. S I L
V E R EDITIO
N.
Celebrating
25Years
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IVER S A R Y
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2016
ANNUAL REPORT
A STRATEGIC INVESTOR IN
CANADIAN MORTGAGES
MCAN's VISION
To be recognized as a
knowledgeable institutional
investor in the investment
of residential mortgages
and residential
construction loans
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(cid:272)(cid:381)(cid:396)(cid:393)(cid:381)(cid:396)(cid:258)(cid:415)(cid:381)(cid:374)(cid:3)(cid:437)(cid:374)(cid:282)(cid:286)(cid:396)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)Income Tax Act(cid:3)(cid:894)(cid:18)(cid:258)(cid:374)(cid:258)(cid:282)(cid:258)(cid:895)(cid:853)(cid:3)(cid:349)(cid:400)(cid:3)
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(cid:286)(cid:367)(cid:349)(cid:336)(cid:349)(cid:271)(cid:367)(cid:286)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:282)(cid:286)(cid:393)(cid:381)(cid:400)(cid:349)(cid:410)(cid:3)(cid:349)(cid:374)(cid:400)(cid:437)(cid:396)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:296)(cid:396)(cid:381)(cid:373)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:18)(cid:258)(cid:374)(cid:258)(cid:282)(cid:258)(cid:3)
(cid:24)(cid:286)(cid:393)(cid:381)(cid:400)(cid:349)(cid:410)(cid:3)(cid:47)(cid:374)(cid:400)(cid:437)(cid:396)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:18)(cid:381)(cid:396)(cid:393)(cid:381)(cid:396)(cid:258)(cid:415)(cid:381)(cid:374)(cid:856)(cid:3)(cid:3)(cid:68)(cid:18)(cid:4)(cid:69)(cid:3)(cid:258)(cid:367)(cid:400)(cid:381)(cid:3)
(cid:393)(cid:258)(cid:396)(cid:415)(cid:272)(cid:349)(cid:393)(cid:258)(cid:410)(cid:286)(cid:400)(cid:3)(cid:349)(cid:374)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:69)(cid:44)(cid:4)(cid:3)(cid:68)(cid:381)(cid:396)(cid:410)(cid:336)(cid:258)(cid:336)(cid:286)(cid:3)(cid:17)(cid:258)(cid:272)(cid:364)(cid:286)(cid:282)(cid:3)
(cid:94)(cid:286)(cid:272)(cid:437)(cid:396)(cid:349)(cid:415)(cid:286)(cid:400)(cid:3)(cid:393)(cid:396)(cid:381)(cid:336)(cid:396)(cid:258)(cid:373)(cid:856)(cid:3)(cid:3)(cid:121)(cid:272)(cid:286)(cid:286)(cid:282)(cid:3)(cid:68)(cid:381)(cid:396)(cid:410)(cid:336)(cid:258)(cid:336)(cid:286)(cid:3)(cid:18)(cid:381)(cid:396)(cid:393)(cid:381)(cid:396)(cid:258)(cid:415)(cid:381)(cid:374)(cid:853)(cid:3)
(cid:258)(cid:3)(cid:449)(cid:346)(cid:381)(cid:367)(cid:367)(cid:455)(cid:882)(cid:381)(cid:449)(cid:374)(cid:286)(cid:282)(cid:3)(cid:400)(cid:437)(cid:271)(cid:400)(cid:349)(cid:282)(cid:349)(cid:258)(cid:396)(cid:455)(cid:3)(cid:381)(cid:296)(cid:3)(cid:68)(cid:18)(cid:4)(cid:69)(cid:853)(cid:3)(cid:349)(cid:400)(cid:3)(cid:258)(cid:374)(cid:3)
(cid:381)(cid:396)(cid:349)(cid:336)(cid:349)(cid:374)(cid:258)(cid:410)(cid:381)(cid:396)(cid:3)(cid:381)(cid:296)(cid:3)(cid:400)(cid:349)(cid:374)(cid:336)(cid:367)(cid:286)(cid:3)(cid:296)(cid:258)(cid:373)(cid:349)(cid:367)(cid:455)(cid:3)(cid:373)(cid:381)(cid:396)(cid:410)(cid:336)(cid:258)(cid:336)(cid:286)(cid:400)(cid:3)(cid:349)(cid:374)(cid:3)(cid:18)(cid:258)(cid:374)(cid:258)(cid:282)(cid:258)(cid:856)
Investors
We achieve superior and
sustainable returns for our
shareholders by employing
expert balance sheet
management and by leveraging
our investment expertise.
Term Deposits
MCAN’s term deposits are
eligible for CDIC insurance, have
competitive rates and are
distributed by a network of
independent deposit brokers
across Canada.
Mortgages
MCAN is a strategic investor in
the Canadian real estate market.
Our focus is residential
mortgages and residential
construction loans.
2016 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 (Canada) (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 in the MIC
entity) 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”), is an originator 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 .................................................................................................. 3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS ................................................................................... 5
CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................... 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................................................................................. 69
DIRECTORS AND EXECUTIVE OFFICERS ...................................................................................................................... 103
CORPORATE INFORMATION ..................................................................................................................................... 104
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
MESSAGE TO SHAREHOLDERS
MCAN Mortgage Corporation (“MCAN”, the “Company” or “we”) reported record net income for the second year in a row in 2016.
Net income increased by 22% to $40.2 million for the year ended December 31, 2016 from $32.9 million reported in the prior
year ended December 31, 2015.
We also experienced increases in earnings per share (from $1.51 to $1.75), return on average shareholders’ equity (from 13.45%
to 14.74%) and taxable income per share (from $0.90 to $1.24).
Current year improvements in financial performance and net income noted above were primarily attributable to an increase in
equity income recorded from our equity investment in MCAP Commercial LP (“MCAP”) from $10.1 million to $13.5 million.
Additionally, income from financial investments and other loans increased from $3.5 million to $6.5 million, driven by higher
income from our investments in Crown Realty II Limited Partnership and the KingSett High Yield Fund.
In the fourth quarter of 2016, the Board of Directors (the “Board”) increased the regular quarterly dividend to $0.30 per share,
resulting in total 2016 dividends paid of $1.17 per share compared to $1.13 per share in 2015, an annual increase of 3.5%.
Consistent with the prior quarter, the Board declared a regular dividend of $0.30 per share to be paid March 30, 2017 to
shareholders of record as of March 15, 2017.
Corporate Assets
Corporate assets totalled $1.19 billion at December 31, 2016, up $33 million from December 31, 2015 but down $21 million from
September 30, 2016. The corporate mortgage portfolio decreased by $61 million during Q4 2016 to $904 million from $965
million, which included decreases of $35 million in uninsured single family, $10 million in construction and $8 million in
commercial mortgages. Our higher-yielding corporate non-mortgage investments, consisting of marketable securities, our equity
investment in MCAP and financial investments, increased by $36 million during 2016.
Total mortgage arrears were $27 million at December 31, 2016, significantly improved from $40 million at September 30, 2016
and $34 million at December 31, 2015. The impaired total mortgage ratio remained low at 0.14% at December 31, 2016, compared
to 0.15% at September 30, 2016 and 0.11% at December 31, 2015. The impaired corporate mortgage ratio also remained low at
0.31%, compared to 0.32% at September 30, 2016 and 0.23% at December 31, 2015. Our arrears levels remain low by historical
standards. We remain vigilant and use conservative underwriting standards and default management practices which we believe
are appropriate in the context of the current market.
Equity income from our investment in MCAP was $3.2 million in Q4 2016, up $1.1 million from Q4 2015. In fiscal 2016, MCAP
contributed $13.5 million in income, which was $3.4 million higher than the $10.1 million earned in 2015. The increase was a
result of higher securitized mortgage interest income from a larger average portfolio, and higher servicing and administration
income due to an increase in assets under administration. MCAP’s origination volumes were $16 billion in 2016. MCAP had $60.6
billion of assets under administration as at November 30, 2016, which represents an increase of 14% from November 30, 2015.
In mid-2016, MCAP filed a preliminary prospectus with respect to an initial public offering of common shares. Subsequently,
MCAP withdrew the prospectus due to adverse market conditions. Despite this decision, MCAP posted strong financial results in
2016. MCAP continues to evaluate market conditions and the opportunity for the proposed initial public offering.
Securitization Assets
In 2016 we recommenced our participation in the CMB program by securitizing $100 million of insured single family mortgages
and $86 million of insured multi family loans. We also continued our participation in the market MBS program by securitizing $42
million of insured single family mortgages.
Business Activities
In the second half of 2016, we maintained higher average construction and commercial portfolio balances. The higher outstanding
balances helped to increase corporate net investment income, as these product lines generally have higher spreads than the
single family mortgages. Our single family uninsured portfolio decreased by $111 million (31%) during 2016, primarily due to
the fact that our focus was on the implementation of new systems and processes during the year. Earlier in the year we
implemented a new origination system which was focused on two primary objectives: the transition from inefficient legacy
systems that were over a decade old that slowed our origination processes, and the implementation of a new framework of
underwriting and credit standards that were adopted in 2015. Additionally, we experienced longer mortgage approval and
origination processing times during 2016 which were the result of our tighter credit approval standards and focus on mortgage
quality. As a result of our enhanced underwriting processes, we also observed an increase in mortgage application declines due
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
to an increased proportion of mortgages that did not meet our credit standards. These noted items contributed to lower
origination volumes during 2016.
During 2016, we observed heightened concerns regarding portions of the residential re-sale markets such as Vancouver and
Toronto. We noted high levels of home price inflation and evidence of over-bid markets, where multiple offers contributed to
home sale prices well above appraised values. As a result of this and the internal factors noted above, we believe that the
measured decrease in our uninsured single family portfolio and related originations were a prudent step towards a more
defensive position to limit our overall exposure.
We offset the single family factors discussed above with growth in our construction portfolio during 2016. While the 2016 year-
end balance was $32 million higher than 2015, we also carried a higher intra-year balance as a result of seasonal
fundings. Construction growth involved lending to experienced developers who build and sell housing product in market
segments where the cost to build has not followed the high rate of inflation experienced in the resale market. The cost basis that
developers are currently building at exposes us to less risk than lending to borrowers for the purchase of single family homes in
a market with significant price inflation. Our construction lending is based on specific conditions that must be met before we
advance funds. Funds are also advanced on a staged basis to limit credit exposure during the different phases of
construction. We did not experience any losses in our construction portfolio during 2016, nor did we have any construction loans
in arrears at December 31, 2016.
Our corporate asset growth was 3% in 2016 compared to our stated annual target of 10%.
We continue to monitor Canadian housing market developments as they evolve to ensure that our corporate mortgage portfolio
remains well positioned. Given the recent regulatory announcements and changes to mortgage insurance discussed in the
Outlook section of the MD&A, we believe that our 2016 growth was moderate yet prudent. In 2017, we will continue to assess
and monitor the impact of announced changes to the housing market and supply dynamics while adhering to our underwriting
standards and risk appetite.
Our market views are unchanged from the Q3 2016 Message to Shareholders, other than noting that we have also observed
continued increasing volatility in the markets following the U.S. election which may impact future Canadian policy and real estate
markets. As mortgage markets adjust, potentially with higher spreads, our origination and growth may continue to fluctuate as
we focus on ensuring high credit level quality.
Income tax asset capacity, which represents available room for additional corporate asset investment, was $209 million as at
December 31, 2016.
We believe that MCAN’s portfolio of assets continues to perform well and provide a solid risk adjusted return to our shareholders.
In summary, we are pleased to have provided our shareholders a second consecutive year of strong earnings in 2016 while also
ensuring that we remained cautious in our origination strategy. During 2017, our focus will remain on improving our origination
platform capabilities, while we focus on the areas of the Canadian mortgage market that deliver positive risk adjusted returns for
MCAN.
William Jandrisits
President and Chief Executive Officer
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2016 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, 2016 and December 31, 2015 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 presented in Canadian currency. This MD&A has been
presented as at February 23, 2017.
Additional information regarding MCAN Mortgage Corporation (“MCAN”, the “Company” or “we”), including copies of our
continuous disclosure materials such as the Annual Information Form, are available on the System for Electronic Document Analysis
and Retrieval (“SEDAR”) at www.sedar.com and our website at www.mcanmortgage.com.
TABLE OF CONTENTS - MD&A
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS .................................................................................. 6
SELECTED FINANCIAL INFORMATION ............................................................................................................................................... 8
HIGHLIGHTS .................................................................................................................................................................................... 10
OUTLOOK ........................................................................................................................................................................................ 11
RESULTS OF OPERATIONS ............................................................................................................................................................... 13
FINANCIAL POSITION ...................................................................................................................................................................... 21
SELECTED QUARTERLY FINANCIAL DATA ........................................................................................................................................ 31
SUMMARY OF FOURTH QUARTER RESULTS .................................................................................................................................... 32
SECURITIZATION PROGRAMS.......................................................................................................................................................... 39
CAPITAL MANAGEMENT ................................................................................................................................................................. 41
LIQUIDITY MANAGEMENT .............................................................................................................................................................. 45
RISK GOVERNANCE AND MANAGEMENT........................................................................................................................................ 47
DESCRIPTION OF CAPITAL STRUCTURE ........................................................................................................................................... 55
OFF-BALANCE SHEET ARRANGEMENTS ......................................................................................................................................... 56
DIVIDEND POLICY AND RECORD ..................................................................................................................................................... 56
TRANSACTIONS WITH RELATED PARTIES ........................................................................................................................................ 57
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS .................................................................................................................. 57
PEOPLE ............................................................................................................................................................................................ 57
REGULATORY COMPLIANCE ............................................................................................................................................................ 58
INTERNAL AUDIT ............................................................................................................................................................................. 58
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS .................................................................................................................. 58
STANDARDS ISSUED BUT NOT YET EFFECTIVE ................................................................................................................................ 60
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING ........................................ 61
NON-IFRS MEASURES...................................................................................................................................................................... 62
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS
This MD&A contains “forward-looking statements” within the meaning of applicable Canadian securities laws. The words “may,”
“believe,” “will,” “anticipate,” “expect,” “planned,” “estimate,” “project,” “future,” and other expressions that are predictions of
or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Such
statements reflect management’s current beliefs and are based on information currently available to management. The forward-
looking statements in this MD&A include, among others, statements and assumptions with respect to:
• the current business environment and outlook;
• possible or assumed future results;
• ability to create shareholder value;
• business goals and strategy;
• the stability of home prices;
• effect of challenging conditions on us;
•
factors affecting our competitive position within the housing markets;
• the price of oil and its impact on housing markets in Western Canada;
• sufficiency of our access to capital resources; and
• the timing of the effect of interest rate changes on our cash flows.
The material factors or assumptions that were identified and applied by us in drawing conclusions or making forecasts or
projections set out in the forward-looking statements include, but are not limited to:
the effect of competition;
factors and assumptions regarding interest rates;
• the Company’s ability to successfully implement and realize on its business goals and strategy;
•
• housing sales and residential mortgage borrowing activities;
•
• government regulation of the Company’s business;
•
•
•
•
•
• acceptance of the Company’s products in the marketplace;
• availability of key personnel;
•
•
computer failure or security breaches;
future capital and funding requirements;
the value of mortgage originations;
the expected margin between interest earned on mortgage portfolios and interest paid on deposits;
the relative continued health of real estate markets;
the Company’s operating cost structure; and
the current tax regime.
Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and
other factors, which may cause the actual results to differ materially from the anticipated future results expressed or implied by
such forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-
looking statements include, but are not limited to:
• global market activity;
• worldwide demand for and related impact on oil and other commodity prices;
• changes in government and economic policy;
• changes in general economic, real estate and other conditions;
• changes in interest rates;
• changes in Canada Mortgage Bonds (“CMB”) and mortgage-backed securities (“MBS”) spreads and swap rates;
• MBS and mortgage prepayment rates;
• mortgage rate and availability changes;
• adverse legislation or regulation;
• availability of CMB and MBS issuer allocation;
• technology changes;
• confidence levels of consumers;
• ability to raise capital and term deposits 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;
•
• relationships with our mortgage originators;
• additional risks and uncertainties, many of which are beyond our control, referred to in this MD&A and our other public filings
litigation risk;
with the applicable Canadian regulatory authorities.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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.
ACRONYMS
ALCO
Asset and Liability Committee
HELOC
Home Equity Line of Credit
MD&A
BCBS
CAR
CDIC
Basel Committee on Banking
Supervision
Capital Adequacy
Requirements
Canada Deposit Insurance
Corporation
CET 1
Common Equity Tier 1
CHT
Canada Housing Trust
IAS
IASB
IFRIC
IFRS
LAR
International Accounting
Standard
International Accounting
Standards Board
IFRS Interpretations
Committee
International Financial
Reporting Standards
Liquidity Adequacy
Requirements
Management’s Discussion &
Analysis
Mortgage Investment
Corporation
MIC
NHA
National Housing Act
NSFR
Net Stable Funding Ratio
OSFI
Office of the Superintendent of
Financial Institutions
RAF
Risk Appetite Framework
CMB
Canada Mortgage Bonds
LCR
Liquidity Coverage Ratio
RCB
Risk Committee of the Board
CMHC
Canada Mortgage and
Housing Corporation
LP ARA
Limited Partner’s At-Risk
Amount
RMBS
DRIP
Dividend Reinvestment Plan
LTV
Loan to Value (ratio)
SEDAR
Residential Mortgage Backed
Securities
System for Electronic Document
Analysis and Retrieval
EIM
Effective Interest Rate Method MBS
Mortgage Backed Securities
TSX
Toronto Stock Exchange
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
SELECTED FINANCIAL INFORMATION
Table 1: Income Statement Highlights
(in thousands except for per share amounts and %)
2016
2015
2014
Change from 2015
(%)
($)
Income Statement Highlights
Net investment income - corporate assets
Net investment income - securitization assets
Other income
Operating expenses
Net income before income taxes
Provision for (recovery of) income taxes
Net income
Basic and diluted earnings per share
Dividends per share
Taxable income per share 1
Return on average shareholders' equity 1
Yields
Average mortgage portfolio yield - corporate 2
Term deposit average interest rate 2
Spread of mortgages over term deposits
Average mortgage portfolio yield - securitized 2
Financial liabilities from securitization
- average interest rate 2
Spread of mortgages over liabilities
$ 51,701 $ 42,741 $ 39,151
(94)
39,057
782
13,383
26,456
1,010
$ 40,182 $ 32,857 $ 25,446
4,467
47,208
68
14,508
32,768
(89)
5,778
57,479
-
17,963
39,516
(666)
$
$
$
1.75 $
1.17 $
1.51 $
1.13 $
1.23
1.12
1.24 $
0.90 $
14.74%
13.45%
0.86
11.50%
5.15%
2.23%
2.92%
5.35%
2.34%
3.01%
5.62%
2.46%
3.16%
2.73%
2.71%
2.90%
2.02%
0.71%
2.07%
0.64%
2.37%
0.53%
$
$
$
$
$
8,960
1,311
10,271
21.0%
29.3%
21.8%
(68) (100.0%)
23.8%
20.6%
648.3%
22.3%
3,455
6,748
(577)
7,325
0.24
0.04
0.34
15.9%
3.5%
37.8%
1.29%
(0.20%)
(0.11%)
(0.09%)
0.02%
(0.05%)
0.07%
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 for a definition of this measure.
- 8 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 2: Balance Sheet Highlights
(in thousands except for per share amounts and %)
As at December 31
Balance Sheet Highlights
Assets
Corporate
Securitization
Total assets
Mortgages - corporate
Mortgages - securitized
Liabilities
Corporate
Securitization
Total liabilities
Shareholders' equity
Capital Ratios 1
Income 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)
Total Capital Ratio (transitional)
Total Capital Ratio (all-in)
Leverage ratio 2
Assets to Capital Multiple 2
Credit Quality
Impaired mortgage ratio (total) 1
Impaired mortgage ratio (corporate) 1
Mortgage Arrears
Corporate
Securitized
Total
Common Share Information (end of period)
Number of common shares outstanding
Book value per common share 1
Common share price - close
Market capitalization 1
2016
2015
2014
Change from 2015
($)
(%)
$
$
$
$
$
$
$
$
$
$
$
$
1,188,480 $
1,092,375
2,280,855 $
1,155,046 $
1,091,912
2,246,958 $
1,045,352 $
760,366
1,805,718 $
33,434
463
33,897
904,112 $
1,071,849 $
944,109 $
1,075,947 $
895,467 $
741,184 $
(39,997)
(4,098)
927,293 $
1,071,786
1,999,079 $
917,852 $
1,070,304
1,988,156 $
834,310 $
746,105
1,580,415 $
9,441
1,482
10,923
281,776 $
258,802 $
225,303 $
22,974
4.87
5.11
5.05
22.98%
22.55%
22.98%
22.55%
22.98%
22.55%
10.46%
n/a
0.14%
0.31%
23.58%
23.02%
23.58%
23.02%
23.58%
23.02%
9.96%
n/a
0.11%
0.23%
23.37%
22.62%
23.37%
22.62%
23.37%
22.62%
n/a
8.14
0.50%
0.92%
13,041 $
13,609
26,650 $
19,889 $
14,361
34,250 $
29,859 $
8,546
38,405 $
(6,848)
(752)
(7,600)
23,075
12.21 $
14.32 $
330,434 $
22,782
11.36 $
12.14 $
276,573 $
20,808
10.83 $
14.40 $
299,635 $
0.85
2.18
53,861
2.9%
0.0%
1.5%
(4.2%)
(0.4%)
1.0%
0.1%
0.5%
8.9%
(4.7%)
(0.60%)
(0.47%)
(0.60%)
(0.47%)
(0.60%)
(0.47%)
0.50%
n/a
0.03%
0.08%
(34.4%)
(5.2%)
(22.2%)
1.3%
7.5%
18.0%
19.5%
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
2 Mortgages securitized through the market MBS program and CMB program for which derecognition has not been achieved are included in
regulatory assets in the leverage ratio and assets to capital multiple. The leverage ratio replaced the assets to capital multiple effective January
1, 2015 such that the leverage ratio is n/a for 2014 and the assets to capital multiple is n/a for 2015 and 2016. For further information, refer to
the “Capital Management” section of this MD&A.
- 9 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
HIGHLIGHTS
Income Statement
(cid:120) We earned record net income of $40.2 million in 2016, an increase of $7.3 million (22%) from $32.9 million in 2015.
(cid:120)
(cid:120)
(cid:120) Our equity investment in MCAP Commercial LP (“MCAP”) continued to provide strong equity income of $13.5 million
Earnings per share increased by $0.24 (16%) to $1.75 in 2016 from $1.51 in 2015.
Return on average shareholders’ equity1 increased to 14.74% in 2016 from 13.45% in 2015.
(cid:120)
in 2016, an increase of 34% from $10.1 million in 2015.
Increase of 29% in securitization income from our continued participation in the market MBS program and re-entry into
the CMB program in 2016.
Corporate Activity
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Corporate assets, which totalled $1.19 billion at December 31, 2016, increased by $33 million from December 31, 2015.
The corporate mortgage portfolio decreased by $40 million during 2016 to $904 million from $944 million, which
included increases of $32 million in construction, $28 million in commercial and $25 million in insured single family,
and decreases of $111 million in uninsured single family and $13 million in completed inventory loans.
Increase of $36 million during 2016 in our higher-yielding corporate non-mortgage investments, consisting of
marketable securities, our equity investment in MCAP and financial investments. Increases in the fair value of
marketable securities and financial investments led to a $5.8 million increase in accumulated other comprehensive
income during 2016, up from a $2.9 million increase in 2015.
Consistent with the prior quarter dividend increase, the Board of Directors (the “Board”) declared a 2017 first quarter
dividend of $0.30 per share to be paid on March 30, 2017 to shareholders of record as of March 15, 2017.
Securitization Activity
(cid:120) We recommenced our participation in the CMB program in 2016 by securitizing $100 million of insured single family
mortgages and $86 million of insured multi family loans. We recognized upfront gains of $394,000 on securitization of
the multi family loans, while the single family mortgages remained on our balance sheet after securitization.
(cid:120) We securitized $42 million of new MBS to third parties through the market MBS program.
Credit Quality
(cid:120)
(cid:120)
(cid:120)
The impaired total mortgage ratio1 increased to 0.14% at December 31, 2016 from 0.11% at December 31, 2015.
The impaired corporate mortgage ratio1 increased to 0.31% at December 31, 2016 from 0.23% at December 31, 2015.
Total mortgage arrears1 were $27 million at December 31, 2016, down $7 million (22%) from $34 million at December
31, 2015.
(cid:120) Net write-offs were 2.4 basis points of the average corporate portfolio in 2016, improved from 4.2 basis points in 2015.
(cid:120)
The average loan to value ratio (“LTV”) of our uninsured single family portfolio was 56.5% at December 31, 2016,
improved from 63.4% at December 31, 2015.
Capital
(cid:120) Our Common Equity Tier 1, Tier 1 and Total Capital to risk-weighted assets ratios1 were 22.98% on the transitional basis
and 22.55% on the “all-in” basis at December 31, 2016 compared to 23.58% and 23.02%, respectively, at December 31,
2015.
(cid:120) Our leverage ratio1 was 10.46% at December 31, 2016 compared to 9.96% at December 31, 2015.
(cid:120)
Income tax asset capacity1 was $209 million at December 31, 2016 compared to $141 million at December 31, 2015.
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
- 10 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
OUTLOOK
Market conditions
The Bank of Canada has forecasted 2017 Canadian GDP growth of 2.1%, a slight increase over the 1.9% rate for Q4 2016. With
the relatively low levels of expected economic growth, the probability of increased interest rates is again low for 2017. However,
one of the effects of the recent U.S. election has been an increase in U.S. bond yields, which has also impacted the interest rate
market in Canada. We expect housing markets to continue to benefit from historically low interest rates, but we also expect a
slowdown in housing as a result of the impact of regulatory changes announced last quarter to mortgage underwriting and
insurance.
Canadian residential real estate markets continue to have mixed performances as regional economies adjust with local economic
conditions. Western Canada continues to experience the negative impact of weak oil prices on employment, while other regional
economies benefit from the lower Canadian dollar and employment strength in the manufacturing sector. The Canadian dollar
has strengthened marginally since the U.S. election, but has continued to trade at a discount to the U.S. dollar due to weak world-
wide commodity prices, a stronger U.S. economy, higher U.S. interest rates and the potential for further U.S. rate increases.
We expect financial markets to experience increased volatility following the U.S. election result, with increased uncertainty
around U.S. policy, particularly trade. Fluctuations in stock markets upon reaction to announced changes will impact expectations
for global growth and volatility in international currencies as they impact corporate earnings and valuations. In Canada, the
impact of a weak oil sector and soft commodity prices continues to affect a significant portion of the stock market. Concerns over
low or regionally negative economic growth and increases in unemployment rates are expected to have a spillover effect on
consumer confidence.
Ontario and British Columbia have continued to exhibit strong fundamentals and growth, with GDP growth driven by exports and
immigration. In Alberta, housing markets have continued to slow as a result of lower oil prices and weakening employment. We
continue to focus our origination in Ontario and British Columbia and monitor our exposure to Alberta. We are selective in our
origination of new residential construction projects.
Real estate conditions
Canadian housing market conditions continue to be mixed. The Toronto housing market continues to experience significant price
inflation with forecasts for continued strength in 2017. Price inflation in Toronto continues to be well in excess of levels supported
by employment and income growth.
Vancouver has recently experienced a slowing of sales and price inflation. This has arisen after recent changes in mortgage
underwriting rules and the 15% tax on non-resident real estate purchases enacted in mid-2016. This tax was intended to help
restore housing affordability for residents in the Metro Vancouver Area by raising non-residents’ cost of purchasing and, on the
margin, discouraging foreign speculation. The greatest impact of this foreign buyer tax has been on homes selling above $5
million.
While some of the price inflation in both Toronto and Vancouver is driven by low mortgage rates and lot supply shortages, we
believe that price inflation at these high levels increases the risk of a price correction. We are operating with tightened
underwriting policies for uninsured mortgages, specifically for self-employed applicants.
In late 2016, the Department of Finance announced new mortgage regulations. The most significant regulations expected to
impact the market are as follows:
(cid:120)
(cid:120)
(cid:120)
Expanding the stress tests to all insured mortgages, to be qualified using the Bank of Canada’s posted rate (currently at
4.64%).
All portfolio-insured mortgages will be required to conform to the same lending guidelines as insured mortgages.
Principal residence capital gains will be limited to Canadian residents.
We expect the impact of these new regulations to be as follows:
(cid:120) No change to overall market CMB issuance levels.
(cid:120)
Expected decrease to MBS issuance levels and tighter MBS spreads in the market as less mortgages are eligible for
portfolio insurance.
Redirection of uninsurable mortgages to balance sheet investors such as MCAN, chartered bank covered bonds, asset-
backed commercial paper and potentially the private residential mortgage-backed securities (“RMBS”) market.
Higher market uninsured mortgage rates as lenders price in higher capital requirements and increased funding costs.
Stable short-term market insured mortgage rates due to increased competition amongst lenders.
(cid:120)
(cid:120)
(cid:120)
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
The Department of Finance also launched a consultation in late 2016 on lender risk sharing for government backed insured
mortgages. We expect the impact of potential risk sharing to be as follows:
(cid:120)
(cid:120)
Increased lender costs; the Department of Finance expects an increase of 20-30 basis points in lender costs over a five-
year period. To date, we have noted market increases in excess of this amount.
Increased risk-weighting and capital requirements for these assets due to higher risk of loss, which may require
increased collective and individual mortgage allowances.
We have observed the early impacts of the changes noted above on housing markets, specifically the slowing of first time buyers
in the market. However, Q4 2016 market activity is not a good indicator of market momentum, given the relatively small portion
of annual sales that it represents. We are continuing to evaluate the impact of these regulatory changes to the market and
MCAN. We believe that the effect of these changes will likely require a minimum of 6-12 months to begin providing clarity on
the direction of the mortgage market in Canada.
Effective January 1, 2017, the Office of the Superintendent of Financial Institutions Canada (“OSFI”) introduced new minimum
capital adequacy requirements for mortgage insurers. These changes are expected to increase premiums on mortgage portfolio
insurance paid by lenders which may impact rates charged to borrowers.
Impact on MCAN
We will continue to monitor housing market developments as they evolve and will continue to ensure that our mortgage portfolio
remains well positioned. MCAN has a stated annual corporate asset growth target of 10%. In 2016, we experienced below-target
growth of 3%. In 2017, we expect to continue to make adjustments to the composition of our balance sheet so as to evaluate
the risks and rewards of each of our product lines.
We believe that MCAN is well positioned to adapt to changes in mortgage and housing markets given that we, as a regulated
financial institution, have access to both the insured securitization market as well as the term deposit funding market.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
RESULTS OF OPERATIONS
Table 3: Net Income - For the Years Ended December 31
(in thousands except for per share amounts and %)
2016
2015
Change from 2015
(%)
($)
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Financial investments and other loans
Interest on cash and cash equivalents
Whole loan gain on sale income
Realized loss on derivatives
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Provision for (recovery of) credit losses
Other Income - Corporate Assets
Gain on dilution of investment in MCAP Commercial LP
Net Investment Income - Securitization Assets
Mortgage interest
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Fair 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
Dividends per share
$
50,670
13,509
2,547
3,622
6,487
604
324
-
77,763
22,035
3,993
244
(210)
26,062
$ 50,997
10,096
3,231
2,076
3,506
730
626
(2,914)
68,348
20,671
3,823
838
275
25,607
$
(327)
3,413
(684)
1,546
2,981
(126)
(302)
2,914
9,415
1,364
170
(594)
(485)
455
(1%)
34%
(21%)
74%
85%
(17%)
(48%)
(100%)
14%
7%
4%
(71%)
(176%)
2%
51,701
42,741
8,960
21%
-
-
68
68
(68)
(68)
(100%)
(100%)
28,298
461
28,759
21,176
1,805
-
22,981
25,564
198
25,762
19,763
1,461
71
21,295
2,734
263
2,997
1,413
344
(71)
1,686
11%
133%
12%
7%
24%
(100%)
8%
5,778
4,467
1,311
29%
9,406
8,557
17,963
39,516
(666)
40,182
8,515
5,993
14,508
32,768
(89)
$ 32,857
1.75
1.17
$
$
1.51
1.13
$
$
$
$
$
$
891
2,564
3,455
6,748
(577)
7,325
0.24
0.04
10%
43%
24%
21%
648%
22%
16%
4%
- 13 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Net Income
The $7.3 million increase in net income from 2015 was primarily due to increases in equity income from MCAP, income from
financial investments and other loans and securitization income. Additionally, we incurred a significant hedge loss in 2015 that
did not recur in 2016. These items were offset by higher operating expenses in 2016.
Net Investment Income - Corporate Assets
Mortgage interest income
Table 4: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Years Ended December 31
2016
2015
Average
Balance
Interest Average
Rate 1
Income
Average
Balance
Interest Average
Rate 1
Income
(in thousands except %)
Single family
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non residential
Commercial loans
- Uninsured
Mortgages - corporate portfolio
Term deposits
Spread of mortgages over term deposits
Mortgages - securitized portfolio
Financial liabilities from securitization
Spread of mortgages over liabilities
$
$
$
318,503 $
110,694
19,099
14,611
3,562
1,038
4.59% $
3.40%
5.44%
318,892 $
143,685
14,534
407,246
6,957
22,286
390
5.47%
5.61%
336,762
1,186
124,625
987,124 $
940,926
8,783
50,670
22,035
1,035,457 $
1,046,154
28,298
21,176
7.05%
5.15% $
2.23%
2.92%
2.73% $
2.02%
0.71%
94,567
909,626 $
844,309
950,480 $
962,263
25,564
19,763
15,171
5,154
799
20,262
65
9,546
50,997
20,671
4.74%
3.58%
5.48%
5.57%
5.52%
9.28%
5.35%
2.34%
3.01%
2.71%
2.07%
0.64%
1 Average interest rate is equal to income/expense divided by the average balance on an annualized basis. The average interest rate as presented
may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items such as discount income on impaired
loans, deferred interest and prior period adjustments are excluded from the calculation of the average interest rate as applicable. Excluding
discount income on impaired loans and deferred interest, non-recurring items were immaterial for the years ended December 31, 2016 and
December 31, 2015. Average interest rate is considered to be a non-IFRS measure. Refer to the “Non-IFRS Measures” section of this MD&A for a
definition of this measure.
We experienced a significant increase in our construction portfolio balance during 2016 amidst lower single family origination
volumes. The construction growth was a result of lending to experienced builders in market segments where the cost to build
has not followed real estate appreciation. Lending in this segment is based on specific conditions required prior to funding, which
act as a risk mitigant given other concerns in the real estate market. The average portfolio balance experienced a seasonal
increase in the middle of the year, but levelled off later in the year. The decrease in the average yield was a result of lower funding
rates for new loans in the residential construction portfolio in 2016.
The higher income from the construction portfolio provided a balance against the decrease in uninsured single family income, as
that portfolio declined significantly during 2016.
New uninsured single family originations were low in 2016 due to reduced spreads from a competitive market, the tightening of
our underwriting standards (specifically for self-employed borrowers) and increased processing times as we worked on a
transition of our systems and processes. As a result of these factors, we experienced an increase in mortgage applications in 2016
that did not meet our underwriting standards or had unsupported or difficult to substantiate income verification. We took a more
defensive approach to origination in 2016 given the accelerated valuations in this market segment. We believe that this
conservative approach to uninsured single family mortgage origination was an appropriate course of action given the risk
environment in 2016.
The average uninsured single family portfolio balance was comparable to 2015, however the portfolio balance trended
downwards throughout 2016 given the lower origination volumes and tightened underwriting standards noted above. Market
rates for the funding of new single family mortgages decreased for most of 2016, which led to the decreases in the portfolio
average yield for both uninsured single family and insured single family.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
In general, the majority of our insured single family originations from the Xceed platform are destined for securitization such that
the majority of the portfolio is held on a short-term basis. Given our lower securitization volumes in 2016 compared to 2015, the
average insured single family portfolio balance decreased in 2016.
The 2016 growth in the commercial portfolio was primarily in commercial term mortgages. In 2016, we targeted growth in this
higher-yielding portfolio and were able to identify investment opportunities. The decrease in the yield from 2015 was due to a
lower average rate on the high ratio component of the portfolio, which consists of loans such as second mortgages on residential
construction projects. The yield on this component of the commercial portfolio can be volatile.
In 2015, we earned discount income of $1.5 million on the payout of previously impaired construction loans and $529,000 of
deferred interest on a commercial loan, both of which are excluded from the average yield as they were non-recurring items.
Average mortgage portfolio yield is considered to be a non-IFRS measure. For a definition of this measure, refer to the “Non-IFRS
Measures” section of this MD&A.
Equity income from MCAP
The increase in equity income from MCAP in 2016 was a result of higher securitized mortgage interest income from a larger
average portfolio, and higher servicing and administration income due to an increase in assets under administration.
Other net investment income
The decrease in fees in 2016 is primarily due to a non-recurring $742,000 deferred profit participation fee received on a
commercial loan in 2015.
The increase in marketable securities income in 2016 is a result of a significantly higher average portfolio balance.
Income from financial investments and other loans includes $4.1 million of income recognized from our investment in the Crown
Realty II Limited Partnership (“Crown LP”), compared to $2.5 million in 2015. The receipt of partnership distributions from Crown
LP generates a transfer from accumulated other comprehensive income to net income. We also recognized $2.1 million of income
from our investment in the KingSett High Yield Fund, up from $0.9 million in 2015 as a result of a higher average investment
balance.
The realized loss on derivatives incurred in 2015 was related to the hedging of mortgage funding commitments at that time. In
late 2015, we closed out these hedges and adjusted the structure of our term deposit portfolio to provide a closer term match
such that we did not have any gains or losses from derivatives in 2016.
The change in the average term deposit balance is generally similar to that of the average corporate mortgage portfolio in that
we use term deposits to fund our corporate assets. Similar to single family mortgages, market rates for new term deposits, all of
which are fixed-rate, decreased from 2015.
Mortgage expenses, consisting primarily of mortgage servicing fees, were comparable to 2015. Although we had a larger average
mortgage portfolio, the average servicing rate decreased slightly from 2015.
Details of the provision for (recovery of) credit losses are discussed in the “Credit Quality” sub-section below.
For further information on corporate and securitization net investment income, refer to the “Net Interest Income” sub-section
below.
Net Investment Income - Securitization Assets
Net investment income from securitization assets relates to our participation in the market MBS program and CMB program,
which involve the securitization of insured mortgages through the Canada Mortgage and Housing Corporation (“CMHC”) National
Housing Act (“NHA”) MBS program. For further details on these programs, refer to the “Securitization Programs” section of this
MD&A.
In 2016, our total securitization volumes were $228 million (2015 - $589 million), consisting of $42 million of insured single family
mortgages (2015 - $589 million) through the market MBS program and $100 million of insured single family mortgages (2015 -
$nil) and $86 million of insured multi family loans (2015 - $nil) through the CMB program. Securitization volumes in 2016 were
lower than the past two years due to the reduced origination volumes noted above.
- 15 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Market MBS Program
Although our 2016 market MBS program securitization volumes were lower than 2015, the average portfolio balance increased
over 2015 as new securitizations were adequate to offset mortgage repayments. Additionally, the average yield increased slightly
due to the fact that the 2016 average portfolio contained a higher proportion of mortgages originated through our internal Xceed
platform than 2015. Our internally originated mortgages are significantly more profitable than externally purchased mortgages,
which contributed to the increase in spread income.
CMB Program
Spread income from insured single family mortgages securitized through the CMB program was minimal in 2016 given the small
average portfolio size. These mortgages remained on our consolidated balance sheet since we retained significant continuing
involvement with the mortgages. Although our average portfolio balance was low in 2016 given our recent re-entry into the
program and low origination volumes, the net spread of 1.08% earned on the CMB program mortgages is significantly higher than
the market MBS spread given the much lower CMB program funding cost.
On securitization, the multi family loans were derecognized from our balance sheet as we transferred control of the assets at that
time. Accordingly, we recognized upfront gains of $394,000 on the securitization of these mortgages, which are included in other
securitization income.
- 16 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Net Interest Income
Presented in the following tables is an analysis of average rates and net interest income. Net interest income is the difference
between interest earned on certain assets and the interest paid on liabilities to fund those assets. For further details, refer to
the “Non-IFRS Measures” section of this MD&A.
Average
Balance 1
2016
Income /
Expense
Average
Rate3
Average
Balance 1
2015
Income /
Expense
Average
Rate3
Table 5: Net Interest Income
For the Years Ended December 31
(in thousands except %)
Assets
Cash and cash equivalents
Marketable securities
Mortgages - corporate
Financial investments
Other loans
Corporate interest earning assets
Cash held in trust
Mortgages - securitized
Financial investments
Securitization interest earning assets
Total interest earning assets
Non interest earning assets
Total assets
$
77,790 $
50,078
987,124
19,117
3,878
1,137,987
15,158
1,035,457
-
1,050,615
2,188,602
85,404
$ 2,274,006 $
$
Liabilities and shareholders' equity
Term deposits
Loans payable
Corporate liabilities
Securitization liabilities
Total interest bearing liabilities
Non interest bearing liabilities
Shareholders' equity
Total liabilities and shareholders' equity $ 2,274,006 $
940,926 $
6,749
947,675
1,046,154
1,993,829
7,541
272,636
604
3,622
50,670
2,135
204
57,235
40
28,298
-
28,338
85,573
4,148
89,721
22,035
244
22,279
21,176
43,455
-
-
43,455
0.78%
7.23%
5.15%
11.17%
5.26%
5.03%
0.26%
2.73%
-
2.70%
3.91%
-
3.95%
2.23%
3.32%
2.24%
2.02%
2.13%
-
-
1.91%
$
86,138 $
30,250
909,626
7,851
1,774
1,035,639
17,511
950,480
95
968,086
2,003,725
75,161
$ 2,078,886 $
$ 844,309 $
21,595
865,904
962,263
1,828,167
6,480
244,239
$ 2,078,886 $
730
2,076
50,997
913
84
54,800
76
25,564
1
25,641
80,441
2,509
82,950
20,671
838
21,509
19,763
41,272
-
-
41,272
0.85%
6.86%
5.35%
11.63%
4.74%
5.29%
0.87%
2.71%
2.11%
2.68%
4.01%
-
3.99%
2.34%
3.12%
2.37%
2.07%
2.23%
-
-
1.99%
Net Interest Income 2
$
46,266
$
41,678
1 The average balances (excluding cash and cash equivalents, mortgages and term deposits) are calculated with reference to opening and closing
monthly balances and as such may not be as precise as if daily balances were used. The average cash and cash equivalents, mortgage and term
deposit balances are calculated using daily balances.
2 Net interest income is equal to net investment income less equity income from MCAP, fees, whole loan gain on sale income, realized gain (loss)
on derivatives, other securitization income, mortgage expenses, provision for credit losses and fair value adjustment - derivative financial
instruments. Net interest income is a non-IFRS measure. Refer to the “Non-IFRS Measures” section of this MD&A for a definition of this measure.
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. Excluding discount income on
impaired loans and deferred interest, non-recurring items were immaterial for the years ended December 31, 2016 and December 31, 2015.
Average rate is considered to be a non-IFRS measure. Refer to the “Non-IFRS Measures” section of this MD&A for a definition of this measure.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Credit Quality
Table 6: Provisions for Credit Losses and Write-offs
(in thousands except basis points)
For the Years Ended December 31
2016
2015
Change from 2015
(%)
($)
Individual provision (recovery)
Single family uninsured
Residential construction
Collective provision (recovery)
Single family uninsured
Single family uninsured - completed inventory
Construction
Commercial
Corporate mortgages - total
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)
$
$
$
$
$
$
287
-
287
(459)
(56)
200
257
(58)
(439)
(497)
$
78 $
(55)
23
363
42
(99)
341
647
(395)
252 $
209
55
264
(822)
(98)
299
(84)
(705)
(44)
(749)
268%
(100%)
1148%
(226%)
(233%)
(302%)
(25%)
(109%)
11%
(297%)
(210)
$
275 $
(540)
(196%)
$
$
229
239
2.4
670 $
385 $
4.2
(441)
(146)
(1.8)
(66%)
(38%)
(43%)
Individual mortgage allowances are recorded to reduce a mortgage to its estimated realizable value. Collective mortgage
allowances represent losses that we believe have been incurred in the mortgage portfolio but have not yet been specifically
identified. The collective provisions (recoveries) recorded during both periods are consistent with the growth (reduction) in the
size of the respective mortgage portfolios.
During 2016, we had recoveries of $387,000 as a result of mortgage settlements or litigations, included in other provisions
(recoveries). These recoveries related to Xceed-originated insured single family mortgages that had previously been written off
prior to the acquisition of Xceed in 2013.
Operating Expenses
Table 7: Operating Expenses
(in thousands)
For the Years Ended December 31
2016
2015
Change from 2015
(%)
($)
Salaries and benefits
General and administrative
$
$
9,406
8,557
17,963
$
$
8,515
5,993
14,508
$
$
891
2,564
3,455
10%
43%
24%
The increase in salaries and benefits in 2016 is partly due to an increase in the average number of employees from 2015. We
have continued to grow the size of our staff in operations, risk management and credit to maintain a sound corporate governance
environment and risk management framework. Additionally, certain long-term compensation expenses were higher in 2016 as
a result of a more pronounced increase in the share price in 2016.
The increase in general and administrative expense in 2016 consists primarily of expenditures relating to the development of new
systems and processes related to single family mortgage operations; during 2016 we undertook multiple projects to improve
governance and mitigate risk as part of this overall development process. This increase was also due to internal audit, risk and
related expenses related to the Company’s procedures and controls.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Provision for Income Taxes
Table 8: Income Taxes
(in thousands)
For the Years Ended December 31
2016
2015
Change from 2015
(%)
($)
Current tax provision
Deferred tax provision (recovery)
$
$
(100) $
(566)
(666) $
- $
(89)
(89) $
(100)
(477)
(577)
$
$
-
536%
648%
The deferred tax recoveries in both years were due to tax losses recognized at the subsidiary level.
As at December 31, 2016, we had $11 million of losses available for carry-forward in the MCAN mortgage investment corporation
(“MIC”) parent company on a non-consolidated basis (December 31, 2015 - $12 million), the benefit of which is not reflected in
deferred taxes.
The March 31, 2016 dividend created a timing difference in the loss carry forward balance in that it was deducted from 2016
taxable income instead of 2015. This deduction will increase the loss carry forward by $6.6 million when we finalize our 2016
corporate tax position. For further information, refer to Note 4 to the consolidated financial statements.
Taxable Income
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 of net income for accounting and tax purposes. Taxable
income is presented on a non-consolidated basis and does not incorporate taxable income from Xceed and other subsidiaries as
it does not directly impact MCAN’s non-consolidated taxable income.
The key differences between taxable income and pre-tax net income for accounting purposes include differences between equity
income from MCAP and Xceed for accounting and tax purposes and the treatment of securitization program origination costs,
securitization gains or losses, capital gains income, collective provisions for credit losses and the amortization of upfront
securitization program 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.
Dividends that are deducted in the calculation of taxable income are not included in the table below.
We originate and purchase insured mortgages that are securitized through the market MBS program and CMB program and sold
to third parties or retained on our balance sheet (for further details on these programs, refer to the “Securitization Programs”
section of this MD&A). The purchase of mortgages involves the payment of an up-front origination fee that is deductible for
income tax purposes in the period that the mortgages are securitized, while for accounting purposes this fee is capitalized and
amortized over the term of the associated mortgages. In 2016, we incurred $3.8 million of origination costs on securitized
mortgages, including market MBS held by MCAN (2015 - $13.8 million). As at December 31, 2016, the unamortized origination
fee balance was $15.6 million (2015 - $17.1 million), which represents costs that are still to be expensed for non-consolidated
accounting purposes but will be added back in the calculation of taxable income in future periods.
Taxable income is considered to be a non-IFRS measure. For further details, refer to the “Non-IFRS Measures” section of this
MD&A.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 9: Taxable Income Reconciliation 1
(in thousands)
For the Periods Ended December 31
Net income for accounting purposes
Adjustments:
Equity income from MCAP
Equity income from subsidiaries 2
Provision for (recovery of) credit losses 2
Amortization of upfront securitization program costs 3
Securitization program mortgage origination costs 3
CMB program multi family gain on sale adjustment 4
Other securitization program cash outflows
Gain on sale of interest-only strips
Capital gains
Other items
Taxable Income
Q4
2016
Q4
2015
YTD
2016
YTD
2015
$
9,000
$
9,450
$
40,182
$
32,857
(1,104)
622
(255)
1,614
(1,171)
(300)
(321)
-
-
(403)
7,682
$
(3,610)
(2,522)
527
1,776
(1,235)
-
(209)
3,073
(57)
(373)
6,820
(9,674)
(601)
(56)
6,300
(3,799)
(1,830)
(452)
-
(163)
(1,460)
28,447
$
(5,919)
(440)
557
6,003
(13,810)
-
(1,639)
3,073
(57)
(1,045)
19,580
$
$
1 Taxable income is presented above on a non-consolidated basis for the MIC entity. The current year amounts presented above represent estimates
as they are not finalized until the completion of our corporate tax filings.
2 Not deductible/recognizable in the calculation of taxable income. Individual mortgage allowances are 90% deductible for tax purposes.
3 Deductible in full for tax purposes as mortgages securitized; capitalized and amortized for accounting purposes, however amortization is added
back in calculation of taxable income.
4 This adjustment reverses the recognition of the non-cash component of the upfront accounting gain and accounts for spread income collected
for tax purposes.
Summary of Three Year Results of Operations
2014 represented the first full year of the integration of Xceed into MCAN operations. We re-launched the Xceed single family
brand with mortgage brokers and originated over $200 million of new mortgages. Additionally, our securitization volumes
through the market MBS program grew significantly to $561 million as the program provided incremental income to MCAN.
Earnings per share were $1.23.
In 2015, we earned then-record net income of $32.9 million while earnings per share increased to $1.51. The Xceed origination
platform increased significantly with $518 million in new mortgages originated. Our market MBS program securitization volumes
were $589 million as the securitized mortgage portfolio continued to provide a reliable source of incremental income. Equity
income from our investment in MCAP also increased by 63% to over $10 million. Corporate asset growth exceeded our 10%
annual target as we finished the year with a $1.16 billion portfolio.
In 2016, we again posted record net income of $40.2 million with earnings per share of $1.75. Although we had lower single
family originations and a reduction in the size of those portfolios, we experienced growth in certain higher-yielding asset classes
such as construction and commercial mortgages, marketable securities and financial investments, and earned strong returns in
these investments. Additionally, we had a record performance from our equity investment in MCAP, providing $13.5 million of
income which represented a 34% increase over 2015. We also re-commenced our participation in the CMB program, and
increased our net investment income from securitization assets.
Cash Flows
Operating activities provided cash flows of $52 million in 2016 and $22 million in 2015, primarily due to lower net corporate
mortgage fundings in 2016.
Investing activities provided cash flows of $6 million in 2016 and $4 million in 2015. In 2016, we had higher distributions from
the equity investment in MCAP.
Financing activities used cash flows of $23 million in 2016 and $1 million in 2015. In 2015, we had a substantially higher inflow
from the issuance of common shares due to a rights issue.
- 20 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
FINANCIAL POSITION
Table 10: Assets
(in thousands)
As at
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Financial investments
Other loans
Equity investment in MCAP Commercial LP
Foreclosed real estate
Deferred tax asset
Other assets
Securitization Assets
Cash held in trust
Mortgages
Other assets
Mortgages - Corporate & Securitized
Table 11: Mortgage Summary
(in thousands)
As at
Corporate portfolio:
Single family mortgages
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
Securitized portfolio:
Single family insured - Market MBS program
Single family insured - CMB program
December 31 December 31
2015
2016
Change from 2015
(%)
($)
$
$
111,732
55,126
904,112
57,264
3,584
50,805
529
1,782
3,546
1,188,480
$
75,762
40,735
944,109
41,793
4,176
44,191
529
1,125
2,626
1,155,046
15,724
1,071,849
4,802
1,092,375
2,280,855
13,112
1,075,947
2,853
1,091,912
$ 2,246,958
$
$
35,970
14,391
(39,997)
15,471
(592)
6,614
-
657
920
33,434
2,612
(4,098)
1,949
463
33,897
47%
35%
(4%)
37%
(14%)
15%
-
58%
35%
3%
20%
-
68%
-
2%
December 31
2016
December 31
2015
Change from 2015
(%)
($)
$
248,065 $
108,334
18,162
359,465 $
83,619
31,280
379,212
7,851
142,488
904,112
349,808
5,595
114,342
944,109
(111,400)
24,715
(13,118)
-
29,404
2,256
-
28,146
(39,997)
971,548
100,301
1,071,849
1,975,961
$
1,075,947
-
1,075,947
2,020,056 $
(104,399)
100,301
(4,098)
(44,095)
$
(31%)
30%
(42%)
8%
40%
25%
(4%)
(10%)
-
-
(2%)
- 21 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Corporate and Securitized Mortgage Portfolio Analysis
Figure 1: Total Corporate and Securitized Mortgage Portfolio (in thousands)
The corporate mortgage portfolio decreased in the first half of 2015 as we took a measured approach to new construction
fundings and reduced our Alberta exposure. After completing this rebalancing, we experienced significant growth in late 2015
and the first half of 2016 before experiencing seasonal repayments in the second half of 2016. This intra-year increase caused
the average 2016 construction portfolio balance to be significantly higher than 2015. The uninsured single family mortgage
portfolio declined throughout 2016 as a result of low origination volumes, which drove the overall decline in the corporate
portfolio.
The securitized mortgage portfolio increased significantly throughout 2015 as a result of high securitization volumes, but
decreased in Q4 2015 as a result of the sale of the interest-only strips associated with certain mortgages and a resulting
derecognition from our balance sheet. Our 2016 securitization volumes were low such that new issuances and repayments of the
existing portfolio offset each other.
Figure 2: Corporate Mortgage Portfolio Composition by Product Type (in thousands)
- 22 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Figure 3: Mortgage Portfolio Geographic Distribution as at December 31, 2016 (December 31, 2015)
Corporate Mortgages
2016 Summary
After $75 million of growth in the first two quarters of 2016, our corporate portfolio decreased by $115 million in the second half
of the year for a net decrease of $40 million in 2016.
The construction portfolio was very strong in the first half of 2016 as a result of seasonal portfolio growth. This portfolio reduced
to a more typical balance in the second half of the year as a result of seasonal repayments.
Single family mortgage origination volumes were lower in 2016 as a result of a tightening of our underwriting standards and
increased processing times as we worked on a transition of systems and processes. Additionally, we took a more defensive
approach to origination in 2016 given the accelerated valuations in this market segment. The uninsured portfolio decreased
consistently throughout 2016, reducing by $111 million in the year. Despite the low origination volumes, the insured portfolio
balance was relatively consistent in 2016 since the majority of originations are destined for securitization and therefore are held
on a short-term basis.
Single family mortgages
We invest in insured and uninsured single family mortgages in Canada, primarily originated through Xceed for our own corporate
portfolio and for securitization activities. Uninsured mortgages 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 CMHC or other private insurers may exceed this
ratio.
As we securitize mortgages that do not achieve derecognition, the assets are effectively transferred from corporate mortgages
to securitized mortgages on the balance sheet. The change contributes to changes in asset levels when corporate mortgages are
securitized in the following quarter.
For further information on MCAN-issued market MBS retained for liquidity purposes and included in corporate insured single
family mortgages, refer to the “Securitization Programs” section of this MD&A.
Completed inventory loans
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 completed inventory
loans. Final occupancy permits, condominium corporation registration and/or written confirmation by the cost consultant as to
the completion of the units are examples of verification measures.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Construction loans
Residential construction loans are made to homebuilders to finance residential construction projects. These loans generally have
a floating interest rate and terms of one to two years. Non-residential construction loans provide construction financing for retail
shopping developments, office buildings and industrial developments.
Commercial loans
Commercial loans include commercial term mortgages (e.g. loans secured by apartment buildings) and high ratio mortgage loans
(e.g. second mortgages on residential construction projects). As at December 31, 2016, 50% of our commercial loan portfolio
consisted of multi-family residential loans (December 31, 2015 - 46%).
Other items
While MCAN has exposure to real estate in the Fort McMurray area, we have no existing commercial lending or construction
projects in the region. In regards to our single family mortgage exposure, we had $1.1 million and $8.9 million of outstanding
corporate and securitized single family mortgages, respectively, and $7.4 million of off-balance sheet mortgages as at December
31, 2016. All of the aforementioned mortgages have mortgage insurance except for $117,000 of the corporate portfolio, for
which no damage or loss was incurred. We are continuing to work with our borrowers and business partners to resolve any
insurance claims. The fire in the Fort McMurray region has not had a material impact on net income to date and is not expected
to have a future material impact on net income.
The Canadian mortgage industry has experienced an increase in the risk relating to the falsification of supporting documents
provided to lenders in the mortgage underwriting process and we have observed this activity in our own underwriting
processes. In response, we have added enhanced procedures to our underwriting process. We do not expect a material impact
to our financial position or performance arising out of any such activity within the market or our own operations.
We continue to monitor our Alberta-based corporate mortgage portfolio. We are very diligent and selective in our mortgage
funding opportunities and work with seasoned borrowers.
Mortgage renewal rights
Through Xceed, we retain the renewal rights to internally originated single family mortgages that are held as corporate or
securitized mortgages or have been sold to third parties and derecognized from the balance sheet. At renewal, we may be able
to renew these mortgages by offering clients attractive renewal options, thereby contributing to future revenues.
As at December 31, 2016, we had the renewal rights to $1.1 billion of single family mortgages (December 31, 2015 - $1.3 billion
billion). The majority of these renewal rights relate to mortgages held on the consolidated balance sheet as corporate or
securitized mortgages. The remaining balance of $130 million relates to off-balance sheet mortgages sold to third parties on a
whole loan basis (December 31, 2015 - $219 million).
- 24 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 12: Arrears and Impaired Mortgages
(in thousands except %)
As at
Corporate impaired mortgages
Single family - uninsured
Single family - insured
Securitized impaired mortgages
Total impaired mortgages
Impaired mortgage ratio (total) 1
Impaired mortgage ratio (corporate) 1
Total corporate mortgage arrears 1
Single family - uninsured
Single family - insured
Commercial
Total securitized mortgage arrears 1
Total mortgage arrears 1
Collective allowance
Individual allowance
Total allowance
December 31
2016
September 30
2016
December 31
2015
$
$
$
$
$
$
2,759
1,118
3,877
587
4,464
0.14%
0.31%
8,878
4,163
-
13,041
13,609
26,650
4,859
390
5,249
$
$
$
$
$
$
3,091
1,892
4,983
-
4,983
0.15%
0.32%
15,208
6,002
3,000
24,210
15,887
40,097
5,115
377
5,492
$
$
$
$
$
$
2,196
531
2,727
-
2,727
0.11%
0.23%
14,826
5,063
-
19,889
14,361
34,250
4,920
339
5,259
1 Refer to the "Non-IFRS Measures" section of this MD&A for a definition of this measure.
Economic volatility and continued weakness in commodity prices continue to affect housing markets in impacted provinces such
as Alberta and Saskatchewan where job losses have impacted industry mortgage arrears. We continue to be diligent in
monitoring the local housing markets in which we lend and will closely monitor our mortgage portfolio for early indicators of
potential performance concerns.
Figure 4: Impaired Corporate Mortgage Ratio
- 25 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 13: Mortgage Originations
(in thousands)
For the Periods Ended December 31
Single family - insured
Single family - uninsured
Single family - uninsured completed inventory
Residential construction (new loan fundings)
Non-residential construction (advances)
Commercial
Q4
2016
Q4
2015
Annual
2016
Annual
2015
$
$
43,895
6,998
-
21,951
-
15,725
88,569
$
51,099 $ 144,241
23,993
53,181
17,214
-
78,662
89,689
638
5,215
79,294
10,754
$ 209,938 $ 344,042
$ 356,594
167,453
4,603
173,117
5,215
58,674
$ 765,656
Uninsured single family originations were significantly lower in 2016 as a result of reduced spreads from a competitive market,
the tightening of our underwriting standards (specifically for self-employed borrowers) and increased processing times as we
transition our processes and legacy systems. Throughout 2016, we had an increase in mortgage applications that did not meet
our underwriting standards and we therefore experienced a notable increase in the proportion of declined mortgage applications.
The Toronto and Vancouver markets have experienced significant price inflation recently which is well in excess of supporting
employment and income growth. Accordingly, we tightened our underwriting standards to mitigate these and other risks.
Insured single family originations also decreased in 2016, primarily due to increased processing times noted above.
Residential and non-residential construction volumes represent first advances on newly originated loans, i.e. they exclude
additional fundings on existing loans in the portfolio. Although originations decreased from 2015, we still experienced growth in
the portfolio during 2016 as a result of further draws on existing loans.
An increased focus on higher yielding commercial loans in 2016 led to higher origination volumes and an increase in the portfolio
from December 31, 2015.
Table 14: Average Mortgage Loan to Value (LTV) Ratios
As at
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured completed inventory
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
Securitized portfolio:
Single family insured - Market MBS Program
Single family insured - CMB Program
December 31
2016
September 30
2016
December 31
2015
72.2%
63.8%
77.9%
58.8%
58.4%
67.3%
66.2%
86.2%
83.1%
85.9%
76.8%
72.5%
51.0%
81.1%
60.2%
58.7%
58.1%
65.7%
86.0%
83.7%
85.9%
76.2%
72.7%
63.3%
79.3%
66.1%
59.4%
68.7%
63.5%
85.9%
-
85.9%
75.4%
- 26 -
2016 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, 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 LTV by province. LTV is calculated as the ratio of the outstanding loan balance on an amortized cost basis to the
value of the underlying collateral at the time of origination.
Insured mortgages include mortgages insured by CMHC or other approved insurers at origination and mortgages that are portfolio
insured after origination.
The HELOC balances displayed below relate to insured single family mortgages that have been acquired by MCAN. We do not
originate HELOCs.
Table 15: Single Family Mortgages by Province as at December 31, 2016
(in thousands except %)
Insured
% Uninsured
% HELOCs
%
Corporate
Securitized
Insured
%
Total
%
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
Total
$ 68,374 63.2% $ 173,246 65.1% $ 160 63.2% $
47,312 17.8%
9.4%
24,947
2.5%
6,777
3.0%
8,103
2.2%
5,842
613,036 57.1%
231,027 21.6%
107,980 10.1%
4.0%
3.9%
3.3%
$ 108,081 100.0% $ 266,227 100.0% $ 253 100.0% $ 1,071,849 100.0%
20,311 18.8%
2.7%
5.1%
8.0%
2.2%
51 20.2%
42 16.6%
-
-
-
2,953
5,495
8,616
2,332
42,715
41,407
35,684
-
-
-
Table 16: Single Family Mortgages by Province as at December 31, 2015
(in thousands except %)
Insured
% Uninsured
% HELOCs
%
Corporate
Securitized
Insured
%
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
Total
$ 42,449 50.9% $ 264,490 67.7% $ 122 52.2% $ 589,912 54.8%
239,192 22.2%
121,811 11.3%
4.1%
4.1%
3.5%
$ 83,385 100.0% $ 390,745 100.0% $ 234 100.0% $ 1,075,947 100.0%
54,815 14.0%
41,809 10.7%
2.2%
2.9%
2.5%
19,433 23.3%
4.4%
3,646
6,887
8.3%
8,848 10.6%
2.5%
2,122
53 22.6%
59 25.2%
-
-
-
8,688
11,303
9,640
43,960
43,712
37,360
-
-
-
$ 854,816 59.1%
298,701 20.7%
9.4%
135,922
3.8%
54,987
4.0%
58,126
3.0%
43,858
$ 1,446,410 100.0%
Total
%
$ 896,973 57.9%
313,493 20.2%
167,325 10.8%
3.8%
4.1%
3.2%
$ 1,550,311 100.0%
59,535
63,863
49,122
Table 17: Single Family Mortgages by Amortization Period as at December 31, 2016
(in thousands except %)
Up to 20
Years
>20 to 25
Years
>25 to 30
Years
>30 to 35
Years
>35 to 40
Years
Total
Corporate
Securitized
Total
$
$
$
67,175 $
17.9%
88,400 $
23.6%
211,956 $
56.6%
6,924 $
1.9%
106 $
0.0%
374,561
100.0%
164,923 $
15.4%
568,428 $
53.0%
247,246 $
23.1%
90,905 $
8.5%
347 $ 1,071,849
100.0%
0.0%
232,098 $
16.1%
656,828 $
45.4%
459,202 $
31.7%
97,829 $
6.8%
453 $ 1,446,410
100.0%
0.0%
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 18: Single Family Mortgages by Amortization Period as at December 31, 2015
(in thousands except %)
Up to 20
Years
>20 to 25
Years
>25 to 30
Years
>30 to 35
Years
>35 to 40
Years
Total
Corporate
Securitized
Total
$
$
$
76,636 $
16.2%
79,032 $
16.7%
301,874 $
63.6%
16,434 $
3.5%
388 $
0.0%
474,364
100.0%
119,194 $
11.1%
575,192 $
53.5%
277,016 $
25.7%
103,802 $
9.6%
743 $ 1,075,947
100.0%
0.1%
195,830 $
12.6%
654,224 $
42.2%
578,890 $
37.3%
120,236 $
7.8%
1,131 $ 1,550,311
100.0%
0.1%
Table 19: Average Loan to Value (LTV) Ratio for Uninsured Single Family Mortgage Originations
(in thousands except %)
For the Periods Ended December 31
Q4 Average
LTV
2016
YTD Average
LTV
2016
Q4 Average
LTV
2015
YTD Average
LTV
2015
Ontario
Alberta
British Columbia
Atlantic Provinces
Other
$
$
6,064
-
750
-
184
6,998
74.4%
-
57.7%
-
80.0%
72.8%
$ 30,627
5,525
4,502
-
553
$ 41,207
74.0%
69.3%
67.3%
-
72.8%
72.7%
$ 40,084
6,401
4,733
-
1,963
$ 53,181
73.8%
73.2%
73.0%
-
76.4%
73.7%
$ 127,446
26,023
13,149
1,336
4,102
$ 172,056
73.8%
74.3%
72.7%
62.7%
73.7%
73.7%
Based on past experience and relative to the specifics of the then prevailing economic conditions, we would expect to observe
an increase in overall mortgage default and arrears rates in the event of an economic downturn as realization periods on collateral
become longer and borrowers adjust to the new economic conditions and changing real estate values. This would also result in a
corresponding increase in our allowance for credit losses. An economic downturn, for example, could include changes to
employment and unemployment rates, income levels and consumer spending which would have the above noted impact on our
single family mortgage portfolio. MCAN utilizes a number of risk assessment and mitigation strategies to lessen the potential
impact for loss on single family mortgages. In addition, MCAN’s corporate uninsured single family mortgage portfolio is also
secured with an average LTV at origination of 71.6% as at December 31, 2016 (December 31, 2015 - 73.4%). Based on an industry
index that incorporates current real estate values, the ratios would be 56.5% and 63.4%, respectively.
Other Corporate Assets
Cash and cash equivalents
Cash and cash equivalents, which include cash balances with banks and overnight term deposits, increased by $36 million in 2016.
The December 31, 2016 balance was higher than usual as a result of certain early loan payouts. Cash and cash equivalents provide
liquidity to meet maturing term deposit and new mortgage funding commitments and are considered to be Tier 1 liquid assets.
For further information, refer to the “Liquidity Management” section of this MD&A.
Marketable securities
Marketable securities, consisting of corporate bonds and real estate investment trusts (“REITs”), increased by $14 million in 2016,
which included a $3.6 million net increase in the unrealized gain on the portfolio that was reflected in accumulated other
comprehensive income. The unrealized gain on the portfolio was volatile throughout 2016, primarily due to the impact of interest
rate movements on REIT valuations. Marketable securities provide additional liquidity at yields in excess of cash and cash
equivalents and are considered to be Tier 2 liquid assets. For further details, refer to the “Liquidity Management” section of this
MD&A.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Financial investments
Corporate financial investments include a $33 million investment in Crown LP, in which we have a 14.1% equity interest
(December 31, 2015 - $31 million). Crown LP invests primarily in commercial office buildings and classifies them into its core
fund, which represents buildings expected to provide stable cash flows over a longer time horizon, and its opportunity fund,
which represents buildings with medium term capital appreciation. Its fair value is driven primarily by independent appraisals of
the buildings. As property acquisitions are made by Crown LP, we advance our proportionate share to finance the acquisitions.
During 2016, we recorded a $7.2 million gross increase in the unrealized gain on the investment (2015 - $8.5 million), which is
recognized in the consolidated statements of comprehensive income net of deferred taxes. Additionally, we recognized $4.1
million of income from the Crown LP investment in 2016 (2015 - $2.5 million). The receipt of partnership distributions from
Crown LP generates a transfer from accumulated other comprehensive income to net income, where it is reflected in income
from financial investments and other loans.
We hold a $24 million investment in the KingSett High Yield Fund, in which we have a 9% equity interest (December 31, 2015 -
$11 million). The fund invests in mortgages secured by real estate with a focus on mezzanine, subordinate and bridge mortgages
and is carried at fair value. As mortgage advances are made by the fund, we advance our proportionate share. The fund pays a
base distribution of 9% per annum, and distributes any additional income earned on a quarterly basis. Our 2016 return was
11.2%. Our total funding commitment is $63 million, which consists of $42 million of capital advances for the fund and $21 million
that supports credit facilities.
Equity investment in MCAP
We hold a 14.74% equity interest in MCAP, which represents 4.3 million units held by MCAN of the 29.2 million total outstanding
MCAP partnership units. The investment had a net book value of $51 million as at December 31, 2016 (December 31, 2015 - $44
million). The Limited Partner’s At-Risk Amount (“LP ARA”), which represents the cost base of the equity investment in MCAP for
income tax purposes, was $39 million as at December 31, 2016 (December 31, 2015 - $42 million). For further information on
the LP ARA, refer to the “Non-IFRS Measures” section of this MD&A.
Our investment in MCAP creates a deduction from Total Capital under Basel III (refer to the “Capital Management” section of this
MD&A), which is measured on an accounting basis and is phased in by 20% on an annual basis to 2018 such that the deduction
was 60% in 2016. We have managed our investment in MCAP in line with our Risk Appetite Framework (“RAF”) and regulatory
requirements in order to minimize this deduction from Total Capital under Basel III while optimizing the economic benefits of the
investment.
MCAP is an originator and servicer of mortgages for third party investors in Canada and securitizes mortgages on its own behalf.
MCAP’s origination volumes were $15.9 billion in 2016. MCAP had $60.6 billion of assets under administration as at November
30, 2016.
We currently use the equity basis of accounting for our investment in MCAP as per International Accounting Standard (“IAS”) 28,
Investments in Associates and Joint Ventures, as we have significant influence in MCAP through our entitlement to a position on
MCAP’s Board of Directors. If we experience further dilution we may no longer qualify for the equity basis of accounting. In that
case, we would not recognize our pro-rata share of MCAP’s net income as equity income, but would instead recognize
distributions received from MCAP as income and would carry the investment as available for sale with changes in fair value
recognized through accumulated other comprehensive income.
In mid-2016, MCAP filed a preliminary prospectus with respect to an initial public offering of common shares. Subsequently,
MCAP withdrew the prospectus due to adverse market conditions. Since the events did not lead to a change in accounting, we
continue to use the equity basis of accounting for our investment in MCAP.
Foreclosed real estate
Foreclosed real estate consists of a real estate investment which was previously an impaired construction loan. This investment
is carried at the lower of the carrying amount and fair value less estimated costs to sell.
Securitization Assets
Securitization assets consist primarily of single family insured mortgages securitized through the market MBS program and CMB
program. During 2016 we recognized $42 million of new securitized mortgages on our balance sheet from our participation in
the market MBS program and $100 million from the CMB program.
For further information, refer to the “Securitization Programs” section of this MD&A.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 20: Liabilities and Shareholders' Equity
(in thousands)
As at
Corporate Liabilities
Term deposits
Current tax liabilities
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
December 31
2016
September 30
2016
December 31
2015
Change from 2015
(%)
($)
$
$
911,866
-
3,050
12,377
927,293
$
948,946
-
2,363
5,428
956,737
903,041 $
100
2,299
12,412
917,852
8,825
(100)
751
(35)
9,441
1%
(100%)
33%
-
1%
1,071,786
1,071,786
1,999,079
1,058,402
1,058,402
2,015,139
1,070,304
1,070,304
1,988,156
210,239
510
55,923
15,104
281,776
$ 2,280,855
210,239
510
53,846
11,271
275,866
$ 2,291,005
206,382
510
42,617
9,293
258,802
2,246,958 $
$
1,482
1,482
10,923
3,857
-
13,306
5,811
22,974
33,897
-
-
1%
2%
-
31%
63%
9%
2%
We issue term deposits that are eligible for Canada Deposit Insurance Corporation (“CDIC”) deposit insurance to fund our
corporate operations. The role of term deposits in managing liquidity risk is discussed in the “Liquidity and Funding Risk” sub-
section of the “Risk Governance and Management” section of this MD&A.
Financial liabilities from securitization relate to our participation in the market MBS program and CMB program, representing
MBS that we have sold to third parties but have not been derecognized from our balance sheet. Activity in 2016 consists of the
creation of $42 million of new liabilities from our participation in the market MBS program and $100 million from the CMB
program less $141 million of net repayments. For further information on the market MBS program and CMB program, refer to
the “Securitization Programs” section of this MD&A.
Share capital activity for 2016 reflects new common shares issued through the Dividend Reinvestment Plan (“DRIP”) and the
Executive Share Purchase Plan. For further information, refer to Note 21 to the consolidated financial statements.
Retained earnings activity for 2016 consists of net income of $40.2 million less dividends of $26.9 million.
Accumulated other comprehensive income represents unrealized gains or losses on available for sale marketable securities and
financial investments. During 2016, we recorded a $3.6 million net increase in the unrealized gain on the marketable securities
portfolio. In addition, we recorded a $2.2 million net increase in the unrealized gain on available for sale financial investments,
which included a $7.0 million gross increase in the unrealized gain less a $4.1 million transfer to net income net of deferred taxes.
- 30 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
SELECTED QUARTERLY FINANCIAL DATA
Table 21: Selected Quarterly Financial Data
(in thousands except for per
share amounts and %)
Net investment income - corporate
assets
Other income - corporate assets
Net investment income -
securitization assets
Operating expenses
Net income before income taxes
Provision for (recovery of) income
taxes
Net income
Q4/16
Q3/16
Q2/16
Q1/16
Q4/15
Q3/15
Q2/15
Q1/15
$ 11,684 $ 12,396 $ 16,996
-
-
-
$ 10,625
-
$ 12,602 $
-
8,996 $ 13,745
68
-
1,519
13,203
4,471
8,732
1,594
13,990
4,323
9,667
1,421
18,417
4,650
13,767
1,244
11,869
4,519
7,350
1,469
14,071
4,224
9,847
1,246
10,242
3,577
6,665
1,058
14,871
3,136
11,735
(268)
9,000 $
(108)
131
9,775 $ 13,636
$
(421)
7,771
$
397
9,450 $
(528)
(183)
7,193 $ 11,918
$
7,398
-
694
8,092
3,571
4,521
225
4,296
Average mortgage portfolio yield -
corporate 1
Average term deposit interest rate 1
Basic and diluted earnings per share $
Return on average shareholders'
equity 1
4.99%
2.20%
5.14%
2.22%
5.21%
2.22%
5.27%
2.25%
5.31%
2.27%
5.25%
2.32%
5.34%
2.38%
5.48%
2.40%
0.39 $
0.43 $
0.59
$
0.34
$
0.42 $
0.32 $
0.56
0.21
12.94%
14.08%
20.10%
11.80%
14.66%
11.36%
20.16%
7.49%
Dividends per share
Regular
Total
$
$
0.30 $
0.30 $
0.29 $
0.29 $
0.29
0.29
$
$
0.29
0.29
$
$
0.29 $
0.29 $
0.28 $
0.28 $
0.28
0.28
0.28
0.28
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
Net investment income from corporate assets has been consistent since Q1 2015 with the exception of significant increases in Q4
2015 and Q2 2016 from income recognized upon the receipt of distributions from Crown LP. Q2 2015 and Q2 2016 also had
substantial equity income from MCAP. Additionally, Q1 2015 was negatively impacted by significant realized and unrealized losses
on derivatives. We have experienced a steady decrease in our corporate mortgage portfolio and term deposit yields due to
decreases in market rates for new fundings. Realized and unrealized losses on derivatives were volatile in 2015.
Net investment income from securitization assets has increased steadily from growth in the market MBS program and our re-entry
into the CMB program.
For an analysis of the increase in operating expenses in recent quarters, refer to the “Operating Expenses” sub-section of the
“Results of Operations” section of this MD&A.
Table 22: Ten Year Financial Summary
(in thousands except per share amounts)
December 31
2016 (IFRS)
2015 (IFRS)
2014 (IFRS)
2013 (IFRS)
2012 (IFRS)
2011 (IFRS)
2010 (IFRS)
2009 (CGAAP)
2008 (CGAAP)
2007 (CGAAP)
$
Net
Income
Earnings Dividends
Per Share
Per Share
40,182 $
32,857
25,446
30,805
16,494
24,262
31,667
24,742
30,348
14,843
1.75 $
1.51
1.23
1.57
0.94
1.50
2.20
1.73
2.14
1.12
1.17 $
1.13
1.12
1.15
1.42
1.81
1.19
1.44
0.96
1.00
Assets1
1,188,480 $
1,155,046
1,044,579
1,027,176
950,686
753,799
538,118
506,683
570,154
557,425
Shareholders’
Market
Equity Capitalization
330,434
281,776 $
276,573
258,802
299,635
225,303
265,993
214,900
262,393
177,781
225,951
158,465
200,249
125,079
194,766
122,879
129,438
116,609
140,416
103,007
1 2010-2016 consist of corporate assets only as reported under IFRS. 2007-2009 consist of total assets as reported under Canadian Generally
Accepted Accounting Principles (“CGAAP”).
- 31 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
SUMMARY OF FOURTH QUARTER RESULTS
Table 23: Quarterly Net Income
(in thousands)
For the Quarters Ended
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Financial investments and other loans
Interest on cash and cash equivalents
Whole loan gain on sale income
Realized gain on derivatives
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Provision for (recovery of) credit losses
Net Investment Income - Securitization Assets
Mortgage interest
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
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
Dividends per share
December 31
2016
September 30
2016
December 31
2015
$
$
$
$
$
11,728
3,209
638
889
933
206
-
-
17,603
5,492
1,013
-
(586)
5,919
$
12,987
3,276
683
1,205
614
145
-
-
18,910
5,685
1,009
64
(244)
6,514
12,610
2,070
937
802
2,920
149
113
2
19,603
5,189
1,124
163
525
7,001
11,684
12,396
12,602
7,122
112
7,234
5,250
465
5,715
1,519
2,129
2,342
4,471
8,732
(268)
9,000
0.39
0.30
$
$
$
7,187
219
7,406
5,356
456
5,812
1,594
2,191
2,132
4,323
9,667
(108)
9,775
0.43
0.29
$
$
$
7,556
50
7,606
5,684
453
6,137
1,469
2,586
1,638
4,224
9,847
397
9,450
0.42
0.29
- 32 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Q4 2016 vs. Q4 2015
Net Investment Income - Corporate Assets
Table 24: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Quarters Ended December 31
2016
2015
(in thousands except %)
Single family
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non residential
Commercial loans
- Uninsured
Mortgages - corporate portfolio
Term deposits
Spread of mortgages over term deposits
Mortgages - securitized portfolio
Financial liabilities from securitization
Spread of mortgages over liabilities
Average
Balance
Interest Average
Rate 1
Income
Average
Balance
Interest Average
Rate 1
Income
$
271,126 $
125,902
17,888
387,536
7,852
3,104
755
244
5,152
108
143,843
$
954,147 $
934,475
2,365
11,728
5,492
$ 1,032,208 $
1,046,078
7,122
5,250
4.56% $
3.12%
5.42%
354,792 $
102,650
19,822
5.29%
5.45%
348,882
4,705
4,026
938
229
4,883
65
6.55%
4.99% $
2.20%
2.79%
101,567
932,418 $
864,518
2,469
12,610
5,189
2.74% $ 1,126,839 $
2.01%
0.73%
1,135,196
7,556
5,684
4.53%
3.65%
4.59%
5.59%
5.52%
8.88%
5.31%
2.27%
3.04%
2.66%
2.01%
0.65%
1 Average interest rate is equal to income/expense divided by the average balance on an annualized basis. The average interest rate as presented
may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items such as discount income on impaired
loans, deferred interest and prior period adjustments are excluded from the calculation of the average interest rate as applicable. Excluding
discount income on impaired loans and deferred interest, non-recurring items were immaterial for the quarters ended December 31, 2016 and
December 31, 2015. Average interest rate is considered to be a non-IFRS measure. Refer to the “Non-IFRS Measures” section of this MD&A for a
definition of this measure.
Changes in the average portfolio balance from Q4 2015 are generally consistent with the fiscal 2016 discussion in the “Net
Investment Income - Corporate Assets” sub-section of the “Results of Operations” section of this MD&A.
The uninsured single family portfolio declined throughout 2016 as a result of low origination volumes for new mortgages in the
year. Despite a general trend downwards in funding rates for new mortgages, the average portfolio yield increased over Q4 2015
as a result of higher penalty income.
The increase in the average construction portfolio balance from Q4 2015 was primarily due to strong funding volumes in the first
half of 2016 that helped to maintain a high balance throughout the year amidst seasonal repayments.
We targeted growth in our commercial portfolio during 2016 and experienced a significant increase in the average portfolio
balance over Q4 2015.
Market rates for new mortgage and term deposit fundings have generally decreased since 2015. Average mortgage portfolio
yield is considered to be a non-IFRS measure. For a definition of this measure, refer to the “Non-IFRS Measures” section of this
MD&A.
The increase in equity income from MCAP in Q4 2016 was a result of higher securitized mortgage interest income from a larger
average portfolio, and higher servicing and administration income due to an increase in assets under administration.
The decrease in income from financial investments and other loans in Q4 2016 is primarily due to the recognition of $2.5 million
of income from our investment in Crown LP in Q4 2015 upon the receipt of partnership distributions.
Net Investment Income - Securitization Assets
Despite a lower average portfolio balance, spread income from securitization assets was unchanged from Q4 2015. The slight
increase in net investment income from securitization assets was due to a $78,000 upfront gain earned on the securitization of
insured multi family loans through the CMB program.
- 33 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
In Q4 2016, our total securitization volumes were $74 million (Q4 2015 - $239 million), consisting of $8 million of insured single
family mortgages (Q4 2015 - $239 million) through the market MBS program and $51 million of insured single family mortgages
(Q4 2015 - $nil) and $15 million of insured multi family loans (Q4 2015 - $nil) through the CMB program.
For further information on corporate and securitization net investment income, refer to the “Net Interest Income” sub-section
below.
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.
Table 25: Net Interest Income
For the Quarters Ended December 31
2016
2015
Average
Balance 1
Income / Average
Rate 3
Expense
Average
Balance 1
Income / Average
Rate 3
Expense
(in thousands except %)
Assets
Cash and cash equivalents
Marketable securities
Mortgages
Financial investments
Other loans
Corporate interest earning assets
Short term investments
Mortgages
Financial investments
Securitized interest earning assets
Total interest earning assets
Non interest earning assets
Total assets
$
98,044 $
51,682
954,147
21,195
3,662
1,128,730
18,405
1,032,208
-
1,050,613
2,179,343
88,514
$ 2,267,857 $
$
934,475 $
Liabilities and shareholders' equity
Term deposits
Loans payable
Corporate liabilities
Securitization liabilities
Total interest bearing liabilities
Non interest bearing liabilities
Shareholders' equity
Total liabilities and shareholders' equity $ 2,267,857 $
-
934,475
1,046,078
1,980,553
9,044
278,260
208
889
11,728
494
48
13,367
11
7,122
-
7,133
20,500
391
20,891
5,492
-
5,492
5,250
10,742
-
-
10,742
0.84%
6.84%
4.99%
9.27%
5.21%
4.71%
0.24%
2.74%
-
2.70%
3.74%
-
3.66%
2.20%
-
2.20%
2.01%
2.11%
-
-
1.88%
$
74,384 $
38,829
932,418
9,149
2,027
1,056,807
11,775
1,126,839
-
1,138,614
2,195,421
83,036
$ 2,278,457 $
$
864,518 $
14,234
878,752
1,135,196
2,013,948
6,728
257,781
$ 2,278,457 $
149
802
12,610
382
29
13,972
8
7,556
-
7,564
21,536
2,509
24,045
5,189
163
5,352
5,684
11,036
-
-
11,036
0.79%
8.19%
5.31%
16.57%
5.68%
5.25%
0.27%
2.66%
-
2.64%
3.89%
-
4.19%
2.27%
3.06%
2.29%
2.01%
2.15%
-
-
1.92%
Net Interest Income 2
$
10,149
$
13,009
1 The average balances (excluding cash and cash equivalents, mortgages and term deposits) are calculated with reference to opening and closing
monthly balances and as such may not be as precise as if daily balances were used. The average cash and cash equivalents, mortgage and term
deposit balances are calculated using daily balances.
2 Net interest income is equal to net investment income less equity income from MCAP, fees, whole loan gain on sale income, realized gain (loss) on
derivatives, other securitization income, mortgage expenses and provision for credit losses. Net interest income is a non-IFRS measure. Refer to
the “Non-IFRS Measures” section of this MD&A for a definition of this measure.
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. Excluding discount income on impaired loans
and deferred interest, non-recurring items were immaterial for the quarters ended December 31, 2016 and December 31, 2015. Average rate is
considered to be a non-IFRS measure. Refer to the “Non-IFRS Measures” section of this MD&A for a definition of this measure.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Credit Quality
Table 26: Provisions for Credit Losses and Write-offs
(in thousands except basis points)
For the Quarters Ended
Individual provision (recovery)
Single family uninsured
Collective provision (recovery)
Single family uninsured
Single family uninsured - completed inventory
Construction
Commercial
Corporate mortgages - total
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)
December 31 September 30 December 31
2015
2016
2016
$
50 $
51 $
(148)
(1)
(67)
(37)
(253)
(383)
(636) $
(167)
8
(218)
105
(272)
(23)
(295) $
(586) $
(244) $
(203) $
$
39
1.6
(221) $
-
$
-
$
$
$
$
6
133
96
291
38
558
(39)
519
525
564
45
1.9
The change in the corporate mortgage collective provision from Q4 2015 to Q4 2016 was largely driven by portfolio activity.
Corporate mortgages that attract a collective allowance increased by $96 million in Q4 2015, compared to a $53 million decrease
in Q4 2016. For a discussion of other provisions (recoveries), refer to the “Credit Quality” sub-section of the “Results of
Operations” section of this MD&A.
Table 27: Operating Expenses
(in thousands)
For the Quarters Ended
Salaries and benefits
General and administrative
December 31
2016
September 30
2016
December 31
2015
$
$
2,129 $
2,342
4,471 $
2,191
2,132
4,323
$
$
2,586
1,638
4,224
Salaries and benefits were higher in Q4 2015 as a result of a higher variable compensation expense. For a discussion of general
and administrative expenses, refer to the “Operating Expenses” sub-section of the “Results of Operations” section of this MD&A.
Table 28: Income Taxes
(in thousands)
For the Quarters Ended
Deferred tax provision
December 31
2016
September 30
2016
December 31
2015
$
$
(268)
(268)
$
$
(108)
(108)
$
$
397
397
The deferred tax provision (recovery) is driven by taxable income (losses) recognized in subsidiaries.
- 35 -
3,621
954
374
5,729
104
2,205
12,987
5,685
7,187
5,356
4.72%
3.23%
6.75%
5.42%
5.57%
6.57%
5.14%
2.22%
2.92%
2.77%
2.05%
0.72%
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Q4 2016 vs. Q3 2016
Net Investment Income - Corporate Assets
Table 29: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Quarters Ended
December 31, 2016
September 30, 2016
Average
Balance
Interest Average
Rate 1
Income
Average
Balance
Interest Average
Rate 1
Income
(in thousands except %)
Single family
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non residential
Commercial loans
- Uninsured
Mortgages - corporate portfolio
Term deposits
Spread of mortgages over term deposits
$
271,126 $
125,902
17,888
387,536
7,852
3,104
755
244
5,152
108
143,843
$
954,147 $
934,475
2,365
11,728
5,492
4.56% $
3.12%
5.42%
306,022 $
117,815
22,098
5.29%
5.45%
421,242
7,408
133,784
6.55%
4.99% $ 1,008,369 $
2.20%
2.79%
962,150
Mortgages - securitized portfolio
Financial liabilities from securitization
Spread of mortgages over liabilities
$ 1,032,208 $
1,046,078
7,122
5,250
2.74% $ 1,032,280 $
2.01%
0.73%
1,045,122
1 Average interest rate is equal to income/expense divided by the average balance on an annualized basis. The average interest rate as presented
may not necessarily be equal to “Income/Expense” divided by “Average Balance”, as non-recurring items such as discount income on impaired
loans, deferred interest and prior period adjustments are excluded from the calculation of the average interest rate as applicable. Excluding
discount income on impaired loans and deferred interest, non-recurring items were immaterial for the quarters ended December 31, 2016 and
September 30, 2016. Average interest rate is considered to be a non-IFRS measure. Refer to the “Non-IFRS Measures” section of this MD&A for a
definition of this measure.
Lower corporate mortgage interest was the main factor behind the small decrease in net income from Q3 2016 to Q4 2016. The
decline in the average corporate portfolio balance in Q4 2016 was a result of continued low uninsured single family originations
and seasonal repayments in the construction portfolio. All other key components of net income were comparable to Q3 2016.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Financial Position
Table 30: Quarterly Balance Sheet
(in thousands)
As at
Assets
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Financial investments
Other loans
Equity investment in MCAP Commercial LP
Foreclosed real estate
Deferred tax asset
Other assets
Securitization Assets
Cash held in trust
Mortgages
Other assets
Liabilities and Shareholders' Equity
Liabilities
Corporate Liabilities
Term deposits
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Shareholders' Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
December 31 September 30 Change from Prior Quarter
(%)
2016
2016
($)
$
$
$
$
111,732
55,126
904,112
57,264
3,584
50,805
529
1,782
3,546
1,188,480
$
80,204
52,901
964,901
49,716
3,729
49,073
529
1,501
7,017
1,209,571
15,724
1,071,849
4,802
1,092,375
2,280,855
17,669
1,059,512
4,253
1,081,434
$ 2,291,005
$
911,866
3,050
12,377
927,293
948,946
2,363
5,428
956,737
$
$
$
31,528
2,225
(60,789)
7,548
(145)
1,732
-
281
(3,471)
(21,091)
(1,945)
12,337
549
10,941
(10,150)
39%
4%
(6%)
15%
(4%)
4%
-
19%
(49%)
(2%)
(11%)
1%
13%
1%
-
(37,080)
687
6,949
(29,444)
(4%)
29%
128%
(3%)
1,071,786
1,071,786
1,058,402
1,058,402
13,384
13,384
210,239
510
55,923
15,104
281,776
2,280,855
210,239
510
53,846
11,271
275,866
$ 2,291,005
$
-
-
2,077
3,833
5,910
(10,150)
1%
1%
-
-
4%
34%
2%
-
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 31: Quarterly Mortgage Summary
(in thousands)
As at
Corporate portfolio:
Single family mortgages
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
Securitized portfolio:
Single family insured - Market MBS program
Single family insured - CMB program
December 31
2016
September 30 Change from Prior Quarter
(%)
2016
($)
$
248,065 $
108,334
18,162
283,016 $
115,840
18,515
(34,951)
(7,506)
(353)
379,212
7,851
142,488
904,112
389,679
7,516
150,335
964,901
(10,467)
335
(7,847)
(60,789)
971,548
100,301
1,071,849
1,975,961
$
1,009,426
50,086
1,059,512
2,024,413 $
(37,878)
50,215
12,337
(48,452)
$
(12%)
(6%)
(2%)
(3%)
4%
(5%)
(6%)
(4%)
100%
1%
(2%)
The primary change in the corporate balance sheet during Q4 2016 was the decline in the corporate mortgage portfolio noted
above. Our cash balances increased significantly during Q4 2016 due to certain early loan payouts. The increase in financial
investments was driven by an increase in the fair value of the Crown LP investment, recorded to accumulated other
comprehensive income. Securitization assets increased modestly as a result of new CMB program and market MBS program
securitization issuances.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
SECURITIZATION PROGRAMS
We are an NHA MBS issuer, which involves the securitization of insured mortgages to create MBS. We issue MBS through our
internal market MBS program and the Canada Housing Trust (“CHT”) CMB program. In both programs, we leverage our regulatory
asset capacity by originating or purchasing insured single family mortgages for securitization and sale to third parties, thus
providing us with a reliable source of incremental income.
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 MBS default by the issuer,
thus fulfilling the Timely Payment obligation to investors. 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 programs noted below provide for many responsibilities that are linked to the issuer of these MBS
instruments. We do not transfer program oversight or these specific responsibilities when selling MBS to other parties.
Market MBS Program
As part of the market MBS program, we may sell MBS to third parties and may also sell the interest-only strips to third parties.
The MBS portion of the mortgage represents the core securitized mortgage principal and the right to receive coupon interest at
a specified rate. The interest-only strips represent the right to receive excess cash flows after satisfying the MBS coupon interest
payment and any other expenses such as mortgage servicing. As part of this program, we originate and purchase insured single
family mortgages to sell as MBS.
During 2016, we pooled and sold $42 million of MBS to third parties (2015 - $589 million). The majority of our previous mortgage
sales have not achieved derecognition as we retained significant continuing involvement with the assets such that the associated
mortgages remained on the balance sheet while a corresponding liability was incurred. The mortgage interest income and
interest on the financial liability from securitization associated with these mortgages are recognized on the accrual basis over the
term of the mortgages.
During 2015, we sold the interest-only strips associated with $147 million of mortgages securitized through the market MBS
program to third parties. Subsequent to sale, we derecognized the securitized mortgages and associated financial liabilities from
securitization from the consolidated balance sheet as a result of the transfer of substantially all risks and rewards of ownership
to the purchaser of the interest-only strip. We did not sell any interest-only strips in 2016.
We may issue market MBS through the NHA MBS program and retain the underlying MBS security instead of selling it to a third
party. As at December 31, 2016, we held $37 million of retained MBS on our balance sheet (December 31, 2015 - $21 million),
which is included in the insured single family classification within corporate mortgages.
CMB Program
We recommenced our participation in the CMB program in 2016 by securitizing both insured single family and insured multi
family loans (e.g. loans secured by apartment buildings) through the CMB program. The CMB program involves the sale of MBS
to CHT who in turn issues a non-amortizing bullet bond to external investors. The CMB program generally includes the
reinvestment of mortgage principal repayments by the issuer into certain permitted assets, however we have transferred the
benefits and obligations associated with the principal reinvestment function to a third party such that we only earn spread income
on the amortizing mortgage balance. The third party is responsible for sourcing assets in which to reinvest and any associated
obligations. This transfer has no net ongoing financial impact on MCAN.
We securitized $100 million of insured single family mortgages during 2016 (2015 - $nil). Similar to the market MBS program
transaction, we did not derecognize the mortgages from the consolidated balance sheet as we retained significant continuing
involvement with the assets such that the associated mortgages remained on the consolidated balance sheet while a
corresponding liability was incurred. The mortgage interest income and interest on the financial liability from securitization
associated with these mortgages is recognized on the accrual basis over the term of the mortgages.
We securitized $86 million of insured multi family loans during 2016 (2015 - $nil). We derecognized the mortgages from the
consolidated balance sheet as control over the assets was transferred on securitization. In achieving derecognition, we
recognized upfront gains of $394,000, which are included in other securitization income. Additionally, we recognized receivables
in the amount of estimated discounted spread income to be earned over the term of the securitized mortgages.
Other Accounting Considerations
The primary risks associated with the market MBS program and CMB program are prepayment, liquidity and funding risk,
including the obligation to fund 100% of any cash shortfall related to the Timely Payment (discussed below in the “Timely
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Payment” sub-section). Prepayment risk includes the acceleration of the amortization of mortgage premiums as a result of early
payouts.
Any mortgages securitized through the market MBS program or CMB program for which derecognition is not achieved remain on
the consolidated balance sheet as securitized assets and are also included in total exposures in the calculation of the leverage
ratio. A corresponding liability is also recognized on the balance sheet for mortgage securitizations that fail derecognition.
However, for income tax purposes, all mortgages securitized by MCAN are considered to be true mortgage sales and therefore
are not included in income tax assets. For further details on total exposures, regulatory capital and income tax assets and capital,
refer to the “Capital Management” and “Non-IFRS Measures” sections of this MD&A.
MCAN has capitalized certain mortgage acquisition costs. These costs are amortized using the effective interest rate method
(“EIM”), which incorporates mortgage prepayment assumptions.
Timely Payment
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, to ensure that the Timely Payment of principal and interest
to MBS investors is effected. Similarly, at the maturity of the MBS pools that have been issued by MCAN, any outstanding
principal must be paid to CMHC. We maintain the Timely Payment 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.
As part of our participation in the market MBS program and CMB program, we are required to fund 100% of any cash shortfall
unless we have sold the interest-only strip, in which case the purchaser of the interest-only strip is obligated to fund 100% of any
cash shortfall. 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 our 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.
In the case of mortgage defaults, we are required to make scheduled principal and interest payments to investors as part of the
Timely Payment and then place the mortgage/property through the insurance claims process to recover any losses. These
defaults may result in cash flow timing mismatches that may marginally increase funding and liquidity risks.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CAPITAL MANAGEMENT
Our primary capital management objectives are to maintain sufficient capital for regulatory purposes and to earn acceptable and
sustainable risk-weighted returns for our shareholders. Through our risk management and corporate governance framework, we
assess current and projected economic, housing market, interest rate and credit conditions to determine appropriate levels of
capital. We typically pay out all taxable income by way of dividends. Capital growth is achieved through retained earnings, public
share offerings, rights offerings and the DRIP. Our capital management is driven by the guidelines set out by the Income Tax Act
(Canada) (the “Tax Act”) and OSFI.
Income Tax Capital
As a MIC under the Tax Act, we are limited to an income tax liabilities to capital ratio of 5:1 (or an income tax assets to capital
ratio of 6:1), based on our non-consolidated balance sheet in the MIC entity measured at its tax value. Securitization assets and
liabilities (less accrued interest) are both excluded from the calculation of the income tax assets to capital ratio.
We manage our income tax assets to a level of 5.75 times income tax capital on a non-consolidated tax basis to provide a prudent
cushion between the maximum permitted assets and total actual assets. Income tax asset capacity represents additional asset
growth available to yield a 5.75 income tax assets to income tax capital ratio.
Table 32: Income Tax Capital 1
(in thousands except ratios)
As at
Income tax assets 1
Consolidated assets
Adjust for assets in subsidiaries
Non-consolidated assets in MIC entity
Add: mortgage allowances
Less: securitization assets 2
Less: equity investments in MCAP and subsidiaries
Other adjustments
Income tax liabilities 1
Consolidated liabilities
Adjust for liabilities in subsidiaries
Non-consolidated liabilities in MIC entity
Less: securitization liabilities 2
Income tax capital 1
Income tax asset capacity 1
Income tax capital ratios 1
Income tax assets to capital ratio
Income tax liabilities to capital ratio
December 31
2016
September 30
2016
December 31
2015
$
$
$
$
$
$
2,280,855 $
6,918
2,287,773
4,897
(1,089,358)
(37,049)
(5,605)
1,160,658 $
2,291,005 $
7,363
2,298,368
5,152
(1,075,746)
(32,292)
(5,483)
1,189,999 $
2,246,958
5,535
2,252,493
4,953
(1,091,099)
(31,088)
122
1,135,381
1,999,079 $
(6,500)
1,992,579
(1,070,117)
2,015,139 $
(5,860)
2,009,279
(1,056,713)
922,462 $
952,566 $
1,988,156
(6,213)
1,981,943
(1,068,541)
913,402
238,196 $
237,433 $
221,979
208,970 $
175,243 $
140,998
4.87
3.87
5.01
4.01
5.11
4.11
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
2 The majority of securitization assets and liabilities per balance sheet are excluded from income tax assets, liabilities and capital to the extent
that they are held in the MIC entity.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Regulatory Capital
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 minimum leverage ratio
which is calculated on a different basis from the income tax assets to capital ratio discussed in the “Income Tax Capital” sub-
section.
Since the financial crisis, OSFI and the Basel Committee on Banking Supervision (“BCBS”) have taken measures to promote a more
resilient banking sector and strengthen global capital standards. Changes from Basel III that impact MCAN through the Capital
Adequacy Requirements (“CAR”) Guideline, Leverage Ratio and other items are listed below. We expect to be able to meet OSFI’s
requirements and expectations without materially adversely affecting the Company’s business plan.
(cid:120) 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. The minimum capital ratios are 4.5% for CET 1, 6% for Total Tier
1 and 8% for Total Capital (with the phase-in of certain regulatory adjustments and phase-out of non-qualifying capital
instruments by 2022).
(cid:120)
(cid:120)
(cid:120)
The regulatory adjustments to be phased into the calculation of the capital ratios of a federally regulated financial
institution include the deduction of certain 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), which
incorporates an adjustment for the equity investment in MCAP into CET 1 capital. For 2016, the “transitional” basis
phases the adjustment in by a factor of 60%, while the “all-in” basis incorporates the entire adjustment. The adjustment
factor will increase by 20% annually over the phase-in period until it is fully deductible by 2018.
In 2016, OSFI implemented the requirement for all federally regulated financial institutions to maintain a capital
conservation buffer. The buffer will be phased in over time and will 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 have a CET 1 ratio of 7% and a Total Tier 1 ratio of 8.5% and a Total
Capital ratio of 10.5% (in each case, calculated on an “all in” basis giving effect to all regulatory adjustments that will be
required by 2019 and including the 2019 capital conservation buffer). Failure to achieve such targets will serve as
triggers for supervisory intervention.
OSFI began the phase-in of the Credit Valuation Adjustment (“CVA”) risk capital charge in 2014. The CVA risk capital charge
applicable to CET 1 Capital is 64% in 2016. This will increase annually until it reaches 100% by 2019. The implementation of the
CVA risk capital charge has had an insignificant impact on MCAN.
Our internal target minimum CET 1, Tier 1 and Total Capital ratios are 20%. We maintain prudent capital planning practices to
ensure that we are adequately capitalized and continue to satisfy minimum standards and internal targets.
OSFI and the BCBS are finalizing consultations for an update to the regulatory capital framework for loans secured by residential
real estate properties. The potential impact to MCAN will largely be in changes to the risk weighting of mortgages as calculated
in the standardized approach and a new capital charge for insured mortgages.
In late 2016, OSFI enacted revisions to the CAR Guideline effective January 1, 2017. The key revisions that impact MCAN are as
follows:
(cid:120)
(cid:120)
An explicit requirement that institutions have appropriate policies and procedures in place to originate, underwrite and
administer insured single family mortgages so as to receive a 0% risk-weighting for these assets; otherwise they would
attract a 35% or 75% risk weighting similar to uninsured single family mortgages.
A revision to the risk-weighting of equity investments in funds. MCAN would likely use the “look through” approach
that incorporates the risk-weighting of assets held inside the fund and the leverage used by the fund. This revision will
impact the risk-weighting of the financial investments in Crown LP and the KingSett High Yield Fund.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 33: Regulatory Capital
(in thousands except %)
As at
Regulatory Ratios (OSFI)
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Deduction for equity investment in MCAP (Transitional adjustment) 1
Common Equity Tier 1, Tier 1 and Total Capital (Transitional) 2
Deduction for equity investment in MCAP (All-in adjustment) 1
Common Equity Tier 1, Tier 1 and Total Capital (All-in) 2
Total Exposures/Regulatory Assets 2
Consolidated assets
Less: deductions from all-in Tier 1 Capital 1
Other adjustments 3
Total On-Balance Sheet Exposures
Mortgage and investment funding commitments
Less: conversion to credit equivalent amount (50%)
Letters of credit
Less: conversion to credit equivalent amount (50%)
Total Off-Balance Sheet Items
December 31
September 30
December 31
2016
2016
2015
$
$
$
$
$
$
$
$
210,239
510
55,923
15,104
(13,576)
268,200
(9,051)
259,149
2,280,855
(22,627)
1,489
2,259,717
402,861
(201,431)
30,537
(15,269)
216,698
210,239
510
53,846
11,271
(12,892)
262,974
(8,595)
254,379
$
$
$
206,382
510
42,617
9,293
(7,324)
251,478
(10,986)
240,492
2,291,005
(21,487)
1,920
2,271,438
$ 2,246,958
(18,310)
2,229
2,230,877
393,698
(196,849)
31,306
(15,653)
212,502
333,667
(166,834)
35,863
(17,932)
184,764
Total Exposures/Regulatory Assets
$
2,476,415
$
2,483,940
$ 2,415,641
Leverage ratio 2
Risk weighted assets (transitional) 2
Risk weighted assets (all-in) 2
10.46%
10.24%
9.96%
$
$
1,167,226
1,149,124
$
$
1,183,427
1,166,237
$ 1,066,558
$ 1,044,586
Regulatory Capital Ratios 2
Common Equity Tier 1 capital to risk-weighted assets ratio (transitional)
Tier 1 capital to risk-weighted assets ratio (transitional)
Total capital to risk-weighted assets ratio (transitional)
Common Equity Tier 1 capital to risk-weighted assets ratio (all-in)
Tier 1 capital to risk-weighted assets ratio (all-in)
Total capital to risk-weighted assets ratio (all-in)
22.98%
22.98%
22.98%
22.55%
22.55%
22.55%
22.22%
22.22%
22.22%
21.81%
21.81%
21.81%
23.58%
23.58%
23.58%
23.02%
23.02%
23.02%
1 The deduction for the equity investment in MCAP on an all-in basis is equal to the equity investment balance less 10% of the Company’s
shareholders’ equity. In 2016, the deduction on the transitional basis is equal to 60% of the all-in adjustment (2015 - 40%). The adjustment factor
will increase by 20% annually over the phase-in period until it is fully deductible by 2018.
2 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
3 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 34: Regulatory Risk-Weighted Assets
(in thousands except %)
As at December 31
2016
Per Balance Average Risk Weighted
Assets
Rate
Sheet
2015
Per Balance Average Risk Weighted
Assets
Rate
Sheet
On-Balance Sheet Assets
Cash and cash equivalents
Cash held in trust
Marketable securities
Mortgages - corporate
Mortgages - securitized
Financial investments
Other loans
Equity investment in MCAP (all-in) 1
Foreclosed real estate
Deferred tax asset
Other assets
$
111,732
15,724
55,126
904,112
1,071,849
57,264
3,584
50,805
529
1,782
8,348
20% $
20%
100%
71%
3%
100%
100%
55%
100%
100%
100%
Off-Balance Sheet Items
Letters of credit
Commitments
Charge for operational risk
30,537
402,861
50%
46%
$
75,762
13,112
40,735
944,109
1,075,947
41,793
4,176
44,191
529
1,125
5,479
21% $
20%
100%
67%
3%
100%
100%
59%
100%
100%
100%
35,863
333,667
50%
44%
22,644
3,145
55,126
637,871
37,432
57,264
3,584
28,177
529
1,782
8,348
855,902
15,269
184,378
199,647
93,575
15,598
2,622
40,735
629,171
27,288
41,793
4,176
25,879
529
1,125
5,479
794,395
17,932
148,109
166,041
84,150
Risk-Weighted Assets (all-in)
1,149,124
1,044,586
Equity investment in MCAP
(transitional adjustment) 1
Risk-Weighted Assets (transitional)
18,102
$ 1,167,226
21,972
$ 1,066,558
1 In calculating risk-weighted assets on the "all-in" basis, the capital deduction related to the investment in MCAP is risk weighted at 0%, while the
component not deducted from capital is risk weighted at 100%. In calculating risk-weighted assets on the transitional basis, the difference
between the all-in deduction and the transitional deduction is risk weighted at 200%.
Other Capital Management Activity
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 necessary to support the various inherent risks that we face, including credit, liquidity, interest rate, market,
geographic concentration and reputational risks. Our 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, the Company performs stress testing on our internal forecasts for capital
adequacy on a quarterly basis, and the results of such testing are reported to the Board.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
LIQUIDITY MANAGEMENT
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.
For further information on how we manage liquidity risk, refer to the “Liquidity and Funding Risk” sub-section of the “Risk
Governance & Management” section of this MD&A. For information on our credit facilities refer to Note 31 to the consolidated
financial statements.
OSFI’s Liquidity Adequacy Requirements (“LAR”) guideline establishes three minimum standards based on the Basel III framework
with national supervisory discretion applied to certain treatments: the Liquidity Coverage Ratio (“LCR”) and Net Cumulative Cash
Flow (“NCCF”) metric, which both became effective January 1, 2015, and the Net Stable Funding Ratio (“NSFR”), which is effective
January 1, 2018.
As at December 31, 2016, we were in compliance with the LCR and NCCF and we believe that we will be able to comply with the
NSFR requirements once enacted.
These requirements are supplemented by additional supervisory monitoring metrics including the liquidity monitoring tools and
the intraday liquidity monitoring tools as considered in the Basel III framework.
The following table shows the composition of our internal liquidity ratios. These internal ratios include assumptions relating to
the value of liquid assets such as the ability to sell these assets in a stressed market scenario. We manage our liquid assets to a
minimum of 100% of term deposit liabilities maturing within 100 days. As at December 31, 2016, we were in compliance with
our internal liquidity ratios.
Table 35: Liquidity Ratios
(in thousands except %)
As at
Tier 1 liquid assets 1
Cash and cash equivalents
Tier 2 liquid assets 1
Marketable securities
Less: marketable securities adjustment 2
Market MBS retained by MCAN 3
Tier 3 liquid assets 1
Single family insured mortgages 4
Less: single family insured mortgages adjustment 4
December 31
2016
September 30
2016
December 31
2015
$
111,732
$
80,204
$
75,762
55,126
(13,007)
36,606
78,725
69,899
(24,293)
45,606
52,901
(12,636)
37,616
77,881
76,338
(29,820)
46,518
40,735
(10,104)
21,250
51,881
60,399
(18,503)
41,896
Total liquid assets 1
100 day term deposit maturities
$
$
236,063
$
204,603
130,357
$
141,194
$
$
169,539
92,622
Liquidity ratios 1
Tier 1 & 2 liquid assets to 100 day term deposit maturities
Total liquid assets to 100 day term deposit maturities
146%
181%
112%
145%
138%
183%
1 Refer to the "Non-IFRS Measures" section of this MD&A for a definition of these measures.
2 Adjusted to reflect estimated impact to fair market value in a stressed scenario. Corporate bonds are reduced as follows: BBB- or higher (30%);
below BBB- (45%). REITs are reduced as follows: constituent in TSX/S&P Composite Index (20%); not a constituent in TSX/S&P Composite Index
(40%).
3 Included in corporate mortgages - insured single family. For further information, refer to the "Securitization Programs" section of this MD&A.
4 Single family insured mortgages exclude mortgages pledged as collateral and second mortgages not insured by CMHC. The adjustment reflects
lower liquidity than Tier 1 and Tier 2 liquidity, as follows: CMHC insured (25%), CMHC insured second mortgages (50%), privately insured (50%).
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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 36: Liquidity Analysis
(in thousands)
Sources of liquidity
Cash and cash equivalents
Marketable securities
Mortgages - corporate
Financial investments
Other loans
Uses of liquidity
Term deposits
Other liabilities
Within 3 Months
To 1 Year
3 Months
1 to 3
Years
3 to 5
Years
Over 5 December 31 December 31
2015
2016
Years
$ 111,732 $
53,953
118,906
-
1,535
286,126
513
420,209
-
-
420,722
- $
- $
629
314,006
-
-
314,635
- $
-
38,464
-
2,049
40,513
- $
31
12,527
57,264
-
69,822
111,732 $
55,126
904,112
57,264
3,584
1,131,818
75,762
40,735
944,109
41,793
4,176
1,106,575
119,472
12,377
131,849
327,739
-
327,739
336,926
-
336,926
127,729
-
127,729
-
-
-
911,866
12,377
924,243
903,041
12,412
915,453
Net liquidity surplus (deficit)
$ 154,277 $ 92,983 $ (22,291) $ (87,216) $ 69,822 $
207,575 $
191,122
Off-Balance Sheet
Unfunded mortgage commitments $ 324,680 $ 39,481 $
Commitment - KingSett High Yield
Fund
-
-
$ 324,680 $ 39,481 $
- $
-
- $
- $
- $
364,161 $
308,242
38,700
-
- $ 38,700 $
38,700
402,861 $
25,425
333,667
Note: The above table excludes securitized assets and liabilities and pledged assets as their use is restricted to securitization program operations.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
RISK GOVERNANCE AND MANAGEMENT
We are exposed to a number of risks, including credit risk, liquidity and funding risk, operational risk, strategic and business risk,
reputational risk, interest rate risk, market risk and cyber risk, 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.
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.
We operate in changing regulatory and economic environments. As a result, we believe that our management team and the
Board are particularly diligent in their consideration of all identified and emerging 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.
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 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.
Risk Governance
The RCB is responsible for overseeing risk management across the Company. It looks to ensure 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 oversees, and is supported by an Enterprise Risk Management
framework (“ERMF”) consisting of policies, procedures and controls. The goal of the ERMF is to manage 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 RAF and ERMF for approval by the Board. They are responsible for
fostering a strong risk culture through 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 Executive Committee recommends a risk
appetite that aligns with the Mission Statement, Operating Philosophies and Goals and Objectives of the Company and the
Operating Committee provides governance over the operations of MCAN to ensure that the strategy and tactics used by MCAN
in its funding and investing activities are effective in meeting the Company’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 framework and policies, and provides risk guidance
and oversight of the effectiveness of first line risk management practices. These activities are provided by:
(cid:120)
(cid:120)
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 confirming and reporting on the significant business risks as
identified by and assessed by the first line of defense 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 department,
led by the CFO, also updates the plan with periodic forecasts, advises the Board of anticipated outcomes, and
recommends revisions to capital plans and structures as appropriate.
(cid:120)
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
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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.
(cid:120)
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 (Canada) 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.
Risk Appetite
MCAN’s RAF sets out the approach to risk management used by the Company in pursuing its strategic and business objectives.
Key principles that guide MCAN’s approach to risk appetite are as follows:
(cid:120) MCAN’s strategy, including business objectives, business plans and stakeholder expectations should be reflected in the
risk appetite.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The approach should engage both top down senior management and Board leadership and bottom up involvement of
employees at all levels.
Risk appetite considerations should be embedded in both strategic and day-to-day decisions and supported by a
reinforced risk culture aligning decision making and risk.
The approach to risk appetite should reflect good industry practices and relevant regulatory guidance.
The approach should be forward looking and enable adaptation to changing business and market conditions; it should
also give consideration to the skills, resources and technology required to manage and monitor identified risk exposures
and the potential impacts of stressed conditions.
The RAF purposes and objectives are as follows:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Define maximum levels of risk that are within MCAN’s risk capacity including regulatory constraints in order to achieve
its strategic objectives within appropriate and approved target returns.
Give consideration to all material risks reflecting all key aspects of the business.
Contain both qualitative and quantitative elements to define acceptable risk levels within MCAN’s risk capacity.
Set out limits and targets to enable the Board and senior management to assess MCAN’s performance and current risk
levels relative to risk appetite.
Consider MCAN’s current capital position and ability to handle the range of results that may occur under normal
operating conditions and under a range of stress scenarios.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
The Board has oversight responsibility for risk governance within MCAN. It provides this oversight and carries out its risk
management mandate primarily through the RCB, the Audit Committee of the Board (the “Audit Committee”), the Conduct
Review, Corporate Governance and Human Resources Committee of the Board (the “CR, CG & HR Committee”) and the Enterprise
Risk Management Ad Hoc Committee (the “ERM Ad Hoc Committee”). There is a further committee structure at the management
level as illustrated in the following diagram:
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Credit Risk
Credit risk is the risk of financial loss resulting from the failure of a counterparty, for any reason, to fully honour its financial or
contractual obligations to the Company, primarily arising from our mortgage and lending activities. Fluctuations in real estate
values may increase the risk of default and may also reduce the net realizable value of the collateral property to the Company.
These risks may result in defaults and credit losses, which may result in a loss of earnings. Credit losses occur when a counter
party fails to meet its obligations to the Company and the value realized on the sale of the underlying security deteriorates below
the carrying amount of the exposure.
Credit Risk Management
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 CRO 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. Monitoring also takes place
through our Capital Commitments Committee and Single Family Credit Committee, which are both 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.
Our maximum credit exposure on our individual financial assets is equal to the carrying value of the respective assets, except for
our corporate mortgage portfolio, whose maximum credit exposure also includes outstanding commitments for future mortgage
fundings.
Liquidity and Funding Risk
Liquidity and funding 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.
For information on the contractual maturities of certain obligations of the Company, refer to notes 17, 20 and 30 to the
consolidated financial statements.
Liquidity and Funding Risk Management
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 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
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
and cash equivalents, marketable securities, MCAN-issued market MBS retained on our balance sheet, 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. As at December 31, 2016 and December 31, 2015, we met this internal
target.
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. As at December 31, 2015 we also maintained a $50 million credit
warehouse facility for which insured single family mortgages acted as collateral. In early 2016, the credit warehouse facility
counterparty ceased its operations, and as a result thereof, the credit warehouse was terminated.
Subsequent to year end, we entered into an agreement with a Canadian Schedule I Chartered bank that enables the Company to
execute repurchase agreements for liquidity purposes. This facility provides a new source of liquidity and allows the Company to
encumber certain eligible securities for financing purposes. As part of the agreement, we may sell assets to the counterparty at
a specified price with an agreement to repurchase at a specified future date. The interest rate on the borrowings is driven by
market spot rates at the time of borrowing.
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.
We have established and maintain liquidity policies and procedures which meet the standards set under the Trust Act and
regulations or guidelines issued by OSFI.
For a discussion regarding liquidity risk relating to the maturity of securitization program liabilities, refer to the “Timely Payment”
sub-section of the “Securitization Programs” section of this MD&A.
Operational Risk
Operational risk is the potential for loss resulting from people, inadequate or failed internal processes, systems, or from external
events. The risk of loss from people includes internal or external fraud, non-adherence to internal procedures/values/objectives
or unethical behaviour. The largest components of this risk for MCAN have been separately identified as outsourcing risk and
cyber 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.
Operational Risk Management
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 ERM Ad Hoc Committee, and ALCO. We also
provide monthly updates to the Board 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
Within operational 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 the majority of our mortgage and loan origination, servicing and collections to MCAP and other
third parties.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Outsourcing Risk Management
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.
Risk of Accuracy and Completeness of Borrower Information
Within operational risk, in the single family mortgage underwriting process, we rely on information provided by potential
borrowers and other third parties, including mortgage brokers. We may also rely on the representations of potential borrowers
and third parties as to the accuracy and completeness of that information. Our financial position and performance may be
negatively impacted if this information is intentionally misleading or does not fairly represent the financial condition of the
potential borrower and is not detected by our internal controls.
Management of Risk of Accuracy and Completeness of Borrower Information
We frequently review and/or update our underwriting policies, procedures and control processes to strengthen our ability to
detect and to better manage this risk. These updates include improvements to underwriting staff training, independent income
verification procedures, internal audit, risk and other quality control and quality assurance processes.
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.
Strategic and Business Risk Management
Strategic and business risk is managed by the CEO and senior management. The Board approves the Company’s strategies at least
annually and reviews results against those strategies at least quarterly.
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
from events such as cyber security issues, 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.
Reputational Risk Management
We believe that the most effective way for the Company to safeguard its public reputation is through the successful management
of the underlying risks in the business.
Interest Rate Risk
Interest rate risk is the potential impact of changes in interest rates on our earnings and capital. Interest rate risk arises when
our assets and liabilities, both on and off-balance sheet, have mismatched repricing dates. Changes in interest rates where we
have mismatched repricing dates may have an adverse effect on our financial condition and results of operations. In addition,
interest rate risk may arise when changes in the underlying interest rates on assets do not match changes in the interest rates on
liabilities. This potential mismatch may have an adverse effect on our financial condition and results of operations.
Our exposure to interest rate risk is discussed further in Note 32 to the consolidated financial statements.
Interest Rate Risk Management
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
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
deposits so that they offset each other, we seek to reduce the risks associated with interest rate changes, and in conjunction with
liquidity management policies and procedures, we also manage cash flow mismatches. ALCO reviews our interest rate exposure
on a monthly basis using interest rate spread and gap analysis as well as interest rate sensitivity analysis based on various
scenarios. This information is also formally reviewed by the RCB each quarter.
We are exposed to interest rate risk on insured single family mortgages between the time that a mortgage rate is committed to
borrowers and the time that the mortgage is funded, or in the case of mortgages securitized through the market MBS or CMB
programs, the time that the mortgage is securitized. To manage this risk, we may enter into interest rate swaps or we may match
them with long-term fixed-rate term deposits.
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
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 and commodity prices, 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.
Market Risk Management
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.
Cyber Risk
We collect and store confidential and personal information to the extent needed for operational purposes. Unauthorized access
to the Company’s computer systems could result in the theft or publication of confidential information or the deletion or
modification of records or could otherwise cause interruptions in the Company’s operations. In addition, despite the Company’s
implementation of security measures, its systems are vulnerable to damages from computer viruses, natural disasters,
unauthorized access, cyber-attack and other similar disruptions. Any such system failure, accident or security breach could
disrupt the Company’s delivery of services and make the Company’s applications unavailable or cause similar disruptions to the
Company’s operations. If a person penetrates the Company’s network security or otherwise misappropriates sensitive data, we
could be subject to liability or our business could be interrupted, and any of these developments could have a material adverse
effect on the Company’s business, results of operations and financial condition.
Cyber Risk Management
We manage cyber risk through oversight by management, including an IT Management Committee, as well as the use of external
third party advisors and service providers to provide technical expertise. We undertook a cyber security assessment during 2016
that is intended to be updated on an annual basis. We employ the use of external security experts to assist and monitor our
information technology infrastructure for cybersecurity risks. We have also undertaken external vulnerability tests performed by
an independent external party. Additionally, we maintain an incident response plan and have designated officers responsible for
the oversight over the cybersecurity risks. We also maintain cyber security insurance coverage for both direct and third party
coverage in the event of a cyber security incident that would result in a loss.
Other Risk Factors
General Litigation
In the ordinary course of business, MCAN and its service providers (including MCAP), their subsidiaries and related parties may
be party to legal proceedings that may result in unplanned payments to third parties.
To the best of our knowledge, we do not expect the outcome of any existing proceedings to have a material adverse effect on
the consolidated financial position or results of operations of the Company.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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.
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
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.
Mortgage Renewal Risk
We retain renewal rights on mortgages that we originate that are either sold to third parties or retained on the consolidated
balance sheet. If mortgagors are unable to renew their mortgages at their scheduled maturities, we may be required to use our
own financial resources to fund these obligations until mortgage arrears are collected or proceeds are received from mortgage
insurers following the sale of mortgaged properties.
Mortgage Prepayment Risk
In acquiring certain mortgages from third parties, we pay a premium to the mortgage par value based on the expected term of
the mortgage. To the extent that mortgages repay prior to maturity, we may be required to accelerate the amortization of the
premium and sustain a financial loss.
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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Environmental Risk
We recognize that environmental hazards are a potential liability. This risk exposure can result from non-compliance with
environmental laws, either as principal or lender, which may negatively affect our financial condition and results of operations.
We aim to mitigate this risk by complying with all environmental laws and by applying a rigorous environmental policy and
procedures to our commercial and development lending activities.
Changes in Laws and Regulations
Changes to current laws, regulations, regulatory policies or guidelines (including changes in their interpretation, implementation
or enforcement), the introduction of new laws, regulations, regulatory policies or guidelines or the exercise of discretionary
oversight by regulatory or other competent authorities including OSFI, may adversely affect us, including by limiting the products
or services that we provide, restricting the scope of our operations or business lines, increasing the ability of competitors to
compete with our products and services or requiring us to cease carrying on business. In addition, delays in the receipt of any
regulatory approvals and authorizations that may be necessary to the operation of our business may adversely affect our
operations and financial condition. Our failure to comply with applicable laws and regulations may result in sanctions and
financial penalties that could adversely impact our earnings and damage our reputation.
Changes in Accounting Standards and Accounting Policies
We may be subject to changes in the financial accounting and reporting standards that govern the preparation of our consolidated
financial statements. These changes may materially impact how we record and report our financial condition and results of
operations and, in certain circumstances, we may be required to retroactively apply a new or revised standard that results in our
restating prior period financial statements. Please refer to the “Standards Issued But Not Yet Effective” section of this MD&A for
further details.
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 we will be able to achieve our 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.
DESCRIPTION OF CAPITAL STRUCTURE
Our authorized share capital consists of an unlimited number of common shares with no par value. At December 31, 2016, there
were 23,075,227 common shares outstanding (December 31, 2015 - 22,782,433). As at February 23, 2017, there were 23,147,410
common shares outstanding.
During 2016, we issued 280,376 new common shares under the DRIP (2015 - 568,588), which provides MCAN with a reliable
source of new capital and existing shareholders an opportunity to acquire additional shares at a discount to market value. Under
the DRIP, dividends paid to shareholders are automatically reinvested in common shares issued out of treasury at the weighted
average trading price for the five days preceding such issue less a discount of 2%. Additionally, in 2016 we issued 12,418 common
shares through the Executive Share Purchase Plan (2015 - nil).
In 2015, we closed a rights offering to common shareholders that raised $15.1 million of new share capital through the issuance
of 1,406,084 common shares, creating $87 million of additional income tax asset capacity.
For additional information related to share capital, refer to Note 21 to the consolidated financial statements.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
OFF-BALANCE SHEET ARRANGEMENTS
We have contractual obligations relating to an operating lease, in addition to outstanding commitments for future fundings of
corporate mortgages and our investment in the KingSett High Yield Fund.
We outsource the majority of our mortgage servicing and continue to pay servicing expenses as long as the mortgages remain on
our balance sheet.
Table 37: Contractual Obligations
(in thousands)
Mortgage funding commitments
Commitment - KingSett High Yield
Fund
Operating lease
Less than
one year
One to Three to
three years five years
Over five December 31
2016
years
December 31
2015
$ 364,161
$
-
$
- $
- $
364,161
$
308,242
-
575
$ 364,736
$
-
1,158
1,158
$
-
1,194
1,194 $
38,700
1,642
40,342 $
38,700
4,569
407,430
$
25,425
5,145
338,812
We retain mortgage servicing obligations relating to securitized mortgages where balance sheet derecognition has been achieved.
For further information, refer to Note 6 to the consolidated financial statements.
We provide letters of credit, which are not reflected on the consolidated balance sheet, for the purpose of supporting developer
obligations to municipalities in conjunction with residential construction loans. For further information, refer to Note 31 to the
consolidated financial statements.
As at December 31, 2016, of our total single family mortgage renewal rights of $1.1 billion (December 31, 2015 - $1.3 billion),
$130 million related to off-balance sheet mortgages sold to third parties on a whole loan basis (December 31, 2015 - $219 million).
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 paid over the past three years are indicated in the table below. All dividends during this period have been
regular dividends, i.e. none have been capital gains dividends.
Table 38: Dividends
Fiscal Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
2015
2014
$
$
0.29
0.29
0.29
0.30
1.17
$
$
0.28
0.28
0.28
0.29
1.13
$
$
0.28
0.28
0.28
0.28
1.12
Consistent with the prior quarter dividend increase, the Board declared a first quarter dividend of $0.30 per share to be paid
March 30, 2017 to shareholders of record as of March 15, 2017.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Figure 5: Dividend History
Historically, extra dividends have been paid with the regular first quarter dividend.
TRANSACTIONS WITH RELATED PARTIES
Related party transactions for the years ended December 31, 2016 and December 31, 2015 are discussed in Note 29 to the
consolidated financial statements.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The majority of our consolidated balance sheet consists of financial instruments, and the majority of net income is derived from
the related income, expenses, gains and losses. Financial instruments include cash and cash equivalents, cash held in trust,
marketable securities, mortgages, financial investments, other loans, 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 Governance and 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 value of financial instruments is located in the “Critical Accounting Estimates and Judgments” section
of this MD&A.
PEOPLE
As at December 31, 2016, we had 61 employees.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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
Regulatory 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 CR, CG & 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.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the Company’s financial statements requires management to make judgments and estimations 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. 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. 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.
Critical Accounting Estimates
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, estimates are required to establish fair values. These estimates include considerations of liquidity and model
inputs such as discount rates, prepayment rates and default rate assumptions for certain investments.
Allowances 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 review our individually significant mortgage balances at each consolidated financial statement date to assess whether an
impairment loss should be recorded. In particular, estimates by management are required in the calculation of the amount and
timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Company makes
assumptions 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). There have been no recent changes to the methodology, nor are any expected in
the foreseeable future. No trends, events or uncertainties exist that may affect the methodology and assumptions used.
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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. 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.
Mortgage prepayment rates
In calculating the rate at which borrowers prepay their mortgages, the Company makes estimates based on its historical
experience. These assumptions impact the timing of revenue recognition and the amortization of mortgage premiums using the
EIM.
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 in the subsidiaries of the Company. 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
in the subsidiaries of the Company.
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 in the subsidiaries of the Company. Significant management judgment is required to
determine the amount of deferred tax assets that can be recognized in the subsidiaries of the Company, based upon the likely
timing and the level of future taxable income together with future tax planning strategies.
Impairment of financial assets
As applicable, the Company reviews financial assets at each consolidated financial statement date to assess whether an
impairment loss should be recorded. In particular, estimates by management are required in the calculation of the amount and
timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number
of factors and actual results may differ, resulting in future changes to the fair value of the asset.
Critical Accounting Judgments
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.
Significant influence
In determining whether it has significant influence over an entity, the Company makes certain judgments based on the applicable
accounting standards. These judgments form the basis for the Company’s policies in accounting for its equity investments.
Taxes
As a MIC under the Tax Act, the Company is able to deduct from income for tax purposes dividends paid within 90 days of year-
end. The Company intends to maintain its status as a MIC and intends to pay sufficient dividends in current and future years to
ensure that it is not subject to income taxes in the MIC entity on a non-consolidated basis. Accordingly, the Company does not
record a provision for current and deferred taxes within the MIC entity; however provisions are recorded as applicable in all
subsidiaries of MCAN.
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STANDARDS ISSUED BUT NOT YET 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 these standards when they become effective.
IFRS 9, Financial Instruments
In July 2014, the International Accounting Standards Board (“IASB”) issued a final revised IFRS 9 standard, which addresses
impairment, classification and measurement, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after
January 1, 2018.
Project Plan/Implementation
We have established an IFRS 9 Committee which includes representatives of finance, risk and other executives. The Committee
is responsible for the overall implementation of IFRS 9, ensuring proper integration throughout the Company and providing
review and approval of key decisions. We continue to analyze the impact of the IFRS 9 changes on our consolidated financial
statements and will continue to provide details as the project progresses.
Impairment
IFRS 9 introduces a new expected credit loss (“ECL”) impairment model for all financial assets, with the most significant impact
on the Company’s mortgage portfolio. The new ECL model will result in a collective allowance being recorded on financial assets
regardless of whether there has been an actual loss event. The expected credit loss model requires the recognition of 12-month
expected credit losses at origination and the recognition of expected lifetime losses on financial assets that have experienced a
significant increase in credit risk since origination. IFRS 9 requires consideration of past events, current market conditions and
reasonable supportable information about future economic conditions in determining whether there has been a significant
increase in credit risk, and in calculating the amount of expected losses. We are in the process of developing our IFRS 9 models
and we have not yet quantified the impact on our collective allowance.
Classification and Measurement
IFRS 9 requires that debt instruments are classified based on the business model for managing the assets and the contractual
cash flow characteristics of the asset. The business model test determines classification based on the business purpose for
holding the asset. Our debt instruments that have contractual cash flows representing only payments of principal and interest
will be eligible for classification as fair value reported through other comprehensive income (“FVOCI”) or amortized cost. Our
equity instruments would generally be measured at FVOCI with unrealized gains and losses recognized in other comprehensive
income. We are currently analyzing our business models and contractual cash flow characteristics.
Hedge Accounting
IFRS 9 has new hedge accounting principles that are aimed to align hedge accounting more closely with risk management. We
currently do not have any hedging relationships eligible for hedge accounting under IFRS 9 and therefore we do not expect any
impact from the introduction of IFRS 9 hedge accounting rules.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 provides a single principle-based framework that applies to contracts with customers. IFRS 15 is effective for annual
periods beginning on or after January 1, 2018. We are in the process of assessing the impact of IFRS 15 on our consolidated
financial statements.
IFRS 16, Leases
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a
contract, i.e., the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective for annual periods beginning on or after
January 1, 2019. All leases result in a company (the lessee) obtaining the right to use an asset at the start of the lease and, if
lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either
operating leases or finance leases as is required by IAS 17, Leases and, instead, introduces a single lessee accounting model.
Applying that model, a lessee is required to recognize: (a) assets and liabilities for all leases with a term of more than 12 months,
unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the
income statement. We have not yet determined the impact of IFRS 16 on our consolidated financial statements.
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IFRS 2, Share-based Payment Transactions
In June 2016, the IASB issued amendments to IFRS 2, which clarify how to classify and measure certain types of share-based
payment transactions. These amendments are effective for annual periods beginning on or after January 1, 2018 and can be
applied prospectively. We have not yet determined the impact of IFRS 2 on our consolidated financial statements.
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, 2016, 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.
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, 2016.
Ernst & Young LLP, our Independent Registered Chartered Accountants, have audited our consolidated financial statements for
the year ended December 31, 2016.
Changes in ICFR
There were no changes in our ICFR that occurred during the period beginning on January 1 and ending on December 31, 2016
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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
NON IFRS MEASURES
We prepare our consolidated financial statements in accordance with 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:
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 as a monthly average using all components of shareholders’ equity.
Taxable Income Measures
Taxable Income Measures include taxable income and taxable income per share. Taxable income represents MCAN’s net income
on a non-consolidated basis calculated under the provisions of the Tax Act applicable to a MIC. Taxable income is calculated as an
estimate until we complete our annual tax returns subsequent to year end, at which point it is finalized.
Average Interest Rate
The average interest rate is a profitability measure that presents the average annualized yield of an asset or liability. Average
mortgage portfolio yield (corporate or securitized), term deposit average interest rate, financial liabilities from securitization
average interest rate, spread of mortgages over term deposits and spread of securitized assets over liabilities are examples of
average interest rates. The average asset/liability balance that is incorporated into the average interest rate calculation is
calculated on either a daily or monthly basis depending on the nature of the asset/liability. Please refer to the applicable tables
containing average balances for further details.
Net Interest Income
Net interest income is a profitability measure that reflects net income earned only from interest-bearing assets and liabilities.
Impaired Mortgage Ratios
The impaired mortgage ratios represent the ratio of impaired uninsured mortgages to both corporate and total (corporate and
securitized) mortgage principal.
Mortgage Arrears
Mortgage arrears measures include total corporate mortgage arrears, total securitized mortgage arrears and total mortgage
arrears. These measures represent the amount of mortgages from the corporate portfolio, securitized portfolio and the sum of
the two, respectively, that are at least one day past due.
Common Equity Tier 1, Tier 1 and Total Capital, Total Exposures, Regulatory Assets, Leverage Ratio, Assets to Capital Multiple and
Risk Weighted Assets
These measures provided in this MD&A are in accordance with guidelines issued by OSFI and are located on Table 33 of this MD&A
and Note 33 to the consolidated financial statements.
Tier 1, Tier 2, Tier 3 and Total Liquid Assets and Liquidity Ratios
Tier 1, Tier 2, Tier 3 and Total Liquid Assets are internal metrics that quantify the balance sheet assets (or components of assets)
that comprise various liquidity levels. Liquidity ratios represent the ratio of select tiers of liquid assets to term deposits maturing
within 100 days.
Income Tax Capital Measures
Income tax assets, income tax liabilities and income tax capital represent assets, liabilities and capital as calculated on a non-
consolidated basis using the provisions of the Tax Act applicable to a MIC. The calculation of the income tax assets to capital ratio
and income tax liabilities to capital ratio are based on these amounts. Income tax asset capacity represents additional income tax
asset growth available to yield a 5.75 income tax assets to capital ratio, which is our target ratio.
Market Capitalization
Market capitalization is calculated as the number of common shares outstanding multiplied by the closing common share price as
of that date.
Book Value per Common Share
Book value per common share is calculated as total shareholders’ equity divided by the number of common shares outstanding.
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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2016 ANNUAL REPORT | 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
Senior Vice President and Chief Financial Officer
Toronto, Canada,
February 23, 2017
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Independent auditors’ report
To the Shareholders of MCAN Mortgage Corporation
We have audited the accompanying consolidated financial statements of MCAN Mortgage Corporation, which comprise the
consolidated balance sheets as at December 31, 2016 and 2015, 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, 2016 and 2015, and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Toronto, Canada
February 24, 2017
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2016 ANNUAL REPORT | 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
Financial investments
Other loans
Equity investment in MCAP Commercial LP
Foreclosed real estate
Deferred tax asset
Other assets
Securitization Assets
Cash held in trust
Mortgages
Other assets
Liabilities and Shareholders' Equity
Liabilities
Corporate Liabilities
Term deposits
Current taxes payable
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Shareholders' Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Note
2016
2015
7
8
9
10
11
12
13
18
14
15
16
14
17
18
18
19
20
21
21
23
$
$
$
$
111,732
55,126
904,112
57,264
3,584
50,805
529
1,782
3,546
1,188,480
15,724
1,071,849
4,802
1,092,375
2,280,855
911,866
-
3,050
12,377
927,293
1,071,786
1,071,786
1,999,079
210,239
510
55,923
15,104
281,776
2,280,855
$
$
$
$
75,762
40,735
944,109
41,793
4,176
44,191
529
1,125
2,626
1,155,046
13,112
1,075,947
2,853
1,091,912
2,246,958
903,041
100
2,299
12,412
917,852
1,070,304
1,070,304
1,988,156
206,382
510
42,617
9,293
258,802
2,246,958
The accompanying notes and shaded areas of the "Risk Governance and Management" section of Management's Discussion and
Analysis of Operations are an integral part of these consolidated financial statements.
On behalf of the Board:
William Jandrisits Karen Weaver
President and Chief Executive Officer Director, Chair of the Audit Committee
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars except for per share amounts)
Years Ended December 31
Note
2016
2015
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Fees
Marketable securities
Financial investments and other loans
Interest on cash and cash equivalents
Whole loan gain on sale income
Realized loss on derivatives
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Provision for (recovery of) credit losses
Other Income - Corporate Assets
Gain on dilution of investment in MCAP Commercial LP
Net Investment Income - Securitization Assets
Mortgage interest
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Fair 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)
12
24
10
27
28
25
26
12
6
25
18
18
$
$
$
$
50,670
13,509
2,547
3,622
6,487
604
324
-
77,763
22,035
3,993
244
(210)
26,062
51,701
-
-
28,298
461
28,759
21,176
1,805
-
22,981
5,778
9,406
8,557
17,963
39,516
(100)
(566)
(666)
40,182
1.75
1.17
22,968
$
$
$
$
50,997
10,096
3,231
2,076
3,506
730
626
(2,914)
68,348
20,671
3,823
838
275
25,607
42,741
68
68
25,564
198
25,762
19,763
1,461
71
21,295
4,467
8,515
5,993
14,508
32,768
-
(89)
(89)
32,857
1.51
1.13
21,830
The accompanying notes and shaded areas of the "Risk Governance and Management" section of Management's Discussion and Analysis
of Operations are an integral part of these consolidated financial statements.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
Years Ended December 31
Net income
Other comprehensive income
Change in unrealized gain on available for sale marketable securities
Transfer of gains on sale of marketable securities to net income
Change in unrealized gain on available for sale financial investments
Transfer of income distribution from available for sale financial investments to net income
Transfer of unrealized gains on available for sale financial investments to net income
Less: deferred taxes
2016
2015
$
40,182
$
32,857
3,981
(361)
6,999
(3,181)
(967)
(660)
5,811
(2,132)
(114)
8,466
(2,509)
-
(791)
2,920
Comprehensive income
$
45,993
$
35,777
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
2016
2015
21
$
206,382
3,857
210,239
$
183,939
22,443
206,382
510
-
510
42,617
40,182
(26,876)
55,923
9,293
5,811
15,104
510
-
510
34,481
32,857
(24,721)
42,617
6,373
2,920
9,293
Total shareholders' equity
$
281,776
$
258,802
The accompanying notes and shaded areas of the "Risk Governance and Management" section of Management's Discussion and
Analysis of Operations are an integral part of these consolidated financial statements.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Years Ended December 31
2016
2015
Cash provided by (used for):
Operating Activities
Net income
Adjustments to determine cash flows relating to operating activities:
Current taxes
Deferred taxes
Equity income from MCAP Commercial LP
Provision for (recovery of) credit losses
Amortization of securitized mortgage and liability transaction costs
Amortization of other assets
Amortization of mortgage discounts
Gain on dilution of MCAP Commercial LP
Fair value adjustment - derivative financial instruments
Changes in operating assets and liabilities:
Mortgages
Term deposits
Financial liabilities from securitization
Marketable securities
Cash held in trust
Financial investments
Other loans
Other assets
Other liabilities
Cash flows from operating activities
Investing Activities
Distributions from MCAP Commercial LP
Decrease in foreclosed real estate
Acquisition of capital and intangible assets
Cash flows from investing activities
Financing Activities
Issue of common shares
Dividends paid
Cash flows 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
Distributions received from investments
$
40,182
$
32,857
(100)
(566)
(13,509)
(210)
5,550
353
(95)
-
-
39,614
8,825
517
(10,770)
(2,612)
(12,620)
592
(2,651)
(150)
52,350
6,895
-
(572)
6,323
3,857
(26,560)
(22,703)
35,970
75,762
111,732
75,969
40,098
9,451
$
$
-
(89)
(10,096)
275
5,403
349
(246)
(68)
71
(535,388)
81,299
470,562
(18,081)
3,651
(6,461)
(2,068)
(274)
286
21,982
4,765
157
(735)
4,187
22,443
(23,940)
(1,497)
24,672
51,090
75,762
2015
74,507
36,911
5,200
$
$
The accompanying notes and shaded areas of the "Risk Governance and Management" section of Management's Discussion and
Analysis of Operations are an integral part of these consolidated financial statements.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
Page
1. Corporate Information .......................................................................................................................................... 70
2. Basis of Preparation .............................................................................................................................................. 70
3. Basis of Consolidation ........................................................................................................................................... 71
4. Summary of Significant Accounting Policies ......................................................................................................... 71
5. Significant Accounting Judgments and Estimates ................................................................................................. 80
6. Securitization Activities ......................................................................................................................................... 82
7. Cash and Cash Equivalents .................................................................................................................................... 83
8. Marketable Securities ........................................................................................................................................... 84
9. Mortgages - Corporate .......................................................................................................................................... 84
10. Financial Investments ........................................................................................................................................... 86
11. Other Loans........................................................................................................................................................... 87
12. Equity Investment in MCAP Commercial LP ......................................................................................................... 87
13. Foreclosed Real Estate .......................................................................................................................................... 88
14. Other Assets .......................................................................................................................................................... 88
15. Cash Held in Trust ................................................................................................................................................. 89
16. Mortgages - Securitized ........................................................................................................................................ 89
17. Term Deposits ....................................................................................................................................................... 90
18. Income Taxes ........................................................................................................................................................ 91
19. Other Liabilities ..................................................................................................................................................... 91
20. Financial Liabilities from Securitization ................................................................................................................ 92
21. Share Capital and Contributed Surplus ................................................................................................................. 92
22. Dividends .............................................................................................................................................................. 92
23. Accumulated Other Comprehensive Income ........................................................................................................ 93
24. Fees ....................................................................................................................................................................... 93
25. Mortgage Expenses............................................................................................................................................... 93
26. Provision for Credit Losses .................................................................................................................................... 93
27. Whole Loan Gain on Sale Income ......................................................................................................................... 93
28. Realized Loss on Derivatives ................................................................................................................................. 93
29. Related Party Disclosures ..................................................................................................................................... 94
30. Commitments and Contingencies ......................................................................................................................... 96
31. Credit Facilities...................................................................................................................................................... 96
32. Interest Rate Sensitivity ........................................................................................................................................ 96
33. Capital Management ............................................................................................................................................ 98
34. Financial Instruments ......................................................................................................................................... 100
35. Comparative Amounts ........................................................................................................................................ 102
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(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
(Canada) (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 income tax basis in the MIC entity) 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 primary wholly owned subsidiary, Xceed Mortgage Corporation (“Xceed”), is an originator of residential first-charge
mortgage products across Canada. As such, Xceed operates primarily in one industry segment through its sales team and
mortgage brokers. Xceed is incorporated in the province of Ontario.
MCAN is also a National Housing Act (“NHA”) mortgage-backed securities (“MBS”) issuer. For further details, refer to Note
6.
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 (the
“Board”) on February 24, 2017.
2. Basis of Preparation
The consolidated financial statements of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”), effective for the Company as at December 31, 2016, as issued by the International Accounting
Standards Board (“IASB”), including the accounting guidance of OSFI.
The consolidated financial statements have been prepared on a historical cost basis, except for cash and cash equivalents,
marketable securities, foreclosed real estate and certain financial investments designated as available for sale, 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 (Note 5(a)) and estimates (Note 5(b)) applicable to the preparation of the
consolidated financial statements.
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 that have been securitized through the NHA MBS program and subsequently sold to
third parties. These assets are funded by the cash received from the sale of the associated securities, which is then classified
as a financial liability from securitization.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(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, 2016.
Subsidiaries are fully consolidated from the date on which the Company obtains control, and continue to be consolidated
until the date that such control ceases. Per IFRS 10, Consolidated Financial Statements, 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. The financial statements of the subsidiaries are prepared for the same
reporting period as the Company, using consistent accounting policies.
All intercompany balances due to/from subsidiaries, 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. Certain policies adopted in or relevant to fiscal 2016 and 2015 are also discussed below.
(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.
(ii) Measurement of financial instruments
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. Subsequent
measurement and accounting treatment depends principally on the classification of financial instruments at initial
recognition. The classification of an instrument in the measurement categories specified in IFRS depends on a number of
factors, including the purpose and management’s intention for which the financial instruments were acquired and their
contractual characteristics. The Company classifies its financial instruments in the measurement categories noted below:
a.
Financial assets or financial liabilities held for trading
Financial assets or financial liabilities held for trading are recorded at fair value. Changes in fair value are recognized
in the consolidated statements of income. Interest income or expense is recorded in the consolidated statements of
income on the accrual basis.
A financial asset or financial liability is classified as held for trading if:
(a)
it is acquired or incurred principally for the purpose of selling or repurchasing in the near term;
(b) on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for
which there is evidence of a recent actual pattern of short-term profit-taking; or
(c)
it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective
hedging instrument).
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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
b. Available for sale financial investments
Available for sale investments include marketable securities, an equity investment in commercial real estate and an
equity investment in a mortgage fund. 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.
c.
Loans and receivables
The loans and receivables category includes 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:
(cid:120)
(cid:120)
(cid:120)
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, financial assets classified as loans and receivables are subsequently measured at amortized
cost using the effective interest rate method (“EIM”), less any 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 EIM.
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.
d.
Financial liabilities
After initial recognition, interest bearing financial liabilities are subsequently measured at amortized cost using the
EIM.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs using the
EIM. The amortization is included in the related line in the consolidated statements of income. Unamortized premiums
and discounts are recognized in the consolidated statements of income upon extinguishment of the liability.
(iii)
Transaction costs
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset
or financial liability. Transaction costs are capitalized and amortized over the expected life of the instrument using the EIM,
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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
(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:
(cid:120)
(cid:120)
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 qualifying “pass-through” arrangement; and
either:
(cid:120)
(cid:120)
the Company has transferred substantially all the risks and rewards of ownership of the financial asset, or
the Company has neither transferred nor retained substantially all the risks and rewards of ownership of the
financial asset, but has transferred control of the financial asset.
When substantially all the risks and rewards of ownership of the financial asset have been transferred, the Company will
derecognize the financial asset and recognize separately as assets or liabilities any rights and obligations created or retained
in the transfer. When substantially all the risks and rewards of ownership of the financial asset have been retained, the
Company continues to recognize the financial asset and also recognizes a financial liability for the consideration received.
Certain transaction costs incurred are also capitalized and amortized using the EIM. When the Company has neither
transferred nor retained substantially all the risks and rewards of ownership of the financial asset nor transferred control
of the financial asset, the financial asset is recognized to the extent of the Company’s continuing involvement in the financial
asset. In that case, the Company also recognizes an associated liability.
The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the
Company has retained.
(ii) Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original
liability and the recognition of a new liability and the difference in the respective carrying amounts is recognized in the
consolidated statements of income.
(3) Determination of fair value
Per IFRS 13, Fair Value Measurement, fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. 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).
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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
(4)
Foreclosed assets held for sale
Foreclosed assets are repossessed non-financial assets where the Company gains title, ownership or possession of
individual properties, such as real estate properties, which are managed for sale in an orderly manner with the proceeds,
used to reduce or repay any outstanding debt. The Company holds foreclosed properties for sale rather than for its business
use.
Held-for-sale foreclosed assets are initially carried at fair value less costs to sell. In subsequent measurements, the asset is
carried at the lower of its carrying amount and fair 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 in the consolidated statements of income. The Company
predominantly relies on third-party appraisals to determine the carrying value of foreclosed assets.
(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 using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment
loss.
The interest income is recorded as part of the related interest income component. Mortgages, together with the associated
allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realized. 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 write-off is later recovered, the recovery is credited to the provision for credit losses.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate
(“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, risk
rating, past-due status and other relevant factors. Risk ratings are mapped to rating agency assessments of corporate
bonds. Corporate bond historical default rates are used for an actual historical period similar to the environment at the
time of measurement, using factors such as housing starts, unemployment rate, and GDP growth.
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, the Company currently has an
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.
As at December 31, 2016, the Company did not have any outstanding transactions that are subject to netting contracts with
third parties.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(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.
As a MIC under the Tax Act, the Company is able to deduct from income for tax purposes dividends paid within 90 days of
year-end. The Company intends to maintain its status as a MIC and intends to pay sufficient dividends in current and future
years to ensure that it is not subject to income taxes in the MIC entity on a non-consolidated basis. Accordingly, the
Company does not record a provision for current taxes within the MIC entity, however provisions are recorded as applicable
in all subsidiaries of MCAN.
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:
(cid:120)
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:
(cid:120) 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
(cid:120)
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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
As a MIC under the Tax Act, the Company is able to deduct from income for tax purposes dividends paid within 90 days of
year-end. The Company intends to maintain its status as a MIC and intends to pay sufficient dividends in current and future
years to ensure that it is not subject to income taxes in the MIC entity on a non-consolidated basis. Accordingly, the
Company does not record a provision for deferred taxes within the MIC entity, however provisions are recorded as
applicable in all subsidiaries of MCAN.
(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 not recognized as a liability in the consolidated
financial statements but 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.
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 Company’s proportionate 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 EIM, 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. The calculation takes into account the contractual interest rate,
along with any fees or incremental costs that are directly attributable to the instrument and all other premiums or
discounts. Interest income or expense is included in the appropriate component of the consolidated statements of income.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
(11) Cash and cash equivalents
Cash and cash equivalents (including cash held in trust) on the consolidated balance sheets comprise cash held at banks
and short-term deposits with original maturity dates of less than 90 days.
(12) Share-based payment transactions
The cost of cash-settled transactions is measured initially at fair value at the grant date, further details of which are
discussed in Note 29. The obligations are adjusted for fluctuations in the market price of the Company’s common shares.
Changes in the obligations are recorded as salaries and benefits in the consolidated statements of income with a
corresponding change to other liabilities. The liability is re-measured at fair value at each consolidated financial statement
date up to and including the settlement date.
(13) Capital assets and intangible assets
Capital assets and intangible assets are recorded at cost less accumulated amortization. Amortization is recorded at the
following rates:
Capital assets
Furniture and fixtures
Computer hardware
Leasehold improvements
Intangible assets
Computer software
Five years straight line
Three to five years straight line
Lease term and one renewal straight line
One year to five years straight line
The amortization expense is included in the general and administrative operating expense category in the consolidated
statements of income.
The amortization period and the amortization method for capital assets and intangible assets are reviewed at least at the
end of each reporting period.
Research and development costs
Research costs are expensed as incurred. Development expenditures on an individual project are recognized as an intangible
asset when the Company can demonstrate:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The technical feasibility of completing the intangible asset so that the asset will be available for use or sale
Its intention to complete and its ability and intention to use or sell the asset
How the asset will generate future economic benefits
The availability of resources to complete the asset
The ability to measure reliably the expenditure during development
(14) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are
shown in equity as a deduction, net of tax, from the proceeds. Where the Company purchases the Company’s equity share
capital (treasury shares), the consideration paid, including any directly attributable incremental costs is deducted from
equity attributable to the Company’s equity holders until the share are either cancelled or re-issued. Where such ordinary
shares are subsequently reissued, any consideration received, net of any directly attributable incremental transactions
costs, is included in equity.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
(15) Contingent liabilities
Provisions for legal claims are recognized when the group (a) has a present legal or constructive obligation as a result of
past events; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) the amount has
been reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to
settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks
specific to the obligation. The increase in the provision due to passage of time is included in interest expense.
(16) 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
In July 2014, the IASB issued a final revised IFRS 9 standard, which addresses impairment, classification and measurement,
and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018.
Project Plan/Implementation
The Company has established an IFRS 9 Committee which includes representatives of finance, risk and other executives.
The Committee is responsible for the overall implementation of IFRS 9, ensuring proper integration throughout the
Company and providing review and approval of key decisions. The Company continues to analyze the impact of the IFRS 9
changes on its consolidated financial statements and will continue to provide details as the project progresses.
Impairment
IFRS 9 introduces a new expected credit loss (“ECL”) impairment model for all financial assets, with the most significant
impact on the Company’s mortgage portfolio. The new ECL model will result in a collective allowance being recorded on
financial assets regardless of whether there has been an actual loss event. The expected credit loss model requires the
recognition of 12-month expected credit losses at origination and the recognition of expected lifetime losses on financial
assets that have experienced a significant increase in credit risk since origination. IFRS 9 requires consideration of past
events, current market conditions and reasonable supportable information about future economic conditions in
determining whether there has been a significant increase in credit risk, and in calculating the amount of expected losses.
The Company is in the process of developing its IFRS 9 models and it has not yet quantified the impact on the collective
allowance.
Classification and Measurement
IFRS 9 requires that debt instruments are classified based on the business model for managing the assets and the
contractual cash flow characteristics of the asset. The business model test determines classification based on the business
purpose for holding the asset. The Company’s debt instruments that have contractual cash flows representing only
payments of principal and interest will be eligible for classification as fair value reported through other comprehensive
income (“FVOCI”) or amortized cost. The Company’s equity instruments would generally be measured at FVOCI with
unrealized gains and losses recognized in other comprehensive income. The Company is currently analyzing its business
models and contractual cash flow characteristics.
Hedge Accounting
IFRS 9 has new hedge accounting principles that are aimed to align hedge accounting more closely with risk management.
The Company currently does not have any hedging relationships eligible for hedge accounting under IFRS 9 and therefore
does not expect any impact from the introduction of IFRS 9 hedge accounting rules.
IFRS 15, Revenue from Contracts with Customers
IFRS 15 provides a single principle-based framework that applies to contracts with customers. IFRS 15 is effective for annual
periods beginning on or after January 1, 2018. The Company is in the process of assessing the impact of IFRS 15 on its
consolidated financial statements.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4. Summary of Significant Accounting Policies (continued)
IFRS 16, Leases
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to
a contract, i.e., the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective for annual periods beginning on or
after January 1, 2019. All leases result in a company (the lessee) obtaining the right to use an asset at the start of the lease
and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of
leases as either operating leases or finance leases as is required by IAS 17, Leases and, instead, introduces a single lessee
accounting model. Applying that model, a lessee is required to recognize: (a) assets and liabilities for all leases with a term
of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from
interest on lease liabilities in the income statement. The Company has not yet determined the impact of IFRS 16 on its
consolidated financial statements.
IFRS 2, Share-based Payment Transactions
In June 2016, the IASB issued amendments to IFRS 2, which clarify how to classify and measure certain types of share-based
payment transactions. These amendments are effective for annual periods beginning on or after January 1, 2018 and can
be applied prospectively. The Company has not yet determined the impact of IFRS 2 on its consolidated financial
statements.
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.
(a) Significant Accounting Judgments
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.
Significant influence
In determining whether it has significant influence over an entity, the Company makes certain judgments based on the
applicable accounting standards. These judgments form the basis for the Company’s policies in accounting for its equity
investments.
Taxes
As a MIC under the Tax Act, the Company is able to deduct from income for tax purposes dividends paid within 90 days of
year-end. The Company intends to maintain its status as a MIC and intends to pay sufficient dividends in current and future
years to ensure that it is not subject to income taxes in the MIC entity on a non-consolidated basis. Accordingly, the
Company does not record a provision for current and deferred taxes within the MIC entity, however provisions are recorded
as applicable in all subsidiaries of MCAN.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
5. Significant Accounting Judgments and Estimates (continued)
(b) Significant Accounting Estimates
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, estimates are required to establish fair values. These estimates 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, estimates by management are required in the calculation of
the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the
Company makes assumptions 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 price indices and the performance of different individual groups).
Mortgage prepayment rates
In calculating the rate at which borrowers prepay their mortgages, the Company makes estimates based on its historical
experience. These assumptions impact the timing of revenue recognition and the amortization of mortgage premiums
using the EIM.
Taxes
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 in the subsidiaries of the Company. Significant management judgment is
required to determine the amount of deferred tax assets that can be recognized in the subsidiaries of the Company, based
upon the likely timing and the level of future taxable income together with future tax planning strategies.
Impairment of financial assets
As applicable, the Company reviews financial assets at each consolidated financial statement date to assess whether an
impairment loss should be recorded. In particular, estimates by management are required in the calculation of the amount
and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about
a number of factors and actual results may differ, resulting in future changes to the fair value of the asset.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
6. Securitization Activities
The Company is an NHA MBS issuer, which involves the securitization of insured mortgages to create MBS. The Company
issues MBS through its internal market MBS program and the Canada Housing Trust (“CHT”) Canada Mortgage Bonds
(“CMB”) program. In both programs, the Company originates or purchases mortgages for securitization.
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 MBS default by the issuer, thus fulfilling the timely payment obligation to investors. To date,
the Company has sold MBS as part of the market MBS program and the CMB program, which are discussed below.
Market MBS Program
MCAN originates and purchases insured single family mortgages to sell as MBS as part of the market MBS program. The
Company may sell MBS to third parties and may also sell the net economics and cash flows from the underlying mortgages
(“interest-only strips”) to third parties. The MBS portion of the mortgage represents the core securitized mortgage principal
and the right to receive coupon interest at a specified rate. The interest-only strips represent the right to receive excess
cash flows after satisfying the MBS coupon interest payment and any other expenses such as mortgage servicing.
During 2016, MCAN pooled and sold $41,728 of MBS to third parties (2015 - $589,148). When the MBS is sold to third
parties and the interest-only strip is retained by MCAN, the securitized mortgages remain on MCAN’s consolidated balance
sheet while a corresponding financial liability from securitization is incurred (Notes 16 and 20), due to the fact that MCAN
retains significant continuing involvement with the assets.
During 2015, MCAN sold the interest-only strips associated with $147,219 of mortgages securitized through the market
MBS program to third parties. Subsequent to sale, MCAN derecognized the securitized mortgages and associated financial
liabilities from securitization from its consolidated balance sheet as a result of the transfer of substantially all risks and
rewards of ownership to the purchaser of the interest-only strip. As part of the transaction, MCAN recognized a loan
receivable from the third party purchaser (Note 11) and recognized a gain on sale net of unamortized transaction costs,
which is included in other securitization income. The Company did not sell any interest-only strips in 2016.
CMB Program
The Company recommenced its participation in the CMB program in 2016 by securitizing both insured single family and
insured multi family loans (e.g. loans secured by apartment buildings). The CMB program involves the sale of MBS to CHT
who in turn issues a non-amortizing bullet bond to external investors. The CMB program generally includes the
reinvestment of mortgage principal repayments by the issuer into certain permitted assets, however the Company has
transferred the benefits and obligations associated with the principal reinvestment function to a third party such that it
only earns spread income on the amortizing mortgage balance.
During 2016, the Company securitized $100,377 of insured single family mortgages (2015 - $nil). Similar to the market MBS
program transaction, the Company did not derecognize the mortgages from its consolidated balance sheet as it retained
significant continuing involvement with the assets such that the associated mortgages remained on the consolidated
balance sheet while a corresponding liability was incurred. The mortgage interest income and interest on the financial
liability from securitization associated with these mortgages are recognized on the accrual basis over the term of the
mortgages.
During 2016, the Company securitized $85,526 of insured multi family loans (2015 - $nil). The Company derecognized the
mortgages from its consolidated balance sheet as control over the assets was transferred on securitization. In achieving
derecognition, the Company recognized upfront gains of $394 (2015 - $nil), which is included in other securitization income,
and recognized receivables in the amount of the estimated discounted spread income to be earned over the term of the
securitized mortgages.
Other Accounting Considerations
The primary risks associated with the market MBS program and CMB program are prepayment, liquidity and funding risk,
including the obligation to fund 100% of any cash shortfall related to the Timely Payment (discussed below).
Any mortgages securitized through the market MBS program or CMB program for which derecognition is not achieved
remain on MCAN’s consolidated balance sheet as securitized assets and are also included in total exposures in the
calculation of the leverage ratio (Note 33). For income tax purposes, mortgage securitizations by MCAN are considered to
be true mortgage sales and therefore are not included in income tax assets (Note 33).
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
6. Securitization Activities (Continued)
MCAN has capitalized certain mortgage acquisition costs. These costs are amortized using the EIM, which incorporates
mortgage prepayment assumptions.
Timely Payment
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 its participation in the market MBS program and CMB program, the Company is required to fund 100% of any
cash shortfall unless it has sold the interest-only strip, in which case the purchaser of the interest-only strip is obligated to
fund 100% of any cash shortfall.
In the case of mortgage defaults, MCAN is required to make scheduled principal and interest payments to investors as part
of the Timely Payment and then place the mortgage/property through the insurance claims process to recover any losses.
These defaults may result in cash flow timing mismatches that may marginally increase funding and liquidity risks.
Transferred financial assets that are not derecognized in their entirety
Since MCAN neither transferred nor retained risks and rewards of ownership on sale and retained significant continuing
involvement through the provision of the Timely Payment obligation, the majority of the market MBS program and single
family CMB program sale transactions have resulted in MCAN continuing to recognize the securitized mortgages and
financial liabilities from securitization on its consolidated balance sheet. The securitized mortgage balance as at December
31, 2016 was $1,071,849 (December 31, 2015 - $1,075,947) (Note 16). The financial liabilities from securitization balance
as at December 31, 2016 was $1,071,786 (December 31, 2015 - $1,070,304) (Note 20).
Transferred financial assets that are derecognized in their entirety but where the Company has a continuing involvement
MCAN sells MBS and the associated interest only strips to third parties and derecognizes the mortgages from its
consolidated balance sheet as a result of the transfer of control of the asset or substantially all risks and rewards on sale.
The Company’s continuing involvement is the ongoing obligation in its role as MBS issuer to service the mortgages and MBS
until maturity.
The total outstanding derecognized MBS balance related to the market MBS program and CMB program as at December
31, 2016 was not reflected as an asset or liability on MCAN’s consolidated balance sheet. The MBS mature as follows:
2016
2017
2020
2021
2026
Total
December 31, 2016
December 31, 2015
$
$
-
29,272
$
$
122,016
157,741
$
$
132,075
147,219
$
$
75,142
-
$
$
9,911
-
$
$
339,144
334,232
7.
Cash and Cash Equivalents
Cash and cash equivalents include balances with banks and certain short-term investments with original maturity dates of
less than 90 days.
Refer to Note 31 for an analysis of the Company’s available credit facilities.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
8. Marketable Securities
As at December 31
Real estate investment trusts
Corporate bonds
2016
53,953
1,173
55,126
$
$
2015
37,958
2,777
40,735
$
$
Marketable securities are designated as available for sale. Corporate bonds mature between 2017 and 2022 while real
estate investment trusts have no specific maturity date. Fair values are based on bid prices quoted in active markets (real
estate investment trusts) and observable inputs other than quoted prices (corporate bonds), and changes in fair value are
recognized in the consolidated statements of comprehensive income.
9. Mortgages - Corporate
(a) Summary
As at December 31, 2016
Corporate portfolio:
Single family mortgages
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
As at December 31, 2015
Corporate portfolio:
Single family mortgages
- Uninsured
- Insured
- Uninsured - completed inventory
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$ 249,296
108,334
18,240
381,904
7,902
$
1,061
-
78
2,472
51
170
-
-
220
-
$
1,231
-
78
$ 248,065
108,334
18,162
2,692
51
379,212
7,851
143,685
$ 909,361
$
1,197
4,859
$
-
390
$
1,197
5,249
142,488
$ 904,112
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$ 361,107
83,619
31,415
352,314
5,632
$
1,523
-
135
2,286
37
$
119
-
-
220
-
1,642
-
135
2,506
37
$ 359,465
83,619
31,280
349,808
5,595
115,281
$ 949,368
$
939
4,920
$
-
339
$
939
5,259
114,342
$ 944,109
Gross principal as presented in the tables above includes unamortized capitalized transaction costs and accrued interest.
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 other private insurers 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.
Residential construction loans are made to homebuilders to finance residential construction projects. These loans generally
have a floating interest rate and terms of one to two years.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
9. Mortgages - Corporate (continued)
Commercial loans include commercial term mortgages (e.g. loans secured by apartment buildings) and high ratio mortgage
loans (e.g. second mortgages on residential construction projects).
The weighted average yield of the Company’s corporate mortgage portfolio is as follows:
As at December 31
Single family - uninsured
Single family - uninsured completed inventory
Single family - insured
Construction - residential
Construction - non residential
Commercial
Total
2016
4.57%
5.23%
3.14%
5.16%
5.41%
6.35%
4.90%
2015
4.42%
5.10%
3.52%
5.52%
5.59%
7.22%
5.12%
Outstanding commitments for future fundings of mortgages intended for the Company’s corporate portfolio are as follows:
As at December 31
Single family - insured
Single family - uninsured
Single family - uninsured completed inventory
Construction - residential
Construction - non-residential
Commercial
Total
2016
2015
$
$
32,139
3,026
1,229
311,653
203
15,911
364,161
$
$
30,691
10,396
789
259,684
1,593
5,089
308,242
The fair value of the corporate mortgage portfolio as at December 31, 2016 was $913,016 (December 31, 2015 - $958,772).
Fair values are calculated on a discounted cash flow basis using the prevailing market rates for similar mortgages. For
information regarding the maturity dates of the Company’s mortgages, refer to Note 32.
As at December 31, 2016, single family insured mortgages included $36,606 of mortgages that had been securitized through
the market MBS program, however the underlying MBS security has been retained by the Company for liquidity purposes
(December 31, 2015 - $21,250).
(b) Geographic Analysis
As at December 31, 2016
Single Family
Construction
Commercial
Total
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
$
241,780
67,674
27,942
12,272
16,719
8,174
374,561
$
$
164,649
90,583
108,746
-
-
23,085
387,063
$
$
73,064
22,587
35,899
-
-
10,938
142,488
$
$
479,493
180,844
172,587
12,272
16,719
42,197
904,112
As at December 31, 2015
Single Family
Construction
Commercial
Total
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
$
307,061
74,301
45,514
15,575
20,151
11,762
474,364
$
$
154,006
76,743
104,855
-
-
19,799
355,403
$
$
72,275
17,991
12,430
-
11,500
146
114,342
$
$
533,342
169,035
162,799
15,575
31,651
31,707
944,109
53.0%
20.0%
19.1%
1.4%
1.8%
4.7%
100.0%
56.5%
17.9%
17.2%
1.6%
3.4%
3.4%
100.0%
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
9. Mortgages - Corporate (continued)
(c) Mortgage Allowances
Details of the allowances for mortgage credit losses for the current and prior years are as follows:
Collective
Individual
2016
Total
Collective
Individual
Balance, beginning of year
Provisions
Reversals of provisions
Write-offs, net
Balance, end of year
$
$
4,920 $
(58)
-
(3)
4,859 $
339 $
364
(77)
(236)
390 $
5,259 $
306
(77)
(239)
5,249 $
4,332 $
647
-
(59)
4,920 $
642 $
721
(698)
(326)
339 $
2015
Total
4,974
1,368
(698)
(385)
5,259
(d) Arrears and Impaired Mortgages
Mortgages past due but not impaired are as follows:
As at December 31, 2016
Single family - uninsured
Single family - insured
As at December 31, 2015
Single family - uninsured
Single family - insured
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
$
$
3,992
2,081
6,073
1 to 30
days
$
$
8,132
2,269
10,401
$
$
$
$
1,083
76
1,159
31 to 60
days
3,374
273
3,647
$
$
$
$
1,044
-
1,044
$
$
-
888
888
61 to 90
days
Over 90
days
1,124
-
1,124
$
$
-
1,990
1,990
Total
6,119
3,045
9,164
Total
12,630
4,532
17,162
$
$
$
$
Impaired mortgages (net of individual allowances) are as follows:
As at
SF Insured SF Uninsured
Total
SF Insured SF Uninsured
Total
December 31, 2016
December 31, 2015
Ontario
Alberta
Quebec
Atlantic Provinces
Other
$
$
129
623
366
-
-
1,118
$
$
1,079
1,228
333
119
-
2,759
$
$
1,208 $
1,851
699
119
-
3,877
$
98
-
364
69
-
531
$
$
873
322
614
143
244
2,196
$
$
971
322
978
212
244
2,727
10. Financial Investments
As at December 31
Investment - Crown Realty II Limited Partnership
Investment - KingSett High Yield Fund
2016
2015
$
$
33,207
24,057
57,264
$
$
31,102
10,691
41,793
The Company holds an investment in Crown Realty II Limited Partnership (“Crown LP”), in which it has a 14.1% equity
interest. Crown LP invests primarily in commercial office buildings and classifies them into its core fund, which represents
buildings expected to provide stable cash flows over a longer time horizon, and its opportunity fund, which represents
buildings with medium-term capital appreciation. Its fair value is driven primarily by independent appraisals of the
buildings. As property acquisitions are made by Crown LP, the Company advances its proportionate share to finance the
acquisitions.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
10. Financial Investments (continued)
During 2016, the Company recorded a $7,242 gross increase in the unrealized gain on the investment (2015 - $8,466), which
is recognized in the consolidated statements of comprehensive income net of deferred taxes. Additionally, the Company
recognized $4,148 of income from the Crown LP investment in 2016 (2015 - $2,509). The receipt of partnership distributions
from Crown LP generates a transfer from accumulated other comprehensive income to net income, where it is reflected in
income on financial investments and other loans.
The Company holds an investment in the KingSett High Yield Fund, in which it has a 9% equity interest. The fund invests in
mortgages secured by real estate with a focus on mezzanine, subordinate and bridge mortgages. As mortgage advances
are made by the fund, the Company advances its proportionate share. The fund pays a base distribution of 9% per annum,
and distributes any additional income earned on a quarterly basis. The Company’s total funding commitment is $63,000,
which consists of $42,000 of capital advances for the fund and $21,000 that supports credit facilities. As at December 31,
2016, the Company’s unfunded commitment was $38,700 (December 31, 2015 - $25,425).
Both investments noted above are designated as available for sale, with changes in fair value recognized in the consolidated
statements of comprehensive income.
11. Other Loans
As at December 31
Loans receivable - Executive Share Purchase Plan
Loans receivable - other
All other loans are classified as loans and receivables.
12. Equity Investment in MCAP Commercial LP
Note
29
6
$
$
2016
1,535
2,049
3,584
2015
1,559
2,617
4,176
$
$
As at December 31, 2016, the Company held a 14.74% equity interest in MCAP Commercial LP (“MCAP”) (December 31,
2015 - 14.70%), consisting of 15.0% of voting class A units (December 31, 2015 - 15.0%), 0% of non-voting class B units
(December 31, 2015 - 0%) and 17.0% of non-voting class C units (December 31, 2015 - 17.0%). The equity interest represents
4.3 million units held by MCAN of the 29.2 million total outstanding MCAP partnership units. MCAN holds a 15.0% voting
interest in MCAP through its class A units (December 31, 2015 - 15.0%).
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, 2016, 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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
12. Equity Investment in MCAP Commercial LP (continued)
Years Ended December 31
Balance, beginning of year
Equity income
Dilution gain
Distributions received
Balance, end of year
Selected MCAP financial information is as follows:
As at November 30
MCAP's balance sheet:
Assets
Liabilities
Equity
Years Ended November 30
MCAP revenue and net income:
Revenue
Net income
13. Foreclosed Real Estate
2016
44,191
13,509
-
(6,895)
50,805
$
$
2015
38,792
10,096
68
(4,765)
44,191
$
$
2016
2015
$ 28,436,501
28,060,296
376,205
$ 21,081,191
20,748,503
332,688
2016
2015
$
$
516,896
91,678
$
$
470,053
68,660
The Company holds a real estate investment which is a previously impaired residential construction loan that was foreclosed
upon. The investment is carried at the lower of its carrying amount and fair value less estimated costs to sell.
14. Other Assets
As at December 31
Corporate assets:
Intangible assets, net
Capital assets, net
Prepaid expenses
Related party receivable - MCAP
Receivables
Other
2016
2015
$
$
1,020
811
778
876
61
-
3,546
$
$
668
945
569
21
219
204
2,626
Other securitization assets, totalling $4,802 as at December 31, 2016 (December 31, 2015 - $2,853), consist of interest-only
strips from CMB program multi-family securitizations (Note 6) and prepaid expenses. Other assets are carried at cost.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
14. Other Assets (continued)
The capital assets and intangible assets continuity is as follows:
Furniture &
Fixtures
Computer
Hardware
Leasehold Capital Assets
Total
Improvements
Intangible
Assets
$
793 $
23
816
-
816
792
3
795
5
800
1,554 $
147
1,701
15
1,716
1,291
98
1,389
93
1,482
1,574 $
263
1,837
-
1,837
3,921 $
433
4,354
15
4,369
1,171
54
1,225
51
1,276
3,254
155
3,409
149
3,558
$
21
16 $
312
234 $
612
561 $
945
811 $
4,386
304
4,690
556
5,246
3,831
191
4,022
204
4,226
668
1,020
Cost
At January 1, 2015
Additions
At December 31, 2015
Additions
At December 31, 2016
Amortization
At January 1, 2015
Amortization for the year
At December 31, 2015
Amortization for the year
At December 31, 2016
Net Book Value
At December 31, 2015
At December 31, 2016
15. Cash Held in Trust
Cash held in trust represents securitized mortgage principal collections from borrowers payable to MBS holders. It includes
balances with banks and certain short-term investments with original maturity dates of less than 90 days.
16. Mortgages - Securitized
MCAN’s securitized mortgage portfolio consists of insured mortgages securitized through the market MBS program and
CMB program. These mortgages are held as collateral against the related securitization liabilities (Notes 6 and 20).
(a) Summary
As at December 31
Single family insured - Market MBS program
Single family insured - CMB program
2016
2015
$
971,548
100,301
$ 1,071,849
$ 1,075,947
-
$ 1,075,947
Certain capitalized transaction costs are included in mortgages and are amortized using the EIM. As at December 31, 2016,
the unamortized capitalized cost balance was $10,110 (December 31, 2015 - $13,563). The amortization of these
transaction costs incorporates a 12% annual mortgage prepayment rate.
All mortgages in the securitized portfolio are insured, therefore they do not have a collective allowance. The fair value of
the securitized mortgage portfolio as at December 31, 2016 was $1,106,997 (December 31, 2015 - $1,107,168).
The weighted average yield of the Company's securitized mortgage portfolio is as follows:
As at December 31
Single family - Market MBS program
Single family - CMB program
Total
2016
2.50%
2.21%
2.47%
2015
2.48%
-
2.48%
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
16. Mortgages - Securitized (continued)
(b) Geographic Analysis
As at
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
December 31, 2016
December 31, 2015
$
$
613,036
231,027
107,980
42,715
41,407
35,684
1,071,849
57.2%
21.6%
10.1%
4.0%
3.9%
3.2%
100.0%
$
589,912
239,192
121,811
43,960
43,712
37,360
$ 1,075,947
54.8%
22.2%
11.3%
4.1%
4.1%
3.5%
100.0%
Mortgages past due but not impaired are as follows:
As at December 31, 2016
Single family - Market MBS Program
Single family - CMB Program
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
$
$
6,922
336
7,258
$
$
2,948
649
3,597
$
$
769
-
769
$
$
1,398
-
1,398
$
$
12,037
985
13,022
As at December 31, 2015
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
Single family - Market MBS program
$
10,651
$
1,849
$
1,356
$
505
$
14,361
Impaired mortgages are as follows:
As at
Quebec
17. Term Deposits
December 31, 2016
December 31, 2015
CMB Market MBS
Total
CMB Market MBS
Total
$
$
-
-
$
$
587
587
$
$
587
587
$
-
-
$
-
-
$
-
-
Term deposits are issued to various individuals and institutions with original maturities ranging from 30 days to five years.
The weighted average term deposit interest rate as at December 31, 2016 was 2.21% (December 31, 2015 - 2.26%). The
Company’s term deposits are eligible for CDIC deposit insurance.
Term deposits mature as follows:
Within
3 Months
3 Months
to 1 Year
One to
three years
Three to
five years
Total
December 31, 2016
December 31, 2015
$
$
119,472
86,895
$
$
327,739
489,020
$
$
336,926
289,175
$
$
127,729
37,951
$
$
911,866
903,041
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, 2016 was $913,071 (December 31, 2015 - $905,167), and is determined by discounting
the contractual cash flows using market interest rates currently offered for deposits of similar remaining maturities.
- 90 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
18. Income Taxes
The composition of the provision for (recovery) of income taxes is as follows:
Years Ended December 31
Income before income taxes
Statutory rate of tax
Tax provision (recovery) before the following:
Income subject to tax in subsidiaries
Years Ended December 31
Current tax
Current tax provision
Deferred tax provision (recovery)
Financial investment
Relating to loss carry forward benefit
Other
The composition of the deferred tax asset and liability is as follows:
As at December 31
Deferred tax asset
Loss carry forward benefit
Other
Deferred tax liability
Financial investments
2016
2015
$
$
39,516
0%
-
(666)
(666)
$
$
32,768
0%
-
(89)
(89)
2016
2015
$
(100)
$
-
91
(568)
(89)
(666)
$
330
(328)
(91)
(89)
2016
2015
1,478
304
1,782
3,050
3,050
$
$
$
$
910
215
1,125
2,299
2,299
$
$
$
$
$
Deferred taxes recorded in accumulated other comprehensive income relating to financial investments were $660 in 2016
(2015 - $791).
The Company has loss carry forward amounts in the non-consolidated MIC entity of $11,052 (December 31, 2015 -
$11,710), the benefit of which has not been recorded to deferred taxes. Tax activity for 2016 has not been reflected in the
table below as the Company’s 2016 tax position has not yet been finalized. Tax loss carry forwards expire after 20 years, as
follows:
2033
2034
19. Other Liabilities
As at December 31
Accounts payable and accrued charges
Dividends payable
$
$
5,517
5,535
11,052
2016
$
$
5,454
6,923
12,377
$
$
2015
5,805
6,607
12,412
- 91 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
20. Financial Liabilities from Securitization
Financial liabilities from securitization consist of liabilities relating to the Company’s participation in the market MBS
program and the CMB program.
As at December 31
Financial liabilities - Market MBS program
Financial liabilities - CMB program
Note
2016
2015
6
6
$
$
972,263
99,523
1,071,786
$ 1,070,304
-
$ 1,070,304
The weighted average interest rate on financial liabilities from securitization is as follows:
As at December 31
Financial liabilities - Market MBS program
Financial liabilities - CMB program
2016
1.84%
1.42%
1.80%
2015
1.87%
-
1.87%
Financial liabilities from securitization mature as follows:
December 31, 2016
December 31, 2015
$
$
120,825 $
137,731 $
468,304 $
504,041 $
383,134 $
428,532 $
99,523 $
- $
1,071,786
1,070,304
2018
2019
2020
2021
Total
21. Share Capital and Contributed Surplus
The authorized share capital of the Company consists of unlimited common shares with no par value.
Number
of Shares
2016
Number
of Shares
2015
Balance, beginning of year
Issued
Dividend reinvestment plan
Executive Share Purchase Plan
Rights offering
Balance, end of year
22,782,433
$
206,382
20,807,761
$
183,939
280,376
12,418
-
23,075,227
$
3,680
177
-
210,239
568,588
-
1,406,084
22,782,433
$
7,332
-
15,111
206,382
During 2016, the Company issued 280,376 (2015 - 568,588) shares under the dividend reinvestment plan (“DRIP”) out of
treasury at the weighted average trading price for the five days preceding such issue less a discount of 2%. The DRIP
participation rate for the 2016 fourth quarter dividend was 15% (2015 fourth quarter - 14%).
During 2015, the Company completed a rights offering to its common shareholders. The rights offering raised net proceeds
of $15,111 with 1,406,084 new common shares issued.
For details on the Executive Share Purchase Plan, refer to Note 29.
The Company had no potentially dilutive instruments as at December 31, 2016 or December 31, 2015.
Contributed surplus of $510 represents the discount on the repurchase of warrants in 2004.
22. Dividends
Subsequent to the end of the year and before the date that these consolidated financial statements were authorized for
issuance, the Board declared a quarterly dividend of $0.30 per share payable on March 30, 2017 to shareholders of record
as of March 15, 2017.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
23. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of unrealized gains and losses on available for sale marketable securities
and financial investments.
As at December 31
2016
2015
To be reclassified to the income statement in subsequent periods:
Unrealized gain (loss) on available for sale marketable securities
$
1,049
$
(2,571)
Unrealized gain on available for sale financial investments
Less: deferred taxes
16,526
(2,471)
14,055
13,675
(1,811)
11,864
$
15,104
$
9,293
24. Fees
Fees include extension, renewal and letter of credit fees earned on the Company’s corporate mortgage portfolio.
25. Mortgage Expenses
Corporate Assets
Years Ended December 31
Mortgage servicing expense
Letter of credit expense
Other mortgage expenses
2016
3,109
605
279
3,993
$
$
2015
3,016
623
184
3,823
$
$
Letter of credit expense relates to outstanding letters of credit in the Company’s credit facility, discussed in Note 31.
Securitization Assets
Mortgage expenses associated with securitization assets consist primarily of mortgage servicing expenses.
26. Provision for Credit Losses
Years Ended December 31
Note
2016
2015
Mortgages - collective provisions (recoveries), net
Mortgages - individual provisions (reversals), net
Other provisions (recoveries), net
9
9
$
$
(58)
287
(439)
(210)
$
$
647
23
(395)
275
27. Whole Loan Gain on Sale Income
The Company regularly sells mortgages to third party mortgage aggregators on a whole-loan basis with mortgage premiums
received at the time of sale. The Company maintains renewal rights on these sales.
During 2016, the Company sold $13,343 of insured mortgages (2015 - $26,215) and recorded a gain on sale of $324 (2015 -
$626).
28. Realized Loss on Derivatives
During 2015, the Company incurred net realized losses of $2,914 on interest rate swaps used to hedge interest rate risk on
mortgage funding commitments. The Company did not apply hedge accounting. The hedge positions were closed before
the end of 2015 such that there was no impact to the consolidated statement of income in 2016.
- 93 -
2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
29. Related Party Disclosures
The consolidated financial statements include the financial statements of the Company and its equity-accounted associate,
MCAP. The Company holds a 14.74% equity interest in MCAP (December 31, 2015 - 14.70%), a non-public entity. MCAP’s
principal activities include the origination and servicing of mortgages. The Company holds one of six seats on MCAP’s Board
of Directors.
Transactions between the Company and its subsidiaries meet the definition of related party transactions. If these
transactions are eliminated on consolidation, they are not disclosed as related party transactions.
In 2016, the Company purchased certain corporate services from MCAP in the amount of $144 (2015 - $231) and purchased
certain mortgage origination and administration services from MCAP in the amount of $3,904 (2015 - $3,765). The
Company received $3,823 of mortgage fees from MCAP in 2016 (2015 - $4,851). Related party balances with MCAP are
reflected in other assets and other liabilities on the consolidated balance sheet where applicable.
In 2015, the Company paid $5,346 in mortgage premiums to MCAP as part of the acquisition of mortgages securitized
through the market MBS program.
The Company holds construction loans totalling $638 as at December 31, 2016 for which the borrower is a close family
member of a member of the Board (December 31, 2015 - $3,971). In 2016, the Company earned interest income of $110
(2015 - $222) on these loans. The outstanding commitment for future fundings of these loans as at December 31, 2016
was $1,998 (December 31, 2015 - $1,100). The loans were contracted at market terms.
All related party transactions noted above were in the normal course of business.
Key management personnel of the Company consists of individuals that have authority and responsibility for planning,
directing and controlling the activities of the Company, directly or indirectly. Key management personnel includes the
members of the Board.
The compensation of key management personnel is as follows:
Years Ended December 31
Short term employee benefits (salaries, benefits and director fees)
Share-based payments (DSU, RSU, PSU)
Executive Share Purchase Plan
2016
3,337
424
3,761
$
$
2015
2,630
60
2,690
$
$
The Company has an Executive Share Purchase Plan (the “Share Purchase Plan”) whereby the Board can approve loans to
senior management for the purpose of purchasing the Company’s common shares. The maximum amount of loans
approved under the Share Purchase Plan is limited to 10% of the issued and outstanding common shares.
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.
In 2016, the Company advanced $177 of new loans under the Share Purchase Plan (2015 - $185). As at December 31, 2016,
$1,535 of loans were outstanding (December 31, 2015 - $1,559). The loans under the Share Purchase Plan bear interest at
prime plus 1% (3.7%) as at December 31, 2016 (December 31, 2015 - prime plus 1% (3.7%) and have a five-year term. The
shares are pledged as security for the loans and had a fair value of $2,753 as at December 31, 2016 (December 31, 2015 -
$2,469).
In 2016, MCAN recognized $56 of interest income (2015 - $58) on the Share Purchase Plan loans.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
29. Related Party Disclosures (continued)
Deferred Share Units Plan
The Company has a Deferred Share Units Plan (the “DSU Plan”) whereby the Board 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 initially granted 30,000 units under the DSU Plan and is entitled
to receive dividend distributions in the form of additional units. All dividends paid after July 6, 2014 vest immediately such
that as at December 31, 2016, all 53,234 units issued had vested (December 31, 2015 - 48,890).
The Company recognizes compensation expenses associated with the DSU Plan over the vesting period. The compensation
expense recognized related to the DSU Plan for 2016 was $184 (2015 - recovery of $61). As at December 31, 2016, the
accrued DSU Plan liability was $766 (December 31, 2015 - $581).
Restricted Share Units Plan
The Company has a Restricted Share Units Plan (the “RSU Plan”) whereby the Board granted units under the RSU Plan to
certain members of senior management 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. In addition, the RSU Participants are entitled to receive
dividend distributions in the form of additional units. All RSU units vest after three years.
During 2016, the RSU Participants were granted 3,808 units under the RSU Plan (2015 - 35,120). Additionally, 9,452 units
vested during 2016 (2015 - nil). At the time of vesting, the Company paid the RSU Participants $133 (2015 - $nil).
As at December 31, 2016, 46,785 units were outstanding (December 31, 2015 - 65,802), of which no units had vested
(December 31, 2015 - nil).
The Company recognizes compensation recoveries or expenses associated with the RSU Plan over the vesting period. The
compensation expense (recovery) recognized related to the RSU Plan for 2016 was $231 (2015 - $152). As at December 31,
2016, the accrued RSU Plan liability was $326 (December 31, 2015 - $229).
Performance Share Units Plan
In 2016, the Company established a Performance Share Units Plan (the “PSU Plan”) whereby the Board granted units under
the PSU Plan to certain members of senior management of the Company (the “PSU Participants”). Each unit is equivalent
in value to one common share of the Company and vests 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. In addition, the PSU Participants are entitled to receive dividend distributions in the form
of additional units. At the time of vesting, a “Performance Factor” of 0-150% is applied to the number of units awarded
which is based on earnings per share and other adjustments in the fiscal year two years subsequent to the grant date.
The units granted under the PSU Plan may be either PSU units or Performance Deferred Share Units (“PDSU” units). Holders
of PSU units are paid in cash at the time of vesting. Holders of PDSU units are paid in cash at their retirement/termination
date, provided that the units have vested. Additionally, the PDSU units earn dividends subsequent to vesting until the
retirement/termination date.
In 2016, the PSU Participants were granted 26,796 units under the PSU Plan (2015 - n/a). As at December 31, 2016, 27,328
units were outstanding (December 31, 2015 - n/a). As at December 31, 2016, no units had vested (December 31, 2015 -
n/a).
The Company recognizes compensation recoveries or expenses associated with the PSU Plan over the vesting period. The
compensation expense (recovery) recognized related to the PSU Plan for 2016 was $56 (2015 - n/a). As at December 31,
2016, the accrued PSU Plan liability was $56 (December 31, 2015 - n/a).
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
30. Commitments and Contingencies
The Company’s mortgage funding commitments relate primarily to its corporate residential construction loan portfolio.
The commitment as noted below represents the undrawn portion of the authorized loan facility for construction and
commercial loans. For single family mortgages, the commitment represents irrevocable offers to clients that the Company
is contractually obligated to fund.
For further details on the commitment associated with the KingSett High Yield Fund investment, refer to Note 10.
The Company also has contractual obligations associated with its premises lease.
One to
Less than
one year three years
Three to Over five December 31 December 31
2015
2016
years
five years
Mortgage funding commitments
Commitment - KingSett High Yield Fund
Operating lease
$ 364,161 $
-
575
$ 364,736 $
- $
-
1,158
1,158 $
- $
-
1,194
1,194 $
- $
38,700
1,642
40,342 $
364,161 $
38,700
4,569
407,430 $
308,242
25,425
5,145
338,812
The Company incurred $548 of operating lease expenses during 2016 (2015 - $492), included in general and administrative
expenses.
The Company outsources the majority of its mortgage servicing and continues to pay servicing expenses as long as the
mortgages remain on its consolidated balance sheet.
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 its knowledge, the Company’s management does not expect the outcome of any existing proceedings to have
a material effect on the consolidated financial position or results of operations of the Company.
31. Credit Facilities
The Company has a $75,000 line of credit facility from a Canadian Schedule I Chartered bank bearing interest at prime plus
0.75% (3.45%) as at December 31, 2016 (December 31, 2015 - prime plus 0.75% (3.45%)). 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,
2016, the outstanding overdraft balance was $nil (December 31, 2015 - $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, 2016, there were letters of credit in the amount of $30,537 issued (December 31,
2015 - $35,863) and additional letters of credit in the amount of $26,138 committed but not issued (December 31, 2015 -
$22,936).
Subsequent to year end, the Company entered into an agreement with a Canadian Schedule I Chartered bank that enables
the Company to execute repurchase agreements for liquidity purposes. This facility allows the Company to encumber
certain eligible securities for financing purposes. As part of the agreement, the Company may sell assets to the counterparty
at a specified price with an agreement to repurchase at a specified future date. The interest rate on the borrowings is
driven by market spot rates at the time of borrowing.
32. Interest Rate Sensitivity
Interest rate risk, or sensitivity, is the potential impact of changes in interest rates on financial assets and liabilities. Interest
rate risk arises when principal and interest cash flows have mismatched repricing and maturity dates.
An interest rate gap is a common measure of interest rate sensitivity. A positive gap occurs when more assets than liabilities
reprice/mature within a particular time period. A negative gap occurs when there is an excess of liabilities over assets
repricing/maturing. 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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
32. Interest Rate Sensitivity (continued)
The interest rate sensitivity analysis is based on the Company’s consolidated balance sheets as at December 31, 2016 and
December 31, 2015 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 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 following tables present the assets and liabilities of the Company by interest rate sensitivity. Yield spread represents
the difference between the weighted average interest rate of the assets and liabilities in a certain category.
As at December 31, 2016
Floating
Rate
Within
3 Months
3 Months
to 1 Year
1 to 3
Years
3 to 5
years
Over 5
years
Non Interest
Sensitive
Total
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
Shareholders' Equity
$ 492,842 $
-
492,842
88,766 $ 240,380 $ 146,335 $
15,724
104,490
609,883
756,218
-
240,380
39,973 $
36,362 $
461,967
501,940
-
36,362
143,822 $ 1,188,480
1,092,375
2,280,855
4,801
148,623
-
-
-
-
119,472
-
119,472
327,739
-
327,739
336,926
589,129
926,055
127,729
482,657
610,386
-
-
-
-
-
-
-
-
15,427
-
15,427
927,293
1,071,786
1,999,079
281,776
281,776
GAP
$ 492,842 $
(14,982) $
(87,359) $ (169,837) $
(108,446) $
36,362 $
(148,580) $
-
YIELD SPREAD
4.05%
2.45%
2.62%
1.26%
1.00%
6.71%
As at December 31, 2015
Floating
Rate
Within
3 Months
3 Months
to 1 Year
1 to 3
Years
3 to 5
Years
Over 5
Years
Non Interest
Sensitive
Total
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
Shareholders' Equity
$ 341,705 $ 66,107 $ 325,826 $ 252,821 $ 32,992 $ 18,063 $ 117,532 $ 1,155,046
1,091,912
2,246,958
-
341,705
896,370
929,362
179,577
432,398
-
325,826
2,853
120,385
-
18,063
13,112
79,219
-
-
-
-
86,895
-
86,895
489,020
-
489,020
289,175
137,731
426,906
37,951
932,573
970,524
-
-
-
-
-
-
-
-
14,811
-
14,811
917,852
1,070,304
1,988,156
258,802
258,802
GAP
$ 341,705 $
(7,676) $ (163,194) $
5,492 $
(41,162) $ 18,063 $
(153,228)
-
YIELD SPREAD
4.08%
2.42%
2.98%
1.95%
1.02%
6.47%
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
32. Interest Rate Sensitivity (continued)
Certain residential construction loans and single family uninsured completed inventory loans are subject to the greater of
a minimum interest rate (ranging between 3.75% and 9%) or a prime based interest rate. To the extent that the minimum
rate exceeds the prime based rate as at December 31, 2016, these mortgages have been reflected in the table above as
fixed rate mortgages, as follows: within 3 months - $41,304 (December 31, 2015 - $33,005), 3 months to 1 year - $60,947
(December 31, 2015 - $75,877) and 1 to 5 years - $28,973 (December 31, 2015 - $85,065).
An immediate and sustained 1% increase to market interest rates as at December 31, 2016 would have an estimated
positive effect of $1,478 (December 31, 2015 - $1,508) to net income over the following twelve month period. An immediate
and sustained 1% decrease to market interest rates as at December 31, 2016 would have an estimated adverse effect of
$1,835 (December 31, 2015 - $720) to net income over the following twelve month period. An immediate and sustained
1% increase (decrease) to market interest rates as at December 31, 2016 would have an estimated adverse (positive) effect
of $9 (December 31, 2015 - $27) on accumulated other comprehensive income.
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.
33. Capital Management
The Company's primary capital management objectives are to maintain sufficient capital for regulatory purposes and to
earn acceptable and sustainable risk-weighted returns for shareholders. Through its risk management and corporate
governance framework, the Company assesses current and projected economic, housing market, interest rate and credit
conditions to determine appropriate levels of capital. The Company typically pays out all of its taxable income by way of
dividends. Capital growth is achieved through retained earnings, public share offerings, rights offerings and the DRIP. The
Company's capital management is driven by the guidelines set out by the Tax Act and OSFI.
Regulatory Capital
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 risk-weighted asset ratios and a minimum leverage ratio which is calculated on a different
basis from the aforementioned MIC leverage ratio.
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. 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.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
33. Capital Management (continued)
As at December 31
Regulatory Ratios (OSFI)
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Deduction for equity investment in MCAP (Transitional adjustment) 1
Common Equity Tier 1, Tier 1 and Total Capital (Transitional)
Deduction for equity investment in MCAP (All-in adjustment) 1
Common Equity Tier 1, Tier 1 and Total Capital (All-in)
Total Exposures/Regulatory Assets
Consolidated assets
Less: deductions from all-in Tier 1 Capital 1
Other adjustments 2
Total On-Balance Sheet Exposures
Mortgage and investment funding commitments
Less: conversion to credit equivalent amount (50%)
Letters of credit
Less: conversion to credit equivalent amount (50%)
Off-Balance Sheet Items
$
$
$
2016
2015
210,239
510
55,923
15,104
(13,576)
268,200
(9,051)
259,149
$
$
206,382
510
42,617
9,293
(7,324)
251,478
(10,986)
240,492
2,280,855
(22,627)
1,489
2,259,717
$ 2,246,958
(18,310)
2,229
2,230,877
402,861
(201,431)
30,537
(15,269)
216,698
333,667
(166,834)
35,863
(17,932)
184,764
Total Exposures/Regulatory Assets
$
2,476,415
$ 2,415,641
Leverage ratio
10.46%
9.96%
1 The deduction for the equity investment in MCAP on an all-in basis is equal to the equity investment balance less 10% of the Company’s
shareholders’ equity. In 2016, the deduction on the transitional basis is equal to 60% of the all-in adjustment (2015 - 40%). The adjustment
factor will increase by 20% annually over the phase-in period until it is fully deductible by 2018.
2 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets.
As at December 31, 2016 and December 31, 2015, the Company was in compliance with the capital guidelines issued by
OSFI under Basel III.
Income Tax Capital
As a MIC under the Tax Act, the Company is limited to an income tax liabilities to capital ratio of 5:1 (or an income tax assets
to capital ratio of 6:1), based on the non-consolidated balance sheet in the MIC entity measured at its tax value. For further
information on the Company’s income tax capital management, refer to the “Income Tax Capital” sub-section of the Capital
Management section of the MD&A.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
34. Financial Instruments
The majority of the Company’s consolidated balance sheet consists of financial instruments, and the majority of net income
is derived from the related income, expenses, gains and losses. Financial instruments include cash and cash equivalents,
cash held in trust, marketable securities, mortgages, financial investments, other loans, financial liabilities from
securitization, term deposits and loans payable.
All financial instruments that are carried at fair value on the consolidated balance sheets (marketable securities and certain
financial investments) or for which fair value is disclosed 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.
As at December 31, 2016
Level 1
Level 2
Level 3
Total
Carrying
Value
Assets measured at fair value
Cash and cash equivalents
Marketable securities
Financial investments - Crown Realty II Limited
Partnership 1
Financial investments - KingSett High Yield Fund 2
Securitization program cash held in trust
Assets for which fair values are disclosed
Mortgages - corporate 3
Other loans 4
Mortgages - securitized 3
Liabilities measured at fair value
Other liabilities - corporate 5
Liabilities for which fair values are disclosed
Term deposits 6
Financial liabilities from securitization 7
$
$
$
$
$
$ 111,732
53,953
$
$
-
1,173
-
-
$ 111,732
55,126
$ 111,732
55,126
-
-
15,724
$ 181,409
-
-
-
1,173
$
33,207
24,057
-
57,264
33,207
24,057
15,724
$ 239,846
33,207
24,057
15,724
$ 239,846
-
-
-
-
$ 913,016
3,584
1,106,997
$ 2,023,597
$ 913,016
3,584
1,106,997
$ 2,023,597
$ 904,112
3,584
1,071,849
$ 1,979,545
$
$
$
-
-
-
-
-
$
-
$
12,377
$
12,377
$
12,377
-
-
-
$
$
-
-
-
$ 913,071
1,086,583
$ 1,999,654
$ 913,071
1,086,583
$ 1,999,654
$ 911,866
1,071,786
$ 1,983,652
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 is based on the redemption value of the fund less a credit allowance based on the nature of the underlying mortgages.
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. The
Company classifies its mortgages as Level 3 given the fact that although many of the inputs to the valuation models used 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 The carrying value of the asset/liability approximates fair value.
6 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.
7 Fair value of financial liabilities from securitization is determined using current market rates for CMB and MBS.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
34. Financial Instruments (continued)
As at December 31, 2015
Level 1
Level 2
Level 3
Total
Carrying
Value
Assets measured at fair value
Cash and cash equivalents
Marketable securities
Financial investments - Crown Realty II Limited
Partnership 1
Financial investments - KingSett High Yield Fund 2
Securitization program cash held in trust
Assets for which fair values are disclosed
Mortgages - corporate 3
Other loans 4
Mortgages - securitized 3
Liabilities measured at fair value
Other liabilities - corporate 5
Liabilities for which fair values are disclosed
Term deposits 6
Financial liabilities from securitization 7
$
$
$
$
$
$
$
75,762
37,958
- $
$
-
-
$
75,762
40,735
75,762
40,735
-
-
13,112
$ 126,832
31,102
10,691
-
41,793
31,102
10,691
13,112
$ 171,402
31,102
10,691
13,112
$ 171,402
$
2,777
-
-
-
2,777
$
$
$
-
-
-
-
-
-
-
-
$ 958,772
4,176
1,107,168
$ 2,070,116
$ 958,772
4,176
1,107,168
$ 2,070,116
$ 944,109
4,176
1,075,947
$ 2,024,232
-
$
-
$
12,412
$
12,412
$
12,412
-
-
-
$
$
-
-
-
$ 905,167
1,103,339
$ 2,008,506
$ 905,167
1,103,339
$ 2,008,506
$ 903,041
1,070,304
$ 1,973,345
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 is based on the redemption value of the fund less a credit allowance based on the nature of the underlying mortgages.
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. The
Company classifies its mortgages as Level 3 given the fact that although many of the inputs to the valuation models used 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 The carrying value of the asset/liability approximates fair value.
6 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.
7 Fair value of financial liabilities from securitization is determined using current market rates for CMB and MBS.
The following table shows the continuity of Level 3 financial assets recorded at fair value:
Balance, December 31, 2015
Advances
Repayments
Changes in fair value, recognized in other comprehensive income
Balance, December 31, 2016
$
$
41,793
13,611
(2,975)
4,835
57,264
An increase of 0.25% to capitalization rates as at December 31, 2016 would result in a decrease to the fair value of the
investment in Crown LP by $1,144 (December 31, 2015 - $1,099). A decrease of 0.25% to capitalization rates as at December
31, 2016 would result in an increase to the fair value of the investment in Crown LP by $1,123 (December 31, 2015 - $1,085).
There were no transfers between levels during the years ended December 31, 2016 or December 31, 2015.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
34. Financial Instruments (continued)
Risk Management
The types of risks to which the Company is exposed include but are not limited to 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. These policies are developed and implemented by management and reviewed and
approved annually by the Board.
The nature of these risks and how they are managed is provided in the Risk Governance and Management section of the
MD&A. Certain disclosures required under IFRS 7, Financial Instruments: Disclosures, related to the management of credit,
interest rate, liquidity and market risks inherent with financial instruments are included in the MD&A. The relevant MD&A
sections are identified by shading within boxes and the content forms an integral part of these consolidated financial
statements.
35. Comparative Amounts
Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. There
was no impact to the financial position or net income as a result of these reclassifications.
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
DIRECTORS
Scott Coates
Managing Director, Mortgage Investments, KingSett Capital
Member of Audit Committee
Member of Risk Committee
Director since May 2014
EXECUTIVE OFFICERS
William Jandrisits
President and Chief Executive Officer
Jeffrey Bouganim
Senior Vice President and Chief Financial Officer
Leonard Zaidener
Vice President, Investments
Robert Horton
Vice President and Chief Risk Officer
Carl Brown
Vice President, Operations
Business Continuity/Disaster Recovery Coordinator
Jeffrey Lum
Vice President, Treasury and Securitization
Martin Beaudry
Vice President, Single Family Mortgage Operations
Sylvia Pinto
Vice President, Chief Compliance Officer & Corporate
Secretary
Dipti Patel
Vice President and Chief Audit Officer
Brydon Cruise
Chair, Brookfield Financial
Chair of Risk Committee
Director since May 2010
Verna Cuthbert
Counsel, Fasken Martineau DuMoulin LLP
Member of Conduct Review, Corporate Governance and Human
Resources Committee
Member of Risk Committee
Director since September 2013
Susan Doré
Corporate Director
Member of Audit Committee
Member of Conduct Review, Corporate Governance and Human
Resources Committee
Director since May 2010
William Jandrisits
President and Chief Executive Officer, MCAN Mortgage
Corporation
Member of Enterprise Risk Management Ad Hoc Committee
Director since August 2010
Brian A. Johnson
Partner, Crown Capital Partners and Crown Realty Partners
Member of Risk Committee
Member of Enterprise Risk Management Ad Hoc Committee
Chair of Conduct Review, Corporate Governance and Human
Resources Committee
Director since January 2001
Ian Sutherland
Chair, MCAN Mortgage Corporation
Member of Enterprise Risk Management Ad Hoc Committee
Director since January 1991
Karen Weaver
Executive Vice President and Chief Financial Officer, DH
Corporation
Chair of Audit Committee
Director since November 2011
W. Terrence Wright
Counsel, Pitblado LLP
Member of Audit Committee
Member of Conduct Review, Corporate Governance and Human
Resources Committee
Chair of Enterprise Risk Management Ad Hoc Committee
Director since September 2013
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2016 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CORPORATE INFORMATION
Head Office
200 King Street West, Suite 600
Toronto, Ontario M5H 3T4
Tel: 416-572-4880
Tel: 1-855-213-6226 (toll free)
Fax: 416-598-4142
mcanexecutive@mcanmortgage.com
Term Deposits
Tel: 1-800-387-9096 (toll free)
Fax: 1-877-821-0710
termdeposits@mcanmortgage.com
Stock Listing
Toronto Stock Exchange
Symbol: MKP
Corporate Counsel
Goodmans LLP
Toronto, Ontario
Auditors
Ernst & Young LLP
Toronto, Ontario
Bank
Bank of Montreal
First Canadian Place
Toronto, Ontario
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Tel: 1-800-564-6253
Websites
www.mcanmortgage.com
www.xceedmortgage.com
Dividend Reinvestment Plan (DRIP)
For further information regarding MCAN’s Dividend
Reinvestment Plan, please visit:
www.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/.
Shareholders
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, Computershare
(see left for contact).
Report Copies
This MCAN Mortgage Corporation 2016 Annual Report is
available for viewing/printing on our website at
www.mcanmortgage.com, and also on SEDAR at
www.sedar.com.
To request a printed copy, please contact Ms. Sylvia Pinto,
Corporate Secretary, or e-mail spinto@mcanmortgage.com.
General Information
For general enquiries about MCAN Mortgage Corporation,
please write to Ms. Sylvia Pinto, Corporate Secretary (head
office details at left) or e-mail
mcanexecutive@mcanmortgage.com
Annual and Special Meeting of Shareholders
Tuesday, May 9, 2017
4:30pm (local time)
St. Andrew’s Club & Conference Centre
150 King Street West, 27th Floor
Toronto, Ontario
All shareholders and prospective investors
are invited to attend.
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200 King Street West, Suite 600
Toronto, ON M5H 3T4
Toll Free Phone: 1-855-213-6226
Toronto Phone:
Fax:
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(cid:3)
416-572-4880
416-598-4142
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www.mcanmortgage.com