2011
$ 123,825
-
119,985
-
565
19
244,394
$
- $
-
307,611
-
2,480
-
310,091
230,981
9,493
240,474
236,976
-
236,976
-
7,092
302,307
-
779
1,240
311,418
309,120
-
309,120
$
-
13,298
9,909
4,355
14,243
1,905
43,710
$ 123,825
20,390
739,812
4,355
18,067
3,164
909,613
$
51,309
30,149
640,351
-
12,536
3,027
737,372
-
-
-
777,077
9,493
786,570
601,577
7,943
609,520
Net liquidity surplus (deficit)
$
3,920
$
73,115 $
2,298
$
43,710
$ 123,043
$ 127,852
Off-Balance Sheet
Unfunded mortgage commitments
$ 124,459
$
73,877 $
49,251
$
-
$ 247,587
$ 296,666
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 and procedures, 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 RCB 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 at least annually.
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.
General Litigation
In the ordinary course of business, MCAN and its service providers (including MCAP), their subsidiaries and related parties may
from time to time be party to legal proceedings that may result in unplanned payments to third parties. To the best of our
knowledge, MCAN management does not expect the outcome of any of these proceedings to have a material adverse effect on
the consolidated financial position or results of operations of MCAN. Currently, MCAP is one of several parties to a claim in
respect of a development project in Alberta. Although a summary judgment in MCAP’s favour was rendered at trial, the Alberta
Court of Appeal overturned the summary judgment in part and has directed that certain aspects of the claim be allowed to
proceed to trial. MCAN management does not believe that the claim has any merit and believes the claim will ultimately be
unsuccessful. In any event, management of MCAN believes that any monetary damages against MCAP would not have a
material financial impact on MCAN.
PEOPLE
As at December 31, 2012, we had 23 employees.
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.
INTERNAL AUDIT
The Internal Audit function, consisting of the Chief Audit Officer, 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 the 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 MCAN. 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, we may use derivative and non-derivative financial instruments to
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
manage interest rate risk as discussed above in the “Securitization Programs” section. Hedge accounting is optional, and where it
can be applied, it requires MCAN 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, 2012, we 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, 5, 7, 8, 9, 11, 12, 15, 18, 21 and 22 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.
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 and 12 to the
consolidated financial statements.
Discount Income Recognition
We 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 19 to the consolidated
financial statements. We will continue to proactively monitor the appropriateness of our position on a quarterly basis.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 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 - 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. This standard is effective for periods beginning on or after
January 1, 2013. Retrospective application will be required. The Company does not expect the adoption of this standard to have
a material impact on its results as well as to the presentation of the Company’s financial statements.
IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32).
These amendments clarify the offsetting criteria in IAS 32 to address inconsistencies in their application. These amendments
clarify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event and
enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all
counterparties. The amendment also clarifies the application of the IAS 32 offsetting criteria to settlement systems. This
amendment will be effective for annual periods beginning on or after January 1, 2014. The Company is in the process of assessing
the impact of adopting this amendment.
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 does not anticipate any material
changes to the financial position or operating results upon adoption of IFRS 10.
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 does not expect the
adoption of this standard to result in material changes to the presentation of the Company’s financial statements.
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 does not expect the adoption of this standard to have a material impact on its results.
IAS 1, Presentation of Financial Statements
This standard has a number of amendments regarding financial statement presentation and disclosure requirements. This standard
is effective for annual periods beginning on or after July 1, 2012. The Company does not expect the adoption of this standard to
result in material changes to the presentation of the Company’s financial statements.
IAS 19, Revised Employee Benefits
This standard prescribes the accounting and disclosure requirements for employee benefits. This standard shall be applied by an
employer in accounting for all employee benefits, except those to which IFRS 2, Share-based Payment, applies. This standard is
effective for annual periods beginning on or after January 1, 2013. The Company does not expect the adoption of this standard to
have a material impact on its results as well as to the presentation of the Company’s financial statements.
IAS 28, Investments in Associates and Joint Ventures
This amendment prescribes the accounting for investments in associates and to set out the requirements for the application of the
equity method when accounting for investments in associates and joint ventures. This standard shall be applied by all entities that
are investors with joint control of, or significant influence over, an investee. This standard is effective for annual periods
beginning on or after January 1, 2013. The Company does not expect the adoption of this standard to have a material impact on
its results.
- 40 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2012 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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, 2012, 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, 2012.
Ernst & Young LLP, our Independent Registered Chartered Accountants, have audited our consolidated financial statements for
the year ended December 31, 2012.
Changes in ICFR
There were no changes in our ICFR that occurred during the period beginning on January 1 and ending on December 31, 2012
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 -
2012 A
ANNUAL REPOR
RT / MCAN MOR
RTGAGE CORP
PORATION
STATEME
ENT OF MANA
AGEMENT’S R
RESPONSIBILI
ITY FOR FINA
ANCIAL INFOR
RMATION
The accomp
responsibilit
representati
all other sec
Internationa
Superintend
panying consoli
ty of manageme
ons contained in
ctions of the ann
al Financial Rep
dent of Financial
idated financial
ent and have been
n these consolid
nual report. The
porting Standard
l Institutions Can
statements of
n approved by th
dated financial st
consolidated fin
ds (“IFRS”), inc
nada.
MCAN Mortga
he Board of Dire
tatements, the M
nancial statemen
cluding the acco
age Corporation
ectors. Managem
Management’s D
nts have been pre
ounting requirem
n (“MCAN” or
ment is responsib
Discussion and A
epared by manag
ments of our re
the “Company
ble for the inform
Analysis of Oper
gement in accor
egulator, the Of
y”) are the
mation and
rations and
rdance with
ffice of the
The Compa
reasonable a
from unauth
any’s accounting
assurance that th
horized use or di
g system and re
he Company’s f
isposition.
elated internal c
financial record
controls are des
s are complete
signed, and supp
and accurate an
porting procedu
nd that assets ar
ures maintained
re safeguarded a
to provide
against loss
The Office
deemed nec
depositors a
of the Superinte
cessary to be sati
and that the Com
endent of Financ
isfied that the pr
mpany is in sound
cial Institutions C
rovisions of the
d financial condi
Canada makes su
Trust and Loan
ition.
uch examination
Companies Act
n and enquiry in
t are being duly
nto the affairs of
observed for the
f MCAN as
e benefit of
The Board o
responsible
through an A
controls, con
of Directors is r
for reviewing
Audit Committe
ntrol systems an
esponsible for e
and approving
e of unrelated di
nd compliance m
nsuring that man
the consolidated
irectors appointe
matters and report
nagement fulfils
d financial state
ed by the Board
ts thereon to the
s its responsibili
ements. These
of Directors. Th
e Audit Committ
ity for financial
responsibilities
he Chief Financi
tee.
reporting and is
are carried out
ial Officer review
s ultimately
t primarily
ws internal
The Audit C
reporting p
statements a
Directors an
Committee meet
rocess, auditing
and recommend
nd Shareholders
ts periodically w
g matters and f
s them to the B
the appointment
with managemen
financial reporti
oard of Director
t of external aud
nt and the extern
ing issues. Th
rs for approval.
ditors and approv
nal auditors to d
he Audit Comm
The Audit Com
val of their fees.
discuss internal
mittee reviews t
mmittee also rec
controls over th
the consolidated
commends to th
he financial
d financial
he Board of
The consoli
with Canadi
idated financial
ian generally acc
statements have
cepted auditing s
e been audited b
standards. Ernst
by the Company
t & Young LLP
y’s external aud
has full and free
ditors, Ernst & Y
e access to the A
Young LLP, in a
accordance
e.
Audit Committee
William Jan
President an
ndrisits
nd Chief Executi
ive Officer
T
Tammy Oldenbu
Vice President a
V
urg
and Chief Financ
cial Officer
Toronto, Ca
February 28
anada,
8, 2013
- 42 -
2012 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
Independent auditors’ report
To the Shareholders of MCAN Mortgage Corporation
We have audited the accompanying consolidated financial statements of MCAN Mortgage Corporation, which comprise the
consolidated balance sheets as at December 31, 2012 and December 31, 2011 and the consolidated statements of income,
comprehensive income, changes in shareholders’ equity 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
auditors consider 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, 2012 and December 31, 2011, and its financial performance 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 28, 2013
- 43 -
2012 ANN
NUAL REPORT /
CONSOLIDAT
C
(in thousand
ED BALANCE
ds of Canadian d
E SHEETS
dollars)
MCAN MORTG
GAGE CORPORA
ATION
As at Decem
mber 31
Assets
Not
te
2012
20
011
Assets
Corporate
Cash and c
s
cash equivalents
Marketabl
le securities
s
Mortgages
d real estate
Foreclosed
investments
Financial i
ns
Other loan
vestment in MCA
Equity inv
ets
Other asse
AP Commercial
LP
tion Assets
Securitizat
Short-term
m investments
s
Mortgages
investments
Financial i
e financial instru
Derivative
ets
Other asse
uments
Liabilities
and Shareholde
ers’ Equity
Liabilities
Corporate
Term depo
Current tax
Deferred t
Other liabi
Liabilities
osits
x liabilities
tax liabilities
ilities
Securitizat
Financial l
Other liabi
tion Liabilities
liabilities from s
ilities
securitization
Shareholde
Share cap
Contribut
Retained
Available
ers’ Equity
pital
ted surplus
earnings
e
e for sale reserve
7
8
9
10
0
11
1
12
2
13
3
4
14
15
5
6
16
11
1
17
7
4
14
18
8
19
9
9
19
0
20
1
21
0
20
22
2
2
22
4
24
$
$
$
123,825
20,390
739,812
4,355
18,067
3,164
36,386
4,687
950,686
378,443
936,947
714,631
4,666
1,248
2,035,935
2,986,621
777,077
2,114
1,842
9,493
790,526
2,015,046
3,268
2,018,314
2,808,840
155,005
510
19,985
2,281
177,781
2,986,621
$
$
51,3
30,
640,3
309
149
351
-
12,5
536
027
3,0
480
15,4
947
9
799
753,7
345,4
1,499,0
1,279,4
13,3
3,0
3,140,3
$ 3,894,1
487
016
479
348
029
359
158
$
601,5
3,3
5,4
7,9
618,2
577
321
436
943
277
3,111,3
6,0
3,117,4
3,735,6
357
059
416
693
132,8
817
5
510
491
23,4
647
1,6
465
158,4
158
$ 3,894,1
The accompan
Operations are
nying notes and sh
e an integral part
haded areas of the
of these consolida
“Risk Factors” a
ated financial state
and “Risk Manage
ements.
ement” sections of
f Management’s D
Discussion and Ana
alysis of
On behalf of th
he Board:
William Jand
President and
drisits
d Chief Executiv
ve Officer
David G. B
Director, C
Broadhurst
Chairman of the
Audit Committe
ee
- 44 -
2012 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars except for per share amounts)
Years Ended December 31
Note
2012
2011
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Interest on financial investments and other loans
Interest on cash and cash equivalents
Term deposit interest and expenses
Mortgage expenses
Provision for 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
25
26
27
28
26
17
19
19
$
$
$
$
41,395
6,906
2,236
2,061
1,422
544
54,564
17,157
3,712
2,560
23,429
31,135
14,372
4,763
1,547
9,407
30,089
26,888
423
27,311
2,778
(8,682)
(5,904)
25,231
3,953
5,040
8,993
16,238
(1,519)
(3,736)
(5,255)
21,493
1.22
1.42
17,579
$
$
$
$
32,593
5,007
1,593
1,281
1,342
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
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 -
2012 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
Years Ended December 31
Net income
Other comprehensive income
Change in unrealized gain on available for sale marketable securities
Transfer of gains on sale of marketable securities to net income
Change in unrealized gain on available for sale financial investments
Less: deferred taxes
2012
2011
$
21,493
$
27,103
1,527
(943)
190
(140)
634
736
-
1,249
(306)
1,679
Comprehensive income
$
22,127
$
28,782
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
Balance, end of year
Total shareholders’ equity
Note
2012
2011
22
23
$
132,817
22,188
155,005
$
100,112
32,705
132,817
510
-
510
23,491
21,493
(24,999)
19,985
1,647
634
2,281
510
-
510
24,489
27,103
(28,101)
23,491
(32)
1,679
1,647
$
177,781
$
158,465
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 -
2012 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Years Ended December 31
2012
2011
Cash provided by (used for):
Operating Activities
Net income
Adjusted for non-cash items:
Current taxes
Deferred taxes
Equity income
Provision for credit losses
Fair market value adjustment - derivative financial instruments
Amortization of securitized mortgage and liability transaction costs
Amortization of other assets
Amortization of mortgage discounts
Amortization of premium on marketable securities
Gain on sale of financial investment
Mortgage advances
Mortgage reductions
Proceeds on sale of mortgages
Issuance of term deposits
Repayment of term deposits
Repayment of financial liabilities from securitization
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Cash flows (for) from operating activities
Investing Activities
Decrease (increase) in marketable securities
Increase in short-term investments
Decrease (increase) in financial investments
Increase in foreclosed real estate
Increase in equity investment in MCAP Commercial LP
Decrease (increase) in other loans
Proceeds on sale of financial investment
Distributions from MCAP Commercial LP
Cash flows from (for) investing activities
Financing Activities
Issue of common shares
Dividends paid
Cash flows (for) from financing activities
Increase (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
$
21,493
$
27,103
(1,519)
(3,736)
(6,906)
2,560
8,682
3,083
127
(332)
154
-
(1,704,120)
1,400,526
762,382
575,609
(400,109)
(1,096,911)
(2,085)
(2,520)
(443,622)
10,190
(32,956)
559,509
(4,355)
(14,000)
(130)
-
-
518,258
22,188
(24,308)
(2,120)
72,516
51,309
123,825
2012
62,755
39,915
58
$
$
(2,072)
(183)
(5,007)
1,058
(228)
3,610
110
(116)
-
(876)
(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)
-
-
305
1,619
1,057
(428,645)
32,705
(27,305)
5,400
(34,000)
85,309
51,309
2011
57,309
36,342
323
$
$
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 -
2012 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.
Significant Accounting Judgments and Estimates ................................................................................................................. 56
5.
Securitization Activities ........................................................................................................................................................ 57
6.
7.
Cash and Cash Equivalents ................................................................................................................................................... 59
8. Marketable Securities ............................................................................................................................................................ 59
9. Mortgages - Corporate ........................................................................................................................................................... 60
10. Foreclosed Real Estate .......................................................................................................................................................... 63
11. Financial Investments ............................................................................................................................................................ 63
12. Other Loans ........................................................................................................................................................................... 64
13. Equity Investment in MCAP Commercial LP ....................................................................................................................... 64
14. Other Assets .......................................................................................................................................................................... 65
15. Short-Term Investments ........................................................................................................................................................ 65
16. Mortgages - Securitized ......................................................................................................................................................... 65
17. Derivative Financial Instruments ........................................................................................................................................... 66
18. Term Deposits ....................................................................................................................................................................... 67
Income Taxes ........................................................................................................................................................................ 67
19.
20. Other Liabilities ..................................................................................................................................................................... 68
21. Financial Liabilities from Securitization ............................................................................................................................... 69
22. Share Capital and Contributed Surplus .................................................................................................................................. 69
23. Dividends .............................................................................................................................................................................. 70
24. Available for Sale Reserve .................................................................................................................................................... 70
25. Fees ....................................................................................................................................................................................... 70
26. Mortgage Expenses ............................................................................................................................................................... 71
27. Provision for Credit Losses ................................................................................................................................................... 71
28. Other Securitization Income .................................................................................................................................................. 71
29. Related Party Disclosures ...................................................................................................................................................... 71
30. Commitments and Contingencies .......................................................................................................................................... 73
31. Credit Facilities ..................................................................................................................................................................... 73
Interest Rate Sensitivity ......................................................................................................................................................... 74
32.
33. Capital Management .............................................................................................................................................................. 76
34. Financial Instruments ............................................................................................................................................................ 77
35. Standards Issued But Not Effective ....................................................................................................................................... 78
36. Comparative Amounts ........................................................................................................................................................... 80
- 48 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (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”).
As a Loan Company under the Trust Act, the Company is subject to the guidelines and regulations set by the Office of the
Superintendent of Financial Institutions Canada (“OSFI”).
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
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 6.
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 under the symbol MKP.
The consolidated financial statements were approved in accordance with a resolution of the Board of Directors on February
28, 2013.
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”).
The consolidated financial statements have been prepared on a historical cost basis, except for marketable securities,
foreclosed real estate, 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 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 balances of MCAN and its subsidiaries as at December 31, 2012.
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 / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (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 / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (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 marketable 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.
Certain marketable securities are intended to be held for an indefinite period of time but 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.
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.
- 51 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
(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. Where 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. The fair value of certain real estate assets is determined using independent appraisals.
Models and valuations are adjusted to reflect counterparty credit and liquidity spread and limitations in the models.
(4) Non-current assets held for sale
Held-for-sale foreclosed assets in the settlement of an impaired mortgage are initially carried at fair market value less costs
to sell. In subsequent measurements, the asset is carried at the lower of its carrying amount and fair market value less the
estimated cost to sell at the date of foreclosure. Any difference between the carrying value of the asset before foreclosure
and the initially estimated realizable amount of the asset is recorded in the provision for credit losses line of the
consolidated statements of income.
- 52 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
(5)
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 have 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 / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (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, one of the indications of impairment 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.
(6) Offsetting financial instruments
Financial assets and financial liabilities where MCAN is considered the principal to the underlying transactions 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.
(7) 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 / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (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.
(8) 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.
(9)
Investments in associates
The Company’s investments 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.
(10) 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.
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 statements of income.
- 55 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
(11) 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.
(12) 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 29. 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.
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.
- 56 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
5. Significant Accounting Judgments and Estimates (continued)
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 19.
6.
Securitization Activities
The Company participates in the National Housing Act (“NHA”) mortgage-backed securities (“MBS”) program, which
involves the securitization of insured mortgages to create MBS. Pursuant to the NHA MBS program, investors of MBS
receive monthly cash flows consisting of interest and scheduled and unscheduled principal payments. Canada Mortgage
and Housing Corporation (“CMHC”) makes principal and interest payments in the event of any NHA MBS default by the
issuer, thus fulfilling the timely payment obligation to investors. To date, the Company has sold MBS as part of the CMB
program, the Insured Mortgage Purchase Program (“IMPP”) and a market MBS program, which are discussed below.
CMB Program
MCAN participates in the CMB program, which involves the sale of MBS to the Canada Housing Trust (“CHT”). On the
sale of MBS to CHT, MCAN receives proceeds for the sale, incurs a liability in the amount of such proceeds received and
is obligated to pay interest on this liability, which does not amortize over the term of the issuance and is payable in full at
maturity. The securitized mortgages and reinvestment assets are held as collateral against the CMB liabilities.
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. MCAN also recognizes servicing expenses on the mortgages and pays certain
upfront costs.
MCAN participates in the CMB program with MCAP Commercial LP and its wholly owned subsidiaries including MCAP
Service Corporation (collectively “MCAP”). 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, 2012 was 30% (December 31, 2011 - 28%). MCAP has indemnified MCAN for the remaining 70% of CMB
program obligations (December 31, 2011 - 72%).
The sales to CHT failed to meet derecognition criteria since MCAN did not transfer substantially all risks and rewards on
sale. The primary risk retained was mortgage prepayment risk, while the primary reward retained was the excess of
mortgage interest income and reinvestment asset interest over securitization liability interest. Interest rate risk is largely
mitigated by the interest rate swaps discussed below, and credit risk is minimal as all mortgages securitized through the
NHA MBS program are insured. MCAN accounted for these transactions as collateralized borrowings and recorded 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 16), reinvestment assets (Notes 11 and 15) and securitization liabilities (Note 21) on the
consolidated balance sheets until the maturity of the CMB issuance. MCAN recognizes its 30% share of mortgage interest
income, principal reinvestment income, interest expense on the securitization liabilities and certain other program expenses
on the accrual basis. MCAN has also capitalized certain costs associated with the securitized mortgages and securitization
liabilities, 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 17). 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 volatility to the consolidated statements of income since there is no
offset to fair value changes in the interest rate swaps.
- 57 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
6.
Securitization Activities (continued)
Other MBS Programs
Insured Mortgage Purchase Program
The Company participated in the IMPP, which involved the sale of MBS to CMHC by MCAN. Although MCAN has no
continuing economic involvement in the IMPP, it earned an up-front fee for its participation. MCAN participated in the
IMPP on behalf of MCAP, who is entitled to 100% of the ongoing economics and cash flows of the IMPP.
MCAN purchased certain mortgages from MCAP that were subsequently securitized into MBS as part of the IMPP. These
mortgage sales from MCAP to MCAN failed to meet derecognition criteria, since MCAP retained substantially all risks and
rewards as part of the aforementioned entitlement to all economics and cash flows. As a result of this, at the time of sale
MCAN recognized a corresponding financial investment representing a receivable from MCAP (Note 11) and financial
liability from securitization representing the securitization proceeds received from CMHC (Note 21). MCAN is the
counterparty for the ongoing cash flows between MCAP and CMHC in its role as the IMPP counterparty.
Market MBS Program
In 2011, the Company commenced the market MBS program, under which it sells MBS into the market and the net
economics and cash flows from the underlying mortgages (“interest-only strips”) to a third party. To date, all interest-only
strip sales have been made to MCAP. MCAN met derecognition criteria on the sale of the mortgages (i.e. upon creation of
MBS and subsequent sales of MBS and interest-only strips to third parties) since it transferred substantially all risks and
rewards on sale, and accordingly they were removed from the consolidated balance sheet at that time. The primary risk
associated with the market MBS program is liquidity risk, specifically the obligation to fund 100% of any cash shortfall
related to the Timely Payment Guarantee (discussed below) as part of the market MBS program. The primary reward
associated with the market MBS program is the excess of mortgage interest income over the MBS interest. The risks and
rewards are both transferred to the purchaser of the interest-only strips pursuant to contractual agreements entered into with
such purchaser.
In 2012, MCAN recognized $978 of income (2011 - $261) related to the sale of MBS and the interest-only strips associated
with the underlying mortgages. The Company has no continuing economic involvement with the MBS and the interest-
only strips on the underlying mortgages. The Company only earns income from this program at the time of sale of the MBS
and interest-only strips.
Timely Payment Guarantee
Consistent with all issuers of MBS, the Company is required to remit 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, any outstanding principal must
be paid to the MBS investors.
As part of the CMB program, MCAP is responsible for its pro-rata share of the timely payment guarantee obligations noted
above based on its respective contracted economic participation. As part of the IMPP, MCAP is obligated to fund 100% of
any cash shortfall. As part of the market MBS program, the purchaser of the interest-only strip is obligated to fund 100% of
any cash shortfall.
During 2012, the Company adopted certain amendments to IFRS 7, Financial Instruments: Disclosures. The amendments
require 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 amendments require 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 adoption of IFRS 7 had no impact on the Company’s financial position or
net income.
Transferred financial assets that are not derecognized in their entirety
CMB Program
As a result of the failure to meet derecognition criteria, the CMB mortgage sale transactions have resulted in MCAN
recognizing the securitized mortgages, reinvestment assets and financial liabilities from securitization on its balance sheet.
The remaining securitized mortgage balance as at December 31, 2012 was $936,947 (December 31, 2011 - $1,499,016)
(Note 16). The reinvestment asset balance as at December 31, 2012 was $878,588 (December 31, 2011 - $1,402,050)
(Notes 11 and 15). The financial liabilities from securitization balance as at December 31, 2012 was $1,855,051 (December
31, 2011 - $2,944,209) (Note 21).
- 58 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
6.
Securitization Activities (continued)
Insured Mortgage Purchase Program
As a result of the failure to meet derecognition criteria, the IMPP mortgage sale transactions have resulted in MCAN
recognizing a loan receivable from MCAP and a loan payable to the IMPP counterparty on its consolidated balance sheet.
The balance of both loans as at December 31, 2012 was $159,995 (December 31, 2011 - $167,148) (Notes 11 and 21).
Transferred financial assets that are derecognized in their entirety but where the Company has a continuing
involvement
Market MBS Program
The Company sold $284,143 of MBS through the market MBS program during 2012 (2011 - $26,132), and has sold
$310,275 since the inception of the program. MCAN recognized $978 of income in 2012 (2011 - $261), and has
recognized $1,239 of income since the inception of the program. MCAN met derecognition criteria on the sale of the
mortgages (i.e. on creation and sale of MBS) and the interest-only strips as a result of the transfer of substantially all risks
and rewards, and accordingly they were removed from the consolidated balance sheet at that time. MCAN’s continuing
involvement relates to the Timely Payment Guarantee obligation noted above. Similarly, at the maturity of the MBS pools
that have been issued by MCAN, any outstanding principal must be paid to the MBS investors. The total outstanding MBS
balance related to the market MBS program as at December 31, 2012 was $295,948 (December 31, 2011 - $26,054), which
was not reflected as an asset or liability on MCAN’s consolidated balance sheet at either date. The MBS mature as follows:
2016 - $48,378, 2017 - $247,570.
7. Cash and Cash Equivalents
As at December 31
Cash balances with banks
Bankers’ acceptances and term deposits
2012
$
$
11,825
112,000
123,825
$
$
2011
8,309
43,000
51,309
Cash and cash equivalents include balances with banks and short-term investments with original maturity dates of less than
90 days.
Refer to Note 31 for an analysis of the Company’s available credit facilities.
8. Marketable Securities
As at December 31
Corporate bonds
Real estate investment trusts
Exchange-traded funds
2012
8,491
7,825
4,074
20,390
$
$
2011
15,819
11,283
3,047
30,149
$
$
Marketable securities are designated as available for sale. Corporate bonds mature between 2015 and 2022, while real
estate investment trusts and exchange-traded funds have no specific maturity date. 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.
- 59 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
9. Mortgages - Corporate
(a) Summary
As at December 31, 2012
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured (completed inventory loans)
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
- Insured
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
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$ 271,662
20,315
76,104
274,977
26,585
74,605
-
$ 744,248
$
1,135
80
-
1,748
166
594
-
3,723
$
$
147
150
-
300
-
116
-
713
$
1,282
230
-
$ 270,380
20,085
76,104
2,048
166
272,929
26,419
710
-
4,436
73,895
-
$ 739,812
$
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
$
Gross principal as presented in the tables above includes unamortized capitalized transaction costs.
MCAN’s corporate mortgage 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 Financial Mortgage
Insurance Company Canada Inc. (“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.
The weighted average yield of the Company’s corporate mortgage portfolio is as follows:
As at December 31
Single family
Construction
Commercial
Total
2012
4.63%
5.95%
6.94%
5.39%
2011
5.48%
6.49%
5.63%
5.82%
- 60 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
9. Mortgages - Corporate (continued)
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, 2012 was $742,779 (December 31, 2011 - $644,361). 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 dates of the Company’s mortgages, refer to Note 32.
As at December 31, 2012, the Company held $12,565 of second uninsured single family mortgages (December 31, 2011 -
$969).
As at December 31, 2012, the Company had $11,981 (December 31, 2011 - $nil) of insured single family mortgages
pledged as collateral as part of the CMB program.
Outstanding commitments for future fundings of mortgages intended for the Company’s corporate portfolio were $247,587
at December 31, 2012 (December 31, 2011 - $296,666). 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, 2012, the Company held discounted mortgages with an aggregate
discount of $5,874 (December 31, 2011 - $9,141). 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 MCAP (refer to Note 29 for profit sharing fees paid to/from MCAP). 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 2013 (for certain fixed rate mortgages) to 2032 (for certain floating rate mortgages). The recognition of discount
income is based on management’s expectations as to when cash will be received.
The composition of the discount is as follows:
As at December 31
Fixed rate
Floating rate
(c) Geographic Analysis
2012
3,648
2,226
5,874
$
$
2011
2,310
6,831
9,141
$
$
As at December 31, 2012
Single Family
Construction
Commercial
Total
Ontario
Alberta
British Columbia
Other
$
$
167,177
74,108
60,033
65,251
366,569
$
$
135,627
101,181
50,678
11,862
299,348
$
$
26,375
21,417
3,884
22,219
73,895
$
$
329,179
196,706
114,595
99,332
739,812
As at December 31, 2011
Single Family
Construction
Commercial
Total
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
$
$
253,757
198,506
113,886
74,202
640,351
44.5%
26.6
15.5
13.4
100.0%
39.6%
31.0
17.8
11.6
100.0%
- 61 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
9. Mortgages - Corporate (continued)
(d) Mortgage Allowances
Details of the collective allowances for mortgage credit losses for the current and prior year are as follows:
Collective
Individual
2012
Total
Collective
Individual
Balance, beginning of year
Provisions (recoveries)
Write-offs
Balance, end of year
$
$
2,919
1,127
(323)
3,723
$
$
1,160
553
(1,000)
713
$
$
4,079
1,680
(1,323)
4,436
$
$
2,047
1,147
(275)
2,919
$
$
1,246
(86)
-
1,160
$
$
The Company’s individual allowances for mortgage credit losses are as follows:
As at December 31
Uninsured single family
Residential construction
Commercial - uninsured
(e) Arrears and Impaired Mortgages
Mortgages past due but not impaired are as follows:
2012
297
300
116
713
$
$
$
$
As at December 31, 2012
Single family - uninsured
Single family - insured
Residential construction
Commercial
As at December 31, 2011
Single family - uninsured
Single family - insured
Residential construction
1 to 30
days
14,064
330
$
3,436
17,830
$
31 to 60
days
61 to 90
days
Over 90
days
8,378
385
2,743
-
11,506
$
$
646
58
-
-
704
$
$
-
627
-
-
627
$
$
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
$
$
$
-
$
$
$
Impaired mortgages (net of individual allowances) are as follows:
As at December 31, 2012
Ontario
Alberta
British Columbia
Other
As at December 31, 2011
Ontario
Alberta
British Columbia
Other
Residential
Single Family Construction
Commercial
$
$
1,533
1,528
1,736
2,059
6,856
$
$
-
1,760
-
-
1,760
$
$
-
-
-
-
-
$
$
Single Family
Residential
Construction
Commercial
$
$
2,055
769
393
542
3,759
$
$
1,237
8,708
-
-
9,945
$
$
427
-
-
-
427
$
$
2011
Total
3,293
1,061
(275)
4,079
2011
102
1,000
58
1,160
Total
23,088
1,400
2,743
3,436
30,667
Total
13,094
1,415
-
14,509
Total
1,533
3,288
1,736
2,059
8,616
Total
3,719
9,477
393
542
14,131
- 62 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
10. Foreclosed Real Estate
In 2012, the Company foreclosed an impaired residential construction loan which is now held as real estate within a wholly
owned subsidiary and is carried at the lower of carrying amount and fair market value less the estimated cost to sell. The
investment was recorded at its fair value less estimated cost to sell at the time of foreclosure, and no gain or loss was
recognized at this time as the fair market value was equal to the carrying value of the impaired loan net of its individual
allowance. During the year, the Company’s share of the initial phase of this property was sold for $2,400, while the
subsequent phases are subject to an option to purchase by the same party under the same contract. No gain or loss was
recognized on the sale of the initial phase.
11. Financial Investments
As at December 31
Corporate assets:
Investment - commercial real estate
Retained interest
Other financial investments
Asset-backed commercial paper
Subordinated loan - residential mortgage securitization program
Securitization assets:
Insured mortgage-backed securities (in trust for CMB program)
Receivables - IMPP
Corporate Assets
2012
2011
13,792
3,084
734
457
-
18,067
$
$
8,250
-
1,294
457
2,535
12,536
554,636
159,995
714,631
$ 1,112,331
167,148
$ 1,279,479
$
$
$
$
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 Company holds a retained interest in insured single family mortgages that yields up to 8.75% depending on mortgage
prepayment levels. During 2012, its average yield was 8.75% (2011 - n/a). The retained interest is designated as fair value
through profit and loss, with changes in fair market value recognized in the consolidated statements of income.
The Company held a subordinated loan - residential mortgage securitization program with an interest rate of 10% at
December 31, 2011. The loan was rated BB high by Dominion Bond Rating Service (“DBRS”), was classified as loans and
receivables and had no specific maturity date. The subordinated loan was receivable from a special purpose entity (“SPE”).
The Company did not control the SPE and therefore did not consolidate it.
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 1.74% at
December 31, 2012 (December 31, 2011 - 1.77%). The fair market value of MBS held in trust for the CMB program as at
December 31, 2012 was $556,620 (December 31, 2011 - $1,121,238).
Receivables - IMPP represent the Company’s loan receivable from MCAP associated with the Company’s involvement in
the IMPP (Note 6), 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 and retained interest, whose classifications are discussed above. The carrying value of all financial
investments approximates fair value, except the insured MBS noted above.
- 63 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
12. Other Loans
As at December 31
Loans receivable - employees
Loans receivable - MCAP
Loans receivable - other
Note
29
29
2012
1,924
1,240
-
3,164
$
$
2011
1,831
-
1,196
3,027
$
$
The Company has loans receivable from MCAP bearing interest at 5% and maturing in 2015.
A loan receivable as at December 31, 2011 had an interest rate of the greater of 7% and prime plus 4% (7% at December
31, 2011) and was payable on demand.
All other loans are classified as loans and receivables.
13. Equity Investment in MCAP Commercial LP
The Company has a 23.4% equity interest in MCAP as at December 31, 2012 (December 31, 2011 - 22.7%), consisting of
25% of voting class A units, 0% of non-voting class B units and 25% of non-voting class C units.
During 2012, MCAN purchased $14,000 of non-voting class C units in MCAP. MCAP used these funds, in addition to
equity capital from one of its other partners, to acquire the remaining 80% in MCAP Service Corporation that was not
previously owned by MCAP. During 2012, MCAP also acquired the residential mortgage operations and certain related
assets of ResMor Trust Company.
Subsequent to MCAN’s purchase of class C units in MCAP, MCAP issued new class B units such that MCAN’s interest in
MCAP decreased to 23.4%.
Since MCAP’s fiscal year end is November 30th, MCAN records equity income from MCAP on a one-month lag. To the
extent that MCAP has a material 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.
MCAN holds a 25% voting interest in MCAP through its class A units. The remaining 75% of the class A and class C units
are held by Cadcap Limited Partnership, a subsidiary of the Caisse de dépôt et placement du Québec.
Years Ended December 31
Balance, beginning of year
Additional equity investment
Equity income
Distributions received
Balance, end of year
As at December 31
Share of MCAP’s balance sheet:
Assets
Liabilities
Equity
$
$
2012
15,480
14,000
6,906
-
36,386
2012
$ 1,215,427
1,175,194
40,233
$
$
$
2011
11,530
-
5,007
(1,057)
15,480
2011
109,533
90,063
19,470
Carrying amount - equity investment in MCAP
$
36,386
$
15,480
The variance between MCAN’s share of MCAP’s equity and MCAN’s carrying amount of its equity investment in MCAP
arose from a corporate reorganization that took place in 2004 in which MCAN reduced its partnership interest in MCAP
from 50% to 25%.
Years Ended December 31
2012
2011
Share of MCAP revenue and net income:
Revenue
Net income
$
$
33,392
6,906
$
$
12,010
5,007
- 64 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
14. Other Assets
Other corporate assets include receivables, capital assets and prepaid expenses. Other securitization assets, totalling $1,248
at December 31, 2012 (December 31, 2011 - $3,049), consist of miscellaneous assets relating to the Company’s
participation in the CMB program. Other assets are carried at cost.
As at December 31
Corporate assets:
Receivables
Related party receivables - MCAP
Capital assets
Other
15. Short-Term Investments
As at December 31
Commercial paper (in trust for CMB program)
Repo GOCs (in trust for CMB program)
CMB cash held in trust
Cash pledged as collateral - CMB program
2012
2011
952
2,757
565
413
4,687
$
$
287
-
379
281
947
2012
2011
319,590
4,362
54,491
-
378,443
$
$
289,719
-
52,964
2,804
345,487
$
$
$
$
Short-term investments consist primarily of commercial paper and Government of Canada Bonds for which MCAN has a
repurchase agreement with a financial institution (“Repo GOCs”) held as reinvestment assets for the CMB program in
addition to CMB cash held in trust and cash pledged as CMB program collateral. The weighted average yields of the CMB
principal reinvestment assets listed above are as follows: commercial paper - 1.14% (December 31, 2011 - 1.10%) and
Repo GOCs - 0.90% (December 31, 2011 - n/a). 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. Mortgages - Securitized
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 6 and 21).
(a) Summary
As at December 31, 2012
Single family
Commercial
As at December 31, 2011
Single family
Commercial
Gross
Principal
Allowance
Net
Principal
$
$
889,213
47,734
936,947
$
$
-
-
-
$
$
889,213
47,734
936,947
Gross
Principal
Allowance
Net
Principal
$ 1,451,075
47,941
$ 1,499,016
$
$
-
-
-
$ 1,451,075
47,941
$ 1,499,016
Certain capitalized transaction costs are included in mortgages and are amortized using the EIRM. As at December 31,
2012, the unamortized capitalized cost balance was $1,636 (December 31, 2011 - $3,965). All mortgages in the securitized
portfolio are insured, therefore they do not have a collective allowance. The fair market value of the securitized mortgage
portfolio as at December 31, 2012 was $1,057,508 (December 31, 2011 - $1,672,958).
- 65 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
16. Mortgages - Securitized (continued)
The weighted average yield of the Company’s securitized mortgage portfolio is as follows:
As at December 31
Single family
Commercial
Total
(b) Geographic Analysis
As at December 31
Ontario
Alberta
British Columbia
Other
2012
3.34%
3.26%
3.34%
2011
4.00%
3.49%
3.99%
2012
2011
$
$
451,569
221,606
133,095
130,677
936,947
48.2%
23.7%
14.2%
13.9%
100.0%
$
749,176
348,636
218,030
183,174
$ 1,499,016
50.0%
23.3
14.5
12.2
100.0%
(c) Arrears and Impaired Mortgages
Mortgages past due but not impaired are as follows:
As at December 31, 2012
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
Single family
$
16,665
$
3,682
$
1,538
$
2,321
$
24,206
As at December 31, 2011
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
Single family
$
27,713
$
12,776
$
3,117
$
3,947
$
47,553
There were no impaired securitized mortgages as at December 31, 2012 (December 31, 2011 - $86).
17. 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, 2012
Less than
one year
One to
five years
Over five
years
Total
CMB interest rate swaps - fair value
CMB interest rate swaps - outstanding notional
$
$
1,802
94,983
$
$
2,864
102,690
$
$
-
-
$
$
4,666
197,673
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
- 66 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
17. Derivative Financial Instruments (continued)
Derivative financial instrument activity was as follows:
Years Ended December 31
Balance, beginning of year
Net interest rate swap receipts
Unrealized derivative financial instrument gain (loss)
Balance, end of year
18. Term Deposits
As at December 31
Term deposits
Accrued interest
Fair value
2012
2011
$
13,348
$
13,120
(7,408)
(1,274)
(8,682)
(8,587)
8,815
228
$
4,666
$
13,348
2012
2011
$
$
$
769,450
7,627
777,077
786,837
$
$
$
595,747
5,830
601,577
610,944
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, 2012 was 2.45% (December 31, 2011 - 2.44%). 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.
19. Income Taxes
The composition of the provision for (recovery of) income taxes is as follows:
Years Ended December 31
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
Temporary differences not previously recognized
Deferred tax included in equity of associate
Adjustments in respect of prior years
Years Ended December 31
Current tax provision (recovery)
Deferred tax provision (recovery)
2012
16,238
(24,999)
(8,761)
39%
(3,417)
66
(495)
(428)
(450)
(452)
(79)
(5,255)
2012
(1,519)
(3,736)
(5,255)
$
$
$
$
2011
24,848
(28,101)
(3,253)
40%
(1,301)
(225)
(6)
(569)
-
-
(154)
(2,255)
2011
(2,072)
(183)
(2,255)
$
$
$
$
- 67 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
19. Income Taxes (continued)
The composition of the deferred tax liabilities is as follows:
As at December 31
Provision for credit losses
Securitization-related items
Equity investment in MCAP Commercial LP
Financial investments
Marketable securities
Loss carry forward benefit
Other
Current Taxes Payable
2012
2011
$
$
(1,492)
2,454
931
191
253
(126)
(369)
1,842
$
$
(1,198)
6,529
(157)
162
137
-
(37)
5,436
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.
20. Other Liabilities
As at December 31
Corporate liabilities:
Accounts payable and accrued charges
Related party payables - MCAP
Dividends payable
Securitization liabilities:
Accrued charges
Other CMB liabilities
2012
2011
$
$
$
$
4,249
-
5,244
9,493
17
3,251
3,268
$
$
$
$
2,602
789
4,552
7,943
28
6,031
6,059
The Company held investments in the senior position and first loss position of a residential construction loan securitization
program that were both repaid in full in 2010 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. During 2012, the Company increased its accrued liability representing estimated
losses associated with this indemnity from $200 to $1,100 as a result of a decrease in the fair market value of an impaired
residential construction loan that the Company has indemnified. This amount represents the Company’s estimated loss as at
December 31, 2012 based on the underlying property value given market conditions at that date. There are no other
impaired mortgages associated with the indemnification of this securitization program. As at December 31, 2012, the
outstanding balance of the remaining loans was $25,226 (December 31, 2011 - $25,282).
Due to the short-term nature of other liabilities, their carrying value approximates fair value.
- 68 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
21. 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.
As at December 31
Financial liabilities - CMB program
Financial liabilities - IMPP
Note
6
6
2012
2011
$ 1,855,051
159,995
$ 2,015,046
$ 2,944,209
167,148
$ 3,111,357
The financial liabilities - CMB program had a weighted average interest rate of 3.18% as at December 31, 2012 (December
31, 2011 - 3.66%).
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, 2012 mature as follows:
2013
2014
2015
CMB
IMPP
Total
$
965,885
844,359
44,807
$ 1,855,051
$
$
132,433
27,562
-
159,995
$ 1,098,318
871,921
44,807
$ 2,015,046
MCAN does not participate in the economics of the IMPP (Note 6) 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, 2012, the unamortized capitalized cost balance was $500 (December 31, 2011 - $1,099).
22. 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
Rights offering
Dividend reinvestment plan
Executive Share Purchase Plan
Balance, December 31
Number
of Shares
2012
Number
of Shares
2011
16,861,575
$
132,817
14,447,743
$
100,112
-
1,699,157
167,768
-
18,728,500
-
19,913
2,275
-
155,005
2,300,000
-
93,532
20,300
16,861,575
31,024
-
1,382
299
132,817
$
$
During 2012, the Company successfully completed a fully subscribed rights offering of 1,699,157 common shares at a price
of $11.85 per share, for net proceeds of $19,913 after deducting $222 of issuance costs.
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 2012, the Company issued 167,768 (2011 - 93,532) shares under the dividend reinvestment plan out of treasury at
the weighted average trading price for the 5 days preceding such issue (2011 - 20 days). In November 2011, the Company
amended its dividend reinvestment plan to change the basis of the weighted average trading price to the five days preceding
such issue less a discount of 2%. The January 3, 2012 dividend was the first dividend for which the revised basis was
applicable.
For details on the Executive Share Purchase Plan, refer to Note 29.
The Company had no potentially dilutive instruments as at December 31, 2012 or December 31, 2011.
Contributed surplus of $510 represents the discount on the repurchase of warrants in 2004.
- 69 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
23. Dividends
Dividends on common shares declared in the prior year and paid in the current year
(recognized as a liability at December 31, 2011 and 2010)
Fourth quarter dividend, 2011: $0.27 per share (2010: $0.26 per share)
Dividends on common shares declared and paid during the year
2012: $1.14 per share (2011: $1.54 per share)
Dividends on common shares declared during the year
(recognized as a liability at December 31, 2012 and 2011)
Fourth quarter dividend, 2012: $0.28 per share (2011: $0.27 per share)
2012
2011
$
4,552
$
3,756
$
19,755
$
23,549
$
5,244
$
4,552
Dividends on common shares approved in first quarter (not recognized as a
liability at December 31, 2012 or 2011)
First quarter dividend, 2013: $0.31 per share (2012: $0.60 per share)
$
5,819
$
10,129
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 2013 first quarter dividend of $5,819 noted above (2012 -
$10,129), which was not recognized as a liability as at December 31, 2012, is expected to reduce current taxes payable as at
March 31, 2013 by $2,297 (March 31, 2012 - $4,017). Certain additional factors may impact current taxes payable
between December 31, 2012 and March 31, 2013.
24. 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.
As at December 31
Unrealized gain on available for sale marketable securities
Less: deferred taxes
$
Unrealized gain on available for sale financial investments
Less: deferred taxes
2012
1,284
(252)
1,032
1,440
(191)
1,249
$
2011
697
(137)
560
1,249
(162)
1,087
25. Fees
Years Ended December 31
Mortgagor fees
Fee income from profit sharing
$
2,281
$
1,647
Note
29
2012
2,046
190
2,236
$
$
2011
1,290
303
1,593
$
$
- 70 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
26. Mortgage Expenses
Corporate Assets
Years Ended December 31
Mortgage servicing expense
Other mortgage expenses
Securitization Assets
2012
2,401
1,311
3,712
$
$
Mortgage expenses associated with securitization assets consist primarily of mortgage servicing expenses.
27. Provision for Credit Losses
Years Ended December 31
Mortgages - collective provisions
Mortgages - individual recoveries
Financial investments and other loans - collective recoveries
Other provisions
28. Other Securitization Income
Years Ended December 31
Net interest rate swap receipts
Refinancing and renewal gains
Income from sale of MBS
Other securitization-related items
29. Related Party Disclosures
2012
1,127
553
(20)
900
2,560
2012
7,408
1,325
978
(304)
9,407
$
$
$
$
2011
2,612
795
3,407
2011
1,147
(86)
(3)
-
1,058
2011
8,587
132
261
21
9,001
$
$
$
$
$
$
The consolidated financial statements include the financial statements of the Company and its equity accounted associates
listed in the following table:
Associate:
MCAP Commercial LP
% Equity Interest
December 31
2012
December 31
2011
23.4%
22.7%
The Company holds a 23.4% equity interest in MCAP, a non-public entity. During 2012, MCAN purchased $14,000 of
non-voting class C units in MCAP. MCAP’s principal activities include the origination and servicing of mortgages. The
Company holds one of five seats on MCAP’s Board of Directors.
During 2012, the Company purchased certain corporate services from MCAP in the amount of $566 (2011 - $497) and
purchased certain mortgage origination and administration services from MCAP in the amount of $2,766 (2011 - $2,859).
Also, the Company received $3,038 (2011 - $2,201) of mortgage fees from MCAP.
During 2012, the Company paid fees in the amount of $1,675 (2011 - $2,685) to MCAP relating to a profit sharing
arrangement on a portfolio of discounted mortgages and received $190 (2011 - $303) of fees from MCAP relating to a
profit sharing arrangement on a portfolio of discounted mortgages.
- 71 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
29. Related Party Disclosures (continued)
As part of the aforementioned profit sharing arrangements related to discounted mortgages, MCAP pays MCAN 50% of
any recoveries of discounts on mortgages held on MCAP’s balance sheet. In addition, MCAN reimburses MCAP for 50%
of any credit losses on discounted mortgages held on MCAP’s balance sheet (where MCAN participates in a profit sharing
arrangement), and vice versa.
During 2012, MCAN created certain MBS that were sold to a third party. MCAN subsequently entered into an economic
arrangement with MCAP and sold the rights to all net economics associated with these MBS, consisting primarily of
interest-only strips less upfront costs. MCAN earned $978 from these sales (2011 - $261), which are included in other
securitization income. Derecognition was achieved on the sale of the mortgages.
During 2012, MCAN purchased a retained interest in insured single family mortgages from MCAP that yields up to 8.75%
depending on mortgage prepayment levels. The balance as at December 31, 2012 was $3,084 (December 31, 2011 - $nil)
(Note 11).
During 2012, MCAN advanced loans to MCAP bearing interest at 5%. At December 31, 2012, the outstanding loan
balance was $1,240 (December 31, 2011 - $nil) (Note 12).
All related party transactions noted above were in the normal course of business. 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:
Years Ended December 31
Salaries and short term employee benefits
Other long term benefits
Executive Share Purchase Plan
2012
1,878
137
2,015
$
$
2011
1,557
181
1,738
$
$
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 2012,
no common shares were issued out of treasury under the Share Purchase Plan (2011 - 20,300). The loans advanced in 2012
were provided to purchase shares issued through the rights offering. 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.
MCAN advanced $305 of new loans under the Share Purchase Plan during 2012 (2011 - $299). As at December 31, 2012,
$1,924 of loans were outstanding (December 31, 2011 - $1,831) (Note 12). The loans under the Share Purchase Plan bear
interest at prime plus 1%, 4% at December 31, 2012 (December 31, 2011 - 4%) and have a five-year term. The shares are
pledged as security for the loans and had a fair market value of $3,159 as at December 31, 2012 (December 31, 2011 -
$2,749).
During 2012, MCAN recognized $72 of interest income (2011 - $70) 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, 2012, 20,000 units had vested (December 31,
2011 - 10,000). The remaining 10,000 units vest on July 6, 2013.
The Company recognizes compensation expenses associated with the DSU Plan in line with the graded vesting schedule.
The compensation expense recognized related to the DSU Plan for the year ended was $137 (2011 - $181). As at
December 31, 2012, the accrued DSU Plan liability was $446 (December 31, 2011 - $309).
- 72 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
30. 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.
As at December 31, 2012
Term deposits
Operating lease
Mortgage fundings
CMB obligations
Less than
one year
One to
five years
Over five
years
Total
$
$
467,957
277
198,336
473
667,043
$
$
309,120
205
49,251
201
358,777
$
$
-
-
-
-
-
$
777,077
482
247,587
674
$ 1,025,820
MCAN incurred $260 of operating lease expenses during the year (2011 - $238), 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. CDP Capital - Real Estate Advisory Inc.
(“CDP Capital - Real Estate Advisory”) indemnifies the Company to the extent of 75% of the costs of any claim 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 MCAP.
The guarantees subject to the CDP Capital - Real Estate Advisory indemnity are as follows:
(a) guarantee of the performance of MCAP with respect to the warehousing of residential construction loans related to
MCAP’s residential construction loan securitization program; and
(b) guarantee of the premises lease with respect to the premises occupied by MCAP and the Company at 200 King Street
West, Toronto with a current monthly rent of $116 and expiring in September 2014.
The Company is a party to an indemnity agreement relating to a residential construction loan securitization program,
discussed in Note 20.
In the ordinary course of business, MCAN and its service providers (including MCAP), their subsidiaries and related
parties may from time to time be party to legal proceedings which may result in unplanned payments to third parties. To
the best of the Company’s knowledge, MCAN management does not expect the outcome of any of these proceedings to
have a material effect on the consolidated financial position or results of operations of MCAN.
Currently, MCAP is one of several parties to a claim in respect of a development project in Alberta. Although a summary
judgment in MCAP’s favour was rendered at trial, the Alberta Court of Appeal overturned the summary judgment in part
and has directed that certain aspects of the claim be allowed to proceed to trial. MCAN management does not believe that
the claim has any merit and believes the claim will ultimately be unsuccessful against MCAP at trial. In any event,
management of MCAN believes that any monetary damages against MCAP would not have a material financial impact on
MCAN.
31. 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, 2012 (December 31, 2011 - prime plus 1%, 4%). 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, 2012, the outstanding overdraft balance was $nil (December 31, 2011 - $nil).
- 73 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
31. Credit Facilities (continued)
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, 2012, there were letters of credit in
the amount of $25,665 issued (December 31, 2011 - $26,666) and additional letters of credit in the amount of $16,082
committed but not issued (December 31, 2011 - $12,597).
32. 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, 2012 and
December 31, 2011 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 Risk 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 6 and 17.
- 74 -
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
32.
Interest Rate Sensitivity (continued)
The following table presents the assets and liabilities of the Company by interest rate sensitivity:
As at December 31, 2012
Floating
Rate
Within
3 Months
3 Months
to 1 Year
1 to 5
Years
Over 5
Years
Non Interest
Sensitive
Total
$ 378,655
410,198
788,853
$
74,847
539,952
614,799
$ 216,912
460,824
677,736
$
203,574
463,718
667,292
$
$
5,588
-
5,588
71,110
161,243
232,353
$ 950,686
2,035,935
2,986,621
Shareholders’ Equity
-
-
-
-
-
80,519
80,519
230,981
-
230,981
236,976
965,884
1,202,860
309,120
808,648
1,117,768
-
-
-
-
13,449
163,263
176,712
790,526
2,018,314
2,808,840
177,781
177,781
GAP
$ 708,334
$ 383,818
$ (525,124)
$ (450,476)
$
5,588
$
(122,140)
-
YIELD SPREAD
1.01%
0.92%
1.90%
1.74%
5.61%
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
$ 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
-
-
-
-
16,700
173,207
189,907
618,277
3,117,416
3,735,693
158,465
158,465
GAP
$ 814,428
$ 391,825
$ (477,722)
$ (619,012)
$
13,663
$
(123,182)
-
YIELD SPREAD
0.62%
1.13%
1.55%
1.12%
6.63%
Certain residential construction loans and single family uninsured completed inventory loans are subject to the greater of a
minimum interest rate (ranging between 3% and 15%) or a prime based interest rate. To the extent that the minimum rate
exceeds the prime based rate at December 31, 2012, these mortgages have been reflected in the table above as fixed rate
mortgages, as follows: within 3 months - $65,024 (December 31, 2011 - $32,651), 3 months to 1 year - $57,580 (December
31, 2011 - $57,783) and 1 to 5 years - $28,330 (December 31, 2011 - $35,406).
An immediate and sustained 1% increase (decrease) to market interest rates at December 31, 2012 would have a positive
(adverse) effect of $2,608 (December 31, 2011 - $1,539) to net income over the following twelve month period. An
immediate and sustained 1% increase (decrease) to market interest rates at December 31, 2012 would have an adverse
(positive) effect to the available for sale reserve of $208 (December 31, 2011 - $494).
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.
- 75 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
33. 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. 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%. Both ratios were above this target as at December 31, 2012.
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 Company’s Tax Act and regulatory ratios are as follows:
As at December 31
Tax Act Ratios
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
Capital ratios
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Assets to capital ratio
2012
2011
$
953,235
168,477
5.66
4.66
$
766,065
156,116
4.91
3.91
$
$
155,005
510
19,985
(229)
175,271
1,032
(229)
803
132,817
510
23,491
(229)
156,589
560
(229)
331
$
176,074
$
156,920
$ 1,002,759
$
818,112
21.74%
21.84%
5.70
22.21%
22.26%
5.21
As at December 31, 2012 and December 31, 2011 the Company was in compliance with the capital guidelines issued by
OSFI under Basel II.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
33. Capital Management (continued)
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 December 31
On-Balance Sheet Assets
Cash and cash equivalents
Short term investments
Marketable securities
Mortgages - corporate
Financial investments
Other loans
Equity investment in MCAP
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
Charge for operational risk
Total Risk-Weighted Assets
2012
2011
$
$
25,396
-
20,390
494,935
21,966
3,164
36,386
5,933
608,170
12,832
123,794
136,626
197,673
0.5%
988
4,666
5,654
20%
1,131
10,813
561
30,149
402,632
18,414
3,027
15,480
3,976
485,052
13,333
137,526
150,859
272,903
0.5%
1,365
13,348
14,713
20%
2,943
60,213
66,100
$
806,140
$
704,954
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. Further details on Basel III are available in
the Capital Management section of the Management’s Discussion and Analysis (“MD&A”).
34. Financial Instruments
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).
- 77 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
34. Financial Instruments (continued)
As at December 31, 2012
Level 1
Level 2
Level 3
Financial Assets
Marketable securities
Financial investments - commercial real estate
Financial investments - retained interest
Derivative financial instruments
$
$
11,899
-
-
-
11,899
$
$
8,491
-
-
4,666
13,157
$
$
-
13,792
3,084
-
16,876
As at December 31, 2011
Level 1
Level 2
Level 3
Financial Assets
Marketable securities
Financial investments - commercial real estate
Derivative financial instruments
$
$
14,330
-
-
14,330
$
$
15,819
-
13,348
29,167
$
$
-
8,250
-
8,250
The following table shows the continuity of Level 3 financial assets recorded at fair value:
Balance, December 31, 2011
Advances
Repayments
Changes in fair value, recognized in other comprehensive income
Balance, December 31, 2012
$
$
8,250
12,711
(4,275)
190
16,876
An increase of 0.25% to capitalization rates as at December 31, 2012 would result in a decrease to the fair value at Level 3
financial investments - commercial real estate by $1,015 (December 31, 2011 - $688). A decrease of 0.25% to
capitalization rates as at December 31, 2012 would result in an increase to the fair value of Level 3 financial investments -
commercial real estate by $1,084 (December 31, 2011 - $736).
An increase of 1% to market interest rates as at December 31, 2012 would result in a decrease to the fair value at Level 3
financial investments - retained interest by $15 (December 31, 2011 - n/a). A decrease of 1% to capitalization rates as at
December 31, 2012 would result in an increase to the fair value of Level 3 financial investments - retained interest by $15
(December 31, 2011 - n/a).
There were no transfers between levels during the years ended December 31, 2012 or December 31, 2011. There were no
financial liabilities reported at fair value as at December 31, 2012 or December 31, 2011.
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.
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.
35. 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.
- 78 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
35. Standards Issued But Not Effective (continued)
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. This standard is effective for periods beginning on
or after January 1, 2013. Retrospective application will be required. The Company does not expect the adoption of this
standard to have a material impact on its results as well as to the presentation of the Company’s financial statements
IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (Amendments to IAS
32).
These amendments clarify the offsetting criteria in IAS 32 to address inconsistencies in their application. These
amendments clarify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a
future event and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of
the entity and all counterparties. The amendment also clarifies the application of the IAS 32 offsetting criteria to settlement
systems. This amendment will be effective for annual periods beginning on or after January 1, 2014. The Company is in the
process of assessing the impact of adopting this amendment.
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 does not anticipate any material changes to the financial position or operating results upon adoption of IFRS 10.
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 does not
expect the adoption of this standard to result in material changes to the presentation of the Company’s financial statements.
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 does not expect the adoption of this standard to have a material
impact on its results.
IAS 1, Presentation of Financial Statements
This standard has a number of amendments regarding financial statement presentation and disclosure requirements. This
standard is effective for annual periods beginning on or after July 1, 2012. The Company does not expect the adoption of
this standard to result in material changes to the presentation of the Company’s financial statements.
IAS 19, Revised Employee Benefits
This standard prescribes the accounting and disclosure requirements for employee benefits. This standard shall be applied
by an employer in accounting for all employee benefits, except those to which IFRS 2, Share-based Payment, applies. This
standard is effective for annual periods beginning on or after January 1, 2013. The Company does not expect the adoption
of this standard to have a material impact on its results as well as to the presentation of the Company’s financial statements.
IAS 28, Investments in Associates and Joint Ventures
This amendment prescribes the accounting for investments in associates and to set out the requirements for the application
of the equity method when accounting for investments in associates and joint ventures. This standard shall be applied by all
entities that are investors with joint control of, or significant influence over, an investee. This standard is effective for
annual periods beginning on or after January 1, 2013. The Company does not expect the adoption of this standard to have a
material impact on its results.
- 79 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2012 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2012 (Dollar amounts in thousands except for per share amounts)
36. 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.
- 80 -
2012 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 Risk 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 Risk 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 Risk Committee; Director
since November 2005.
Robert A. Stuebing
Corporate Director; Member of Audit Committee; Chair of
Risk 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 and Chief Risk Officer
Tammy Oldenburg
Vice President and Chief Financial Officer
Carl Brown
Vice President, Operations
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
- 81 -
CORPORATE INFORMATION
Head Office
200 King Street West, Suite 400
Toronto, Ontario
M5H 3T4
Tel: (416) 572-4880
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
2012 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
Corporate Information
This MCAN Mortgage Corporation 2012 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 416-572-4880 or 1-855-213-6226, 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
obtain
www-us.computershare.com/investor/.
Enrolment
Forms
online
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
Tuesday, May 14, 2013
4:30 p.m. (Eastern Daylight Savings Time)
St. Andrew’s Club & Conference Centre
150 King Street West
27th Floor
Toronto, Ontario
- 82 -