ANNUAL REPORT 2013
MCAN MORTGAGE CORPORATION
2013 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
DESCRIPTION OF BUSINESS
MCAN Mortgage Corporation (“MCAN”) is a public company listed on the Toronto Stock Exchange (“TSX”) under the symbol
MKP and is a reporting issuer in all provinces and territories in Canada. MCAN is a Loan Company under the Trust and Loan
Companies Act (the “Trust Act”) and also qualifies as a mortgage investment corporation (“MIC”) under the Income Tax Act
(Canada) (the “Tax Act”).
Our objective is to generate a reliable stream of income by investing our funds in a portfolio of mortgages (including single
family residential, residential construction, non-residential construction and commercial loans), as well as other types of loans and
investments, real estate and securitization investments. We employ leverage by issuing term deposits eligible for Canada Deposit
Insurance Corporation (“CDIC”) deposit insurance up to a maximum of five times capital (on a non-consolidated basis) as limited
by the provisions of the Tax Act applicable to a MIC.
Our term deposits are sourced through a network of independent financial agents. As a MIC, we are entitled to deduct from
income for tax purposes 50% of capital gains dividends and 100% of non-capital gains dividends that we pay to shareholders.
Such dividends are received by our shareholders as capital gains dividends and interest income, respectively.
MCAN’s wholly-owned subsidiary, Xceed Mortgage Corporation (“Xceed”), focuses on the origination and sale to third party
mortgage aggregators of residential first-charge mortgage products across Canada. As such, Xceed operates primarily in one
industry segment through its sales team and mortgage brokers.
TABLE OF CONTENTS
PRESIDENT AND CEO’S MESSAGE TO SHAREHOLDERS ................................................................................. 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS ................................................................ 4
CONSOLIDATED FINANCIAL STATEMENTS ..................................................................................................... 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................. 60
DIRECTORS, OFFICERS AND MANAGEMENT ................................................................................................. 100
CORPORATE INFORMATION ............................................................................................................................... 101
2013 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
MESSAGE TO SHAREHOLDERS
We reported net income for the year ended December 31, 2013 of $30.2 million, an increase of 41% over 2012 net income of
$21.5 million. Earnings per share were $1.54 per share for the year, up from $1.22 per share in 2012. Return on average
shareholders’ equity was 15.79% in 2013 compared to 13.03% in 2012. Taxable income (please refer to the “Non-IFRS
Measures” section of the MD&A) was $0.78 per share in 2013 compared to $1.17 per share in 2012.
Corporate assets were $1.02 billion at December 31, 2013, up 7% from $951 million at December 31, 2012. Mortgage interest
income increased by $9.1 million from the prior year as a result of a $93 million increase in the average mortgage portfolio (from
$691 million in 2012 to $784 million in 2013) and an increase in the average mortgage yield from 5.81% in 2012 to 6.40% in
2013.
Corporate mortgage arrears were $28 million as at December 31, 2013, down from $39 million as at December 31, 2012. The
decrease relates primarily to single family mortgages. Securitized mortgage arrears were $11 million as at December 31, 2013,
down from $24 million as at December 31, 2012. 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.
The net investment income from securitization assets before fair market value adjustments was $141,000 in 2013 compared to
$2.8 million in 2012. Including fair market value adjustments on derivative financial instruments, there was a net investment loss
on securitization assets of $3.1 million in 2013 compared to a loss of $5.9 million in 2012. Gross securitization revenues and
expenses decreased significantly from 2012 from a substantial decline in average securitization asset and liability balances, which
was due to the maturity of $970 million of CMB-related assets and liabilities during 2013.
As we described in previous quarterly results, we completed a transformational milestone in 2013. On July 4, 2013, we
announced the successful completion of the acquisition of Xceed Mortgage Corporation (“Xceed”). We paid consideration of
$51.8 million, consisting of $30.3 million in cash and 1,531,903 MCAN common shares (valued at $14.05 per share, for a total of
$21.5 million). Historically, Xceed has focused primarily on originating insured and uninsured residential single family
mortgages. Once originated, Xceed would then sell its insured mortgages to third parties earning whole loan gain on sale income
or providing on-balance sheet interest income for mortgages held.
Following the close of the transaction, we began to consolidate Xceed’s operating results from July 4, 2013 onwards. Our
purchase of Xceed occurred at a discount to Xceed’s fair value, resulting in a bargain purchase gain of $2.1 million. In addition,
the acquisition enabled us to raise $21.5 million of new share capital. We incurred $2.0 million in transaction and restructuring
costs relating to the costs of completing the acquisition and consolidation and reduction of certain key employees, which largely
offset the bargain purchase gain. As a result of the acquisition, in October we were able to launch a new uninsured single family
mortgage product funded by MCAN and originated by Xceed. Xceed also brought $683 million of renewal rights on insured
single family mortgages on which we continue to offer renewals, which provides us with a new source of revenue.
In the fourth quarter, we also announced a significant change to our investment in MCAP Commercial LP (“MCAP”). On
November 30, 2013, MCAP issued 5,080,802 new class A units and 3,452,829 new class C units to other partners of MCAP at a
cost of $11.72 per unit, raising $100 million of new unitholder equity. As a result of the issuance of the new units at a price in
excess of the carrying value per unit, we recorded a $4.5 million gain on the dilution of the investment in MCAP. Subsequent to
the issuance of the new class A and class C units, we sold 237,880 class A units to another partner of MCAP at a price of $11.72
per unit, recognizing a gain on sale of $736,000. The combination of the two transactions reduced our equity interest in MCAP
from 23.4% to 15.7%. Subsequent to year end, we sold 250,000 class C units, reducing our equity interest to 14.8%. Our
primary objective in reducing our investment level in MCAP was to the minimize capital deductions associated with the
investment under new Basel III capital requirements (refer to the “Capital Management” section of the MD&A for additional
information).
In the fourth quarter, we also obtained approval from CMHC to commence selling interest-only strips, which represent the
residual spread interest earned from insured mortgages that are securitized through the market MBS program (for additional
information, refer to the “Securitization Programs” section of the MD&A). This approval enables us to originate or purchase
insured mortgages which can then be securitized for an up-front gain on sale that is realized through the derecognition of
mortgages from our balance sheet. Previous forms of securitization such as the Canada Mortgage Bonds (“CMB”) program or
sales through the previous market MBS program were punitive to us, as we were unable to obtain balance sheet derecognition and
thus kept the securitized mortgages on our balance sheet. Consequently, insured mortgages resulted in a utilization of available
asset room under existing capital standards. The new market MBS securitization program provides for the sale of interest-only
strips and subsequent balance sheet derecognition. We expect to be able to meet OSFI’s Basel III requirements, both
implemented during 2013 and to be phased in through 2019.
Since MCAN is a Mortgage Investment Corporation (“MIC”) under the Income Tax Act (Canada), we are not subject to corporate
taxes as long as we pay out all of our taxable income within 90 days after our year end. Over the years, we have endeavored to
pay dividends equal to our taxable income and maximize returns to you as our shareholder. The alternative to paying a dividend
is to retain our income, which increases our capital base and the ability for us to leverage our capital into new asset growth.
Taxable income is not an IFRS accounting measure (please refer to the “Non-IFRS Measures” section of the MD&A). Taxable
income, being the income calculated for tax purposes when we prepare our tax returns, is subject to different timing in the
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2013 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
recognition of income compared to income for accounting purposes. As such, we may run into situations as we experienced in
2013, where we generate significant accounting income yet realize much lower taxable income.
One of the causes of timing differences between accounting income and taxable income this year relates to our strategic
investment in MCAP. MCAP continued to yield solid results in 2013, as equity income from the investment was $6.6 million in
2013 compared to $6.9 million in 2012 (representing our share of MCAP’s accounting income).
Our investment in MCAP was $39 million at December 31, 2013 on an equity-accounted basis compared to $36 million at
December 31, 2012. As a result of the tax treatment of MCAP’s securitization activities whereby origination costs are expensed
at the time of origination, MCAP’s earnings are largely tax deferred. As the revenue earned on mortgages accretes into income,
the timing differences associated with income for accounting and tax purposes will reverse over future periods. As a result of
these differences, we recognized a tax loss of $0.4 million from our investment in MCAP in 2013.
Based on most recent projections from MCAP, we expect positive taxable income in future periods. The Board of Directors is
confident that our investment in MCAP is strategic and the opportunity to participate in the growth in earnings and appreciation
in the enterprise value of MCAP is prudent. We are also currently in the process of evaluating alternative tax structures to hold
the MCAP investment more efficiently.
2013 was clearly a transformative year that will benefit MCAN’s future strategic direction. We produced strong net income and
return on equity in 2013, albeit with lower taxable income. We reached $1 billion in corporate assets. We acquired Xceed,
creating mortgage origination capability through a CMHC-approved lender. We re-entered the MBS market with a significant
MBS sale in December. We expect that several of the initiatives executed in 2013 will contribute to future net income and
improved taxable income.
The Board of Directors has declared a dividend of $0.28 per share payable on March 31, 2014 to shareholders of record as at
March 17, 2014.
William Jandrisits
President and Chief Executive Officer
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 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, 2013 and December 31, 2012 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 February 23, 2014.
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 the 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.
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 and other employees;
•
•
•
• additional risks and uncertainties, many of which are beyond our control, referred to in the MD&A and our other public
litigation risk;
relationships with our mortgage originators;
ability to realize anticipated benefits from the acquisition of Xceed Mortgage Corporation (“Xceed”); and
filings with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake no obligation to publicly update any forward-looking statements
whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in
subsequent reports should be consulted.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
TABLE OF CONTENTS - MD&A
SELECTED FINANCIAL INFORMATION ................................................................................................................................... 6
HIGHLIGHTS .................................................................................................................................................................................. 7
OUTLOOK ....................................................................................................................................................................................... 8
NON-IFRS MEASURES .................................................................................................................................................................. 8
PERFORMANCE CHARTS .......................................................................................................................................................... 10
RESULTS OF OPERATIONS ....................................................................................................................................................... 11
FINANCIAL POSITION ................................................................................................................................................................ 20
SUMMARY OF FOURTH QUARTER RESULTS ....................................................................................................................... 28
SELECTED QUARTERLY FINANCIAL DATA ......................................................................................................................... 33
SECURITIZATION PROGRAMS ................................................................................................................................................. 34
DESCRIPTION OF CAPITAL STRUCTURE ............................................................................................................................... 36
DIVIDEND POLICY AND RECORD ........................................................................................................................................... 37
CONTRACTUAL OBLIGATIONS ............................................................................................................................................... 37
TRANSACTIONS WITH RELATED PARTIES ........................................................................................................................... 37
ACQUISITION OF XCEED .......................................................................................................................................................... 38
CAPITAL MANAGEMENT .......................................................................................................................................................... 40
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS .................................................................................................. 42
LIQUIDITY .................................................................................................................................................................................... 42
RISK FACTORS ............................................................................................................................................................................ 43
RISK GOVERNANCE AND MANAGEMENT ............................................................................................................................ 45
PEOPLE ......................................................................................................................................................................................... 50
REGULATORY COMPLIANCE................................................................................................................................................... 50
INTERNAL AUDIT ....................................................................................................................................................................... 50
CRITICAL ACCOUNTING POLICIES AND ESTIMATES ........................................................................................................ 51
STANDARDS ISSUED BUT NOT EFFECTIVE .......................................................................................................................... 52
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING ........ 52
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SELECTED FINANCIAL INFORMATION
Table 1: Income Statement Highlights
(in thousands except for per share amounts and %)
2013
2012
2011
Change from 2012
(%)
($)
Operating Results
Net investment income - corporate assets
Other income - corporate assets
Net investment income - securitization assets
before market value adjustment
Fair market value adjustment
Net investment income - securitization assets
Operating expenses
Net income before income taxes
Provision for (recovery of) income taxes
Net income
Average mortgage portfolio yield - corporate 2,3
Term deposit average interest rate 2
Average mortgage portfolio yield - securitized 2
Financial liabilities from securitization
- average interest rate 2
Basic and diluted earnings per share
Dividends per share
Taxable income 1
Taxable income per share 1
$
38,956 $
5,363
31,135 $
25,650 $
-
-
7,821
5,363
141
(3,218)
(3,077)
2,778
(8,682)
(5,904)
5,830
228
6,058
11,290
29,952
(251)
30,203 $
8,993
16,238
(5,255)
21,493 $
6,860
24,848
(2,255)
27,103 $
(2,637)
5,464
2,827
2,297
13,714
5,004
8,710
5.83%
2.46%
5.81%
2.44%
6.53%
2.36%
3.62%
4.00%
4.23%
3.03%
3.54%
3.66%
1.54 $
1.15 $
1.22 $
1.42 $
1.68 $
1.81 $
0.32
(0.27)
15,301 $
0.78 $
20,518 $
1.17 $
22,879 $
1.42 $
(5,217)
(0.39)
$
$
$
$
$
Return on average shareholders' equity 1
15.79%
13.03%
18.52%
25.1%
0.0%
(94.9%)
(62.9%)
(47.9%)
25.5%
84.5%
(95.2%)
40.5%
0.02%
0.02%
(0.38%)
(0.51%)
26.2%
(19.0%)
(25.4%)
(33.3%)
2.76%
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
2 Refer to “Average Interest Rate” in the “Non-IFRS Measures” section of this MD&A.
3 For the purposes of this table, Xceed mortgages are excluded for the average mortgage portfolio yield. Including Xceed
mortgages, the yield was 6.40% (2012 and 2011 - n/a).
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 2: Balance Sheet Highlights
(in thousands except for per share amounts and %)
December 31
2013
December 31
2012
December 31
2011
Change from 2012
(%)
($)
Balance Sheet Highlights
Assets
Corporate
Securitization
Total assets
Mortgages - corporate
Mortgages - securitized
Liabilities
Corporate
Securitization
Total liabilities
Shareholders' equity
$
$
$
$
$
$
$
1,018,938 $
1,073,348
2,092,286 $
950,686 $
2,035,935
2,986,621 $
753,799 $
3,140,359
3,894,158 $
68,252
(962,587)
(894,335)
861,613 $
592,416 $
739,812 $
936,947 $
640,351 $
1,499,016 $
121,801
(344,531)
824,882 $
1,057,008
1,881,890 $
790,526 $
2,018,314
2,808,840 $
618,277 $
3,117,416
3,735,693 $
34,356
(961,306)
(926,950)
7.2%
(47.3%)
(29.9%)
16.5%
(36.8%)
4.3%
(47.6%)
(33.0%)
210,396 $
177,781 $
158,465 $
32,615
18.3%
Capital Ratios 2
Tax Assets to Capital Ratio
Common Equity Tier 1 Capital Ratio (transitional)
Common Equity Tier 1 Capital Ratio (all-in)
Tier 1 Capital Ratio (transitional)
Tier 1 Capital Ratio (all-in) 1
Total Capital Ratio (transitional)
Total Capital Ratio (all-in) 1
Regulatory Assets to Capital ratio (transitional)
Regulatory Assets to Capital ratio (all-in) 1,3
5.35
20.92%
19.83%
20.92%
19.83%
20.92%
19.83%
5.91
6.47
5.70
n/a
n/a
n/a
21.74%
n/a
21.84%
n/a
5.70
4.91
n/a
n/a
n/a
22.21%
n/a
22.26%
n/a
5.21
(6.1%)
n/a
n/a
n/a
(1.91%)
n/a
(2.01%)
n/a
13.5%
Credit Quality
Impaired mortgage ratio
Total mortgage arrears
Share Information (end of period)
Number of common shares outstanding
Book value per common share
Common share price - close
Market capitalization
$
$
$
$
0.51%
38,456 $
0.51%
63,489 $
0.67%
76,279 $
(25,033)
-
(39.4%)
20,461
10.28 $
13.00 $
265,993 $
18,729
9.49 $
14.01 $
262,393 $
16,862
9.40 $
13.40 $
225,951 $
0.79
(1.01)
3,600
9.2%
8.3%
(7.2%)
1.4%
1 December 31, 2012 and December 31, 2011 amounts are presented using Basel II, which did not have a “transitional” or “all-in”
approach applicable under Basel III effective January 1, 2013.
2 Refer to the “Non-IFRS Measures” section of the MD&A for a definition of these measures.
3 Mortgages sold through the market MBS program for which derecognition has not been achieved are included as assets in the
Regulatory Assets to Capital Ratio.
HIGHLIGHTS
Net income for the year was $30.2 million ($1.54 per share), up 41% from $21.5 million in the prior year ($1.22 per
share). Our return on equity was 15.79% for the year compared to 13.03% in 2012.
Corporate assets were $1.02 billion at December 31, 2013, up 7% from $951 million at December 31, 2012. 2013 was
the first year in which we surpassed the $1 billion level of corporate assets.
Impaired corporate mortgages as a percentage of the corporate portfolio were 0.85% at December 31, 2013, down from
1.17% at December 31, 2012. Impaired mortgages as a percentage of total mortgages were 0.51% at December 31,
2013, unchanged from 0.51% at December 31, 2012.
As at December 31, 2013, we had $76 million of remaining asset capacity based on our target assets to capital ratio of
5.75, which is measured on a tax basis.
Total mortgage arrears were $38 million at December 31, 2013, down from $63 million at December 31, 2012.
Our Common Equity Tier 1 risk-weighted assets to capital ratio (for further details, refer to the “Non-IFRS Measures”
section of this MD&A) was 20.92% at December 31, 2013 on the transitional basis and 19.83% on the “all-in” basis.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
On July 4, 2013, we completed the acquisition of Xceed. The acquisition resulted in an increase of $21.5 million to
share capital, and in purchasing Xceed at a discount to its fair value we recorded a non-taxable bargain purchase gain of
$2.1 million. In addition, we acquired the renewal rights to $683 million of insured single family mortgages previously
originated and sold by Xceed to third parties.
We earned $6.6 million from our equity investment in MCAP Commercial LP (“MCAP”) during the year, although we
incurred a loss of $375,000 during the year for tax purposes. We expect the timing difference between accounting and
taxable income to reverse over the next 4 years. We also sold a portion of the investment, recognizing a gain of
$736,000, and recognized a dilution gain of $4.5 million. The carrying value of our equity investment in MCAP was
$39 million at December 31, 2013.
During the fourth quarter, we gained approval from CMHC to re-commence the sale of interest-only strips associated
with the market MBS program. Accordingly, we re-commenced our participation in the market MBS program and sold
$168 million of MBS to a third party.
Taxable income per share (refer to the “Non-IFRS Measures” section of this MD&A) was $0.78, down from $1.17 in
the prior year. Although the decrease was primarily due to negative taxable income (refer to the “Non-IFRS Measures”
section of the MD&A) from MCAP, we expect to earn future taxable income from our investment in MCAP given the
timing differences between income for accounting and tax purposes. For further details, refer to the “Income Taxes”
sub-section of the “Results of Operations” section of this MD&A.
The Board of Directors (the “Board”) declared a 2014 first quarter dividend of $0.28 per share to be paid on March 31,
2014 to shareholders of record as of March 17, 2014.
OUTLOOK
Canada’s housing markets remain balanced and current demand and supply fundamentals appear positive for stability in price
points and housing sales for the coming year. The reduction in housing demand as a result of regulatory changes has stabilized
markets. Development approvals continue to be constrained in several Canadian markets, limiting the supply of single family
housing and creating price inflation. Housing markets will benefit from low mortgage rates, stable employment, a stable supply
of new and resale listings and reasonable housing affordability within our core lending markets.
We expanded our mortgage lending activities through captive and external origination in 2013. Xceed’s origination platform
allowed the Company to take advantage of attractive returns available in its single family lending markets in the fourth quarter.
We expect to continue to capitalize upon these opportunities with enhanced returns in 2014.
Asset growth has been in line with expectations, however increased competition has resulted in some spread compression within
our single family residential mortgage business. In Q4 2013 we successfully completed our first new MBS issuance through the
market MBS program since Q3 2012. We expect to continue with new issuances throughout 2014. Our focus will be on single
family originations for both our corporate balance sheet and market MBS securitization portfolios throughout 2014. We expect
growth within the corporate mortgage portfolio to remain in line with past years at 15 to 20%.
Our corporate asset portfolio continues to generate an acceptable return on capital, which we expect to improve over the next
twelve months as we grow the acquired origination and underwriting operations to scale and complete the implementation of
further technology enhancements to improve efficiencies. We continue to see good opportunities in our residential construction
and mezzanine lending activities which enhance the overall return to our shareholders, while maintaining portfolio diversification
within our risk appetite.
Financial results for the second half of 2013 contained several one-time items that contributed to net income. While we expect to
see the benefits of the Xceed acquisition in future periods through the realization of mortgages acquired at discounts, mortgage
renewals and increased single family origination, the magnitude of gains realized in 2013 may be difficult to repeat.
We will continue to maintain relatively high levels of liquidity to support our lending activities and depositors. We continue to
actively solicit new sources of deposits to diversify our network of deposits. As we approach full investment, the portfolio will
be adjusted to optimize overall returns on a risk adjusted basis.
NON-IFRS 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-IFRS measures used in this MD&A are defined as follows:
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 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 average shareholders’
equity using average shareholders’ equity, including all components of shareholders’ equity.
Taxable Income Measures
We typically pay out all taxable income to shareholders through dividends. Taxable Income Measures include taxable income,
estimated taxable income and estimated taxable income per share.
Average Interest Rate
The average interest rate is a profitability measure that presents the average annualized yield of an asset or liability.
Net Interest Income
Net interest income is a profitability measure that reflects net income earned only from interest-bearing assets and liabilities.
Common Equity Tier 1, Tier 1, Total Capital and Regulatory Assets to 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 31 of this MD&A and Note 35 to the consolidated financial statements.
Income Tax Capital Measures
Income tax assets, income tax liabilities and income tax capital represent MCAN’s assets, liabilities and capital as calculated
using the provisions of the Income Tax Act (Canada) (the “Tax Act”) applicable to a mortgage investment corporation (“MIC”).
The calculation of the income tax assets to capital ratio and income tax liabilities to capital ratio are based on these amounts.
Limited Partner’s At-Risk Amount
The value of our equity investment in MCAP for income tax purposes is referred to as the Limited Partner’s At-Risk Amount
(“LP ARA”), which represents the cost base of the limited partner’s investment in the partnership. The LP ARA is increased
(decreased) by the partner’s share of partnership income (loss) on a tax basis, increased by the amount of capital contributions
into the partnership and reduced by distributions received from the partnership.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
PERFORMANCE CHARTS
The following graph compares MCAN’s cumulative total shareholder return (assuming an investment of $100 on December 31,
2008) on its common shares during the period from January 1, 2009 to December 31, 2013, with the S&P/TSX Composite Index
(Total Return) and the S&P/TSX Financial Services Index (Total Return), assuming reinvestment of all dividends.
Figure 1: Shareholder Return
$250
$200
$150
$100
$50
$0
01/01/2009
31/12/2009
31/12/2010
31/12/2011
31/12/2012
31/12/2013
MCAN
S&P/TSX Composite Index
S&P/TSX Financial Services Index
Jan 1 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
2009
Compound
2013 Annual Growth
2009
2012
2011
2010
MCAN
S&P/TSX Composite Total Return Index
S&P/TSX Capped Financial Index
100
100
100
169.79
135.05
145.77
189.51
158.83
158.18
206.64
145
152.1
238.89
155.42
178.16
241.21
175.61
225.87
19.26%
11.92%
17.70%
Note: Dividends declared on MCAN's common shares are assumed to be reinvested at the closing price on the payment date.
-10-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Figure 2: Dividend History
Regular Dividend per share
Extra Dividend per share
$1.81
$0.73
$1.44
$0.43
$1.19
$0.15
$1.42
$0.33
$1.15
$0.03
$1.18
$0.34
$1.00
$0.08
$0.96
$0.84
$0.92
$0.96
$1.01
$1.04
$1.08
$1.09
$1.12
2006
2007
2008
2009
2010
2011
2012
2013
Table 3: Ten Year Financial Summary
(in thousands except per share amounts)
December 31
2013 (IFRS)
2012 (IFRS)
2011 (IFRS)
2010 (IFRS)
2009 (CGAAP)
2008 (CGAAP)
2007 (CGAAP)
2006 (CGAAP)
2005 (CGAAP)
2004 (CGAAP)
$
Net
Income
30,203
21,493
27,103
26,658
24,742
30,348
14,843
15,211
14,116
11,601
$
Earnings Dividends
Per Share Per Share
1.15
$
1.42
1.81
1.19
1.44
0.96
1.00
1.18
0.97
1.11
1.54
1.22
1.68
1.85
1.73
2.14
1.12
1.23
1.18
1.12
$
$
Assets1
1,018,938
950,686
753,799
538,118
506,683
570,154
557,425
498,107
434,369
454,365
Shareholders’
$
Market
Equity Capitalization
265,993
210,396
262,393
177,781
225,951
158,465
200,249
125,079
194,766
122,879
129,438
116,609
140,416
103,007
141,052
84,611
116,918
81,164
103,374
74,965
1 2010 - 2013 consist of corporate assets only as reported under IFRS. 2009 and earlier years consist of total assets as reported under Canadian Generally Accepted
Accounting Principles (“CGAAP”).
RESULTS OF OPERATIONS
Net income was $30.2 million for the year ended December 31, 2013, up from $21.5 million in the prior year. Earnings per share
were $1.54 compared to $1.22 in the prior year. The increase in net income was primarily due to higher mortgage interest
income, in addition to a bargain purchase gain recorded on the acquisition of Xceed, significantly higher yields earned on the
Xceed mortgage portfolio, a gain on dilution of our equity investment in MCAP, whole loan gains on sale earned in the year and a
decrease in the net investment loss from securitization assets. These increases were partially offset by higher operating expenses
incurred as part of the acquisition of Xceed and a lower recovery of taxes.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 4: Net Income - For the Years Ended December 31
(in thousands)
2013
2012
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Whole loan gain on sale income
Realized and unrealized gain (loss) on financial instruments
Interest on financial investments and other loans
Interest on cash and cash equivalents
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Provision for credit losses
Other Income - Corporate Assets
Bargain purchase gain
Transaction and restructuring expenses
Gain on dilution of investment in MCAP Commercial LP
Gain on sale of investment in MCAP Commercial LP
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
Operating Expenses
Salaries and benefits
General and administrative
Net Income Before Income Taxes
Provision for (recovery of) income taxes
Net Income
Basic and diluted earnings per share
Taxable income per share 1
Dividends per share
$
$
$
$
$
50,509
6,563
2,347
1,308
1,738
(558)
(62)
887
62,732
19,163
3,290
954
369
23,776
38,956
2,127
(2,010)
4,510
736
5,363
7,365
1,806
1,386
3,761
14,318
13,998
179
14,177
141
(3,218)
(3,077)
6,036
5,254
11,290
29,952
(251)
30,203
1.54
0.78
1.15
1 Refer to the "Non-IFRS Measures" section of this MD&A for a definition of this measure.
Certain items in the table above have been reclassified from prior years and quarters.
$
$
$
$
$
41,395
6,906
2,236
2,061
-
-
1,422
544
54,564
17,157
3,070
642
2,560
23,429
31,135
-
-
-
-
-
14,124
4,763
1,547
9,655
30,089
26,888
423
27,311
2,778
(8,682)
(5,904)
3,953
5,040
8,993
16,238
(5,255)
21,493
1.22
1.17
1.42
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Net Investment Income - Corporate Assets
Mortgage interest income increased by $9.1 million from the prior year as a result of a $93 million increase in the average
mortgage portfolio (from $691 million in 2012 to $784 million in 2013) and an increase in the average mortgage yield from
5.81% in 2012 to 6.40% in 2013. The increase in the average mortgage yield is a result of the higher effective interest rates on
the mortgages acquired as part of the acquisition of Xceed. Excluding the mortgages acquired from Xceed, the average mortgage
yield increased from 5.81% to 5.83%. Given the short duration of the mortgages acquired from Xceed, we expect the corporate
mortgage yield to return to historical levels by mid-2014. Mortgage interest income also includes $948,000 of realized discount
income from MCAN’s acquired mortgage portfolios compared to $1.2 million in 2012. For additional details, refer to Table 7 of
this MD&A.
Equity income from our investment in MCAP remained strong at $6.6 million in 2013, down slightly from $6.9 million in 2012.
MCAP’s assets under administration, origination and securitization volumes increased in the current year, while it also reversed a
significant provision. However, these increases were offset by lower MBS spreads in the current year and a one-time gain earned
in the prior year.
Fees, consisting primarily of extension, renewal and letter of credit fees earned on the corporate mortgage portfolio, increased by
$111,000 from the prior year as a result of a larger average mortgage portfolio.
Marketable securities income decreased by $753,000 from the prior year, primarily due to less trading activity in the portfolio in
the current year. In addition, the average portfolio balance decreased slightly from the prior year.
Whole loan gain on sale income includes a $1.3 million gain on the sale of the remaining balance of the acquired mortgage
portfolio, on which we had previously recognized discount income (included in mortgage interest income), during the fourth
quarter of 2013. In addition, we recognized $281,000 of gains from sales of insured mortgages to third party mortgage
aggregators.
The realized and unrealized loss on financial instruments of $558,000 represents the gain/loss associated with hedging of
mortgage funding commitments to mitigate interest rate risk. To the extent that the related mortgages are sold, offsetting gains or
losses are recognized in the period that the mortgages are sold.
We incurred a loss of $62,000 on financial investments and other loans in the current year, primarily due to a write-off related to
a financial investment. The decrease from the prior year income of $1.4 million was a result of a lower average balance in the
current year and a $493,000 income distribution received from a commercial real estate investment in the prior year.
Term deposit interest and expenses increased by $2.0 million from the prior year, primarily due to a $91 million increase in the
average term deposit balance from $660 million in 2012 to $751 million in 2013. In addition, the average term deposit rate
increased from 2.44% in 2012 to 2.46% in 2013.
Mortgage expenses, consisting primarily of mortgage servicing fees, increased by $220,000 from the prior year as a result of a
larger average mortgage portfolio.
Interest on loans payable increased by $312,000 from 2012 as we increased the use of our credit facilities in the fourth quarter to
facilitate the re-commencement of our participation in the market mortgage-backed securities (“MBS”) program (refer to the
“Securitization Programs” section of this MD&A).
Details of the provision for credit losses are discussed in the “Credit Quality” section of this MD&A.
Other Income - Corporate Assets
As part of the acquisition of Xceed, we recognized a bargain purchase gain of $2.1 million, representing the excess of the fair
value of the net assets acquired over the consideration paid. We also incurred $2.0 million of transaction and restructuring
expenses as part of the acquisition. These include lease termination expense, severance expenses and legal and professional
consulting fees. For further details, refer to the “Acquisition of Xceed” section of this MD&A.
During the fourth quarter of 2013, we recorded a $4.5 million gain on the dilution of our equity investment in MCAP and a
$736,000 gain on the partial sale of the investment. For additional information, refer to the “Equity investment in MCAP” sub-
section of the “Financial Position” section of this MD&A.
Net Investment Income - Securitization Assets
Net investment income from securitization assets relates to MCAN’s participation in the Canada Mortgage Bonds (“CMB”)
program and the market MBS program. For further details, refer to the “Securitization Programs” section of this MD&A. As
existing CMB issuances continue to mature, we expect securitization revenues and expenses to decrease as the related mortgages,
reinvestment assets and liabilities are removed from our balance sheet.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The net investment income from securitization assets before fair market value adjustments was $141,000 in 2013 compared to
$2.8 million in 2012. Including fair market value adjustments on derivative financial instruments, there was a net investment loss
on securitization assets of $3.1 million in 2013 compared to a loss of $5.9 million in 2012. Gross securitization revenues and
expenses decreased significantly from 2012 due to a substantial decline in average securitization asset and liability balances,
which was due to the maturity of $970 million of CMB-related assets and liabilities during 2013.
Securitized mortgage interest income decreased by $6.8 million from the prior year, primarily due to a $499 million decrease in
the average mortgage portfolio from 2012 as a result of the aforementioned maturity of CMB-related assets. In addition, the
average mortgage yield decreased from 4.00% in 2012 to 3.62% in 2013 as older higher-yielding mortgage portfolios matured
during the year. As the mortgages securitized through the CMB program repay, we reinvest the collected principal in certain
permitted investments, which include financial investments and short-term investments. Since we do not currently plan to
participate in new CMB issuances in the near future, we expect CMB-related securitized mortgage interest income to continue to
decrease as the mortgages repay and reinvestment income to decrease as CMB issuances continue to mature.
Interest on financial investments decreased by $3.0 million from 2012 and interest on short-term investments decreased by
$161,000, both as a result of a decrease in the average portfolios from the aforementioned maturity of CMB-related assets.
Other securitization income was $3.8 million in 2013 compared to $9.7 million in 2012, consisting primarily of interest rate swap
receipts of $3.4 million (2012 - $7.4 million). As part of the CMB program, we enter into “pay floating, receive fixed” interest
rate swaps to hedge interest rate risk. In the prior year, we also earned $1.3 million of refinancing and renewal gains and
$978,000 from the sale of MBS, compared to $385,000 and $nil, respectively, in the current year.
Interest on financial liabilities from securitization decreased by $12.9 million from the prior year, primarily due to a significantly
lower average balance as a result of the maturity of $970 million of CMB-related financial liabilities from securitization during
2013. In addition, the average interest rate decreased to 3.03% in 2013 from 3.54% in 2012.
The negative fair market value adjustment to derivative financial instruments of $3.2 million (2012 - $8.7 million) relates to the
CMB interest rate swaps. The unrealized portion of this fair market value adjustment can be volatile as it is driven by changes in
the forward interest rate curve. From an economic perspective, this adjustment is generally offset by changes in future expected
income from securitized mortgages and principal reinvestment assets that have a floating interest rate. We regularly monitor our
interest rate swap hedge position to minimize our exposure to interest rate risk. From an accounting perspective, changes in
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: 2014 - $847 million (CMB program), 2015 - $41 million
(CMB program), 2018 - $168 million (market MBS program).
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 the interest paid on liabilities to fund those assets. For further details, refer to the
“Non-IFRS Measures” section of this MD&A.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 5: Net Interest Income - For the Year Ended December 31, 2013
(in thousands except %)
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
Corporate
Average Balance 1
Securitized
Income/Expense
Average Rate 3
Total Corporate Securitized
Total Corporate Securitized
$
101,726 $
- $
-
20,811
784,216
-
23,364
2,468
932,585
26,835
487,257
-
-
696,328
458,737
-
1,642,322
3,576
959,420 $ 1,645,898 $ 2,605,318 $
101,726 $
487,257
20,811
784,216
696,328
482,101
2,468
2,574,907
30,411
$
887 $
-
1,308
50,509
-
(122)
60
52,642
-
- $
1,386
-
-
7,365
1,806
-
10,557
-
52,642 $
10,557 $
887
1,386
1,308
50,509
7,365
1,684
60
63,199
-
63,199
0.87%
-
5.02%
6.40%
-
5.08%
2.43%
5.77%
-
5.60%
-
0.88%
-
-
3.62%
1.73%
-
2.16%
-
2.15%
Liabilities and shareholders' equity
Term deposits
$
Financial liabilities from
securitization
Loans payable
Other liabilities
Shareholders' equity
751,251 $
- $
751,251 $
19,163 $
- $
19,163
2.46%
-
-
22,673
7,423
-
1,628,440
-
4,288
-
1,628,440
22,673
11,711
191,243
-
954
-
-
13,998
-
-
-
13,998
954
-
-
-
3.39%
-
-
3.03%
-
-
-
Total liabilities and
shareholders' equity
Net Interest Income 2
$
781,347 $ 1,632,728 $ 2,605,318 $
20,117 $
13,998 $
34,115
2.50%
3.03%
$
32,525 $
(3,441)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
3.94%
1 The 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.
2 Net interest income is equal to net investment income less equity income from MCAP, fees, whole loan gain on sale income, realized and
unrealized gain (loss) on financial instruments, other securitization income, mortgage expenses, provision for credit losses and fair market
adjustment - derivative financial instruments. Net interest income is a non-IFRS measure. For further details, refer to the “Non-IFRS Measures”
section of this MD&A.
3 Average rate is equal to income/expense divided by the average balance on an annualized basis. The average rate as presented may not
necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items consisting of one-time gains/losses, asset write-
downs and fees not associated with the asset/liability yield are excluded from the calculation of the average rate. Non-recurring items are
immaterial for the year ended December 31, 2013. Average rate is considered to be a non-IFRS measure. For further details, refer to the “Non-
IFRS Measures” section of this MD&A.
The corporate mortgage yield as presented above is higher than usual as a result of the higher effective interest rates on the
mortgages acquired from Xceed. Given the short duration of these mortgages, we expect the corporate mortgage yield to return
to historical levels by mid-2014.
The income/expenses associated with the securitized assets and liabilities in the tables above represents MCAN’s 32% weighted
average share of CMB program economics.
Although net interest income from securitization assets and liabilities shown above is presented as a negative amount, the net loss
from securitization assets before negative fair market value adjustments was reduced as a result of 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 $3.4 million for the year
ended December 31, 2013.
-15-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 6: Net Interest Income - For the Year Ended December 31, 2012
(in thousands except %)
Corporate
Average Balance 1
Securitized
Total
Corporate
Income/Expense
Securitized
Average Rate 3
Total 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
582,187
-
-
1,195,262
1,063,934
-
2,841,383
10,605
834,844 $ 2,851,988 $ 3,686,832 $
67,779 $
582,187
24,523
690,931
1,195,262
1,085,391
3,496
3,649,569
37,263
$
544 $
-
2,061
41,395
-
1,309
113
45,422
-
45,422 $
- $
1,547
-
-
14,124
4,763
-
20,434
-
20,434 $
544
1,547
2,061
41,395
14,124
6,072
113
65,856
-
65,856
0.80%
-
4.56%
5.81%
-
6.90%
3.23%
5.69%
-
5.50%
-
0.89%
-
-
4.00%
1.77%
-
2.56%
-
2.52%
Liabilities and shareholders' equity
Term deposits
$
Financial liabilities from
securitization
Loans payable
Other liabilities
Shareholders' equity
Total liabilities and
shareholders' equity
$
660,180 $
- $
660,180 $
17,157 $
- $
17,157
2.44%
-
-
19,885
11,862
-
2,824,402
-
5,597
-
2,824,402
19,885
17,459
164,906
-
642
-
-
26,888
-
-
-
26,888
-
-
-
4.00%
-
-
3.54%
-
-
-
691,927 $ 2,829,999 $ 3,686,832 $
17,799 $
26,888 $
44,045
2.50%
3.54%
Net Interest Income 2
$
27,623 $
(6,454)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
3.37%
1 The 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.
2 Net interest income is equal to net investment income less equity income from MCAP, fees, whole loan gain on sale income, realized and
unrealized gain (loss) on financial instruments, other securitization income, mortgage expenses, provision for credit losses and fair market
adjustment - derivative financial instruments. Net interest income is a non-IFRS measure. For further details, refer to the “Non-IFRS Measures”
section of this MD&A.
3 Average rate is equal to income/expense divided by the average balance on an annualized basis. The average rate as presented may not
necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items consisting of one-time gains/losses and fees not
associated with the asset/liability yield are excluded from the calculation of the average rate. Non-recurring items are immaterial for the year
ended December 31, 2012. Average rate is considered to be a non-IFRS measure. For further details, refer to the “Non-IFRS Measures” section
of this MD&A.
The income/expenses 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 was 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 for the
year ended December 31, 2012.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 7: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Years Ended December 31
2013
2012
(in thousands except %)
Single family
Construction and single family uninsured
completed inventory loans
Commercial
Average mortgages - corporate portfolio
Average
Assets
Interest Average
Rate 1
Income
Average
Assets
Interest Average
Rate 1
Income
$
336,870 $
23,193
6.61% $
345,049
$
21,509
5.74%
372,252
75,094
784,216 $
$
21,659
5,657
50,509
6.00%
7.40%
6.40% $
280,039
65,843
690,931
$
15,826
4,060
41,395
6.05%
5.96%
5.81%
1 Average rate is equal to income/expense divided by the average balance on an annualized basis. The average rate as presented may not
necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items such as arrears interest and prior period
adjustments are excluded from the calculation of the average rate. Non-recurring items are immaterial for the years ended December 31, 2013
and December 31, 2012. Average rate is considered to be a non-IFRS measure. For further details, refer to the “Non-IFRS Measures” section of
the MD&A.
The single family yield and overall yield include mortgages acquired from Xceed. The respective yields excluding these mortgages were 5.22%
(2012 - n/a) and 5.83% (2012 - n/a).
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 (recovery)
Single family uninsured
Construction
Commercial
Corporate mortgages - total
Financial investments and other loans
Other provisions (recoveries)
Total provision for (recovery of) credit losses
Corporate mortgage portfolio data:
Provision for (recovery of) credit losses
Net write offs
Net write offs (basis points)
2013
674
-
-
674
270
523
114
907
(9)
(1,203)
(305)
369
1,581
665
8.5
$
$
$
$
$
$
$
2012
195
300
58
553
185
583
359
1,127
(20)
900
2,007
2,560
1,680
1,323
19.1
$
$
$
$
$
$
$
The allowance for credit losses reduces the carrying value of mortgages 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.
During the first quarter of 2012, we recorded a $900,000 increase to an allowance relating to our pro-rata share of estimated
losses pursuant to a construction loan securitization program indemnity. As at December 31, 2012, the allowance was $1.1
million. During the first quarter of 2013, we purchased the other investor’s interest in the underlying loans at a discount,
-17-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
including the impaired residential construction loan with which the allowance was associated. We reversed the existing liability
upon purchase and established an individual mortgage allowance for the same amount, which was reduced to $550,000 later in
the year. Subsequent to purchase, the impaired residential construction loan was reclassified as an uninsured single family
mortgage (completed inventory) as a result of the completion of the individual housing units on the property.
Other recoveries includes amortization of $103,000 relating to the $1.6 million reserve set up at the time of the acquisition of
Xceed, relating to Xceed’s off balance sheet securitized mortgage portfolio. This reserve is expected to be incurred over the
remaining duration of the portfolio. For further details refer to the “Acquisition of Xceed” section of this MD&A.
During the first quarter of 2013, we foreclosed on an impaired residential construction loan with a carrying value of $1.8 million
(net of a $300,000 individual allowance). The realization of the previously recorded individual allowance was recognized as a
mortgage write-off upon foreclosure. During the first quarter of 2012, MCAN and another participant lender foreclosed on an
impaired residential construction loan 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 balance of write-offs in both years relate to uninsured single family mortgages.
Corporate mortgage arrears and impaired mortgages were $28 million as at December 31, 2013, down from $39 million as at
December 31, 2012. The decrease relates primarily to single family mortgages. Securitized mortgage arrears were $11 million
as at December 31, 2013, down from $24 million as at December 31, 2012. 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.
Net Impaired Mortgages and Allowances
Table 9: Net Impaired Mortgages and Allowances
(in thousands except %)
As at December 31
Corporate portfolio
Single family
Single family (completed inventory loans)
Residential construction
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
Table 10: Operating Expenses
(in thousands)
For the Years Ended December 31
Salaries and benefits
General and administrative
2013
2012
$
$
4,834
2,564
-
7,398
$
$
6,856
-
1,760
8,616
$ 1,454,029
$ 1,676,759
0.51%
0.85%
4,265
1,087
5,352
$
$
2013
6,036
5,254
11,290
$
$
0.51%
1.17%
3,723
713
4,436
2012
3,953
5,040
8,993
$
$
$
$
The increase in salaries and benefits from the prior year is primarily due to an increase in the number of employees as a result of
the acquisition of Xceed, in addition to severance costs of $514,000 incurred during the year.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 11: Income Taxes
(in thousands)
For the Years Ended December 31
Current tax provision (recovery)
Deferred tax provision (recovery)
2013
(2,226)
1,975
(251)
$
$
2012
(1,519)
(3,736)
(5,255)
$
$
The recovery of current taxes was a result the significant excess of dividends paid over taxable income.
Deferred tax activity for the year ended December 31, 2013 was largely driven by the significant difference between equity
income from MCAP for accounting and tax purposes noted in the table below. The recovery of deferred taxes in the prior year
was primarily due to the significant negative fair market value adjustment to derivative financial instruments.
MCAN’s taxable income (refer to the “Non-IFRS Measures” section of this MD&A) was $15.3 million ($0.78 per share) in 2013
and $20.5 million ($1.17 per share) in 2012. MCAN’s equity income from MCAP for tax purposes was significantly lower than
for accounting purposes in 2013 as a result of significant securitization activity in MCAP.
The key differences between taxable income and pre-tax net income include differences between equity income from MCAP and
Xceed for accounting and tax purposes, the treatment of capital gains income and the non-deductibility of fair market value
adjustments, collective provisions for credit losses and the amortization of upfront CMB costs for tax purposes. As a MIC, we
typically pay out all of our taxable income to shareholders through dividends. In addition, our MIC status allows us to deduct
dividends paid within 90 days of year end from taxable income.
Taxable income from MCAP was significantly lower than income for accounting purposes in both 2013 and 2012. For tax
purposes, equity income from MCAP related to mortgage securitizations is recognized in line with actual cash flows, such that a
tax loss is incurred up front as program costs are paid while interest income is earned over the term of the mortgage portfolios.
As a result of this difference, we recognized a tax loss of $375,000 in 2013 on our investment in MCAP. The timing differences
associated with income from MCAP for accounting and tax purposes are expected to reverse over future periods.
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. Taxable income is presented
on a non-consolidated basis and does not incorporate taxable income from Xceed as it does not directly impact MCAN’s non-
consolidated taxable income until Xceed distributes income to MCAN. For further information, refer to the “Acquisition of
Xceed” section of this MD&A.
Table 12: Taxable Income Reconciliation
(in thousands)
Net income for accounting purposes
Adjustments:
Provision for (recovery of) income taxes
Equity income from MCAP Commercial LP
Gain on dilution of investment in MCAP Commercial LP
Bargain purchase gain
Equity income and discount income from Xceed
Provision for (recovery of) credit losses
Fair market value adjustment - derivative financial instruments
Capital gains
Amortization of upfront CMB costs
Securitization program cash outflows
Other items
Taxable Income
$
$
For the Quarters
Ended December 31
2012
2013
For the Years
Ended December 31
2012
2013
10,978
$
7,342 $
30,203
$
21,493
1,474
670
(4,510)
-
(1,360)
299
512
(616)
313
(1,674)
292
6,378
(1,440)
(6,668)
-
-
-
246
2,115
22
627
(274)
(527)
1,443
$
(251)
(6,938)
(4,510)
(2,127)
(3,285)
(319)
3,218
(1,214)
1,578
(2,029)
975
15,301
$
(5,255)
(6,739)
-
-
-
1,627
8,682
(1,085)
3,083
(1,013)
(275)
20,518
$
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Taxable income is considered to be a non-IFRS measure. For further details, refer to the “Non-IFRS Measures” section of this
MD&A.
Cash Flows
Operating activities used cash flows of $653 million in 2013 and used cash flows of $444 million in 2012. In the current year,
net mortgage and term deposit inflows were significantly lower than the prior year, although cash outflows from the repayment of
financial liabilities from securitization decreased from the prior year.
Investing activities provided cash flows of $574 million in 2013 and provided cash flows of $518 million in 2012. The current
year net inflow from financial investments was higher than the prior year, while the prior year also had net outflows from short-
term investments. The current year increase was partially offset by outflows associated with the acquisition of Xceed.
Financing activities provided cash flows of $20 million in 2013 and used cash flows of $2 million in 2012. The current year had
net inflows from loans payable while the prior year had no activity.
Summary of Three Year Results of Operations
Earnings per share of $1.68 in 2011 were solid by historical standards as we earned income from the CMB program and our
acquired mortgage portfolio. In addition, equity income from MCAP was significantly higher in 2011 than in recent prior 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.
In 2013, earnings per share increased significantly from 2012, primarily due to the acquisition of Xceed and a dilution gain and
partial gain on sale associated with the equity investment in MCAP. Gross securitization income continued to decline as CMB
issuances matured, although the negative fair market value adjustment associated with the CMB was lower than the prior year.
FINANCIAL POSITION
Total assets were $2.09 billion as at December 31, 2013, consisting of $1.02 billion of corporate assets and $1.07 billion of
securitization assets. Corporate assets increased by $68 million during 2013, which consisted primarily of an increase of $122
million in mortgages and a decrease of $59 million in cash and cash equivalents. As part of the acquisition of Xceed, we
acquired $46 million of corporate mortgages.
Securitization assets decreased by $963 million during 2013, primarily due to the maturity of CMB-related assets of $970 million
and a decrease in Insured Mortgage Purchase Program (“IMPP”) related assets of $158 million during the year. These decreases
were partially offset by an increase of $169 million in securitization mortgages related to the market MBS program. These
mortgages remained on the consolidated balance sheet as a result of MCAN’s retention of risks and rewards associated with the
mortgages. For further information on securitization assets, refer to the “Securitization Programs” section of this MD&A.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 13: 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
2013
2012
$
64,945
21,687
861,613
5,667
19,297
2,530
39,246
3,953
1,018,938
370,400
592,416
108,877
1,448
207
1,073,348
$ 2,092,286
$
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
Cash and cash equivalents, which include cash balances with banks and overnight term deposits, decreased by $59 million during
2013. These investments provide liquidity to meet maturing term deposit and mortgage funding commitments and met our
liquidity requirements at December 31, 2013, which are outlined in the “Risk Management” section of this MD&A.
Marketable securities, consisting of corporate bonds, real estate investment trusts and exchange-traded funds, increased by $1.3
million during the year. Marketable securities provide additional liquidity at yields in excess of cash and cash equivalents.
The corporate mortgage portfolio increased by $122 million during the year, partly due to an increase of $46 million through the
acquisition of Xceed. Activity for the year consisted of increases of $71 million in construction loans, $52 million in insured
single family mortgages (including $40 million via the Xceed acquisition) and $16 million in commercial loans, and a decrease of
$17 million in uninsured single family mortgages.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Figure 3: Total Corporate Mortgage Portfolio (in thousands)
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
2013
2012
TOTAL
$861,613
$739,812
in
continues
activities.
fundamentals, but
We invest in insured and uninsured single
family mortgages in Canada. We also originate
insured and uninsured single family mortgages
through Xceed for our own corporate and
securitization
The Canadian
residential property market continues to exhibit
healthy
to
experience moderation in sales volumes which
we expect to continue into 2014. We do not
invest
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 the
lesser of $400 million or 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 $20 million.
The composition of our corporate mortgage portfolio is as follows:
Figure 4: Corporate Mortgage Portfolio Composition by Product Type (in thousands)
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$-
2013
2012
Single family uninsured
$273,534
$290,465
(39.3%)
(33.3%)
Single family insured
$127,670
$76,104
(14.1%)
(10.3%)
Construction
$370,628
$299,348
(42.5%)
(40.4%)
Commercial
$89,781
$73,895
(10.1%)
(10.0%)
-22-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Figure 5: Corporate Mortgage Portfolio
Geographic Distribution (2013)
Figure 6: Corporate Mortgage Portfolio
Geographic Distribution (2012)
Atlantic:
5.4%
Quebec:
5.9%
BC:
20.9%
Other:
2.7%
Atlantic:
5.9%
Other:
2.6%
Quebec:
4.9%
BC:
15.5%
Ontario:
44.2%
Ontario:
44.5%
Alberta:
20.9%
Alberta:
26.6%
As at December 31, 2012 we held discounted single family mortgages with a net discount of $5.9 million. During 2013, we sold
the entire associated mortgage portfolio, recognizing a gain on sale of $1.3 million. Prior to sale, we participated with MCAP in a
profit sharing program such that 50% of any recoveries of discounts were retained and the remaining 50% was paid to MCAP.
We also hold an uninsured single family completed inventory loan with a net discount of $9.2 million as at December 31, 2013.
The principal value net of the discount and an individual allowance of $550,000 represents our best estimate of net realizable
value at that date given the impaired status of the mortgage and the uncertainty of the resolution period.
In previous quarters we have reported on our exposure to real estate in areas of Alberta that experienced flooding during 2013.
As at December 31, 2013, our potential loss exposure had not changed from previous quarters.
Table 14: Mortgage Originations
(in thousands)
For the Periods Ended
Single family insured
Single family uninsured
Single family uninsured (completed inventory loans)
Residential construction (advances)
Commercial
Quarters Ended December 31
2013
2012
Years Ended December 31
2012
2013
$
$
9,089
15,623
17,489
147,015
15,842
205,058
$
$
439
21,795
10,884
104,800
13,068
150,986
$
$
64,060 $
39,955
58,428
423,675
44,982
631,100 $
19,740
114,824
26,633
330,454
38,957
530,608
The table above includes mortgages originated by Xceed. MCAN originations are solely for investment purposes as corporate
assets, while mortgage originations through Xceed are generally sold to third party mortgage aggregators. In the fourth quarter of
2013, Xceed commenced an uninsured single family mortgage origination program to generate mortgages for MCAN’s corporate
balance sheet.
Foreclosed real estate increased by $1.3 million during the year. For further details on a new property that was foreclosed upon
during 2013, refer to the “Credit Quality” sub-section of the “Results of Operations” section of this MD&A. We are currently
exploring options to sell both properties, which are carried at fair value.
Corporate financial investments increased by $1.2 million during the year, which included a $4.7 million increase in a
commercial real estate investment and a $2.9 million decrease in an investment in a retained interest.
We enter into interest rate swaps to manage interest rate exposures on mortgage funding commitments. The fair value of the
swaps at December 31, 2013 was $123,000, which is included in other corporate assets.
-23-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Equity investment in MCAP
Our equity investment in MCAP, in which we hold a 15.7% equity interest, increased from $36 million to $39 million during the
year. To November 30th, we held a 23.4% equity interest. The value of this investment has increased substantially from the
second quarter of 2012, at which point we contributed $14 million of additional capital to MCAP. In addition, MCAP has earned
significant income for accounting purposes since that time, which increases the value of the investment.
On November 30, 2013, MCAP issued 5,080,802 new class A units and 3,452,829 new class C units to other partners of MCAP
at a cost of $11.72 per unit, raising $100 million of new unitholder equity. As a result of the issuance of the new units at a price
in excess of the carrying value per unit, we recorded a $4.5 million gain on the dilution of the investment in MCAP. Subsequent
to the issuance of the new class A and class C units, we sold 237,880 class A units to another partner of MCAP at a price of
$11.72 per unit, recognizing a gain on sale of $736,000. The combination of the two transactions reduced our equity interest in
MCAP from 23.4% to 15.7%. Subsequent to year end, we sold 250,000 class C units to another partner of MCAP at a price of
$11.72 per unit, reducing our equity interest from 15.7% to 14.8%.
Our investment in MCAP for accounting purposes was $39 million as at December 31, 2013 (December 31, 2012 - $36 million).
The LP ARA of our equity investment in MCAP (refer to the “Non-IFRS Measures” section of this MD&A), is increased
(decreased) by the partner’s share of partnership income (loss) on a tax basis, increased by the amount of capital contributions to
the partnership and reduced by distributions received from the partnership. As at December 31, 2013, after deducting the taxable
loss from MCAP for the year, the LP ARA is $25.0 million (December 31, 2012 - $32.9 million).
The excess of the accounting value of the equity investment in MCAP over the LP ARA as at December 31, 2013 represents our
estimate of the taxable income versus accounting income difference that we expect will be earned in future periods from MCAP.
The future realization of this taxable income is subject to a number of risk factors that could impact future outcomes, as well as
any changes to our investment in the form of new capital invested or a full or partial disposition of our investment in MCAP.
As indicated above, lower taxable income from MCAP has contributed to lower estimated taxable income for the year. In
addition, we note that our investment in MCAP creates a deduction from regulatory capital on an “all-in” basis under Basel III
(refer to the “Capital Management” section of this MD&A). While we view our investment in MCAP as strategic, we are
currently evaluating alternative tax-effective structures to hold the investment.
As a result of the treatment of MCAP’s securitization activity for tax purposes, MCAN’s equity income from MCAP for tax
purposes has been significantly lower than income for accounting purposes during the last two years. In 2012, we had a minimal
equity loss from MCAP for tax purposes, and for the year ended December 31, 2013 MCAN’s tax loss from MCAP was
$375,000.
MCAP is an originator and servicer of mortgages for third party investors in Canada. MCAP’s origination volumes were $10.5
billion in 2013. MCAP had $40.3 billion of assets under administration as at December 31, 2013.
Securitization Assets
Securitization assets decreased by $963 million during 2013, primarily due to the maturity of CMB-related assets of $970 million
and a decrease in IMPP-related assets of $158 million during the year. These decreases were partially offset by an increase of
$169 million in securitization mortgages related to the market MBS program.
Short-term investments decreased by $8 million during 2013. This decrease consisted of the maturity of $219 million of CMB
reinvestment assets from the CMB issuances that matured during the year, an increase of $225 million in CMB reinvestment
assets from other CMB issuances and a decrease of $14 million in CMB cash held in trust and pledged as collateral. Despite the
slight decrease in the balance during 2013, short-term investments as a percentage of CMB reinvestment assets increased
significantly during 2013.
The securitized mortgage portfolio decreased by $345 million during the year, consisting of the maturity of $422 million of
securitized mortgages from CMB issuances that matured during the year, $92 million of principal repayments from borrowers
from other CMB issuances and $169 million of new mortgages retained on the balance sheet through the market MBS program.
The principal repayments were invested into reinvestment assets as part of the CMB program, consisting of short-term
investments and financial investments. The market MBS program mortgages remained on the consolidated balance sheet as a
result of MCAN’s retention of risks and rewards associated with the mortgages.
-24-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The composition of our securitized mortgage portfolio is as follows:
Figure 7: Securitized Mortgage Portfolio Composition by Product Type (in thousands)
$1,000,000
$800,000
$600,000
$400,000
$592,416
$169,041
$42,376
$936,947
$47,734
$889,213
$200,000
$380,999
$-
2013
2012
Single family - Market MBS
Commercial - CMB
Single family - CMB
Figure 8: Securitized Mortgage Portfolio
Geographic Distribution (2013)
Figure 9: Securitized Mortgage Portfolio
Geographic Distribution (2012)
Atlantic:
4.0%
Other:
2.9%
Atlantic:
3.8%
Quebec:
7.9%
Other:
2.2%
Ontario:
44.8%
BC:
14.2%
Ontario:
48.2%
Quebec:
9.1%
BC:
15.8%
Alberta:
23.4%
Alberta:
23.7%
Financial investments consist of insured MBS held as reinvestment assets for the CMB program and a receivable associated with
MCAN’s participation in the IMPP. For further information on the IMPP, refer to the “Securitization Programs” section of this
MD&A. Financial investments decreased by $606 million during the year, consisting of decreases of $447 million in insured
MBS held as reinvestment assets and $158 million relating to the IMPP. The decrease in insured MBS held as reinvestment
assets was partly due to the maturity of $291 million of reinvestment assets from the CMB issuances that matured during the
year.
Derivative financial instruments at December 31, 2013 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 $3.2 million in derivative financial instruments during the year consisted of net interest rate swap receipts of $3.4
million net of an unrealized gain of $158,000.
-25-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Additional Information on Residential Mortgages and Home Equity Lines of Credit (“HELOCs”)
In accordance with OSFI Guideline B-20, Residential Mortgage Underwriting Practices and Procedures, commencing this year,
additional information is provided on the composition of MCAN’s single family mortgage portfolio by insurance status and
province, as well as amortization periods and Loan to Value ratio (“LTV”) by province.
Insured mortgages include mortgages insured by CMHC or other approved insurers at origination and mortgages that are
portfolio insured after origination.
MCAN does not originate HELOCs. The HELOC balances displayed below relate to insured mortgages.
Table 15: Single Family Mortgages by Province
(in thousands except %)
As at December 31, 2013
Insured
% Uninsured
% HELOCs
%
Insured
%
Total
%
Corporate
Securitized
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
Total
$
46,058
35,264
13,129
13,580
11,275
7,961
36.2% $ 129,407
45,777
27.7%
51,637
10.3%
19,610
10.7%
22,733
8.9%
4,370
6.2%
47.3% $
16.7%
18.9%
7.2%
8.3%
1.6%
165
168
70
-
-
-
40.9%
41.7%
17.4%
0.0%
0.0%
0.0%
$ 245,862
133,356
93,767
35,837
23,588
17,630
44.8%
25.2%
17.1%
5.5%
4.3%
3.1%
$ 421,492
214,565
158,603
69,027
57,596
29,961
44.3%
22.6%
16.7%
7.3%
6.1%
3.1%
$ 127,267 100.0% $ 273,534 100.0% $
403 100.0%
$ 550,040 100.0%
$ 951,244 100.0%
Table 16: Single Family Mortgages by Amortization Period
(in thousands except %)
As at December 31, 2013
Up to 20
Years
>20 to 25
Years
>25 to 30
Years
>30 to 35
Years
>35 to 40
Years
Total
Corporate
Securitized
Total
$
$
$
85,089 $
21.2%
105,597 $
26.3%
113,800 $
28.4%
90,643 $
22.6%
6,075 $
1.5%
401,204
100.0%
105,599 $
19.2%
146,760 $
26.7%
131,142 $
23.8%
162,767 $
29.6%
3,772 $
0.7%
550,040
100.0%
190,688 $
20.0%
252,357 $
26.5%
244,942 $
25.7%
253,410 $
26.6%
9,847 $
1.2%
951,244
100.0%
Table 17: Average Loan to Value (LTV) Ratio for Uninsured Single Family Mortgages Originated During
the Periods
(in thousands)
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
Total
Quarter Ended
Amount
Average LTV
Year Ended
Amount
Average LTV
$
$
7,709
5,532
16,661
2,716
266
228
33,112
75.2%
74.0%
70.9%
69.6%
62.0%
65.0%
72.2%
$
$
34,361
28,757
27,415
5,067
1,732
1,051
98,383
71.1%
73.8%
68.9%
72.4%
70.2%
73.0%
71.3%
In the event of an economic downturn, the potential impact for loss on single family mortgages would be mitigated, as MCAN’s
corporate single family mortgage portfolio is well secured with an average LTV of less than 67% based on value at origination.
-26-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 18: Liabilities and Shareholders' Equity
(in thousands)
As at December 31
Liabilities
Corporate Liabilities
Term deposits
Loans payable
Current tax liabilities
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Other liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
2013
2012
$
790,222
17,991
13
3,486
13,170
824,882
1,054,656
2,352
1,057,008
1,881,890
179,215
510
27,669
3,002
210,396
2,092,286
$
$
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
$
Term deposits increased by $13 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.
Loans payable relate to two credit facilities with financial institutions that we use for short-term mortgage funding needs. For
further details, refer to the “Liquidity Risk” sub-section of the “Risk Management” section of this MD&A. As at December 31,
2013, the combined outstanding balance from both facilities was $18 million.
Upon the acquisition of Xceed, we set up a reserve associated with Xceed’s off-balance sheet securitized mortgage portfolio,
which is expected to be incurred over the remaining duration of the portfolio and is included in other corporate liabilities. As at
December 31, 2013, the balance of the reserve was $1.5 million and the associated off balance sheet securitized mortgage
portfolio balance was $683 million. Xceed will earn revenue from renewal rights on its securitized mortgage portfolio.
The $960 million decrease in financial liabilities from securitization from 2012 relates primarily to the maturity of $970 million
of CMB-related financial liabilities from securitization during the year. In addition, there was a $158 million decrease in
financial liabilities from securitization related to the paydown of the liability associated with MCAN’s participation in the IMPP.
Our participation in the market MBS program during fourth quarter led to the creation of a $168 million liability, since we
retained the risks and rewards associated with the mortgages. For further information on market MBS program and IMPP, refer
to the “Securitization Programs” section of this MD&A.
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, 2013 mature as follows: 2014 - $847 million (CMB program), 2015 - $41 million (CMB
program), 2018 - $168 million (market MBS program).
Share capital increased by $24 million during the year, primarily as a result of the $21.5 million issuance of new MCAN shares
related to the Xceed acquisition in the third quarter of 2013. The remaining increase relates to the issuance of new shares through
the Executive Share Purchase Plan and the dividend reinvestment plan.
Retained earnings increased by $7.7 million, consisting of net income of $30.2 million less dividends of $22.5 million.
Accumulated other comprehensive income represents unrealized gains or losses (net of deferred taxes) on available for sale
marketable securities and financial investments.
-27-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SUMMARY OF FOURTH QUARTER RESULTS
Net income for the quarter ended December 31, 2013 was $11.0 million ($0.54 per share), up from $7.3 million ($0.40 per share)
in the prior year.
Table 19: Net Income for the Quarters Ended December 31
(in thousands)
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Whole loan gain on sale income
Realized and unrealized gain (loss) on financial instruments
Interest on financial investments and other loans
Interest on cash and cash equivalents
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Provision for credit losses
Other Income - Corporate Assets
Gain on dilution of investment in MCAP Commercial LP
Gain on sale of investment in MCAP Commercial LP
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
Operating Expenses
Salaries and benefits
General and administrative
Net Income Before Income Taxes
Provision for (recovery of) income taxes
Net Income
Basic and diluted earnings per share
Taxable income per share 1
Dividends per share
2013
15,011
303
923
269
1,652
(341)
37
263
18,117
5,108
972
680
420
7,180
10,937
4,510
736
5,246
1,663
246
319
945
3,173
2,545
38
2,583
590
(512)
78
1,896
1,913
3,809
12,452
1,474
10,978
0.54
0.32
0.28
$
$
$
$
$
1 Refer to the "Non-IFRS Measures" section of this MD&A for a definition of this measure.
$
$
$
$
$
2012
10,006
4,253
677
392
-
-
198
180
15,706
4,687
748
200
421
6,056
9,650
-
-
-
3,024
819
478
2,530
6,851
5,923
91
6,014
837
(2,115)
(1,278)
1,011
1,459
2,470
5,902
(1,440)
7,342
0.40
0.06
0.28
-28-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Net Investment Income - Corporate Assets
Mortgage interest income increased by $5.0 million as a result of a $170 million increase in the average mortgage portfolio from
$728 million in 2012 to $898 million in 2013 and an increase in the average mortgage yield from 5.50% in 2012 to 6.73% in 2013
which was primarily due to the higher-yielding mortgages acquired through the Xceed acquisition.
Equity income from our ownership interest in MCAP decreased by $4.0 million from 2012 as a result of lower MBS spreads in
the current year.
Fees increased by $246,000 from the prior year as a result of to a higher average corporate mortgage portfolio.
For a discussion of whole loan gain on sale income and realized and unrealized losses on financial instruments, refer to the “Net
Investment Income - Corporate Assets” sub-section of the “Results of Operations” section of this MD&A.
Term deposit interest and expenses increased by $421,000 from 2012, primarily due to a $61 million increase in the average
outstanding balance from $731 million in 2012 to $792 million in 2013. The average term deposit interest rate increased from
2.44% in 2012 to 2.46% in 2013.
For a discussion of interest on loans payable, refer to the “Net Investment Income - Corporate Assets” sub-section of the “Results
of Operations” section of this MD&A.
For details of the provision for credit losses, refer to Table 8 of this MD&A.
Other Income - Corporate Assets
For details regarding the $4.5 million gain on dilution of the investment in MCAP and $736,000 gain on the partial sale of the
investment, refer to the “Investment in MCAP” sub-section of the “Financial Position” section of this MD&A.
Net Investment Income - Securitization Assets
Mortgage interest income decreased by $1.4 million, primarily due to a $473 million decrease in the average mortgage portfolio
from 2012.
Interest on financial investments decreased by $573,000 and interest on short-term investments decreased by $159,000 from
2012, both as a result of a decrease in the average portfolio.
Other securitization income decreased by $1.6 million from the prior year, primarily due to a $1.4 million decrease in interest rate
swap receipts.
Interest on financial liabilities from securitization decreased by $3.4 million as a result of a $1.4 billion decrease in the average
outstanding balance and a 0.58% decrease in the average interest rate.
There was a negative fair market value adjustment to derivative financial instruments of $512,000 (2012 - negative $2.1 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 the interest paid on liabilities to fund those assets. For further details, refer to the
“Non-IFRS Measures” section of the MD&A.
-29-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 20: Net Interest Income - For the Quarter Ended December 31, 2013
(in thousands except %)
Corporate
Average Balance1
Securitized
Total
Corporate Securitized
Total Corporate Securitized
Income/Expense
Average Rate3
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
$
92,518 $
- $
-
18,621
897,585
-
23,052
2,221
1,033,997
32,742
457,243
-
-
513,835
214,316
-
1,185,394
1,948
92,518 $
457,243
18,621
897,585
513,835
237,368
2,221
2,219,391
34,690
$ 1,066,739 $ 1,187,342 $ 2,254,081 $
263 $
-
269
15,011
-
23
14
15,580
-
15,580 $
- $
319
-
-
1,663
246
-
2,228
-
2,228 $
263
319
269
15,011
1,663
269
14
17,808
-
17,808
1.13%
-
5.49%
6.73%
-
3.41%
2.57%
6.10%
-
5.91%
-
0.83%
-
-
3.51%
2.07%
-
2.37%
-
2.36%
Liabilities and shareholders' equity
Term deposits
$
Financial liabilities from
securitization
Loans payable
Other liabilities
Shareholders' equity
791,777 $
- $
791,777 $
5,108 $
- $
5,108
2.46%
-
-
72,805
8,669
-
1,170,555
-
3,315
-
1,170,555
72,805
11,984
206,960
-
680
-
-
2,545
-
-
-
2,545
680
-
-
-
3.35%
-
-
2.79%
-
-
-
Total liabilities and
shareholders' equity
Net Interest Income 2
$
873,251 $ 1,173,870 $ 2,254,081 $
5,788 $
2,545 $
8,333
2.56%
2.79%
$
9,792 $
(317)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
4.27%
1 The 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.
2 Net interest income is equal to net investment income less equity income from MCAP, fees, whole loan gain on sale income, realized and
unrealized gain (loss) on financial instruments, other securitization income, mortgage expenses, provision for credit losses and fair market
adjustment - derivative financial instruments. Net interest income is a non-IFRS measure. For further details, refer to the “Non-IFRS Measures”
section of this MD&A.
3 Average rate is equal to income/expense divided by the average balance on an annualized basis. The average rate as presented may not
necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items consisting of one-time gains/losses, asset write-
downs and fees not associated with the asset/liability yield are excluded from the calculation of the average rate. Non-recurring items are
immaterial for the quarter ended December 31, 2013. Average rate is considered to be a non-IFRS measure. For further details, refer to the “Non-
IFRS Measures” section of this MD&A.
The corporate mortgage yield as presented above is higher than usual as a result of the higher effective interest rates on the
mortgages acquired from Xceed. Given the short duration of these mortgages, we expect the corporate mortgage yield to return
to historical levels by mid-2014.
The income/expenses associated with the securitized assets and liabilities in the tables above represents MCAN’s 33% weighted
average share of CMB program economics.
Although net interest income from securitization assets and liabilities shown above is presented as a negative amount, the net loss
from securitization assets before negative fair market value adjustments was reduced as a result of 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 $560,000 in the fourth
quarter of 2013.
-30-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 21: Net Interest Income - For the Quarter Ended December 31, 2012
(in thousands except %)
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
Corporate
Average Balance 1
Securitized
Total
Corporate Securitized
Total Corporate Securitized
Income/Expense
Average Rate 3
$
89,379 $
- $
-
19,740
727,834
-
24,217
3,397
864,567
55,441
757,653
-
-
986,676
836,755
-
2,581,084
7,293
920,008 $ 2,588,377 $ 3,508,385 $
89,379 $
757,653
19,740
727,834
986,676
860,972
3,397
3,445,651
62,734
$
180 $
-
392
10,006
-
177
21
10,776
-
10,776 $
- $
478
-
-
3,024
819
-
4,321
-
4,321 $
180
478
392
10,006
3,024
996
21
15,097
-
15,097
0.80%
-
4.69%
5.50%
-
5.80%
2.45%
5.02%
-
4.71%
-
0.87%
-
-
3.72%
1.67%
-
2.46%
-
2.67%
Liabilities and shareholders' equity
Term deposits
$
Financial liabilities from
securitization
Loans payable
Other liabilities
Shareholders' equity
Total liabilities and
shareholders' equity
$
731,117 $
- $
731,117 $
4,687 $
- $
4,687
2.44%
-
-
16,333
11,742
-
2,569,614
-
4,213
-
2,569,614
16,333
15,955
175,366
-
200
-
-
5,923
-
-
-
5,923
200
-
-
-
4.00%
-
-
3.37%
-
-
-
759,192 $ 2,573,827 $ 3,508,385 $
4,887 $
5,923 $
10,810
2.50%
3.37%
Net Interest Income 2
$
5,889 $
(1,602)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
3.06%
1 The 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.
2 Net interest income is equal to net investment income less equity income from MCAP, fees, whole loan gain on sale income, realized and
unrealized gain (loss) on financial instruments, other securitization income, mortgage expenses, provision for credit losses and fair market
adjustment - derivative financial instruments. Net interest income is a non-IFRS measure. For further details, refer to the “Non-IFRS Measures”
section of this MD&A.
3 Average rate is equal to income/expense divided by the average balance on an annualized basis. The average rate as presented may not
necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items consisting of one-time gains/losses, asset write-
downs and fees not associated with the asset/liability yield are excluded from the calculation of the average rate. Non-recurring items are
immaterial for the quarter ended December 31, 2012. Average rate is considered to be a non-IFRS measure. For further details, refer to the
“Non-IFRS Measures” section of this MD&A.
The income/expenses 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 was 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.
-31-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 22: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Quarters Ended
(in thousands except %)
December 31, 2013
December 31, 2012
Average
Assets
Interest Average
Rate 1
Income
Average
Assets
Interest Average
Rate 1
Income
Single family
Construction and uninsured single family
completed inventory loans
Commercial
Average mortgages - corporate portfolio
$
391,477 $
6,671
6.94% $
351,602 $
4,573
5.02%
419,962
86,146
897,585 $
$
6,586
1,754
15,011
6.22%
8.31%
6.73% $
311,188
65,044
727,834 $
4,449
984
10,006
6.00%
5.77%
5.50%
1 Average rate is equal to income/expense divided by the average balance on an annualized basis. The average rate as presented may not
necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items such as arrears interest and prior period
adjustments are excluded from the calculation of the average rate. Non-recurring items are immaterial for the quarters ended December 31, 2013
and December 31, 2012. Average rate is considered to be a non-IFRS measure. For further details, refer to the “Non-IFRS Measures” section of
this MD&A.
The single family yield and overall yield include mortgages acquired from Xceed. The respective yields excluding these mortgages were 5.03%
(2012 - n/a) and 5.99% (2012 - n/a).
Credit Quality
Table 23: Provisions for Credit Losses and Write-offs
(in thousands except basis points)
For the Quarters Ended December 31
Individual provision (recovery)
Single family uninsured
Residential construction
Commercial uninsured
Collective provision (recovery)
Single family uninsured
Construction
Commercial
Corporate mortgages - total
Financial investments and other loans
Other provisions (recoveries)
Total provision for (recovery of) credit losses
Corporate mortgage portfolio data:
Provision for (recovery of) credit losses
Net write offs
Annualized net write offs (basis points)
Table 24: Operating Expenses
(in thousands)
For the Quarters Ended December 31
Salaries and benefits
General and administrative
2013
49
-
-
49
237
155
39
431
-
(60)
371
420
480
138
6.1
2013
1,896
1,913
3,809
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2012
145
(150)
116
111
24
119
171
314
(4)
-
310
421
425
83
4.6
2012
1,011
1,459
2,470
-32-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The increase in salaries and benefits from the prior year is primarily due to an increase in the number of employees as a result of
the acquisition of Xceed. The increase in general and administrative expenses is a result of the consolidation of Xceed’s
operations in the current year. For further details, refer to the “Acquisition of Xceed” section of this MD&A.
Table 25: Income Taxes
(in thousands)
For the Quarters Ended December 31
Current tax provision (recovery)
Deferred tax provision
2013
838
636
1,474
$
$
2012
(1,604)
164
(1,440)
$
$
The provision for current taxes in the current year and recovery in the prior year were due to the excess and deficiency,
respectively, of taxable income over dividends paid.
Deferred tax activity for the quarter ended December 31, 2013 was largely driven by the difference between equity income from
MCAP for accounting and tax purposes.
Table 26: Selected Quarterly Financial Data
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Net investment income -
corporate assets
Other income - corporate
assets
Net investment income -
before fair market value
adjustment
Fair market value adjustment
Net investment income -
securitization assets
Operating expenses
Net income before income
taxes
Provision for (recovery of)
income taxes
Net income
Basic and diluted earnings per
share
Return on average
shareholders' equity
Taxable income 1
Taxable income per share 1
Dividends per share
Regular
Extra
Total
$ 10,937 $ 12,137 $
8,638 $
7,244
$
9,650 $
5,872 $
9,997 $
5,616
5,246
1,253
(406)
(722)
-
-
-
-
590
(512)
(532)
(385)
44
(1,680)
39
(641)
837
(2,115)
458
(1,869)
457
(1,460)
1,026
(3,238)
78
(917)
(1,636)
(602)
(1,278)
(1,411)
(1,003)
(2,212)
3,809
3,491
2,079
1,919
2,470
2,031
2,351
2,141
12,452
8,982
4,517
4,001
5,902
2,430
6,643
1,263
1,474
$ 10,978 $
(721)
9,703 $
(480)
4,997 $
(524)
4,525
$
$
$
$
$
0.54 $
0.49 $
0.27 $
0.24
21.22%
19.49%
11.17%
10.06%
6,378 $
0.32 $
3,354 $
0.16 $
4,304 $
0.23 $
1,265
0.07
0.28 $
-
0.28 $
0.28 $
-
0.28 $
0.28 $
-
0.28 $
0.28
0.03
0.31
(1,440)
7,342 $
(1,034)
3,464 $
323
6,320 $
(3,104)
4,367
0.40 $
0.19 $
0.37 $
0.26
16.75%
8.25%
16.16%
11.05%
1,443 $
0.06 $
4,809 $
0.27 $
8,150 $
0.48 $
6,116
0.36
0.28 $
-
0.28 $
0.27 $
-
0.27 $
0.27 $
-
0.27 $
0.27
0.33
0.60
$
$
$
$
$
$
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
Prior to the fourth quarter of 2013, other income from corporate assets was not presented individually. During the first three
quarters of 2013, the bargain purchase gain and transaction and restructuring expenses were presented in net investment income -
corporate assets and operating expenses, respectively.
-33-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The increase in net investment income in the third and fourth quarters of 2013 relates to the bargain purchase gain recorded as
part of the Xceed acquisition and the gain on dilution from our equity investment in MCAP, respectively. In addition, we earned
a significantly higher yield on the mortgages acquired from Xceed in both quarters. Excluding the second half of 2013, net
investment income from our corporate portfolio has been stable and consistent for the past eight quarters. The fourth quarter of
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 has declined since 2012 as a result
of the repayment of securitized mortgages. 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 of each year based on the magnitude of the extra dividend. We generally
incur deferred tax expense on a positive fair market value adjustment, and vice versa.
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 market MBS program and the IMPP, which are discussed below. In instances where we have sold MBS, where
applicable, these sales are executed for the purposes of transferring various economic exposures that result in accounting
outcomes noted for each program below. Each of the MBS programs noted below provide for many responsibilities that are
linked to the issuer of these MBS instruments. We do not transfer oversight or these responsibilities when selling MBS to other
parties.
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. As CMB issuance liabilities continue to
mature, we expect net investment income from CMB-related 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, 2013 was
35% (December 31, 2012 - 30%). MCAP has indemnified MCAN for the remaining 65% of CMB program obligations
(December 31, 2012 - 70%).
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 income over securitization liability interest expense. 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 35% 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 CMB program 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.
Market MBS Program
In the fourth quarter of 2013, we re-commenced our participation in the market MBS program, under which we sell MBS to third
parties and may also elect to sell the net economics and cash flows from the underlying mortgages (“interest-only strips”) to third
parties in future periods. As part of this program, we originate and purchase insured single family mortgages to sell as MBS.
During the fourth quarter of 2013, we purchased certain mortgages from MCAP, pooled them with MCAN-originated mortgages
and sold $168 million of MBS to a third party. As we retained all risks and rewards of ownership (eg. prepayment risk, Timely
Payment Guarantee), the sale did not achieve derecognition and the associated mortgages remained on the balance sheet while a
corresponding liability was incurred. During the fourth quarter of 2013, we received approval from CMHC to commence the sale
of interest-only strips to third parties. We are currently evaluating the merits of the sale of interest-only strips to achieve
derecognition of the mortgages from our balance sheet. We did not have any other MBS or interest-only strip sales during 2013.
During 2012, we recognized $978,000 related to the sale of MBS and the interest-only strips associated with the underlying
mortgages as we transferred substantially all risks and rewards on sale. Since the inception of the program in 2011, all interest-
only strip sales have been made to MCAP. We meet 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) if we transfer substantially all risks and rewards on
sale, and if so, they are removed from the consolidated balance sheet at that time.
The primary risks associated with the market MBS program are liquidity and funding risk, including 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 the case of mortgage defaults, we are required to make scheduled principal and interest payments to investors as part of the
Timely Payment Guarantee (discussed below) and then place the mortgage/property through the insurance claims process to
recovery any losses. These defaults may result in cash flow timing mismatches that may marginally increase funding and
liquidity risks.
Any mortgages securitized through the market MBS program for which derecognition is not achieved remain on the balance
sheet and are also included in regulatory assets for OSFI purposes. However, for tax purposes, all mortgages securitized by
MCAN achieve derecognition and are not included in income tax assets. For further details on regulatory assets and capital and
income tax assets and capital, refer to the “Capital Management” section of this MD&A.
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,
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
however they may potentially be used to create new MBS as part of the aforementioned market MBS program that we initiated in
2011. 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.
Timely Payment Guarantee
Consistent with all issuers of MBS, we are required to remit scheduled mortgage principal and interest payments to CMHC, 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 CMHC. Irrespective of any economic sharing arrangements noted
above, we maintain the Timely Payment Guarantee obligation in our role as MBS issuer until the maturity of the security. If we
fail to make a scheduled principal and interest payment to CMHC, CMHC may enforce the assignment of the mortgages included
in all MBS pools in addition to other assets backing the MBS issued.
If mortgage payments have not been collected from mortgagors or mortgagors are unable to renew their mortgages at their
scheduled maturities, 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 MCAP’s 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. 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 MCAP’s 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.
Mortgage Renewal Rights
In acquiring Xceed, MCAN acquired the renewal rights to insured mortgages which arose from CMHC-insured mortgages
previously originated and sold by Xceed to third parties for sale into the CMB program, on which Xceed achieved derecognition
from its balance sheet. As at December 31, 2013, MCAN had the renewal rights to $683 million of off-balance sheet mortgages.
Xceed retains renewal rights on mortgages it originates when it sells mortgages to third parties. At renewal, MCAN and Xceed
may be able to renew these mortgages by offering clients competitive rates, thereby contributing to future revenues.
DESCRIPTION OF CAPITAL STRUCTURE
Our authorized share capital consists of an unlimited number of common shares with no par value. At December 31, 2013, there
were 20,460,936 common shares outstanding. For additional information related to share capital, refer to Note 23 to the
consolidated financial statements. At February 23, 2014, there were 20,507,023 common shares outstanding.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 27: Dividends
Fiscal Period
First Quarter - Regular Dividend
First Quarter - Extra Dividend
Second Quarter
Third Quarter
Fourth Quarter
Taxable Dividends
Capital Gains Dividends
2013
0.28
0.03
0.28
0.28
0.28
1.15
1.15
-
1.15
$
$
$
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
$
$
$
The Board declared a first quarter dividend of $0.28 per share to be paid March 31, 2014 to shareholders of record as of March
17, 2014.
CONTRACTUAL OBLIGATIONS
We have contractual obligations relating to an operating lease, in addition to outstanding commitments for future fundings of
mortgages intended for our own portfolio. As part of the acquisition of Xceed, the former head office of Xceed was vacated and
we wrote off any future obligations as part of the acquisition.
We outsource the majority of our mortgage and loan origination and servicing to MCAP and other third party originators and
servicers. We continue to pay servicing expenses as long as the mortgages and loans remain on our balance sheet.
Table 28: Contractual Obligations
(in thousands)
As at December 31, 2013
Mortgage fundings
Operating lease
Less than
one year
One to
three years
Three to
five years
Over five
years
Total
$
$
335,313
817
336,130
$
$
75,281
1,364
76,645
$
$
-
914
914
$
$
-
2,244
2,244
$
$
410,594
5,339
415,933
TRANSACTIONS WITH RELATED PARTIES
In 2013, we purchased certain corporate services from MCAP in the amount of $695,000 (2012 - $566,000). We also purchased
certain mortgage origination and administration services from MCAP in the amount of $2.1 million (2012 - $2.8 million). In
2013, we received $4.0 million of mortgage fees from MCAP (2012 - $3.0 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 2013, we paid fees in the amount of $1.3 million to MCAP relating to a profit sharing arrangement on a portfolio of discounted
mortgages (2012 - $1.7 million). We received $94,000 of fees from MCAP relating to a profit sharing arrangement on a portfolio
of discounted mortgages (2012 - $190,000). The remaining balance of the portfolio was sold in late 2013.
In 2013, we earned $nil from the sale of interest-only strips to MCAP (2012 - $978,000), discussed above in the “Securitization
Programs” section of this MD&A.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
We have 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 2013, MCAN advanced $450,000 of new loans under the
Share Purchase Plan (2012 - $nil). As at December 31, 2013, $1.8 million of loans were outstanding (December 31, 2012 - $1.9
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, 2013, 30,000 units had vested (December 31, 2012 - 20,000).
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, 2013 related to the DSU Plan was $49,000 (2012 - $137,000). As at
December 31, 2013, the accrued DSU Plan liability was $495,000 (December 31, 2012 - $446,000), included in other corporate
liabilities.
In 2013, we established a Restricted Share Units Plan (the “RSU Plan”) whereby the Board of Directors granted units under the
RSU Plan to certain executives (the “RSU Participants”). Each unit is equivalent in value to one common share of the Company.
The RSU Participants are entitled to receive cash for each unit three years subsequent to the awarding of the units subject to
continued employment with the Company. The individual unit values are based on the value of the Company’s common shares
at the time of payment. The RSU Participants were granted 11,200 units under the RSU Plan in December 2013. In addition, the
RSU Participants are entitled to receive dividend distributions in the form of additional units. All RSU units vest after three
years. As at December 31, 2013, no units had vested (December 31, 2012 - n/a).
We recognize compensation expenses associated with the RSU Plan on the accrual basis over the vesting period. The
compensation expense recognized related to the RSU Plan for 2013 was $2,000 (2012 - n/a). As at December 31, 2013, the
accrued RSU Plan liability was $2,000 (December 31, 2012 - n/a).
ACQUISITION OF XCEED
On July 4, 2013, MCAN acquired all of the issued and outstanding common shares of Xceed. The total purchase price paid by
MCAN consisted of cash of $30.3 million (representing 17,309,747 shares purchased for cash consideration of $1.75 per share)
plus 1,531,903 common shares of MCAN (representing 12,982,310 Xceed shares at an exchange ratio of 0.118).
The 1,531,903 common shares of MCAN were valued using a price of $14.05 per share, representing MCAN’s closing share
price as of July 4, 2013. Under IFRS 3, Business Combinations, the share consideration is measured based on the closing date of
the business combination.
The purchase was accounted for as a business combination using the acquisition method of accounting under IFRS 3. As such,
we valued the identifiable assets and liabilities of Xceed at fair value and recorded a bargain purchase gain of $2.1 million,
representing the excess of the fair value of the net assets and liabilities acquired over the purchase price of Xceed.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Based on the above regarding consideration transferred, the purchase equation is as follows:
Table 29: Xceed Acquisition Information
(in thousands)
Fair value of net assets acquired
Cash and cash equivalents
Mortgages - corporate
Mortgages - securitized
Other assets
Current taxes receivable
Deferred tax assets
Other liabilities
Total net assets acquired
Consideration transferred
Cash
Shares
Total consideration transferred
$
7,007
46,289
394
4,334
148
106
(4,336)
53,942
30,292
21,523
51,815
Excess of net assets acquired over consideration transferred (bargain purchase gain)
$
2,127
The bargain purchase gain of $2.1 million does not include “transaction and restructuring” expenses of $2.0 million included in
the consolidated statement of income for the year ended December 31, 2013.
In the determination of the fair value of the net assets acquired above, adjustments were made to the July 4, 2013 carrying values
to reflect the overall marketability of the mortgages to third party investors, regulatory changes, the yield requirements of third
party investors, factors such as borrower credit and repayment history, loan and debt service ratios, local market conditions and
regulatory requirements.
Other liabilities of $4.3 million include a reserve of $1.6 million set up by MCAN associated with Xceed’s off balance sheet
securitized mortgage portfolio, which is expected to be incurred over the remaining duration of the portfolio. At December 31,
2013, Xceed had $683 million outstanding in this securitized mortgage portfolio.
The total fair value adjustment on acquisition was a reduction of $8.5 million from Xceed’s net book value.
Xceed is a specialized, single family insured and uninsured residential mortgage lender, focused primarily on the insured area of
the mortgage market.
The acquisition of Xceed is expected to provide multiple benefits to MCAN, including: (i) 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; (ii) CMHC-approved lender status which will provide MCAN with the
opportunity to expand the scope of its operations; and (iii) enhanced portfolio management resulting from Xceed’s database
management and reporting capabilities. The issuance of share capital to partially fund the acquisition also increased MCAN’s
asset capacity by approximately $124 million based on its target assets to capital ratio of 5.75 which is measured on a tax basis.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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. We borrow to the extent that we are satisfied that
the borrowing and additional investments will increase our overall profitability.
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.
Table 30: Income Tax Capital 1
(dollars in thousands)
Tax Act Ratios1
Income tax assets
Income tax capital
Income tax assets to capital ratio
Income tax liabilities to capital ratio
December 31
2013
December 31
2012
$ 1,004,711
187,915
$
5.35
4.35
$
$
953,235
168,477
5.66
4.66
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
The maximum leverage permitted under the Tax Act is more constraining on MCAN than the regulatory assets to capital ratio
mandated by OSFI. Accordingly, we manage our assets to a level of 5.75 times capital on a tax basis to provide a prudent
cushion between the maximum permitted assets and total actual assets.
As a loan company under the Trust and Loan Companies Act (the “Trust Act”), OSFI oversees the adequacy of our capital. For
this purpose, OSFI has imposed minimum capital-to-regulatory (or risk-weighted) assets ratios and a maximum assets to capital
ratio. Assets securitized through the CMB program prior to September 30, 2010 are excluded from the calculation of these
regulatory ratios.
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, effective January
1, 2013, 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).
The regulatory adjustments to be phased into the calculation of the capital ratios of a federally regulated financial
institution include the deduction of certain non-significant investments in the capital of banking, financial and insurance
entities above 10% of the institution’s CET 1 capital (after certain prescribed regulatory adjustments). This adjustment
for non-significant investments in the capital of banking, financial and insurance entities is 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 a transitional basis (phasing-in regulatory
adjustments between 2014 and 2018 and phasing-out non-qualifying capital instruments over a 10 year horizon
commencing in 2013). As at December 31, 2013, 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.
In addition to the minimum capital requirements and capital conservation buffer to be maintained by all federally
regulated 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 federally regulated 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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.
Our internal target minimum Tier 1 and Total capital ratios are both 20%. We expect to be able to meet OSFI’s requirements and
expectations above without materially adversely affecting the Company’s business plan.
Table 31: Regulatory Capital
(in thousands except %)
Regulatory Ratios (OSFI)
December 31, 2013 December 31, 2013 December 31, 2012
(Basel II)
Basel III
(All-in)
Basel III
(Transitional)
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income 1
Adjustment for equity investment in MCAP Commercial LP 2
Common Equity Tier 1 capital
$
Tier 1 capital deductions
Tier 1 capital
Unrealized gain on available for sale marketable securities 1
Tier 2 capital deductions
Tier 2 capital
179,215
510
27,669
3,002
(18,206)
192,190
-
192,190
n/a
-
-
$
179,215
510
27,669
3,002
-
210,396
-
210,396
n/a
-
-
$
155,005
510
19,985
n/a
n/a
n/a
(229)
175,271
1,032
(229)
803
Total capital
Total regulatory assets
Total risk-weighted assets
$
192,190
$
210,396
$
176,074
$ 1,244,426
969,150
$
$ 1,244,426
$ 1,005,562
$ 1,002,759
806,140
$
Capital ratios 3
Common Equity Tier 1 capital to risk-weighted assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Assets to capital ratio
19.83%
19.83%
19.83%
6.47
20.92%
20.92%
20.92%
5.91
n/a
21.74%
21.84%
5.70
1 Under Basel III, all accumulated other comprehensive income is included in Common Equity Tier 1 capital. Under Basel II,
only the available for sale marketable securities portfolio was included in regulatory capital, as part of Tier 2 capital.
2 The deduction for the equity investment in MCAP is the amount of the investment in excess of 10% of the Company’s
regulatory capital (but prior to this deduction from regulatory capital).
3 For further details, refer to the “Non-IFRS Measures” section of this MD&A.
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 2013 ICAAP and recent quarters’ stress testing, we have determined that the Company
remains adequately capitalized.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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, derivative financial instruments, financial liabilities from
securitization, term deposits and loans payable, 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 in the “Risk Management” section of this MD&A.
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.
Table 32: Liquidity Ratios
(in thousands except %)
As at December 31
Tier 1 liquidity
Cash and cash equivalents
Tier 2 liquidity
Marketable securities
Market MBS held by MCAN
Tier 3 liquidity
Single family insured mortgages1
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
2013
2012
$
64,945
$
123,825
21,687
7,220
28,907
39,194
20,390
7,137
27,527
19,458
$
$
133,046
72,255
$
$
170,810
141,958
130%
184%
107%
120%
1 Reduced from book value to reflect lower liquidity than Tier 1 and Tier 2, as follows: CMHC insured (25%), CMHC insured
second mortgages (50%), privately insured (50%).
In December 2010, the BCBS introduced Basel III: International framework for liquidity risk measurement, standards and
monitoring, which outlined two minimum standards, the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio
(“NSFR”) and a series of liquidity monitoring tools for supervisors. This framework was followed in January 2013 by the
issuance of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools, which updated the LCR and liquidity
monitoring tool sections of the December 2010 publication. At the end of 2013, OSFI released a draft Liquidity Adequacy
Requirement Guideline that combines the tools and measurements from the BCBS guidance as well as OSFI’s Net Cumulative
Cash Flow (“NCCF”) measure. The LCR is calculated as the ratio of the stock of high-quality liquid assets to stressed net cash
outflows over a 30-day time period under a specified regulatory scenario. The NCCF measures net cumulative cash flows, on a
contractual basis, after the application of assumptions around the functioning of assets and modified liabilities (i.e. where rollover
of certain liabilities is permitted) and helps identify gaps between contractual inflows and outflows for various time bands over
and up to a 12 month time horizon, which indicate potential liquidity shortfalls. The OSFI guideline is scheduled to be finalized
in 2014 with the LCR, NCCF, and liquidity monitoring tools coming into effect as of January 1, 2015. Final guidance on the
NSFR is expected later in 2014 as the BCBS is conducting a review of the standard over 2014. We believe that we are well
positioned to meet these regulatory requirements.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
RISK FACTORS
The shaded areas of this MD&A represent a discussion of risk factors and risk management policies and procedures relating to
credit, liquidity, interest rate and market risks as required under IFRS 7, Financial Instruments: Disclosures. The relevant
MD&A sections are identified by shading within boxes and the content forms an integral part of the consolidated financial
statements.
We are exposed to a number of risks that can adversely affect our ability to achieve our business objectives or execute our
business strategies, and which may result in a loss of earnings, capital and/or damage to our reputation. The risks that have been
identified may not be the only risks that we face. Other risks of which we are not aware of or which we currently deem to be
immaterial may surface and have a material adverse impact on our business, results from operations and financial condition.
The significant risks to which we are exposed are as follows:
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.
Reputational Risk
Reputational risk is the negative consequence of the occurrence of other risks and can occur from an activity undertaken by the
Company, its affiliated companies, or its representatives. The loss of reputation can greatly affect shareholder value through
reduced public confidence, a loss of business, legal action, or increased regulatory oversight. Reputation refers to the perception
of the enterprise by various stakeholders. Typically key stakeholder groups include investors, customers, employees, suppliers
and regulators. Perceptions may be impacted by various events including financial performance, specific adverse occurrences,
unfavourable media coverage, and changes or actions of the corporation’s leadership. Failure to effectively manage reputation
risk can result in reduced market capitalization, loss of client loyalty, and the inability to achieve our strategic objectives.
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.
Strategic and Business Risk
Strategic and business risk is the risk of loss due to fluctuations in the external business environment, the failure of management
to adjust its strategies and business activities for external events or business results, or the inability of the business to change its
cost levels in response to those changes.
Operational Risk
Operational risk is the exposure to loss or harm resulting from inadequate or failed internal processes, people and systems, or
from an external event such as a natural disaster. The largest component of this risk has been separately identified as outsourcing
risk. The remaining risks arise from the small size and entrepreneurial nature of MCAN, and the legacy systems used within it.
The exposure to financial misreporting, inaccurate financial models, fraud, breaches in privacy, information security, attraction
and retention of employees, and business continuity and recovery are included within operational risk.
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.
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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.
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 33 to the consolidated financial statements.
Economic Conditions
Factors that could impact general business conditions include changes in short-term and long-term interest rates; commodity
prices; inflation; consumer, business and government spending; real estate prices and adverse economic events.
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.
Qualification as a Mortgage Investment Corporation
Although we intend to qualify at all times as a MIC, no assurance can be provided in this regard. If for any reason we do not
maintain our qualification as a MIC under the Tax Act, taxable dividends and capital gains dividends paid by MCAN on our
common shares will cease to be fully or partly deductible in computing income for tax purposes and such dividends will no
longer be deemed by the rules in the Tax Act that apply to MICs to have been received by shareholders as interest or a capital
gain, as the case may be. As a consequence, the rules in the Tax Act regarding the taxation of public corporations and their
shareholders should apply, with the result that the combined rate of corporate and shareholder tax could be significantly greater.
Market Risk
Market risk is the exposure to adverse changes in the value of financial assets. Our 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.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 “Standards Issued But Not Effective” 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.
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 GOVERNANCE AND 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The Chair of the Board and the other Board members have overall responsibility for risk governance within MCAN. They
provide oversight and carry out their risk management mandate primarily through the Risk Committee of the Board (“RCB”), the
Audit Committee of the Board (the “Audit Committee”), the Information Technology Committee of the Board (the “IT
Committee”), and the Conduct Review, Corporate Governance and Human Resources Committee of the Board (the “HR
Committee”). There is a further committee structure at the management level as illustrated in the following diagram:
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The RCB is responsible for overseeing risk management across the Company. It ensures the relevance of the Company’s Risk
Appetite Framework (“RAF”) and its alignment with the Company’s strategy. It has the responsibility to ensure that the risk
management function is independent from the business activity it reviews, and that the policies, procedures and controls used by
management are sufficient to keep risks within the Company’s risk framework and appetite.
The Chief Executive Officer (“CEO”) and the executive management team are responsible for developing the strategy and a
comprehensive set of enterprise wide policies, including the risk appetite framework, for approval by the Board. They are
responsible for fostering the “tone at the top” and applying the approved strategy and RAF to the business operations of the
Company to help maximize, within the Company’s risk appetite, the benefit to shareholders and other stakeholders from a
portfolio of risks that the Company is willing to accept. MCAN’s Operating Committee provides governance over the operations
of MCAN to ensure that the strategy and tactics used by which MCAN in its funding and investing activities are effective in
meeting the Corporation’s stated objectives.
The Company’s operating model is predicated on the three-lines-of-defense approach to the management of risk. The operating
areas headed by the CEO are the first line of defense in the Company’s management of risk. They “own” the risk in their areas of
responsibility and are responsible for ensuring the Company pursues only suitable business opportunities that are within the
Company’s risk appetite.
The second line of defense establishes the enterprise level risk management frameworks and policies, and provides risk guidance
and oversight of the effectiveness of First Line risk management practices. These activities are provided by.
The Chief Risk Officer (“CRO”), who is responsible for providing independent review and oversight of enterprise-
wide risks and for the fostering of a strong risk culture throughout the organization. The CRO has responsibility for
maintaining and managing the RAF and in that regard for identifying, measuring, controlling, and reporting on the
significant business risks of the Company.
The Chief Financial Officer (“CFO”), who is responsible for the accuracy and integrity of the Company’s accounting
and financial reporting systems, financial statements, and planning and budgeting systems and documents. The CFO
ensures legal and regulatory compliance for all financial matters within the Company. The CFO is responsible for the
Company’s financial and capital plans which are presented to the Executive Committee and the Board for annual
approval. Progress against these plans is regularly reported to the Board and regulators. The Finance group that the
CFO heads also updates the plan with periodic forecasts, advises the Board of anticipated outcomes, and recommends
revisions to capital plans and structures as appropriate.
The Chief Compliance Officer (“CCO”), who is responsible for measuring, and reporting on, compliance with the
Company’s policies and processes that have been designed to manage and mitigate regulatory compliance risk. The
CCO is mandated to promote a sound compliance culture, report to the Board on compliance with legislative
requirements and make recommendations related to compliance activities.
The Chief Anti-Money Laundering Officer (“CAMLO”), who is responsible for the Company’s adherence to the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act with regard to its deposit taking and lending
activities.
The third line of defense is provided by MCAN’s internal audit group which monitors, and reports on, the effectiveness of
controls, risk management, and governance practices within the Company.
As discussed above in the “Risk Factors” section of this MD&A, we are exposed to certain inherent risks, including 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.
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. The Asset and Liability Committee (“ALCO”), which
is comprised of management, is responsible for liquidity management. We have an internal target of a standard level of liquid
investments (cash and cash equivalents, marketable securities, 75% of CMHC-insured single family mortgages, 50% of CMHC-
insured single family second mortgages and 50% of privately insured 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 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 $75 million, with sub-
limits of $50 million for overdrafts and $50 million for letters of credit. In addition, we maintain a credit warehouse facility
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
which can be drawn as required as mortgage fundings occur, which bears interest at the prime rate. This facility provides up to
$75 million of borrowings, and insured mortgages are eligible to act as collateral in the facility for a period of no longer than one
year.
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 184% of term deposits maturing within 100 days at December 31, 2013 (December 31, 2012 - 120%). For
further details on our liquid assets and our ability to meet liability obligations, refer to Note 34 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 33: 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
Loans payable
Other liabilities
Within
3 Months
3 Months To 1 Year
1 to 3
Years
3 to 5
Years
Over 5 December 31 December 31
Years
2012
2013
$ 64,945 $
-
279,792
-
2
14
344,753
- $
-
172,844
-
145
-
172,989
5,867
296,577
-
244
715
303,403
62,990
-
13,170
76,160
388,142
17,991
-
406,133
300,851
-
-
300,851
- $
- $
- $
1,342
95,633
-
-
-
96,975
38,239
-
-
38,239
14,478
16,767
5,667
18,906
1,801
57,619
64,945 $
21,687
861,613
5,667
19,297
2,530
975,739
-
-
-
-
790,222
17,991
13,170
821,383
123,825
20,390
739,812
4,355
18,067
3,164
909,613
777,077
-
9,493
786,570
Net liquidity surplus (deficit)
$
268,593 $ (233,144) $
2,552 $ 58,736 $ 57,619 $
154,356 $
123,043
Off-Balance Sheet
Unfunded mortgage commitments $
- $ 335,313 $
75,281 $
- $
- $
410,594 $
247,587
The above table excludes securitized assets and liabilities and pledged assets as their use is restricted to CMB/MBS operations.
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.
Reputational Risk
The most effective way for the Company to safeguard its public reputation is through the successful management of the
underlying risks in the business.
Strategic and Business Risk
Strategic and business risk is managed by the CEO and the Board. The Board approves the Company’s strategies at least annually
and reviews results against those strategies at least quarterly.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Operational Risk
We manage operational risk through various committees and processes. Our management team reviews operational measures on
a recurring basis as part of the Operating Committee, Compliance Audit and Enterprise Risk Management Committee, and
ALCO. We also provide monthly updates to the Board to provide an update on operations and other key factors and issues that
arise.
We also maintain appropriate insurance coverage through a financial institution bond policy, which is reviewed at least annually
by the Board for changes to coverage and our operations.
Outsourcing Risk
MCAN’s Outsourcing Policy, which is approved annually by the Board, incorporates the relevant requirements of OSFI
Guideline B-10, Outsourcing of Business Activities, Functions and Processes. We review our outsourced arrangements on an
annual basis to determine if the arrangement is material. If the arrangement is material it is subjected to a risk management
program, which includes detailed monitoring activities.
Credit Risk
Credit and commitment exposure is closely monitored through a reporting process that includes a formal monthly review
involving ALCO 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 certain members 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, 2013, we had recorded $1.1 million (December 31, 2012 - $713,000) of individual allowances on our corporate
mortgage portfolio (refer to Note 10 to the consolidated financial statements).
Our maximum credit exposure on our individual financial assets is equal to the carrying value of the respective assets, except for
our corporate mortgage portfolio, whose maximum credit exposure also includes outstanding commitments for future mortgage
fundings.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
We manage interest rate risk associated with securitization assets and liabilities through the use of “pay-floating, receive-fixed”
interest rate swaps. For further details, refer to the “CMB Program” section of this MD&A.
Ultimately, risk management is monitored and controlled at the highest level of the Company. ALCO reviews and manages these
risks on a monthly basis. The 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 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 believes that any monetary damages
against MCAP would not have a material financial impact on MCAN.
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 “Standards Issued But Not Effective” section of this MD&A for
further details.
PEOPLE
As at December 31, 2013, we had 48 employees.
REGULATORY COMPLIANCE
Our CCO 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 CCO reports quarterly to the HR Committee.
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, the Chair of the Audit Committee and the other members of the Board. 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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
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, 2013, 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, 8, 9, 10, 12, 13, 16, 17, 18, 19 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.
-51-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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.
STANDARDS ISSUED BUT NOT EFFECTIVE
Standards issued but not yet effective up to the date of issuance of the consolidated financial statements are listed below. This
listing is of standards and interpretations issued, which we reasonably expect to be applicable at a future date. We intend to adopt
those standards when they become effective.
IFRS 9, Financial Instruments
IFRS 9 was issued by the IASB in November 2009 and will replace IAS 39, Financial Instruments: Recognition and
Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value,
replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the
context of its business model and the contractual cash flow characteristics of the financial assets.
The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39.
IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company has not yet determined the impact of
IFRS 9 on its consolidated 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. We are in the process of assessing the
impact of adopting this amendment.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING
Disclosure Controls and Procedures (“DC&P”)
A disclosure committee (the “Disclosure Committee”), comprised of members of our senior management is responsible for
establishing and maintaining adequate disclosure controls and procedures. As of December 31, 2013, 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 CEO
and CFO supervised and participated in this evaluation. Based on the evaluation, our CEO and CFO 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 CEO and CFO, to allow timely decisions regarding required
disclosure.
-52-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2013 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
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 CEO and CFO, 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 CEO and CFO concluded that our ICFR were effective as of
December 31, 2013.
Ernst & Young LLP, our Independent Registered Chartered Accountants, have audited our consolidated financial statements for
the year ended December 31, 2013.
Changes in ICFR
There were no changes in our ICFR that occurred during the period beginning on January 1 and ending on December 31, 2013
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.
-53-
2013 CONSOLIDATED FINANCIAL STATEMENTS / MCAN MORTGAGE CORPORATION
STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
The accompanying consolidated financial statements of MCAN Mortgage Corporation (“MCAN” or the “Company”) are the
responsibility of management and have been approved by the Board of Directors. Management is responsible for the information
and representations contained in these consolidated financial statements, the Management’s Discussion and Analysis of
Operations and all other sections of the annual report. The consolidated financial statements have been prepared by management
in accordance with International Financial Reporting Standards (“IFRS”), including the accounting requirements of our regulator,
the Office of the Superintendent of Financial Institutions Canada.
The Company’s accounting system and related internal controls are designed, and supporting procedures maintained to provide
reasonable assurance that the Company’s financial records are complete and accurate and that assets are safeguarded against loss
from unauthorized use or disposition.
The Office of the Superintendent of Financial Institutions Canada makes such examination and enquiry into the affairs of MCAN
as deemed necessary to be satisfied that the provisions of the Trust and Loan Companies Act are being duly observed for the
benefit of depositors and that the Company is in sound financial condition.
The Board of Directors is responsible for ensuring that management fulfils its responsibility for financial reporting and is
ultimately responsible for reviewing and approving the consolidated financial statements. These responsibilities are carried out
primarily through an Audit Committee of unrelated directors appointed by the Board of Directors. The Chief Financial Officer
reviews internal controls, control systems and compliance matters and reports thereon to the Audit Committee.
The Audit Committee meets periodically with management and the external auditors to discuss internal controls over the
financial reporting process, auditing matters and financial reporting issues. The Audit Committee reviews the consolidated
financial statements and recommends them to the Board of Directors for approval. The Audit Committee also recommends to the
Board of Directors and Shareholders the appointment of external auditors and approval of their fees.
The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance
with Canadian generally accepted auditing standards. Ernst & Young LLP has full and free access to the Audit Committee.
William Jandrisits
President and Chief Executive Officer
Jeff Bouganim
Vice President and Chief Financial Officer
Toronto, Canada,
February 24, 2014
-54-
2013 CONSOLIDATED FINANCIAL STATEMENTS / 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, 2013 and December 31, 2012 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, 2013 and December 31, 2012, 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 24, 2014
-55-
2013 CONSOLIDATED FINANCIAL STATEMENTS / MCAN MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
As at December 31
Assets
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
Liabilities and Shareholders' Equity
Liabilities
Corporate Liabilities
Term deposits
Loans payable
Current taxes payable
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Other liabilities
Shareholders' Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Note
2013
2012
8
9
10
11
12
13
14
15
16
17
12
18
15
19
33
20
20
21
22
21
23
23
25
$
$
$
$
64,945
21,687
861,613
5,667
19,297
2,530
39,246
3,953
1,018,938
370,400
592,416
108,877
1,448
207
1,073,348
2,092,286
790,222
17,991
13
3,486
13,170
824,882
1,054,656
2,352
1,057,008
1,881,890
179,215
510
27,669
3,002
210,396
2,092,286
$
$
$
$
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
The accompanying notes and shaded areas of the "Risk Factors" and "Risk Management" sections of Management's Discussion
and Analysis of Operations are an integral part of these consolidated financial statements.
On behalf of the Board:
William Jandrisits
President and Chief Executive Officer
Karen Weaver
Director, Chair of the Audit Committee
-56-
2013 CONSOLIDATED FINANCIAL STATEMENTS / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars except for per share amounts)
Years Ended December 31
Note
2013
2012
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Whole loan gain on sale income
Realized and unrealized gain (loss) on financial instruments
Interest on financial investments and other loans
Interest on cash and cash equivalents
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Provision for credit losses
Other income - Corporate Assets
Bargain purchase gain
Transaction and restructuring expenses
Gain on dilution of investment in MCAP Commercial LP
Gain on sale of investment in MCAP Commercial LP
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
Operating Expenses
Salaries and benefits
General and administrative
Net 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)
14
26
30
18
27
28
6
6
14
14
29
27
18
20
20
$
$
$
$
50,509
6,563
2,347
1,308
1,738
(558)
(62)
887
62,732
19,163
3,290
954
369
23,776
38,956
2,127
(2,010)
4,510
736
5,363
7,365
1,806
1,386
3,761
14,318
13,998
179
14,177
141
(3,218)
(3,077)
6,036
5,254
11,290
29,952
(2,226)
1,975
(251)
30,203
1.54
1.15
19,591
$
$
$
$
41,395
6,906
2,236
2,061
-
-
1,422
544
54,564
17,157
3,070
642
2,560
23,429
31,135
-
-
-
-
-
14,124
4,763
1,547
9,655
30,089
26,888
423
27,311
2,778
(8,682)
(5,904)
3,953
5,040
8,993
16,238
(1,519)
(3,736)
(5,255)
21,493
1.22
1.42
17,579
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.
-57-
2013 CONSOLIDATED FINANCIAL STATEMENTS / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF COMPRHENSIVE 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
Less: deferred taxes
Transfer of gains on sale of marketable securities to net income
Less: deferred taxes
Change in unrealized gain on available for sale financial investment
Less: deferred taxes
2013
2012
$
30,203
$
21,493
(871)
171
(264)
52
1,882
(249)
721
1,527
(301)
(943)
186
190
(25)
634
Comprehensive income
$
30,924
$
22,127
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Years Ended December 31
Share capital
Balance, beginning of period
Common shares issued
Balance, end of period
Contributed surplus
Balance, beginning of period
Changes to contributed surplus
Balance, end of period
Retained earnings
Balance, beginning of period
Net income
Dividends declared
Balance, end of period
Accumulated other comprehensive income
Balance, beginning of period
Other comprehensive income
Balance, end of period
Note
2013
2012
23
$
155,005
24,210
179,215
$
132,817
22,188
155,005
24
510
-
510
19,985
30,203
(22,519)
27,669
2,281
721
3,002
510
-
510
23,491
21,493
(24,999)
19,985
1,647
634
2,281
Total shareholders' equity
$
210,396
$
177,781
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.
-58-
2013 CONSOLIDATED FINANCIAL STATEMENTS / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Years Ended December 31
Cash provided by (used for):
Operating Activities
Net income
Adjusted for non-cash items:
Current taxes
Deferred taxes
Equity income
Bargain purchase gain
Gain on MCAP commercial LP dilution
Gain on sale of investment in MCAP Commercial LP
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 (premiums)
Amortization of premium on marketable securities
Mortgage advances
Mortgage reductions
Proceeds on sale of mortgages
Issuance of term deposits
Repayment of term deposits
Issuance of financial liabilities from securitization
Repayment of financial liabilities from securitization
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Cash flows for operating activities
Investing Activities
Decrease in marketable securities
Increase in short-term investments
Decrease in financial investments
Increase in foreclosed real estate
Proceeds on sale of investment in MCAP Commercial LP
Decrease (increase) in other loans
Distributions from MCAP Commercial LP
Increase in equity investment in MCAP Commercial LP
Net investment in Xceed
Cash flows from investing activities
Financing Activities
Issue of common shares
Increase in loans payable
Dividends paid
Cash flows from (for) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplementary Information
Interest received
Interest paid
Taxes paid
2013
2012
$
30,203
$
21,493
(2,226)
1,975
(6,563)
(2,127)
(4,510)
(736)
369
3,218
(558)
72
(5,033)
219
(1,505,225)
1,119,456
661,083
523,466
(510,321)
168,023
(1,128,772)
4,291
(417)
(654,113)
(2,649)
8,043
606,402
(1,312)
2,788
634
6,162
-
(23,479)
596,589
2,687
17,991
(22,034)
(1,356)
(58,880)
123,825
64,945
2013
50,316
30,387
5
$
$
(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)
-
(130)
-
(14,000)
-
518,258
22,188
-
(24,308)
(2,120)
72,516
51,309
123,825
2012
62,755
39,915
58
$
$
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.
-59-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2013 CONSOLIDATED FINANCIAL STATEMENTS / MCAN MORTGAGE CORPORATION
Page
Note
1. Corporate Information .......................................................................................................................................... 61
2. Basis of Preparation .............................................................................................................................................. 61
3. Basis of Consolidation .......................................................................................................................................... 62
4. Summary of Significant Accounting Policies ....................................................................................................... 62
5. Significant Accounting Judgments and Estimates ................................................................................................ 70
6. Acquisition of Xceed ............................................................................................................................................ 71
7. Securitization Activities ........................................................................................................................................ 72
8. Cash and Cash Equivalents ................................................................................................................................... 75
9. Marketable Securities ........................................................................................................................................... 75
10. Mortgages - Corporate .......................................................................................................................................... 75
11. Foreclosed Real Estate .......................................................................................................................................... 78
12. Financial Investments ........................................................................................................................................... 78
13. Other Loans .......................................................................................................................................................... 79
14. Equity Investment in MCAP Commercial LP ...................................................................................................... 79
15. Other Assets .......................................................................................................................................................... 80
16. Short-Term Investments ....................................................................................................................................... 81
17. Mortgages - Securitized ........................................................................................................................................ 81
18. Derivative Financial Instruments .......................................................................................................................... 82
19. Term Deposits....................................................................................................................................................... 83
20. Income Taxes ........................................................................................................................................................ 84
21. Other Liabilities .................................................................................................................................................... 85
22. Financial Liabilities from Securitization .............................................................................................................. 85
23. Share Capital and Contributed Surplus ................................................................................................................. 86
24. Dividends .............................................................................................................................................................. 87
25. Accumulated Other Comprehensive Income ........................................................................................................ 87
26. Fees ....................................................................................................................................................................... 87
27. Mortgage Expenses ............................................................................................................................................... 88
28. Provision for Credit Losses .................................................................................................................................. 88
29. Other Securitization Income ................................................................................................................................. 88
30. Whole Loan Gain on Sale Income ........................................................................................................................ 88
31. Related Party Disclosures ..................................................................................................................................... 88
32. Commitments and Contingencies ......................................................................................................................... 90
33. Credit Facilities ..................................................................................................................................................... 91
34. Interest Rate Sensitivity ........................................................................................................................................ 91
35. Capital Management ............................................................................................................................................. 93
36. Financial Instruments............................................................................................................................................ 96
37. Standards Issued But Not Effective ...................................................................................................................... 98
38. Comparative Amounts .......................................................................................................................................... 98
-60-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (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”).
MCAN’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’s wholly-owned subsidiary, Xceed Mortgage Corporation (“Xceed”), focuses on the origination and sale to MCAN
and third party mortgage aggregators of residential first-charge mortgage products across Canada. As such, Xceed operates
primarily in one industry segment through its sales team and mortgage brokers. MCAN began to consolidate the operations
of Xceed as at July 4, 2013, which was the date of acquisition. Xceed is incorporated in the province of Ontario. For further
details, refer to Note 6.
MCAN also participates in the Canada Mortgage Bonds (“CMB”) program, the market MBS program and other
securitizations of insured mortgages. For further details, refer to Note 7.
MCAN is incorporated in Canada. MCAN and Xceed’s head office is located at 200 King Street West, Suite 600, 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
24, 2014.
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, market MBS program and reinvestment assets
purchased with CMB program mortgage principal repayments, and are funded by the cash received from the sale of the
associated securities, classified as financial liabilities from securitization.
-61-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
3. Basis of Consolidation
The consolidated financial statements include the balances of MCAN and its subsidiaries as at December 31, 2013.
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 and continue to be
consolidated until the date that such control ceases. Control is achieved where the Company has the power to govern the
financial and operating policies of an entity to obtain benefits from its activities. The financial statements of the
subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.
The Company holds 100% of the nominal share capital of Xceed Capital Corporation (“XCC”), a special purpose entity
(“SPE”). However, the Company has concluded that it does not control XCC, as it has no power to direct the activities of
XCC and does not obtain the majority of benefits or risks. Prior to the acquisition of Xceed by MCAN, Xceed sold assets
to XCC with no continuing involvement and earned fees on the sale. Since the date of acquisition, the Company has not
transferred any assets to XCC or earned any fees. The Company does not provide any guarantees related to the
performance of XCC.
All intercompany balances, income and expenses and unrealized gains and losses resulting from intercompany transactions
and dividends are eliminated in full.
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 and on its mortgage funding commitments.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
(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.
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 that 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
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.
(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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
(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.
(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.
Impaired mortgages include uninsured mortgages that are more than 90 days in arrears or are less than 90 days in arrears
but for which management does not have reasonable assurance that the full amount of principal and interest will be
collected in a timely manner. An insured mortgage is considered to be impaired when the mortgage is 365 days past due,
whether or not collection is in doubt.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
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.
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 the Company 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
(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.
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)
Investment in associate
The Company’s investment in its associate, MCAP Commercial LP (“MCAP”), is accounted for using the equity method.
An associate is an entity in which the Company has significant influence.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
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 change, 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, thus reducing the carrying value
by the amount of impairment.
(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.
(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 31. 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.
(13) Business combinations
The Company applies the acquisition method in accounting for business combinations. The consideration transferred by
the Company to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets
transferred, liabilities incurred and the equity interests issued by the Company, which includes the fair value of any asset or
liability arising from a contingent consideration arrangement. Transaction and restructuring costs are expensed as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
The Company recognizes identifiable assets acquired and liabilities assumed in a business combination regardless of
whether they have been previously recognized in the acquiree’s financial statements prior to the acquisition. Assets
acquired and liabilities assumed are generally measured at their acquisition-date fair values.
Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of a)
fair value of consideration transferred, b) the recognized amount of any noncontrolling interest in the acquiree and c)
acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable
net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a
bargain purchase) is recognized in profit or loss immediately.
(14) Capital assets
Capital assets are recorded at cost less accumulated amortization. Amortization is recorded at the following rates:
Furniture and fixtures
Computer hardware
Computer software
Leasehold improvements
Five years straight line
Three years straight line
One year to five years straight line
Lease term and one renewal straight line
(15) Newly adopted standards, interpretations and amendments
IFRS 7, Financial Instruments: Disclosure - Offsetting Financial Assets and Financial Liabilities - IFRS 7 Amendments
Amendments to IFRS 7, Offsetting Financial Assets and Financial Liabilities, introduced new disclosure requirements for
financial instruments relating to their rights of offset and related arrangements. The adoption of these amendments did not
have a significant impact on the Company’s consolidated financial statements.
IFRS 10, Consolidated Financial Statements
IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10 replaces
the parts of the previously existing IAS 27, Consolidated and Separate Financial Statements, that dealt with consolidated
financial statements and SIC-12, Consolidation - Special Purpose Entities. IFRS 10 changes the definition of control such
that an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee. To meet the definition of control in
IFRS 10, all three criteria must be met, including: (a) an investor has power over an investee; (b) the investor has exposure,
or rights, to variable returns from its involvement with the investee; and (c) the investor has the ability to use its power over
the investee to affect the amount of the investor’s returns. The adoption of IFRS 10 resulted in no impact to the
consolidated financial statements.
IFRS 12, Disclosure of Interests in Other Entities
IFRS 12 sets out the requirements for disclosures relating to an entity’s interests in subsidiaries, joint arrangements,
associates and structured entities. The standard carries forward existing disclosures and also introduces significant
additional disclosure requirements that address the nature of, and risks associated with, an entity’s interest in other entities.
These disclosures are included in Note 14.
IFRS 13, Fair Value Measurement
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change
when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS
13 defines fair value as an exit price. Additionally, the standard requires disclosures of fair value for both financial and
non-financial assets and liabilities measured at, or based on, fair value and for items not measures at fair value but for
which fair value is disclosed. As a result of the guidance in IFRS 13, the Company reassessed its policies for measuring
fair values, in particular its valuations inputs such as non-performance risk for the fair value measurement of liabilities.
The application of IFRS 13 has not materially impacted the fair value measurements carried out by the Company. IFRS 13
also requires specific disclosures on fair values, some of which replace existing disclosure requirements in other standards,
including IFRS 7, Financial Instruments: Disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
IAS 1, Presentation of Items in Other Comprehensive Income - Amendments to IAS 1
The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income. Items that will be
reclassified (“recycled”) to the income statement at a future point in time (e.g. net loss or gain on available for sale
financial assets) have to be presented separately from items that will not be reclassified (e.g. revaluation of land and
buildings). The amendments affect presentation only and have no impact on the Company’s financial position.
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 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 of litigation and
subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognized.
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable income will be
available against which the losses can be used. Significant management judgment is required to determine the amount of
deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable income together with
future tax planning strategies.
-70-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
5. Significant Accounting Judgments and Estimates (continued)
Further details on taxes are disclosed in Note 20.
6. Acquisition of Xceed
On July 4, 2013, MCAN acquired all of the issued and outstanding common shares of Xceed. The total purchase price paid
by MCAN consisted of cash of $30,292 (representing 17,309,747 shares purchased for cash consideration of $1.75 per
share) plus 1,531,903 common shares of MCAN (representing 12,982,310 Xceed shares at an exchange ratio of 0.118).
The 1,531,903 common shares of MCAN were valued using a price of $14.05 per share, representing MCAN’s closing
share price as of July 4, 2013. Under IFRS 3, the share consideration is measured based on the closing date of the business
combination.
The purchase is accounted for as a business combination using the acquisition method of accounting. As such, the
Company valued the identifiable assets and liabilities of Xceed at fair value and recorded a bargain purchase gain of
$2,127, representing the excess of the fair value of the net assets and liabilities acquired over the purchase price of Xceed.
Based on the above regarding consideration transferred, the purchase equation is as follows:
Fair value of net assets acquired
Cash and cash equivalents
Mortgages - corporate
Mortgages - securitized
Other assets
Current taxes receivable
Deferred tax assets
Other liabilities
Total net assets acquired
Consideration transferred
Cash
Shares
Total consideration transferred
$
7,007
46,289
394
4,334
148
106
(4,336)
53,942
30,292
21,523
51,815
Excess of net assets acquired over consideration transferred (bargain purchase gain)
$
2,127
The bargain purchase gain of $2,127 does not include “transaction and restructuring” expenses of $2,010 included in the
consolidated statement of income for the year ended December 31, 2013 as follows: transaction expenses - $1,164; lease
termination expense - $267; severance expense - $579.
The transaction expenses of $1,164 primarily relate to legal and professional consulting fees incurred by MCAN related to
the acquisition of Xceed. The lease termination expenses of $267 relate to costs incurred to terminate Xceed’s existing
premises lease. The severance expense of $579 relates to severance costs incurred for specified Xceed senior management.
In the determination of the fair value of the net assets acquired above, adjustments made to the carrying values of Xceed are
as follows:
Corporate mortgages with a carrying value of $51,048 as at July 4, 2013 were adjusted by $4,759 to a fair value of
$46,289. The fair value is based on the overall marketability of the mortgages to third party investors. The valuation
includes the impact of renewal rates from regulatory changes such as OSFI Guideline B-20, Residential Mortgage
Underwriting Practices and Procedures, effective January 1, 2013. Fair value adjustments were also applied to reflect
the yield requirements of third party investors, incorporating factors such as borrower credit and repayment history,
loan and debt service ratios, local market conditions and regulatory requirements.
Securitized mortgages with a carrying value of $2,076 as at July 4, 2013 were adjusted by $1,682 to a fair value of
$394. The fair value adjustment reflects considerations similar to those noted above in addition to the higher illiquidity
of these mortgages.
Other assets with a carrying value of $4,783 as at July 4, 2013 were adjusted by $449 to a fair value of $4,334 based on
the best estimate at the acquisition date of the contractual cash flows not expected to be collected.
-71-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
6. Acquisition of Xceed (continued)
The $106 fair value of deferred tax assets and the $148 fair value of current taxes receivable represent their carrying
values.
Other liabilities of $4,336 include a credit reserve of $1,565 set up by MCAN associated with a portion of Xceed’s off
balance sheet securitized mortgage portfolio, which is expected to be incurred over the remaining duration of the
portfolio. As at December 31, 2013, Xceed had $683,203 in this securitized mortgage portfolio. The reserve (net of
amortization to date) has been reflected in other corporate liabilities in the consolidated balance sheet.
The total fair value adjustment on acquisition was $8,455.
Xceed has contributed $8,756 and $6,279 to the Company’s revenues and net income, respectively from the acquisition
date to December 31, 2013. Had the acquisition occurred on January 1, 2013, the Company’s revenue for the period to
December 31, 2013 would have been $92,180 and the Company’s net income for the period would have been $33,764.
7. 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 market MBS program and the Insured Mortgage Purchase Program (“IMPP”), which are discussed below. In
instances where the Company has sold MBS, where applicable, these sales are executed for the purposes of transferring
various economic exposures that result in accounting outcomes noted for each program below. Each of the MBS programs
noted below provide for many responsibilities that are linked to the issuer of these MBS instruments, such as the collection
of actual principal and interest payments from the underlying mortgages and the remittance of guaranteed principal and
interest payments to CMHC for transfer to MBS holders. The Company does not transfer oversight or these responsibilities
when selling MBS to other parties.
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”) through a contractual agreement with 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, 2013 was 35% (December 31, 2012 - 30%). MCAP has
indemnified MCAN for the remaining 65% of CMB program obligations (December 31, 2012 - 70%).
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 income over securitization liability interest expense. 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 17), reinvestment assets (Notes 12 and 16) and securitization liabilities (Note 22) on the
consolidated balance sheets until the maturity of the CMB issuance. MCAN recognizes its 35% 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.
-72-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
7.
Securitization Activities (continued)
The Company enters into “pay floating, receive fixed” interest rate swaps as part of the CMB program (Note 18). 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.
Market MBS Program
In the fourth quarter of 2013, MCAN re-commenced its participation in the market MBS program, under which it sells
MBS to third parties and may also elect to sell the net economics and cash flows from the underlying mortgages (“interest-
only strips”) to third parties in future periods. As part of this program, MCAN originates and purchases insured single
family mortgages to sell as MBS.
During the fourth quarter of 2013, MCAN purchased certain mortgages from MCAP, pooled them with MCAN-originated
mortgages and sold $168,023 of MBS to a third party. Since MCAN retained all risks and rewards of ownership (e.g.
prepayment risk, Timely Payment Guarantee), the sale did not achieve derecognition and the associated mortgages
remained on MCAN’s balance sheet while a corresponding liability was incurred (Notes 17 and 22). MCAN did not have
any other MBS or interest-only strip sales during 2013.
During 2012, MCAN recognized $978 related to the sale of MBS and the interest-only strips associated with the underlying
mortgages as it transferred substantially all risks and rewards on sale. Since the inception of the program in 2011, all
interest-only strip sales have been made to MCAP. MCAN meets 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) if it transfers substantially all
risks and rewards on sale, and if so, they are removed from the consolidated balance sheet at that time.
The primary risks associated with the market MBS program are liquidity and funding risk, including 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.
Any mortgages securitized through the market MBS program for which derecognition is not achieved remain on MCAN’s
balance sheet and are also included in regulatory assets for OSFI purposes (Note 35). However, for tax purposes, all
mortgages securitized by MCAN achieve derecognition and are not included in income tax assets (Note 35).
In the case of mortgage defaults, MCAN is required to make scheduled principal and interest payments to investors as part
of the Timely Payment Guarantee (discussed below) and then place the mortgage/property through the insurance claims
process to recovery any losses. These defaults may result in cash flow timing mismatches that may marginally increase
funding and liquidity risks.
During the fourth quarter, as part of the re-commencement of its participation in the market MBS program, MCAN
received permission from CMHC to resume the sale of interest-only strips to third parties.
Other MBS Programs
Insured Mortgage Purchase Program
MCAN 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 failure, at the time of
sale MCAN recognized a corresponding financial investment representing a receivable from MCAP (Note 12) and financial
liability from securitization representing the securitization proceeds received from CMHC (Note 22). MCAN is the
counterparty for the ongoing cash flows between MCAP and CMHC in its role as the IMPP counterparty.
-73-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
7.
Securitization Activities (continued)
Timely Payment Guarantee
Consistent with all issuers of MBS, the Company is required to remit scheduled mortgage principal and interest payments
to CMHC, 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 CMHC. If the Company fails to
make a scheduled principal and interest payment to CMHC, CMHC may enforce the assignment of the mortgages included
in all MBS pools in addition to other assets backing the MBS issued.
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.
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 consolidated
balance sheet. The remaining securitized mortgage balance as at December 31, 2013 was $423,375 (December 31, 2012 -
$936,947) (Note 17). The reinvestment asset balance as at December 31, 2013 was $436,953 (December 31, 2012 -
$878,588) (Notes 12 and 16). The financial liabilities from securitization balance as at December 31, 2013 was $885,466
(December 31, 2012 - $1,855,051) (Note 22).
Market MBS Program
As a result of the failure to meet derecognition criteria, the above-noted 2013 market MBS program mortgage sale
transactions have resulted in MCAN recognizing the securitized mortgages and financial liabilities from securitization on
its consolidated balance sheet. The remaining securitized mortgage balance as at December 31, 2013 was $169,041
(December 31, 2012 - n/a) (Note 17). The financial liabilities from securitization balance as at December 31, 2013 was
$167,501 (December 31, 2012 - n/a) (Note 22).
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, 2013 was $1,689 (December 31, 2012 - $159,995) (Notes 12 and 22).
Transferred financial assets that are derecognized in their entirety but where the Company has a continuing
involvement
Market MBS Program
No MBS sales through the market MBS program during 2013 achieved derecognition (2012 - $284,143). MCAN has sold
$310,275 of MBS that has achieved derecognition since the inception of the program in 2011. MCAN recognized $978 of
income on sale in 2012, and has recognized $1,239 of income since the inception of the program in 2011. MCAN met
derecognition criteria on the sale of certain mortgages (i.e. on creation and sale of MBS) and the related 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. 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 derecognized MBS balance related to the market MBS
program December 31, 2013 was $270,952 (December 31, 2012 - $295,948), which was not reflected as an asset or liability
on MCAN’s consolidated balance sheets at either date. The MBS mature as follows: 2016 - $44,152, 2017 - $226,800.
-74-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
8. Cash and Cash Equivalents
As at December 31
Cash balances with banks
Bankers' acceptances and term deposits
2013
64,945
-
64,945
$
$
2012
$
$
11,825
112,000
123,825
Cash and cash equivalents include balances with banks and short-term investments with original maturity dates of less than
90 days.
Refer to Note 33 for an analysis of the Company’s available credit facilities.
9. Marketable Securities
As at December 31
Corporate bonds
Real estate investment trusts
Exchange-traded funds
2013
7,759
13,928
-
21,687
$
$
2012
8,491
7,825
4,074
20,390
$
$
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.
10. Mortgages - Corporate
(a) Summary
As at December 31, 2013
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured completed inventory loans
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
As at December 31, 2012
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured completed inventory loans
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$
229,444
46,181
127,670
$
976
144
-
$
271
700
-
365,816
7,249
2,390
47
-
-
1,247
844
-
2,390
47
$
228,197
45,337
127,670
363,426
7,202
90,605
866,965
$
$
708
4,265
$
116
1,087
$
824
5,352
$
89,781
861,613
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$
271,662
20,315
76,104
$
1,135
80
-
274,977
26,585
1,748
166
$
147
150
-
300
-
1,282
230
-
2,048
166
$
270,380
20,085
76,104
272,929
26,419
74,605
744,248
$
$
594
3,723
$
116
713
$
710
4,436
73,895
739,812
$
Gross principal as presented in the tables above includes unamortized capitalized transaction costs.
-75-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
10. Mortgages - Corporate (continued)
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 developers to provide interim mortgage financing on
residential units (condominium or freehold), where all construction has been completed and therefore no further
construction risk exists. Satisfactory confirmation that all units are substantially complete is required prior to funding all
inventory loans. Final occupancy permits, condo corporation registration and/or written confirmation by the cost consultant
as to the completion of the units are examples of verification measures.
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
2013
5.66%
6.30%
8.13%
6.18%
2012
4.63%
5.95%
6.94%
5.39%
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, 2013 was $874,942 (December 31, 2012 - $742,779). 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 34.
As at December 31, 2013, the Company held $45,998 of corporate mortgages to be securitized and sold through the market
MBS program (December 31, 2012 - n/a).
Outstanding commitments for future fundings of mortgages intended for the Company’s corporate portfolio were $410,594
as at December 31, 2013 (December 31, 2012 - $247,587). The majority of these commitments relate to floating rate
construction loans.
As at December 31, 2013, the Company had $11,719 (December 31, 2012 - $11,981) of insured single family mortgages
pledged as collateral as part of the CMB program. In addition, the Company had $10,168 of insured single family
mortgages pledged as collateral (December 31, 2012 - n/a) as part of its credit warehouse facility, which is discussed
further in Note 33.
As at December 31, 2013, the Company held $21 of second uninsured single family mortgages (December 31, 2012 -
$240).
(b) Discounted single family mortgages
As applicable, 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. During 2013, the Company sold the entire associated mortgage portfolio, recognizing a
gain on sale of $1,282. Prior to sale, the Company participated with MCAP in a profit sharing program such that 50% of
any recoveries of the discount were retained and the remaining 50% was paid to MCAP (refer to Note 31 for profit sharing
fees paid to/from MCAP).
-76-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
10. Mortgages - Corporate (continued)
The Company also holds an uninsured single family completed inventory loan with a net discount of $9,156 as at
December 31, 2013 that is discussed further in Note 21. The principal value net of the discount and an individual
allowance of $550 represents the Company’s best estimate of net realizable value given the mortgage’s impaired status and
the uncertainty of the resolution period.
(c) Geographic Analysis
As at December 31, 2013
Single Family
Construction
Commercial
Total
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
$
175,630
81,209
64,836
33,190
34,008
12,331
401,204
$
$
164,706
69,271
111,574
13,871
-
11,206
370,628
$
$
40,714
29,358
3,524
3,783
12,096
306
89,781
As at December 31, 2012
Single Family
Construction
Commercial
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
$
167,177
74,108
60,033
26,453
31,401
7,397
366,569
$
$
135,627
101,181
50,678
-
-
11,862
299,348
$
$
26,375
21,417
3,884
10,144
12,075
-
73,895
$
$
$
$
381,050
179,838
179,934
50,844
46,104
23,843
861,613
Total
329,179
196,706
114,595
36,597
43,476
19,259
739,812
44.2%
20.9%
20.9%
5.9%
5.4%
2.7%
100.0%
44.5%
26.6%
15.5%
4.9%
5.9%
2.6%
100.0%
(d) Mortgage Allowances
Details of the collective allowances for mortgage credit losses for the current and prior years are as follows:
Balance, beginning of year
Provisions
Recoveries
Write-offs
Balance, end of year
Collective
Individual
$
$
3,723 $
907
-
(365)
4,265 $
713 $
1,504
(830)
(300)
1,087 $
2013
Total
4,436 $
2,411
(830)
(665)
5,352 $
Collective
Individual
2,919
1,127
-
(323)
3,723 $
1,160 $
860
(307)
(1,000)
713 $
2012
Total
4,079
1,987
(307)
(1,323)
4,436
(e) Arrears and Impaired Mortgages
Mortgages past due but not impaired are as follows:
As at December 31, 2013
Single family - uninsured
Single family - insured
Residential construction
Commercial
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
$
$
8,171
3,019
825
3,382
15,397
$
$
1,673
895
-
-
2,568
$
$
811
-
-
-
811
$
$
-
1,547
-
-
1,547
$
$
Total
10,655
5,461
825
3,382
20,323
-77-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
10. Mortgages - Corporate (continued)
As at December 31, 2012
Single family - uninsured
Single family - insured
Single family - uninsured
(completed inventory)
Commercial
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
$
$
14,064
330
-
3,436
17,830
$
$
8,378
385
2,743
-
11,506
$
$
646
58
-
-
704
$
$
-
627
-
-
627
$
$
Impaired mortgages (net of individual allowances) are as follows:
As at December 31, 2013
Single Family
SF (Completed
Inventory)
Residential
Construction
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
$
1,118
287
2,294
911
164
60
4,834
$
$
-
-
1,091
1,473
-
-
2,564
$
$
-
-
-
-
-
-
-
As at December 31, 2012
Single Family
SF (Completed
Inventory)
Residential
Construction
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
11. Foreclosed Real Estate
$
$
1,533
1,528
1,736
462
147
5,406
$
$
-
-
-
1,450
-
1,450
$
$
-
1,760
-
-
-
1,760
$
$
$
$
Total
23,088
1,400
2,743
3,436
30,667
Total
1,118
287
3,385
2,384
164
60
7,398
Total
1,533
3,288
1,736
1,912
147
8,616
The Company holds two real estate investments within wholly owned subsidiaries, both of which were impaired residential
construction loans that were foreclosed. These investments are carried at the lower of carrying amount and fair market
value less estimated costs to sell. The investments were recorded at their fair value less estimated cost to sell at the time of
foreclosure, and no gain or loss was recognized as the fair market values were equal to the carrying values of the impaired
loans net of individual allowance. The Company assessed the properties as at December 31, 2013 and noted no decrease in
the fair value below the carrying amount. Accordingly, the Company did not recognize a loss during 2013 (2012 - nil).
12. Financial Investments
As at December 31
Corporate assets:
Investment - commercial real estate
Retained interest
Asset-backed commercial paper
Other financial investments
Securitization assets:
Insured mortgage-backed securities (in trust for CMB program)
Receivables - IMPP
2013
2012
$
$
$
$
18,451
145
457
244
19,297
107,188
1,689
108,877
$
$
$
$
13,792
3,084
457
734
18,067
554,636
159,995
714,631
-78-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
12. Financial Investments (continued)
Corporate Assets
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 the quarter, its average yield was 8.75% (2012 - 8.75%). 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.
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 2.05% as
at December 31, 2013 (December 31, 2012 - 1.74%). The fair market value of MBS held in trust for the CMB program as
at December 31, 2013 was $107,457 (December 31, 2012 - $556,620).
Receivables - IMPP represent the Company’s loan receivable from MCAP associated with the Company’s involvement in
the IMPP (Note 7), although it has no economic interest and therefore recognizes no associated 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. 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 carrying value of all financial
investments approximates fair value, except the insured MBS noted above.
13. Other Loans
Loans receivable - employees
Loans receivable - MCAP
All other loans are classified as loans and receivables.
14. Equity Investment in MCAP Commercial LP
Note
31
31
2013
1,815
715
2,530
$
$
2012
1,924
1,240
3,164
$
$
The Company has a 15.7% equity interest in MCAP as at December 31, 2013 (December 31, 2012 - 23.4%), consisting of
15% of voting class A units (December 31, 2012 - 25%), 0% of non-voting class B units (December 31, 2012 - 0%) and
18.2% of non-voting class C units (December 31, 2012 - 25%).
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.
MCAP’s head office is located at 200 King Street West, Suite 400, Toronto, Ontario Canada. Although MCAN’s voting
interest in MCAP was less than 20% as at December 31, 2013, MCAN uses the equity basis of accounting for the
investment as it has significant influence in MCAP per IAS 28, Investments in Associates and Joint Ventures, as a result of
its entitlement to a position on MCAP’s Board of Directors.
MCAN holds a 15% voting interest in MCAP through its class A units (December 31, 2012 - 25%). The remaining 85% of
the class A units (December 31, 2012 - 75%) and remaining 81.8% of the class C units (December 31, 2012 - 75%) are held
by a subsidiary of the Caisse de dépôt et placement du Québec (the “Caisse”).
On November 30, 2013, MCAP issued 5,080,802 new class A units and 3,452,829 new class C units to other partners of
MCAP at a cost of $11.72 per unit, raising $100,000 of new unitholder equity. As a result of the issuance of the new units
at a price in excess of MCAN’s carrying value per unit, MCAN recorded a $4,510 gain on the dilution of its investment in
MCAP. Subsequent to the issuance of the new class A and class C units, MCAN sold 237,880 class A units to another
partner of MCAP at a price of $11.72 per unit, recognizing a gain of $736 on sale. The combination of the two transactions
reduced MCAN’s equity interest in MCAP from 23.4% to 15.7%.
-79-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
14. Equity Investment in MCAP Commercial LP (continued)
Subsequent to year end, MCAN sold 250,000 class C units to another partner of MCAP at a price of $11.72 per unit,
reducing MCAN’s equity interest in MCAP from 15.7% to 14.8%.
Years Ended December 31
Balance, beginning of year
Equity income
Dilution gain
Carrying value of portion of investment sold
Distributions received
Additional equity investment
Balance, end of year
As at November 30
MCAP's balance sheet:
Assets
Liabilities
Equity
Years Ended November 30
MCAP revenue and net income:
Revenue
Net income
15. Other Assets
2013
36,386
6,563
4,510
(2,052)
(6,161)
-
39,246
$
$
2012
15,480
6,906
-
-
-
14,000
36,386
$
$
2013
2012
$
8,548,149
8,251,224
296,925
$
5,084,576
4,916,237
168,339
2013
2012
$
$
258,017
27,274
$
$
200,119
32,968
Other corporate assets include receivables, capital assets and prepaid expenses. Other securitization assets, totalling $207
as at December 31, 2013 (December 31, 2012 - $1,248), 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
Capital assets
Derivative financial instruments
Related party receivable - MCAP
Other
Note
2013
2012
18
$
$
1,626
1,236
123
-
968
3,953
$
$
952
565
-
2,757
413
4,687
-80-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
16. 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
2013
2012
$
$
329,765
-
40,635
370,400
$
$
319,590
4,362
54,491
378,443
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 - 1.17% (December 31, 2012 - 1.14%) and
Repo GOCs - n/a (December 31, 2012 - 0.90%). 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.
17. Mortgages - Securitized
MCAN’s securitized mortgage portfolio consists of insured mortgages securitized through the CMB program and the
market MBS program. These mortgages are held as collateral against the CMB and MBS liabilities (Notes 7 and 22).
(a) Summary
As at December 31, 2013
CMB Program:
Single family - insured
Commercial - insured
Market MBS Program:
Single family - insured
As at December 31, 2012
Single family - insured
Commercial - insured
Gross
Principal
Allowance
Net
Principal
$
$
$
$
380,999
42,376
423,375
169,041
592,416
Gross
Principal
889,213
47,734
936,947
$
$
$
$
-
-
-
-
-
$
$
380,999
42,376
423,375
169,041
592,416
Allowance
Net
Principal
-
-
-
$
$
889,213
47,734
936,947
Certain capitalized transaction costs are included in mortgages and are amortized using the EIRM. As at December 31,
2013, the unamortized capitalized cost balance was $1,764 (December 31, 2012 - $1,636). 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, 2013 was $601,945 (December 31, 2012 - $1,057,508).
The weighted average yield of the Company’s securitized mortgage portfolio is as follows:
As at December 31
CMB Program:
Single family
Commercial
Market MBS Program:
Single family
Total
-81-
2013
2012
2.97%
3.39%
3.01%
3.21%
3.07%
3.34%
3.26%
3.34%
n/a
3.34%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
17. Mortgages - Securitized (continued)
(b) Geographic Analysis
As at December 31
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
2013
2012
$
$
265,370
138,428
93,767
53,633
23,588
17,630
592,416
44.8%
23.4%
15.8%
9.1%
4.0%
2.9%
100.0%
$
$
451,569
221,606
133,095
74,393
35,160
21,124
936,947
48.2%
23.7%
14.2%
7.9%
3.8%
2.2%
100.0%
Mortgages past due but not impaired are as follows:
As at December 31, 2013
Single family - CMB program
Single family - Market MBS program
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
$
$
7,131
409
7,540
$
$
2,069
-
2,069
$
$
383
-
383
$
$
743
-
743
$
$
10,326
409
10,735
As at December 31, 2012
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
Single family - CMB program
$
16,665
$
3,682
$
1,538
$
2,321
$
24,206
There were no impaired securitized mortgages as at December 31, 2013 or December 31, 2012.
18. 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 Company enters into interest rate swaps to manage interest rate risk between the time that a mortgage rate is committed
to borrowers and the time that the mortgage is funded. 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, 2013
Less than
one year
One to
three years
Three to
five years
Over five
years
Total
CMB interest rate swaps - fair value
1,264
CMB interest rate swaps - outstanding notional $ 114,861
$
Mortgage commitment interest rate swaps -
fair value
Mortgage commitment interest rate swaps -
outstanding notional
$
$
123
24,000
$
$
$
$
184
4,813
-
-
$
$
$
$
-
-
-
-
$
$
$
$
-
-
$
1,448
$ 119,674
-
-
$
$
123
24,000
-82-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
18. Derivative Financial Instruments (continued)
As at December 31, 2012
Less than
one year
One to
three years
Three 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
Activity related to the CMB interest rate swaps in the current and prior years 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
2013
2012
$
4,666
$
13,348
(3,376)
158
(3,218)
(7,408)
(1,274)
(8,682)
$
1,448
$
4,666
In 2013, the Company incurred net realized and unrealized losses of $583 (December 31, 2012 - n/a) on the interest rate
swaps used to hedge interest rate risk on mortgage funding commitments. Any offsetting gains to mortgage commitments
are recognized when the related mortgages are sold.
19. Term Deposits
As at December 31
Term deposits
Accrued interest
2013
2012
$
$
782,836
7,386
790,222
$
$
769,450
7,627
777,077
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, 2013 was 2.48% (December 31, 2012 - 2.45%). The
Company’s term deposits are eligible for Canada Deposit Insurance Corporation (“CDIC”) deposit insurance.
The term deposits mature as follows: less than one year - $451,132 (December 31, 2012 - $467,958); one to three years -
$300,851 (December 31, 2012 - $267,153); three to five years - $38,239 (December 31, 2012 - $41,966).
Term deposits are classified as other financial liabilities and are recorded at amortized cost. The estimated fair value of
term deposits as at December 31, 2013 was $791,537 (December 31, 2012 - $786,837), and is determined by discounting
the contractual cash flows using market interest rates currently offered for deposits of similar remaining maturities.
-83-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
20. Income Taxes
The composition of the provision for (recovery) of income taxes is as follows:
Years Ended December 31
Note
2013
Income before income taxes
Less: dividends
Income subject to tax
Statutory rate of tax
Tax provision (recovery) before the following:
Non-taxable portion of capital gains
Permanent differences related to acquisition of Xceed
Other temporary differences
Statutory rate difference in subsidiaries
Rate changes and other differences
Deferred tax included in equity of associate
Adjustments in respect of prior years
Years Ended December 31
Current tax
Current tax provision (recovery)
Adjustment in respect of current income tax of prior years
Deferred tax provision (recovery)
Relating to origination and reversal of temporary differences
The composition of the deferred tax liabilities is as follows:
$
24
$
$
$
29,952
(22,519)
7,433
39%
2,899
(862)
(92)
-
322
113
(405)
(2,226)
(251)
2013
-
(2,226)
1,975
(251)
2012
16,238
(24,999)
(8,761)
39%
(3,417)
(428)
-
(450)
66
(495)
(452)
(79)
(5,255)
2012
(1,440)
(79)
(3,736)
(5,255)
$
$
$
$
As at and for the year ended December 31, 2013
Provision for credit losses
Securitization-related items
Equity investment in MCAP Commercial LP
Financial investments
Marketable securities
Loss carry forward benefit
Other
As at and for the year ended December 31, 2012
Provision for credit losses
Securitization-related items
Equity investment in MCAP Commercial LP
Financial investments
Marketable Securities
Loss carry forward benefit
Other
Deferred Tax
Liability (Asset)
Statement of
Income
Other
Comprehensive
Income
$
$
(1,725)
1,363
5,204
440
149
(1,948)
3
3,486
Deferred Tax
Liability (Asset)
$
$
(1,492)
2,454
931
191
253
(126)
(369)
1,842
$
(233)
(1,091)
4,273
-
119
(1,396)
303
1,975
$
-
-
-
249
(223)
-
-
26
Statement of
Income
Other
Comprehensive
Income
$
$
$
$
(294)
(4,075)
1,088
4
1
(126)
(334)
$
(3,736)
$
-
-
-
25
115
-
-
140
-84-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
20. Income Taxes (continued)
The deferred tax liability at December 31, 2013 includes a deferred tax asset from Xceed as part of the acquisition on July
4, 2013.
Current Taxes Receivable/Payable
As a MIC under the Tax Act, MCAN is able to deduct from income for tax purposes dividends paid within 90 days of year-
end. However, for accounting purposes, dividends paid in the following quarter that have not been declared and accrued
prior to quarter end are not deductible in the calculation of current taxes receivable/payable.
21. Other Liabilities
As at December 31
Corporate liabilities:
Accounts payable and accrued charges
Related party payable - MCAP
Dividends payable
Securitization liabilities:
CMB liabilities - MCAP
Other
Note
2013
2012
24
$
$
$
$
6,797
644
5,729
13,170
2,340
12
2,352
$
$
$
$
4,249
-
5,244
9,493
3,130
138
3,268
The Company was previously a party to an indemnity agreement whereby the investors of a construction loan securitization
program were responsible for any incurred losses in the underlying loans on a pro-rata basis. Since the Company
previously held 25% of the first loss position, it was responsible for 25% of any losses incurred on the remaining loans in
the securitization program. As at December 31, 2012, the Company’s accrued liability representing estimated losses
associated with this indemnity was $1,100.
During 2013, the Company purchased the interest of the other investor (CDP Capital - Real Estate Advisory Inc.) in the
underlying construction loans at a discount, including the impaired construction loan with which the allowance was
associated. The Company reversed the $1,100 accrued liability upon purchase and established an individual mortgage
allowance for the same amount, which was reduced to $550 later in the year. Subsequent to purchase, the impaired
residential construction loan was reclassified as an uninsured single family mortgage (completed inventory) as a result of
the completion of the individual housing units on the property.
CMB liabilities - MCAP represents cash received from MCAP relating to its pro-rata share of the excess of NHA MBS
Timely Payment Guarantee principal obligations over actual mortgage principal collected from borrowers (Note 7).
Due to the short-term nature of other liabilities, their carrying value approximates fair value.
22. 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 - Market MBS program
Financial liabilities - IMPP
Note
7
7
7
2013
2012
$
885,466
167,501
1,689
$ 1,054,656
$ 1,855,051
-
159,995
$ 2,015,046
-85-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
22. Financial Liabilities from Securitization (continued)
The financial liabilities - CMB program had a weighted average interest rate of 2.70% as at December 31, 2013 (December
31, 2012 - 3.18%). The financial liabilities - Market MBS program had a weighted average interest rate of 2.27%
(December 31, 2012 - n/a).
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, 2013 mature as follows:
2014
2015
2018
CMB
Market MBS
$
$
844,814
40,652
-
885,466
$
$
-
-
167,501
167,501
$
$
IMPP
1,689
-
-
1,689
Total
$
$
846,503
40,652
167,501
1,054,656
MCAN does not participate in the economics of the IMPP (Note 7) and therefore pays no interest on this liability, nor does
it recognize interest income from the associated receivable (Note 12).
Certain capitalized transaction costs are included in financial liabilities from securitization and are amortized using the
EIRM. As at December 31, 2013, the unamortized capitalized cost balance was $141 (December 31, 2012 - $500).
23. Share Capital and Contributed Surplus
The authorized share capital of the Company is unlimited common shares with no par value.
Balance, January 1
Issued
Xceed acquisition
Rights offering
Dividend reinvestment plan
Executive Share Purchase Plan
Balance, December 31
Number
of Shares
2013
Number
of Shares
2012
18,728,500
$
155,005
16,861,575
$
132,817
1,531,903
-
165,598
34,935
20,460,936
$
21,523
-
2,237
450
179,215
-
1,699,157
167,768
-
18,728,500
$
-
19,913
2,275
-
155,005
During the year, the Company issued 165,598 (2012 - 167,768) shares under the dividend reinvestment plan out of treasury
at the weighted average trading price for the 5 days preceding such issue less a discount of 2%.
For details on the Executive Share Purchase Plan, refer to Note 31.
The Company had no potentially dilutive instruments as at December 31, 2013 or December 31, 2012.
Contributed surplus of $510 represents the discount on the repurchase of warrants in 2004.
-86-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
24. Dividends
Dividends on common shares declared in the prior year and paid in the current year
(recognized as a liability at December 31, 2012 and 2011)
Fourth quarter dividend, 2012: $0.28 per share (2011: $0.27 per share)
Dividends on common shares declared and paid during the year
2013: $0.87 per share (2012: $1.14 per share)
Dividends on common shares declared during the year
(recognized as a liability at December 31, 2013 and 2012)
Fourth quarter dividend, 2013: $0.28 per share (2012: $0.28 per share)
Dividends on common shares approved in the first quarter
(not recognized as a liability at December 31, 2013 or 2012)
First quarter dividend, 2014: $0.28 per share (2013: $0.31 per share)
2013
2012
$
5,244
$
16,790
$
$
4,552
19,755
$
5,729
$
5,244
$
5,742
$
5,819
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 quarter-end the deduction is not taken into account in determining current
taxes payable for accounting purposes. The payment of the approved 2014 first quarter dividend of $5,742 noted above
(2013 - $5,819), which was not recognized as a liability as at December 31, 2013, is expected to reduce current taxes
payable as at March 31, 2014 by $2,267 (March 31, 2013 - $2,297). Certain additional factors may impact current taxes
payable between December 31, 2013 and March 31, 2014.
25. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of unrealized gains and losses (net of deferred taxes) on available for
sale marketable securities.
As at December 31
2013
2012
$
149
(29)
120
3,322
(440)
2,882
$
1,284
(252)
1,032
1,440
(191)
1,249
$
3,002
$
2,281
Note
31
2013
2,253
94
2,347
$
$
2012
2,046
190
2,236
$
$
To be reclassified to the income statement in subsequent periods:
Unrealized gain on available for sale marketable securities
Less: deferred taxes
Unrealized gain on available for sale financial investments
Less: deferred taxes
26. Fees
Years Ended December 31
Mortgagor fees
Fee income from profit sharing
-87-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
27. Mortgage Expenses
Corporate Assets
Years Ended December 31
Mortgage servicing expense
Letter of credit expense
Other mortgage expenses
Securitization Assets
2013
2,614
462
214
3,290
$
$
Mortgage expenses associated with securitization assets consist primarily of mortgage servicing expenses.
28. Provision for Credit Losses
Years Ended December 31
Note
2013
Mortgages - collective provisions, net
Mortgages - individual provisions (recoveries), net
Financial investments and other loans - collective provisions (recoveries), net
Other provisions (recoveries), net
21
29. Other Securitization Income
Net interest rate swap receipts
Refinancing and renewal gains
Income from sale of MBS
Other
30. Whole Loan Gain on Sale Income
$
$
$
$
907
674
(9)
(1,203)
369
2013
3,376
385
-
-
3,761
2012
2,401
438
231
3,070
2012
1,127
553
(20)
900
2,560
2012
7,408
1,325
978
(56)
9,655
$
$
$
$
$
$
The Company regularly sells mortgages to third party mortgage aggregators for sale into the CMB or pooling as MBS on a
whole-loan basis with premium proceeds received at the time of sale. The Company maintains renewal rights on these
sales.
For the year ended December 31, 2013, the Company sold $17,944 of insured mortgages (2012 - n/a) and recorded a gross
gain of $281 (2012 - n/a).
The Company sold a portfolio of discounted mortgages during 2013, recognizing a gain of $1,282 (Note 10(b)). In addition,
the Company earned $175 from other mortgage sales.
31. Related Party Disclosures
The consolidated financial statements include the financial statements of the Company, its equity accounted associate,
MCAP, and its wholly-owned subsidiary, Xceed. The Company holds a 15.7% equity interest in MCAP (December 31,
2012 - 23.4%), a non-public entity. MCAP’s principal activities include the origination and servicing of mortgages. The
Company holds one of five seats on MCAP’s Board of Directors. Xceed’s principal activities include the origination and
sale of mortgages.
During the year, the Company purchased certain corporate services from MCAP in the amount of $695 (2012 - $566) and
purchased certain mortgage origination and administration services from MCAP in the amount of $2,054 (2012 - $2,766).
Also, the Company received $3,967 (2012 - $3,038) of mortgage fees from MCAP.
During the year, the Company paid fees in the amount of $1,263 (2012 - $1,675) to MCAP relating to a profit sharing
arrangement on a portfolio of discounted mortgages and received $94 (2012 - $190) of fees from MCAP relating to a profit
sharing arrangement on a portfolio of discounted mortgages.
-88-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
31. 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, which were included in other securitization
income. Derecognition was achieved on the sale of the mortgages. There were no similar sales during 2013.
MCAN holds a retained interest in insured single family mortgages that was acquired from MCAP that yields up to 8.75%
depending on mortgage prepayment levels. The balance as at December 31, 2013 was $145 (December 31, 2012 - $3,084)
(Note 12).
MCAN holds loans receivable from MCAP bearing interest at 5% that mature in 2015. As at December 31, 2013, the
outstanding loan balance was $715 (December 31, 2012 - $1,240) (Note 13).
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 and Chief Investment Officer, Vice President and Chief Risk Officer and Vice
President, Operations, is as follows:
Salaries and short term employee benefits
Other long term benefits
Executive Share Purchase Plan
2013
2,545
51
2,596
$
$
$
$
2012
1,878
137
2,015
The Company has 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 2013, 34,935
common shares were issued out of treasury under the Share Purchase Plan (2012 - nil). 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; 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.
As at December 31, 2013, $1,815 of loans were outstanding (December 31, 2012 - $1,924) (Note 13). The loans under the
Share Purchase Plan bear interest at prime plus 1% (4%) as at December 31, 2013 (December 31, 2012 - 4%) and have a
five-year term. The shares are pledged as security for the loans and had a fair market value of $2,829 as at December 31,
2013 (December 31, 2012 - $3,159).
During the year, MCAN recognized $59 of interest income (2012 - $72) 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 “DSU Participant”). Each unit is equivalent in
value to one common share of the Company. Following his retirement/termination date, the DSU 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 DSU Participant was granted 30,000 units under the
DSU Plan during 2010. In addition, the DSU 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, 2013, 30,000
units had vested (December 31, 2012 - 20,000).
-89-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
31. Related Party Disclosures (continued)
The Company recognizes compensation expenses associated with the DSU Plan on the accrual basis over the vesting
period. The compensation expense recognized related to the DSU Plan for 2013 was $49 (2012 - $137). As at December
31, 2013, the accrued DSU Plan liability was $495 (December 31, 2012 - $446).
Restricted Share Units Plan
In 2013, the Company established a Restricted Share Units Plan (the “RSU Plan”) whereby the Board of Directors granted
units under the RSU Plan to certain executives of the Company (the “RSU Participants”). Each unit is equivalent in value
to one common share of the Company. The RSU Participants are entitled to receive cash for each unit three years
subsequent to the awarding of the units subject to continued employment with the Company. The individual unit values are
based on the value of the Company’s common shares at the time of payment. The RSU Participants were granted 11,200
units under the RSU Plan in December 2013. In addition, the RSU Participants are entitled to receive dividend
distributions in the form of additional units. All RSU units vest after three years. As at December 31, 2013, no units had
vested (December 31, 2012 - n/a).
The Company recognizes compensation expenses associated with the RSU Plan on the accrual basis over the vesting
period. The compensation expense recognized related to the RSU Plan for 2013 was $2 (2012 - n/a). As at December 31,
2013, the accrued RSU Plan liability was $2 (December 31, 2012 - n/a).
32. Commitments and Contingencies
The Company has contractual obligations relating to an operating lease. In addition, the Company has outstanding
commitments for future fundings of mortgages intended for its corporate portfolio.
As at December 31, 2013
Mortgage fundings
Operating lease
Less than
one year
One to
three years
Three to
five years
Over five
years
Total
$
$
335,313
817
336,130
$
$
75,281
1,364
76,645
$
$
-
914
914
$
$
-
2,244
2,244
$
$
410,594
5,339
415,933
The Company incurred $360 of operating lease expenses during the year (2012 - $260), included in general and
administrative expenses. After acquisition by MCAN, Xceed’s former head office was vacated and all future obligations
were written off as part of the acquisition. All future obligations related to this space were fully expensed in the current
year (included in “transaction and restructuring expenses”) and the commitment to pay these expenses has been included in
the table above.
The Company outsources the majority of its mortgage and loan origination and servicing. The Company continues to pay
servicing expenses as long as the mortgages and loans remain on its consolidated balance sheet.
The Company guarantees 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. 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 guarantee. The effect of this indemnity is that the cost of any claim will be borne by
the Company and CDP Capital - Real Estate Advisory.
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, MCAN
believes that any monetary damages against MCAP would not have a material financial impact on MCAN.
-90-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
33. Credit Facilities
The Company has a line of credit from a Canadian chartered bank that is a $75,000 facility bearing interest at prime plus
1%, 4% at December 31, 2013 (December 31, 2012 - prime plus 1%, 4%). The facility has a sub limit of $50,000 for
issued letters of credit and $50,000 for overdrafts, and is due and payable upon demand. As at December 31, 2013, the
outstanding overdraft balance was $8,053 (December 31, 2012 - $nil). The letters of credit have a term of up to one year
from the date of issuance, plus a renewal clause providing for an automatic one-year extension at the maturity date subject
to the bank’s option to cancel by written notice at least 30 days prior to the letters of credit expiry date. The letters of credit
are for the purpose of supporting developer obligations to municipalities in conjunction with residential construction loans.
As at December 31, 2013, there were letters of credit in the amount of $33,895 issued (December 31, 2012 - $25,665) and
additional letters of credit in the amount of $27,175 committed but not issued (December 31, 2012 - $16,082).
The Company maintains a credit warehouse facility which can be drawn as required as mortgage fundings occur. The
facility bears interest at the prime rate. The facility provides for up to $75,000 of borrowings and insured mortgages are
eligible to act as collateral in the facility for a period of no longer than one year. The facility is payable on demand with
seven months’ notice. As at December 31, 2013, the Company had borrowed $9,938 from this facility (December 31, 2012
- n/a).
34. 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, 2013 and
December 31, 2012 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 7 and 18.
-91-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
34. Interest Rate Sensitivity (continued)
The following table presents the assets and liabilities of the Company by interest rate sensitivity:
As at December 31, 2013
Floating
Rate
Within
3 Months
3 Months
to 1 Year
1 to 3
Years
3 to 5
years
Over 5 Non Interest
Sensitive
years
Total
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
$
516,593 $
95,643
612,236
60,869 $
525,279
586,148
166,809 $
234,696
401,505
97,733 $
40,254
137,987
78,893 $
175,580
254,473
16,921 $
-
16,921
81,120 $ 1,018,938
1,073,348
1,896
2,092,286
83,016
17,991
80,532
98,523
62,990
-
62,990
388,142
764,282
1,152,424
300,851
40,652
341,503
38,239
167,501
205,740
-
-
-
16,669
4,041
20,710
824,882
1,057,008
1,881,890
Shareholders' Equity
-
-
-
-
-
-
210,396
210,396
GAP
$
513,713 $
523,158 $ (750,919) $ (203,516) $
48,733 $
16,921 $
(148,090)
-
YIELD SPREAD
1.11%
0.70%
2.38%
2.19%
0.84%
3.98%
As at December 31, 2012
Floating
Rate
Within
3 Months
3 Months
to 1 Year
1 to 3
Years
3 to 5
Years
Over 5 Non Interest
Sensitive
Years
Total
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
$ 378,655 $
410,198
788,853
74,847 $ 216,912 $ 147,234 $
539,952
614,799
460,824
677,736
463,718
610,952
56,340 $
5,588 $
-
56,340
-
5,588
71,110 $
161,243
232,353
950,686
2,035,935
2,986,621
-
80,519
230,981
-
236,976
965,884
267,153
808,648
41,967
-
-
-
13,449
163,263
790,526
2,018,314
80,519
230,981
1,202,860
1,075,801
41,967
-
176,712
2,808,840
Shareholders' Equity
-
-
-
-
-
-
177,781
177,781
GAP
$ 708,334 $ 383,818 $ (525,124) $ (464,849) $
14,373 $
5,588 $ (122,140)
-
YIELD SPREAD
1.01%
0.92%
1.90%
1.85%
1.71%
5.61%
Certain residential construction loans and single family uninsured completed inventory loans are subject to the greater of a
minimum interest rate (ranging between 5% and 16%) or a prime based interest rate. To the extent that the minimum rate
exceeds the prime based rate as at December 31, 2013, these mortgages have been reflected in the table above as fixed rate
mortgages, as follows: within 3 months - $2,292 (December 31, 2012 - $65,024), 3 months to 1 year - $14,910 (December
31, 2012 - $57,580) and 1 to 5 years - $17,359 (December 31, 2012 - $28,330).
An immediate and sustained 1% increase (decrease) to market interest rates as at December 31, 2013 would have a positive
(adverse) effect of $2,976 (December 31, 2012 - $2,608) to net income over the following twelve month period. An
immediate and sustained 1% increase (decrease) to market interest rates as at December 31, 2013 would have an adverse
(positive) effect to accumulated other comprehensive income of $143 (December 31, 2012 - $208).
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.
-92-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
35. 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. Securitization assets and liabilities are
both excluded from the calculation of the Tax Act ratio.
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
2013
2012
$ 1,004,711
187,915
$
5.35
4.35
$
$
953,235
168,477
5.66
4.66
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.
As a Loan Company under the Trust Act, OSFI oversees the adequacy of the Company’s capital. For this purpose, OSFI
has imposed minimum capital-to-regulatory (or risk-weighted) assets ratios and a maximum assets to capital ratio. Assets
securitized through the CMB program prior to June 30, 2010 are excluded from the calculation of regulatory ratios.
-93-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
35. Capital Management (continued)
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, became effective as of January 1, 2013. Further details on Basel III are
available in the Capital Management section of the Management’s Discussion and Analysis (“MD&A”) or on the
Company’s website at www.mcanmortgage.com.
December 31 2013
Basel III
(All-in)
December 31 2013 December 31 2012
(Basel II)
Basel III
(Transitional)
Regulatory Ratios (OSFI)
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income 1
Adjustment for equity investment in MCAP Commercial LP 2
Common Equity Tier 1 capital
$
Tier 1 capital deductions
Tier 1 capital
Unrealized gain on available for sale marketable securities 1
Tier 2 capital deductions
Tier 2 capital
179,215
510
27,669
3,002
(18,206)
192,190
-
192,190
n/a
-
-
Total capital
Total regulatory assets
Total risk-weighted assets
$
$
$
192,190
1,244,426
969,150
Capital ratios
Common Equity Tier 1 capital to risk-weighted assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Assets to capital ratio
19.83%
19.83%
19.83%
6.47
$
$
$
$
179,215
510
27,669
3,002
-
210,396
-
210,396
n/a
-
-
210,396
1,244,426
1,005,562
20.92%
20.92%
20.92%
5.91
$
$
$
$
155,005
510
19,985
n/a
n/a
n/a
(229)
175,271
1,032
(229)
803
176,074
1,002,759
806,140
n/a
21.74%
21.84%
5.70
1 Under Basel III, all accumulated other comprehensive income is included in Common Equity Tier 1 capital. Under Basel II,
only the component relating to available for sale marketable securities portfolio was included in regulatory capital, as part of
Tier 2 capital.
2The deduction for the equity investment in MCAP is the amount of the investment in excess of 10% of the Company’s
regulatory capital (but prior to this deduction from regulatory capital).
As at December 31, 2013 and December 31, 2012 the Company was in compliance with the capital guidelines issued by
OSFI under Basel III and Basel II respectively.
-94-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
35. 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
On-Balance Sheet Assets
Cash and cash equivalents
Marketable securities
Mortgages - corporate
Foreclosed real estate
Financial investments
Other loans
Equity investment in MCAP Commercial LP
Other assets
Off-Balance Sheet Assets
Letters of credit
Mortgage funding commitments
Derivative Financial Instruments
CMB interest rate swaps
Potential credit exposure
Positive replacement cost
Credit equivalent
Risk weighting
Risk-weighted equivalent
December 31, 2013
Basel III
(All-in)
December 31, 2013
Basel III
(Transitional)
December 31, 2012
(Basel II)
$
13,536
21,687
587,953
5,667
24,548
2,530
21,038
4,041
681,000
16,947
205,297
222,244
24
1,504
1,528
20%
306
$
13,536
21,687
587,953
5,667
24,548
2,530
57,450
4,041
717,412
16,947
205,297
222,244
24
1,504
1,528
20%
306
$
25,396
20,390
494,935
4,355
17,611
3,164
36,386
5,933
608,170
12,832
123,794
136,626
988
4,666
5,654
20%
1,131
Charge for operational risk
65,600
65,600
60,213
Total Risk-Weighted Assets
$
969,150
$
1,005,562
$
806,140
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 amount
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.
-95-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
36. 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) or for which fair value is disclosed (mortgages) 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 and financial assets and liabilities for which fair
values are disclosed. Financial assets and liabilities are classified into three levels, as follows: quoted prices in an active
market (Level 1), fair value based on observable inputs other than quoted prices (Level 2) and fair value based on inputs that
are not based on observable data (Level 3).
As at December 31, 2013
Level 1
Level 2
Level 3
Total
Carrying
value
Assets measured at fair value
Marketable securities
Financial investments - commercial real estate 1
Financial investments - retained interest 2
Derivative financial instruments - corporate
Derivative financial instruments - securitization
Assets for which fair values are disclosed
Mortgages - corporate 3
Financial investments
- asset-backed commercial paper 4
Financial investments - other 2
Other loans 4
Short-term investments
Mortgages - securitized 3
Financial investments - securitization
Liabilities for which fair values are disclosed
Term deposits 5
Loans payable 6
Financial liabilities from securitization 7
$
$
$
$
$
$
13,928
-
-
-
-
13,928
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
7,759
-
-
123
1,448
9,330
$
$
-
18,451
145
-
-
18,596
$
$
21,687
18,451
145
123
1,448
41,854
$
$
21,687
18,451
145
123
1,448
41,854
-
$ 874,942
$ 874,942
$ 861,613
-
-
-
329,765
-
109,146
$ 438,911
457
244
2,530
-
601,945
-
$ 1,480,118
457
244
2,530
329,765
601,945
109,146
$ 1,919,029
457
244
2,530
329,765
592,416
108,877
$ 1,895,902
$
$
-
-
-
-
$ 791,537
17,991
1,060,641
$ 1,870,169
$ 791,537
17,991
1,060,641
$ 1,870,169
$ 790,222
17,991
1,054,656
$ 1,862,869
1 Fair value of investment is based on the underlying real estate properties determined by the discount cash flow method and direct
capitalization method. The significant unobservable inputs are the capitalization rate and discount rate.
2 Fair value calculated by discounting the expected future cash flows using the current credit spread over the risk free rate.
3 Corporate and securitized fixed rate mortgages are calculated based on discounting the expected future cash flows of the mortgages,
adjusting for credit risk and prepayment assumptions at current market rates for offered mortgages based on term, contractual maturities
and product type. For variable rate mortgages, fair value is assumed to equal their carrying amount since there are no fixed spreads. We
classify our mortgages as level 3 given the fact that although many of the inputs to the valuation models we use are observable, the
mortgages are not specifically quoted in an open market.
4 Fair value is assumed to be the carrying value as underlying mortgages and loans are variable rate.
5 As term deposits are non-transferable by the deposit holders, there is no observable market. As such, the fair value of the deposits is
determined by discounting expected future cash flows of the deposits at current offered rates for deposits with similar terms.
6 Credit facility fair value is approximated by carrying amount due to their short-term nature.
7 Fair value of financial liabilities from securitization are determined using current market rates for MBS and CMB.
-96-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
36. Financial Instruments (continued)
As at December 31, 2012
Level 1
Level 2
Level 3
Total
Carrying
Value
Assets measured at fair value
Marketable securities
Financial investments - commercial real estate 1
Financial investments - retained interest 2
Derivative financial instruments - securitization
Assets for which fair values are disclosed
Mortgages - corporate 3
Financial investments
- asset-backed commercial paper 4
Financial investments - other 2
Other loans 4
Short-term investments
Mortgages - securitized 3
Financial investments - securitization
Liabilities for which fair values are disclosed
Term deposits 5
Financial liabilities from securitization 6
$
$
$
$
$
$
11,889
-
-
-
11,889
-
-
-
-
-
-
-
-
-
-
-
$
$
$
8,491
-
-
4,666
13,157
$
$
-
13,792
3,084
-
16,876
$
$
20,380
13,792
3,084
4,666
41,922
$
$
20,380
13,792
3,084
4,666
41,922
-
$ 742,779
$ 742,779
$ 739,812
-
-
-
323,952
-
716,615
$ 1,040,567
457
734
3,164
-
1,057,508
-
$ 1,804,642
457
734
3,164
323,952
1,057,508
716,615
$ 2,845,209
457
734
3,164
323,952
936,947
714,631
$ 2,719,697
$
$
-
-
-
$ 786,837
1,054,656
$ 1,841,493
$ 786,837
1,054,656
$ 1,841,493
$ 777,077
2,015,046
$ 2,792,123
1 Fair value of investment is based on the underlying real estate properties determined by the discount cash flow method and direct
capitalization method. The significant unobservable inputs are the capitalization rate and discount rate.
2 Fair value calculated by discounting the expected future cash flows using the current credit spread over the risk free rate.
3 Corporate and securitized fixed rate mortgages are calculated based on discounting the expected future cash flows of the mortgages,
adjusting for credit risk and prepayment assumptions at current market rates for offered mortgages based on term, contractual maturities
and product type. For variable rate mortgages, fair value is assumed to equal their carrying amount since there are no fixed spreads. We
classify our mortgages as level 3 given the fact that although many of the inputs to the valuation models we use are observable, the
mortgages are not specifically quoted in an open market.
4 Fair value is assumed to be the carrying value as underlying mortgages and loans are variable rate.
5 As term deposits are non-transferable by the deposit holders, there is no observable market. As such, the fair value of the deposits is
determined by discounting expected future cash flows of the deposits at current offered rates for deposits with similar terms.
6 Fair value of financial liabilities from securitization are determined using current market rates for MBS and CMB.
The following table shows the continuity of Level 3 financial assets recorded at fair value:
Balance, December 31, 2012
Advances
Repayments
Changes in fair value, recognized in other comprehensive income
Balance, December 31, 2013
$
$
16,876
2,780
(2,942)
1,882
18,596
An increase of 0.25% to capitalization rates as at December 31, 2013 would result in a decrease to the fair value at Level 3
financial investments - commercial real estate by $1,443 (December 31, 2012 - $1,015). A decrease of 0.25% to
capitalization rates as at December 31, 2013 would result in an increase to the fair value of Level 3 financial investments -
commercial real estate by $1,557 (December 31, 2012 - $1,084).
An increase of 1% to market interest rates as at December 31, 2013 would result in a decrease to the fair value at Level 3
financial investments - retained interest by $3 (December 31, 2012 - $15). A decrease of 1% to capitalization rates as at
December 31, 2013 would result in an increase to the fair value of Level 3 financial investments - retained interest by $3
(December 31, 2012 - $15).
There were no transfers between levels during the years ended December 31, 2013 or December 31, 2012. There were no
financial liabilities reported at fair value as at December 31, 2013 or as at December 31, 2012.
-97-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2013 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2013 (Dollar amounts in thousands except for per share amounts)
36. Financial Instruments (continued)
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 sections 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.
37. 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 that the Company reasonably expects to be applicable at
a future date. The Company intends to adopt those standards when they become effective.
IFRS 9, Financial Instruments
IFRS 9 was issued by the IASB in November 2009 and will replace IAS 39, Financial Instruments: Recognition and
Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair
value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow characteristics of the financial assets.
The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS
39. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company has not yet determined the
impact of IFRS 9 on its consolidated 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.
38. 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.
-98-
2013 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
DIRECTORS
Brydon Cruise
President and Managing Partner, Brookfield Financial; Chair
of Risk Committee; Director since May 2010.
Derek A. Norton
Chief Executive Officer, MCAP Commercial LP; Member of
Information Technology Committee; Director since July
2000.
Verna Cuthbert
Counsel, Fasken Martineau DuMoulin LLP; Member of Audit
Committee; Member of Risk Committee; Director since
September 2013.
Ian Sutherland
Chair, MCAN Mortgage Corporation; Member of Risk
Committee; Director since January 1991.
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.
Karen Weaver
Executive Vice President and Chief Financial Officer,
First Capital Realty Inc.; Chair of Audit Committee; Member
of Information Technology Committee; Director since
November 2011.
William Jandrisits
President and Chief Executive Officer, MCAN Mortgage
Corporation; Member of Information Technology Committee;
Director since August 2010.
W. Terrence Wright
Counsel, Pitblado LLP; Member of Audit Committee;
Member of Conduct Review, Corporate Governance and
Human Resources Committee; Director since September
2013.
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;
Director since January 2001.
On January 16, 2014, the OSC proposed for comment amendments to Form 58-101F1 of National Instrument 58-101, Disclosure
of Corporate Governance Practices. The proposed amendments to Form 58-101F1 were made in response to feedback received
on the OSC’s consultation paper 58-401, Disclosure Requirements Regarding Women on Boards and in Senior Management.
Noting that corporate decision-making benefits from a diversity of opinions and viewpoints, and that this diversity is enhanced
when leadership roles are held by individuals who have different professional experience, education, skills and other individual
qualities and attributes, the proposed amendments to Form 58-101F1 require certain issuers to provide disclosure regarding the
following matters on an annual basis:
Director term limits
Policies regarding the representation of women on the board and in senior leadership positions
The board’s or nominating committee’s consideration of the representation of women in the director identification and
selection process
The issuer’s consideration of the representation of women in executive officer positions when making executive officer
appointments
The number of women on the board and in executive officer positions
Targets for these numbers in the future
MCAN plans to fully comply with the amendments to 58-101 if and when enacted and will monitor any developments during
2014.
MCAN Mortgage Corporation’s nine-member Board of Directors includes three women members (33%).
-99-
2013 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
OFFICERS AND MANAGEMENT
William Jandrisits
President and Chief Executive Officer
Derek Sutherland
Vice President and Chief Risk Officer
Jeffrey Bouganim
Vice President and Chief Financial Officer
Carl Brown
Vice President, Operations
Business Continuity/Disaster Recovery Coordinator
Michael Misener
Vice President and Chief Investment Officer
Hassan Shaikh
Assistant Vice President, Investments
Sylvia Pinto
Corporate Secretary
Chief Compliance Officer
Robert Horton
Chief Audit Officer
Michel Laroche
Director, Risk Management,
Chief Anti-Money Laundering Officer and
Privacy Officer
Dipti Patel
Senior Manager, Investments
John Tyas
Controller
Eloise Goodwin
Manager of Finance
Paco Lai
Senior Manager, Cash Operations
Murtuza Lakdawala
Assistant Controller
-100-
2013 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CORPORATE INFORMATION
Head Office
200 King Street West, Suite 600
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
Corporate Information
This MCAN Mortgage Corporation 2013 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 600, 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 http://mcanmortgage.com/investor-relations/investor-
materials. An Enrolment Form may be obtained at any time upon written request
addressed to the Plan Agent, Computershare. Registered Participants may also
obtain Enrolment Forms online at www-us.computershare.com/investor/.
General Information
For general enquiries about MCAN Mortgage Corporation, please write to Ms.
Sylvia Pinto, Corporate Secretary or e-mail mcanexecutive@mcanmortgage.com.
Annual Meeting
Wednesday, May 7, 2014
4:30 p.m. (Eastern Daylight Savings Time)
St. Andrew’s Club & Conference Centre
150 King Street West
27th Floor
Toronto, Ontario
-101-