ANNUAL
REPORT
2019
DESCRIPTION OF BUSINESS
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 is a public company listed on the Toronto Stock Exchange under the symbol MKP.
Our objective is to generate a reliable stream of income by investing in a diversified portfolio of Canadian mortgages, including
single family residential, residential construction, non-residential construction and commercial loans, as well as other types of
securities, loans and real estate investments. We employ leverage by issuing term deposits that are eligible for Canada Deposit
Insurance Corporation deposit insurance and are sourced through a network of independent financial agents. We manage our
capital and asset balances based on the regulations and limits of the Trust Act, the Tax Act and OSFI.
As a MIC, we are entitled to deduct the dividends that we pay to shareholders from our taxable income. Regular dividends are
treated as interest income to shareholders for income tax purposes. We are also able to pay capital gains dividends, which would
be treated as capital gains to shareholders for income tax purposes. Dividends paid to foreign investors may be subject to withholding
taxes. To meet the MIC criteria, 67% of our non-consolidated assets measured on a tax basis are required to be held in cash or
cash equivalents and residential mortgages.
MCAN’s wholly-owned subsidiary, XMC Mortgage Corporation, is an originator of single family residential mortgage products across
Canada.
TABLE OF CONTENTS
PRESIDENT AND CEO’S MESSAGE TO SHAREHOLDERS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS AND EXECUTIVE OFFICERS
CORPORATE INFORMATION
4
7
58
63
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
2019 HIGHLIGHTS
$48.3 million
NET INCOME
$2.01
EARNINGS PER SHARE
15.11%
RETURN ON
SHAREHOLDERS’ EQUITY1
11.20%
CORPORATE ASSET
GROWTH
$1.28
DIVIDENDS PER SHARE
PAID IN 2019
27 year track record of dividend distribution
1 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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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
MESSAGE TO SHAREHOLDERS
MCAN Mortgage Corporation (“MCAN”, the
“Company” or “we”) reported net income of
$48.3 million ($2.01 per share) for the year
ended December 31, 2019, an increase of 33%
from $36.3 million ($1.54 per share) earned in
2018. Return on average shareholders’ equity
was 15.11%, compared to 11.90% in the prior
year.
We earned net income of $10.6 million ($0.44
per share) for the fourth quarter ended
December 31, 2019, an increase of 197% from
$3.5 million ($0.15 per share) in the fourth
quarter of 2018. Fourth quarter 2019 return on
average shareholders’ equity was 12.84%
compared to 4.66% in the prior year.
The Board of Directors (the “Board”) declared an
increase to the quarterly dividend from $0.32
per share to $0.34 per share, on February 26,
2020 to be paid March 30, 2020 to shareholders
of record as of March 13, 2020.
2019 Year in Review
Corporate assets in 2019 totalled $1.4 billion,
increasing 11% over 2018, well exceeding our
initial expectations for the year and our targeted
annual growth in corporate assets over the long
term of 10%.
Our Corporate mortgages
increased 18% to $1.1 billion at year end. We
are pleased with this growth, which was
primarily in the single family portfolio, as we also
achieved our objective of balancing the risk
profile of our balance sheet.
Single family originations and acquisitions
totalled $502 million, comprised primarily of
$232 million of insured mortgages, a 127%
increase over 2018, and $222 million of
uninsured mortgages, an 84% increase over
2018. During the year, we securitized $308
million of insured single family mortgages
through the National Housing Act Mortgage-
Backed Securities program compared to $169
million during 2018. We also securitized $14
million of insured multi family mortgages. These
accomplishments were the result of successful
investments in our single family operations,
internal infrastructure effectiveness and the
strength of our strategic partnerships. While we
achieved all of our growth objectives for our
single family business in 2019, we will continue
to advance our capabilities and customer service
to support continued growth. In 2019, our
growth was achieved in a competitive mortgage
market, a testament to our commitment to
growing our business and the drive and talent of
our team.
We continue to be selective and are pleased with
our construction and commercial portfolio in
terms of product composition, geographic mix
and exposure.
We have strong strategic
partnerships for origination and expect to
continue to maintain the quality of our
investment in these portfolios.
We
refined our
We are proactively managing all of our income
earning corporate assets resulting in capital
recycling, growth and better balance sheet
optimization.
liquidity
management and increased our utilization of
repurchase agreements to optimize our funding.
Our marketable securities, comprised primarily
of real estate income trusts, increased in value
during the year, recovering early from the
market wide decline at the end of 2018 and
increasing later in response to the low interest
rate environment and acquisition activities.
During the last two quarters of 2019, we sold
certain of these investments preparing for new
investment opportunities, consistent with our
focus on capital recycling.
During 2019, we added a new $18.0 million
investment in Class A securitization notes, issued
by a subsidiary of MCAP, to our non-marketable
securities portfolio. We also participated in the
growth of the KingSett High Yield Fund,
committing an additional $3.75 million which is
expected to be invested over the next 18
months. The Crown Realty II Limited Partnership
investment value grew by $3.2
(“Crown”)
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
continued support in meeting our growth and
business objectives. I would also like to recognize
the members of our team for their dedication
and work during the year and especially the
leadership and focus by the executive team on
achieving our objectives. We believe that a
culture anchored by customer service delivered
with effective business processes by a high
performing team will enhance our future
successes. This is our mission and I look forward
to reporting on our achievements in the future.
Ian Sutherland has announced that he will step
down as Chair of the Board (the “Chair”),
however will remain on the Board to facilitate
Board renewal and transition. Ian has held the
Chair position since 2010. In previous years,
since founding the Company in 1991, he has also
served in various management and Board roles.
As a founding partner, Ian’s leadership and
guidance have advanced the Company’s strategy
and contributed to our success and growth over
the past 30 years. I have had the pleasure of
working with Ian since joining the Board in 2011
and benefitted immensely from his support over
the past year. Susan Doré and Verna Cuthbert
will be retiring and not standing for re-election
to the Board. Their counsel and advice as Board
members has been
instrumental to our
successes over the years. Derek Sutherland has
been appointed as Chair, bringing with him 12
years of experience with MCAN in management
and, since 2017, as a Director. I look forward to
continuing our work with all Board members in
guiding MCAN in the future.
Karen Weaver
President and CEO
million. Subsequent to December 31, 2019, we
sold our interest in the Crown core fund, which
provides more capital recycling opportunities in
2020. Lastly, our equity investment in MCAP
increased to $69.8 million as a result of their
earnings and growth during 2019. With the
growth in their assets under management and
their market leadership position, we expect that
MCAP will continue to provide solid returns for
MCAN.
We conduct our business activities based on our
views of the economy, interest rates, housing
market dynamics and the overall real estate
cycle in Canada. Our growth in single family
mortgages and our various capital recycling
activities have been executed based on these
views. We will continue to be vigilant and adjust
our business activities in the context of market
dynamics. Our targeted annual growth in
corporate assets over the long term continues
to be 10%.
2019 was a year of transformation in our
operating infrastructure where we enhanced
our capabilities along with select systems and
processes. Our 2019 activities were only the
beginning of a continuing
focus by the
management team on the effectiveness of our
internal operations to drive profitable growth.
We will continue to enhance our infrastructure
and processes
term
competitiveness and sustainability.
increase
long
to
Looking forward, we will focus on growing and
enhancing our business activities in alignment
with our risk appetite, to increase our return on
shareholders equity, dividends and long-term
success in our chosen markets. We will look to
further optimize the utilization of our balance
sheet capacity and continue to increase our
capacity to grow with the support of our
shareholders
continued
participation in our Dividend Reinvestment Plan.
through
their
Our business model is based on strategic
partnerships with brokers, originators and
We appreciate their
services providers.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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2019 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, 2019 and December 31, 2018 and the consolidated statements of income,
changes in shareholders’ equity 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 26,
2020.
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
SELECTED FINANCIAL INFORMATION
HIGHLIGHTS
OUTLOOK
RESULTS OF OPERATIONS
FINANCIAL POSITION
SELECTED QUARTERLY FINANCIAL DATA
CAPITAL MANAGEMENT
RISK MANAGEMENT
DESCRIPTION OF CAPITAL STRUCTURE
OFF-BALANCE SHEET ARRANGEMENTS
DIVIDENDS
TRANSACTIONS WITH RELATED PARTIES
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
PEOPLE
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
NON-IFRS MEASURES
8
10
12
15
16
23
33
34
38
50
50
50
52
52
52
52
53
55
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS
This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. All information
contained in this MD&A, other than statements of current and historical fact, is forward-looking information. All of the forward-
looking information in this MD&A is qualified by this cautionary note. Often, but not always, forward-looking information can be
identified by the use of words such as “may,” “believe,” “will,” “anticipate,” “expect,” “planned,” “estimate,” “project,” “future,”
and variations of these or similar words or other expressions that are predictions of or indicate future events and trends and that
do not relate to historical matters. Forward-looking information in this MD&A includes, among others, statements and assumptions
with respect to:
the current business environment and outlook;
•
• possible or assumed future results;
• our ability to create shareholder value;
•
•
•
•
•
•
•
•
•
•
our business goals and strategy;
the potential impact of new regulations and changes to existing regulations;
the stability of home prices;
the effect of challenging conditions on us;
factors affecting our competitive position within the housing markets;
international trade and geopolitical uncertainties and their impact on the Canadian economy;
the price of oil and its impact on housing markets in Western Canada;
sufficiency of our access to capital resources;
the timing of the effect of interest rate changes on our cash flows; and
the declaration and payment of dividends.
Forward-looking information is not, and cannot be, a guarantee of future results or events. Forward-looking information reflects
management’s current beliefs and is based on information currently available to management. Forward-looking information is
based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable by us at the date
the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other
factors that may cause actual results and events to be materially different from those expressed or implied by the forward-looking
information.
The material factors or assumptions that we identified and were applied by us in drawing conclusions or making forecasts or
projections set out in the forward-looking information include, but are not limited to:
factors and assumptions regarding interest rates;
• our ability to successfully implement and realize on our business goals and strategy;
•
• housing sales and residential mortgage borrowing activities;
•
•
•
•
•
•
•
•
•
•
•
the effect of competition;
government regulation of our business and the cost to us of such regulation;
systems failure or cyber and security breaches;
the availability of funding and capital to meet our requirements;
the value of mortgage originations;
the expected spread between interest earned on mortgage portfolios and interest paid on deposits;
the relative uncertainty and volatility of real estate markets;
acceptance of our products in the marketplace;
the stage of the real estate cycle and the maturity phase of the mortgage market;
impact on housing demand from changing population demographics and immigration patterns;
our ability to forecast future changes to borrower credit and credit scores, loan to value ratios and other forward-looking factors
used in assessing expected credit losses and rates of default;
availability of key personnel;
our operating cost structure;
the current tax regime; and
operations within our equity investments.
•
•
•
•
Reliance should not be placed on forward-looking information because it involves known and unknown risks, uncertainties and
other factors, which may cause actual results to differ materially from anticipated future results expressed or implied by such
forward-looking information. Factors that could cause actual results to differ materially from those set forth in the forward-looking
information include, but are not limited to:
levels of foreign investment in Canada and its real estate market;
• global market activity and trade policies;
•
• 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 climate and environmental policies;
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
• 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, including recent changes implemented by the Office of the Superintendent of Financial
Institutions Canada (“OSFI”) and the potential for higher capital and liquidity requirements for real estate lending;
• availability of CMB and MBS issuer allocation;
• digital and technology evolution and disruptions;
• confidence levels of consumers;
• our 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;
• our ability to retain our executive officers and other employees;
•
• our exposure to litigation;
• our ability to respond to and reposition ourselves within a changing market;
• our relationships with third-party mortgage originators and servicers;
•
• additional risks and uncertainties, many of which are beyond our control, referred to in this MD&A and our other public filings
the success of the business underlying our investments in MCAP, marketable securities and non-marketable securities;
changes in operations within our equity investments; and
with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake no obligation to publicly update or revise any forward-looking
information after the date of this MD&A whether as a result of new information, future events or otherwise or to explain any
material difference between subsequent actual events and any forward-looking information. However, any further disclosures
made on related subjects in subsequent reports should be consulted.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
SELECTED FINANCIAL INFORMATION
Table 1: Financial Statement Highlights - Annual
(in thousands except for per share amounts and %)
For the Years Ended December 31
2019
2018
Change
(%)
Change
(%)
2017
Income Statement Highlights
Net investment income - corporate assets
Net investment income - securitization assets
Net income
Basic and diluted earnings per share
Dividends per share
Return on average shareholders’ equity 1
Taxable income per share 1,2
Yields
Spread of corporate mortgages over term deposit
interest 1
Spread of securitized mortgages over liabilities 1
Average term to maturity (in months)
Mortgages - corporate
Term deposits
As at December 31
Balance Sheet Highlights
Total assets
Mortgages - corporate
Mortgages - securitized
Total liabilities
Shareholders’ equity
Capital Ratios 1
Income tax assets to capital ratio
CET 1, Tier 1 and Total Capital ratios
Leverage ratio 3
Credit Quality
Impaired mortgage ratio (corporate) 1,4
Impaired mortgage ratio (total) 1,4
Mortgage Arrears 1
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
$
$
$
$
$
$
64,943
3,994
48,294
2.01
1.28
15.11%
1.36
$
$
$
$
$
$
50,139
4,976
36,293
1.54
1.43
11.90%
1.29
30% $
(20%) $
33% $
31% $
(10%) $
3.21%
5% $
53,289
5,613
39,928
1.72
1.31
13.75%
1.51
22%
(29%)
21%
17%
(2%)
1.36%
(10%)
2.62%
0.71%
10.7
18.4
3.07% (0.45%)
0.74% (0.03%)
3.07% (0.45%)
0.74% (0.03%)
11.5
18.7
(7%)
(2%)
11.3
19.1
(5%)
(4%)
2019
2018
Change
(%)
Change
(%)
2017
(2%)
26%
(23%)
(4%)
11%
7%
1%
1%
$
$
$
$
$
2,179,341
1,089,401
784,296
1,849,029
330,312
$
$
$
$
$
2,141,072
922,390
887,252
1,834,378
306,694
2% $
18% $
(12%) $
1% $
8% $
2,216,775
863,384
1,016,724
1,919,798
296,977
4.93
22.52%
12.58%
0.32%
0.23%
4.64
21.66%
11.79%
6%
4%
7%
4.60
21.26%
11.31%
0.34% (0.02%)
0.27% (0.04%)
0.29%
0.13%
0.03%
0.10%
$
$
$
$
$
12,161
3,750
15,911
24,215
13.64
17.10
414,077
$
$
$
$
$
9,435
6,527
15,962
29% $
(43%)
—% $
8,766
8,803
17,569
23,798
12.89
13.32
316,989
2%
6% $
28% $
31% $
23,378
12.70
17.84
417,064
39%
(57%)
(9%)
4%
7%
(4%)
(1%)
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 For further information refer to the “Taxable Income” section of this MD&A.
3 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. For further information, refer to the “Capital Management” section of this MD&A.
4 Effective January 1, 2019, we revised the impaired mortgage ratios to include insured mortgages in the numerator such that the ratios are equal to impaired
mortgages divided by portfolio balance. Prior period ratios have been restated.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 2: Financial Statement Highlights
(in thousands except for per share amounts and %)
For the Periods Ended
Income Statement Highlights
Net investment income - corporate assets
Net investment income - securitization assets
Net income
Basic and diluted earnings per share
Dividends per share
Next quarter’s dividend per share
Return on average shareholders’ equity 1
Taxable income per share 1,2
Yields
Spread of corporate mortgages over term deposit
interest 1
Spread of securitized mortgages over liabilities 1
Q4
2019
Q3
2019
Change
(%)
Q4
2018
Change
(%)
$
$
$
$
$
$
$
$
$
$
$
$
14,839
1,015
10,550
0.44
0.32
0.34
18,207
962
14,551
0.60
0.32
(18%) $
6% $
(27%) $
(27%) $
—% $
7,872
1,082
3,547
0.15
0.32
89%
(6%)
197%
193%
—%
12.84%
0.46
$
18.05% (5.21%)
0.28
64% $
4.66%
0.49
8.18%
(6%)
2.63%
0.72%
2.48%
0.72%
0.15%
—%
2.93% (0.30%)
0.70%
0.02%
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 For further information refer to the “Taxable Income” section of this MD&A.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
HIGHLIGHTS
Financial Performance
Q4 2019
•
•
•
•
•
•
2019
•
•
•
•
•
•
Net income of $10.6 million in Q4 2019, an increase of $7.1 million (197%) from $3.5 million in Q4 2018.
Earnings per share totalled $0.44 in Q4 2019, an increase of $0.29 (193%) from $0.15 per share in Q4 2018.
Return on average shareholders’ equity1 of 12.84% in Q4 2019, an increase of 8.18% from 4.66% in Q4 2018.
Net corporate mortgage spread income1 decreased by $0.1 million from Q4 2018. The net corporate mortgage spread
income1 decreased due to a reduction in the spread of corporate mortgages over term deposit interest1 to 2.63% in Q4
2019 from 2.93% in Q4 2018. This decrease in the spread of corporate mortgages over term deposit interest1 was partially
offset by a higher average corporate mortgage portfolio balance1 of $1,094 million in Q4 2019 compared to $968 million
in Q4 2018. The decrease in the spread of corporate mortgages over term deposit interest1 is due to a portfolio mix with
a greater proportion of single family to construction and commercial loans, continued market competition, and increases
to term deposit funding and related costs.
Equity income from MCAP Commercial LP (“MCAP”) totalled $4.0 million in Q4 2019, an increase of $0.7 million (22%)
from $3.3 million in Q4 2018, which was due to higher net interest income on securitized mortgages, net investment
revenue and mortgage origination fees, partially offset by higher financial instrument losses in MCAP.
In Q4 2019, we recorded a $2.1 million net gain on securities compared to a $4.2 million net loss on securities in Q4 2018.
Activity in both Q4 2019 and Q4 2018 included fair value changes related to our real estate investment trust (“REIT”)
portfolio and our investment in Crown Realty II Limited Partnership (“Crown LP”). The net gain in Q4 2019 positively
impacted earnings per share by $0.09, while the net loss in Q4 2018 negatively impacted earnings per share by $0.17.
Net income of $48.3 million for 2019, an increase of $12.0 million (33%) from $36.3 million in 2018.
Earnings per share totalled $2.01 for 2019, an increase of $0.47 (31%) from $1.54 per share in 2018.
Return on average shareholders’ equity1 of 15.11% for 2019, an increase of 3.21% from 11.90% in 2018.
Net corporate mortgage spread income1 decreased by $0.7 million from 2018. The net corporate mortgage spread
income1 decreased due to a reduction in the spread of corporate mortgages over term deposit interest1 to 2.62% in 2019
from 3.07% in 2018. This decrease in the spread of corporate mortgages over term deposit interest1 was partially offset
by a higher average corporate mortgage portfolio balance1 of $1,041 million in 2019 compared to $918 million in 2018.
The decrease in the spread of corporate mortgages over term deposit interest1 is due to a portfolio mix with a greater
proportion of single family to construction and commercial loans, continued market competition, and increases to term
deposit funding and related costs.
Equity income from MCAP totalled $15.8 million for 2019, an increase of $2.6 million (19%) from $13.2 million in 2018.
For 2019, MCAP has earned higher net interest income on securitized mortgages, net investment revenue and mortgage
origination fees, partially offset by higher financial instrument losses. During 2019, we did not sell any partnership units
in MCAP. In 2018, we sold 200,000 partnership units in MCAP, recognizing a gain on sale of $1.7 million.
In 2019, we recorded a $14.0 million net gain on securities compared to a net loss on securities of $0.5 million in 2018,
which was driven by net gains of $10.8 million (2018 - $3.5 million net loss) on our REIT portfolio and $3.2 million (2018
- $2.6 million) on our investment in Crown LP. In 2019, proceeds from dispositions in our REIT portfolio totalled $17.9
million (2018 - $7.5 million), resulting in $6.3 million of realized gains (2018 - $1.9 million). The 2019 net gain positively
impacted earnings per share by $0.58 while the net loss in 2018 negatively impacted earnings per share by $0.02.
Business Activity
•
•
Corporate assets totalled $1.36 billion at December 31, 2019, a decrease of $9 million (1%) from September 30, 2019
and an increase of $137 million (11%) from December 31, 2018.
Corporate mortgage portfolio totalled $1.1 billion at December 31, 2019, a decrease of $7 million (1%) from September
30, 2019 and an increase of $167 million (18%) from December 31, 2018.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
•
•
•
•
•
Uninsured single family portfolio totalled $383 million at December 31, 2019, an increase of $19 million (5%) from
September 30, 2019 and an increase of $127 million (50%) from December 31, 2018.
Uninsured single family originations totalled $222 million in 2019, an increase of $101 million (84%) from 2018. Uninsured
single family originations were $57 million in the fourth quarter of 2019, an increase of $6 million (13%) from the fourth
quarter of 2018.
Insured single family originations totalled $232 million in 2019, an increase of $130 million (127%) from 2018. Insured
single family originations were $60 million in the fourth quarter of 2019, an increase of $32 million (116%) from the
fourth quarter of 2018.
Securitization volumes totalled $322 million in 2019, an increase of $153 million (90%) from $169 million in 2018.
Securitization volumes in 2019 consisted of $308 million of insured single family mortgages (2018 - $169 million) and $14
million of insured multi family mortgages (2018 - $nil). This increase in securitization volumes was offset by mortgage
maturities and resulted in a decrease in our securitized portfolio of 11% from 2018.
Construction and commercial portfolios totalled $551 million at December 31, 2019, a decrease of $4 million (1%) from
September 30, 2019 and an increase of $3 million (1%) from December 31, 2018. Of this, our construction portfolio
totalled $505 million at December 31, 2019, an increase of $4 million (1%) from September 30, 2019 and an increase of
$71 million (16%) from December 31, 2018.
Dividend
•
The Board of Directors (the “Board”) declared an increase to the quarterly dividend from $0.32 per share to $0.34 per
share on February 26, 2020 to be paid March 30, 2020 to shareholders of record as of March 13, 2020.
Credit Quality
The impaired corporate mortgage ratio1 was 0.32% at December 31, 2019 compared to 0.27% at September 30, 2019
and 0.34% at December 31, 20182.
The impaired total mortgage ratio1 was 0.23% at December 31, 2019 compared to 0.18% at September 30, 2019 and
0.27% at December 31, 20182.
Total mortgage arrears1 were $16 million at December 31, 2019 compared to $16 million at September 30, 2019 and $16
million at December 31, 2018. All arrears relate to the single family mortgage portfolio at December 31, 2019.
Net write-offs were $58,000 (2.1 basis points) of the average corporate portfolio in Q4 2019 compared to nil in Q4 2018;
annual write-offs were $99,000 (1.0 basis point) in 2019 and $256,000 (2.8 basis points) in 2018. All write-offs relate to
the uninsured single family mortgage portfolio.
•
•
•
•
Capital
• We manage our capital and asset balances based on the regulations and limits of both the Income Tax Act (Canada) (the
“Tax Act”) and OSFI.
•
•
•
Common Equity Tier 1 (“CET 1”), Tier 1 and Total Capital to risk-weighted assets ratios1 were 22.52% at December 31,
2019 compared to 21.77% at September 30, 2019 and 21.66% at December 31, 2018.
The leverage ratio1 was 12.58% at December 31, 2019 compared to 12.28% at September 30, 2019 and 11.79% at
December 31, 2018.
The income tax assets to capital ratio1 was 4.93 at December 31, 2019 compared to 5.13 at September 30, 2019 and 4.64
at December 31, 2018.
• We issued 416,919 new common shares through the Dividend Reinvestment Plan (“DRIP”) in 2019 compared to 367,942
in 2018. The DRIP participation rate was 17% for the 2019 fourth quarter dividend (2018 fourth quarter dividend - 18%).
The DRIP participation rate for 2019 dividends was 20% (2018 - 19%).
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 Effective January 1, 2019, we revised the impaired mortgage ratios to include insured mortgages in the numerator such that the ratios are
equal to impaired mortgages divided by portfolio balance. Prior period ratios have been restated.
- 13 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Summary of Three Year Results of Operations
Financial Performance
In 2017, we recorded net income of $39.9 million. Although our total assets and corporate mortgage interest income decreased
by 3% and 6% respectively from 2016, our spread of corporate mortgages over term deposits1 increased by 0.15%. The performance
from our equity investment in MCAP and non‐marketable securities was strong with $14.4 million and $8.9 million of income,
respectively. We also earned $0.8 million from the sale of a portion of our investment in MCAP. In 2017, we recorded $1.72 earnings
per share and return on average shareholders’ equity1 of 13.75%.
In 2018, we recorded net income of $36.3 million, a decrease of 9% from 2017. Notably, net corporate mortgage spread income1
increased by 3% from 2017. Equity income from MCAP was $13.2 million while non‐marketable securities contributed $5.4 million,
a decrease of approximately 39% from 2017. We also earned $1.7 million from the sale of a portion of our investment in MCAP. In
2018, we recorded $1.54 earnings per share and return on average shareholders’ equity1 of 11.90%.
In 2019, we recorded net income of $48.3 million, an increase of 33% from 2018. We exceeded our long-term annual growth target
for corporate assets of 10%, with growth of 11% although net corporate mortgage spread income1 decreased by 3% from 2018.
Equity income from MCAP totalled $15.8 million, while non-marketable securities contributed $6.4 million, an increase of
approximately 20% from 2018. Net gain on securities contributed $14.0 million to net income, as compared to a net loss on
securities of $0.5 million in 2018. In 2019, we recorded earnings per share of $2.01 and return on average shareholders’ equity1
of 15.11%.
Business Activity
Assets totalled $2.22 billion as at December 31, 2017, a decrease of 3% from December 31, 2016. Corporate mortgages decreased
by $41 million (5%) due to lower origination volumes in single family, partially offset by higher originations in residential construction.
Assets totalled $2.14 billion as at December 31, 2018, a decrease of 3% from December 31, 2017. During the year, we shifted our
corporate mortgage portfolio strategy to focus more on single family mortgages. Given the phase of the real estate cycle, it was
prudent to focus more on single family lending while being more selective in reviewing opportunities for our construction lending
portfolio. The average balance of our commercial loan portfolio remained consistent during 2018 and provided an appropriate
risk‐adjusted return. Our securitized mortgage portfolio decreased 13% from 2017, due to lower insured originations in 2017 and
natural run off of the portfolio.
Assets totalled $2.18 billion as at December 31, 2019, an increase of 2% from December 31, 2018. As noted above, we experienced
strong growth in our corporate assets during 2019, with corporate assets totalling $1.36 billion. Our corporate mortgage portfolio
totalled $1.09 billion, an increase of 18% from December 31, 2018. Securitization volumes totalled $322 million in 2019, an increase
of $153 million (90%) from $169 million in 2018. Securitization volumes in 2019 consisted of $308 million of insured single family
mortgages (2018 - $169 million) and $14 million of insured multi family mortgages (2018 - $nil). This increase in securitization
volumes was offset by mortgage maturities and resulted in a decrease in our securitized portfolio of 11% from 2018.
1 Refer to the “Non-IFRS Measures” section of this MD&A for a definition of these measures.
- 14 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
OUTLOOK
Market Outlook
Canada’s economy continued growing at a measured pace during the fourth quarter as trade conflicts, low oil and gas prices,
geopolitical risk and their associated uncertainties continued. Canada’s Gross Domestic Product (“GDP”) outlook for 2020 is
expected to be 1.6%. This may be negatively impacted, especially in the first half of 2020, by the potential impact on trade and
GDP from the recent coronavirus outbreak and blockades of key transportation infrastructure. We believe that Canada has largely
adjusted to the negative impact of lower oil prices and various other economic weaknesses and is positively supported by relatively
low interest rates, increasing immigration and strong employment. The economy has been operating at nearly full potential since
the beginning of 2019. Development of the Trans Mountain pipeline expansion project and the Coastal GasLink natural gas pipeline
are expected to provide both price support for Canadian oil and gas over the long term and positive investment and employment
during construction. Headwinds from decreased consumer confidence, weaker investment, other than oil and gas, and international
uncertainties may have negative impacts in 2020 and influence the Bank of Canada overnight rate.
During the fourth quarter, the residential housing market strengthened in most major markets where we do business. Furthermore,
there is a scarcity of affordable new housing supply in our major markets of Vancouver, Toronto and Ottawa. This supported
increases in resales, particularly in the Vancouver and Toronto markets, in the fourth quarter of 2019. The demand for affordable
housing supports continuing housing starts, which are expected to see an uptick into 2020.
The Canadian housing market has essentially rebounded while, at the same time, the policy and regulatory reforms over the past
few years have served to strengthen lending standards governing regulated entities. While Canadian household indebtedness
remains high, it has plateaued as consumers become more cautious. We expect some further stimulus in the housing market with
the recent announcement from the Department of Finance and the Office of the Superintendent of Financial Institutions, regarding
the change to the benchmark rate for the interest rate stress test for insured single family mortgages issued by regulated entities.
Business Outlook
Uncertainty around geopolitical event risk, trade, the impact of the coronavirus outbreak and their potential economic impact on
the Canadian economy is expected to continue in 2020.
As a diversified lender primarily focused on affordable residential Canadian real estate, we believe that our systematic approach
to lending, shaped by our risk appetite and expertise in balance sheet management, will allow us to effectively grow our business
and optimize opportunities even with this ongoing uncertainty.
Strong demand, continued low interest rates and the quality and number of immigration household formations, is expected to
support a balanced overall Canadian residential housing market. In some regions, however, low inventory supply may lead to a
seller’s market and increases in pricing. Over the mid to long term, we expect to continue to see challenges in the housing market
in major urban centres driven by supply and demand fundamentals, which will provide support for new residential housing
construction particularly at the affordable end of the market.
Increased competition from other lenders in the market is placing downward pressure on yields and spreads in our single family,
construction and commercial portfolios. We believe that our portfolio composition continues to provide a balanced risk and return
profile as we position ourselves in this competitive market. We continue to focus on our desired markets with our chosen borrowers
and strategic partnerships, as well as internal efficiencies and customer service, to earn appropriate risk adjusted returns. We
remain dedicated to our strategic partner strategy to support the growth and diversification of our business. In addition, we are
focused on increasing investments in our non-marketable securities portfolio. We believe that diversified assets with differing risk
and return profiles provide the Company with sustainable returns over the mid to long term. Our targeted annual growth in
corporate assets over the long term is 10%. We believe we are well positioned in terms of capital and liquidity to support our
targeted corporate asset growth within our risk appetite into 2020.
This Outlook contains forward-looking statements. For further information, please refer to the “A Caution About Forward-Looking
Information and Statements” section of this MD&A.
- 15 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
RESULTS OF OPERATIONS
Table 3: Net Income
(in thousands except for per share amounts and %)
For the Periods Ended
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Non-marketable securities
Marketable securities
Fees
Interest on cash and other income
Net gain (loss) on securities
Gain on sale of investment in MCAP Commercial LP
Gain on dilution of investment in MCAP Commercial LP
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Other financial expenses
Provision for (recovery of) credit losses
Net Investment Income - Securitization Assets
Mortgage interest
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Provision for (recovery of) credit losses
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
Q4
2019
Q4
Change
Annual
Annual
Change
2018
(%)
2019
2018
(%)
$
14,910 $
13,649
9% $
56,379 $
51,610
4,032
1,802
680
382
247
3,292
1,230
898
397
353
22%
47%
(24%)
(4%)
(30%)
15,759
13,188
6,416
3,027
2,002
1,101
5,357
3,464
1,909
1,284
9%
19%
20%
(13%)
5%
(14%)
2,067
(4,156)
150%
14,008
(512) 2,836%
—
—
—
—
24,120
15,663
7,960
1,111
77
—
133
9,281
6,590
1,048
27
—
126
7,791
n/a
n/a
54%
21%
6%
185%
n/a
6%
19%
—
187
1,701
(100%)
314
98,879
78,315
29,321
4,078
23,814
4,031
638
360
(461)
143
—
188
(40%)
26%
23%
1%
346%
n/a
(345%)
33,936
28,176
20%
14,839
7,872
89%
64,943
50,139
30%
4,950
208
5,158
3,650
494
(1)
5,657
154
5,811
(12%)
35%
(11%)
20,491
24,540
792
360
21,283
24,900
(16%)
120%
(15%)
4,208
519
(13%)
(5%)
15,345
1,954
17,793
2,133
(14%)
(8%)
2
(150%)
(10)
(2)
400%
4,143
4,729
(12%)
17,289
19,924
(13%)
1,015
1,082
(6%)
3,994
4,976
(20%)
3,870
1,744
5,614
2,700
2,812
5,512
43%
(38%)
2%
13,905
7,292
21,197
11,118
7,804
18,922
10,240
(310)
3,442
(105)
198%
195%
47,740
36,193
(554)
(100)
10,550 $
3,547
197% $
48,294 $
36,293
25%
(7%)
12%
32%
454%
33%
0.44 $
0.32 $
0.15
0.32
193% $
—% $
2.01 $
1.28 $
1.54
1.43
31%
(10%)
$
$
$
- 16 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Net Investment Income - Corporate Assets
Mortgage Interest Income
Table 4: Net Mortgage Interest Income and Average Rate by Mortgage Portfolio - Quarterly
For the Quarters Ended
December 31, 2019
September 30, 2019
December 31, 2018
Average
Balance2
Interest Average
Income Rate 1, 2
Average
Balance2
Interest Average
Income Rate 1, 2
Average
Balance2
Interest Average
Income Rate 1, 2
(in thousands except %)
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Residential
Non residential
Commercial loans
Multi family residential
Other
$ 121,690 $
928
3.07% $ 165,970 $
1,305
3.10% $ 126,367 $
977
371,487
47,964
4,416
769
4.76%
6.36%
355,895
21,532
4,098
411
4.59%
6.71%
245,177
2,772
4,400
69
497,878
7,993
4,060
95
6.38%
9.31%
452,837
7,258
4,500
94
6.36%
8.27%
441,790
10,589
15,917
35,350
237
472
5.90%
5.35%
42,731
50,383
616
827
5.72%
6.46%
70,076
69,515
7,448
191
948
1,244
Mortgages - corporate portfolio
$1,094,346 $ 14,910
5.43% $1,093,848 $ 14,609
5.28% $ 967,914 $ 13,649
Term deposit interest and expenses
1,019,641
7,960
2.80% 1,001,159
7,853
2.80%
917,106
6,590
Net corporate mortgage spread
income2
Spread of mortgages over term deposit
interest 2
$
6,950
$
6,756
$
7,059
2.63%
2.48%
Average term to maturity (months)
Mortgages - corporate
Term deposits
10.7
18.4
11.3
19.1
11.5
18.7
Table 5: Net Mortgage Interest Income and Average Rate by Mortgage Portfolio - Annual
Average
Balance2
2019
Interest
Income
Average
Rate 1, 2
Average
Balance2
2018
Interest
Income
Average
Rate 1, 2
For the Years Ended December 31
(in thousands except %)
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Residential
Non residential
Commercial loans
Multi family residential
Other commercial
$
134,839 $
335,057
24,691
4,252
15,409
1,629
3.13% $
104,146 $
4.60%
6.41%
216,631
9,675
3,232
9,948
558
451,416
29,199
6,565
526
428,508
27,795
6,745
438
6.47%
7.79%
5.58%
6.44%
72,878
79,662
5.41% $
918,245 $
2.79%
878,944
$
2.62%
3,885
5,754
51,610
23,814
27,796
Mortgages - corporate portfolio
$ 1,040,960 $
Term deposit interest and expenses
Net corporate mortgage spread income2
Spread of mortgages over term deposit
interest 2
969,121
$
38,394
49,998
2,143
3,221
56,379
29,321
27,058
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 prior period adjustments are
excluded from the calculation of the average interest rate as applicable. Non-recurring items were immaterial for the quarters ended December 31,
2019, September 30, 2019 and December 31, 2018 and the years ended December 31, 2019 and December 31, 2018.
2 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
- 17 -
3.17%
4.52%
6.19%
6.69%
7.15%
5.37%
7.09%
5.62%
2.69%
2.93%
3.10%
4.59%
5.76%
6.49%
6.50%
5.33%
7.24%
5.62%
2.55%
3.07%
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 6: Mortgage Originations
(in thousands except %)
For the Periods Ended
Originations
Single family - insured
Q4
2019
Q3
Change
Q4
Change
Annual
Annual
Change
2019
(%)
2018
(%)
2019
2018
(%)
$
59,553 $
76,970
(23%) $
27,631
116% $ 231,823 $ 102,213
Single family - uninsured
Single family - uninsured completed inventory 1
Residential construction 1
Non-residential construction 1
Commercial 1
57,276
424
104,745
—
2,000
46,179
32,030
74,611
—
212
24%
(99%)
40%
n/a
843%
50,805
3,854
56,580
646
475
13%
(89%)
85%
(100%)
321%
222,301
121,050
47,917
12,900
295,264
298,155
760
3,037
9,129
51,228
$ 223,998 $ 230,002
(3%) $ 139,991
60% $ 801,102 $ 594,675
127%
84%
271%
(1%)
(92%)
(94%)
35%
Renewals of securitized mortgages 2
Single family - insured
$
27,229 $
30,606
(11%) $
12,065
126% $
82,808 $
59,906
38%
1 Construction, commercial and completed inventory originations represent all advances on loans.
2 Represents mortgages previously derecognized or held in the securitized portfolio that have been renewed into the corporate mortgage portfolio.
Overview
The decrease in the spread of mortgages over term deposit interest1 in 2019 from 2018 was due to an increase in the proportion
of our corporate portfolio held in single family mortgages. Re-balancing of the risk profile of the mortgages on our balance sheet
was a strategic focus of the Company in 2019. Continued intense market competition and an increase in term deposit funding and
related costs also contributed to the decrease in the spread of mortgages over term deposit interest1.
Single family
During 2019, we focused on single family originations in our corporate mortgage portfolio and accordingly our volumes increased
significantly over 2018. This increase was a result of our enhanced internal sales and marketing capabilities, strengthened
relationships with the broker community and an increased underwriting capacity. Additionally, we continued to acquire uninsured
single family mortgages from our strategic partners and third party originators.
We continue to grow our insured single family origination volumes to allow us to securitize opportunistically through the Canada
Mortgage and Housing Corporation (“CMHC”) National Housing Act (“NHA”) MBS program. The significant increase in insured
single family originations in 2019 led to an 82% increase in single family securitization volumes to $308 million in 2019 from $169
million in 2018.
Single family mortgages provide comparatively lower yields given the lower risk profile. We will continue to focus on our target
markets and risk profile while anticipating increased competition into 2020. Higher gross coupon and penalty income in our
uninsured single family originations during Q4 2019 contributed to a higher corporate mortgage portfolio average interest rate1
compared to Q3 2019. We increased our single family uninsured completed inventory portfolio during the second half of 2019
through our origination strategic partnerships.
Construction and commercial
During 2019, we focused on originations in our residential construction portfolio in our selected markets, with our preferred
borrowers and risk profile. The decrease in the commercial portfolio was due to the movement of certain loans to the construction
and completed inventory portfolios and increased competition for product within our risk appetite and with our desired risk adjusted
return. During Q4, 2019, we were proactive in managing the portfolio for future growth opportunities.
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
- 18 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Mortgage renewal rights
Through our XMC Mortgage Corporation (“XMC”) origination platform, 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 maturity, we have the right to renew these mortgages, which we believe will contribute to future income.
As at December 31, 2019, we had the renewal rights to $1.2 billion of single family mortgages (September 30, 2019 - $1.1 billion;
December 31, 2018 - $985 million).
Equity Income from MCAP
The $2.6 million increase in equity income from MCAP in 2019 from 2018 was due to higher net interest income on securitized
mortgages, net investment revenue and mortgage origination fees, partially offset by higher financial instrument losses.
In Q4 2019, MCAP’s origination volumes were $4.7 billion, an increase from $3.5 billion in Q4 2018. For 2019, MCAP’s origination
volumes were $16.9 billion, an increase from $15.4 billion in 2018. As at November 30, 2019, MCAP had $105.5 billion of assets
under management compared to $78.1 billion at August 31, 2019 and $72.8 billion as at November 30, 2018.
We recognize equity income from MCAP on a one-month lag such that our 2019 equity income from MCAP is based on MCAP’s
net income for the year ended November 30, 2019. For further information on our equity investment in MCAP, refer to the “Equity
investment in MCAP” sub-section of the “Financial Position” section of this MD&A.
Non-Marketable Securities
Income from non-marketable securities primarily consisted of distribution income of $1.2 million from the KingSett High Yield Fund
(“KSHYF”) in Q4 2019 (Q4 2018 - $1.1 million) and $0.3 million from Crown LP in Q4 2019 (Q4 2018 - $0.1 million). For 2019, we
received $4.7 million of distribution income from the KSHYF (2018 - $4.6 million) and $1.4 million from Crown LP (2018 - $0.8
million).
Marketable Securities
Marketable securities income consists primarily of distributions from the REIT portfolio. The yield on this portfolio was 4.79% in
Q4 2019 (Q4 2018 - 6.35%). During 2019, the yield was 5.19% (2018 - 5.86%). The yield has been calculated based on the average
portfolio balance. The net gain on the REIT portfolio discussed below contributed to the lower 2019 yield by increasing the average
portfolio balance.
Net Gain (Loss) on Securities
In Q4 2019, we recorded a $2.1 million net gain on securities compared to a $4.2 million net loss in Q4 2018. During 2019, we
recorded a $14.0 million net gain on the securities portfolio, which was driven by a net gain of $10.8 million on our REIT portfolio
and $3.2 million on our investment in Crown LP, compared to a $0.5 million net loss in 2018 primarily related to a $3.5 million net
loss on our REIT portfolio. In 2019, proceeds from dispositions in our REIT portfolio totalled $17.9 million, resulting in $6.3 million
of realized gains.
Gain on Dilution of Investment in MCAP
In 2019 and 2018, MCAP issued additional class B units to other partners of MCAP which decreased our equity interest. As a result
of the issuance of new units at prices in excess of the per-unit carrying value of the investment, we recorded a dilution gain of
$0.2 million in 2019 (2018 - $0.3 million).
Term Deposit Interest and Expenses
The increase in term deposit interest and expenses from 2018 is primarily due to the increase in deposit funding and related costs
to support growth in our mortgage portfolio. Market rate changes on new deposits have a more gradual impact on the average
term deposit interest rate given the fixed-rate nature of the term deposit portfolio compared to the floating rate component of
the corporate mortgage portfolio, which reprices immediately. Term deposit expenses include costs related to insurance,
infrastructure and administration.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Net Investment Income - Securitization Assets
Net investment income from securitization assets relates to our participation in the market MBS program and CMB program. Our
total new securitization volumes were $104 million in Q4 2019 (Q4 2018 - $63 million) and $322 million in 2019 (2018 - $169
million). For further details on these programs, refer to the “Securitization Programs” section of this MD&A.
Table 7: Net Mortgage Interest Income and Average Rate for Securitized Mortgage Portfolio - Quarterly
For the Quarters Ended
December 31, 2019
September 30, 2019
December 31, 2018
(in thousands except %)
Average
Balance2
Interest Average
Income Rate 1, 2
Average
Balance2
Interest Average
Income Rate 1, 2
Average
Balance2
Interest Average
Income Rate 1, 2
Mortgages - securitized portfolio
$ 773,136 $
4,950
2.56% $ 747,566 $
4,800
2.58% $ 891,976 $
5,657
Financial liabilities from securitization
793,569
3,650
1.84%
784,259
3,662
1.86%
917,589
4,208
Net securitized mortgage spread
income 2
Spread of mortgages over liabilities 2
$
1,300
$
1,138
$
1,449
0.72%
0.72%
Table 8: Net Mortgage Interest Income and Average Rate for Securitized Mortgage Portfolio - Annual
For the Years Ended December 31
(in thousands except %)
Average
Balance2
Mortgages - securitized portfolio
$
802,970 $
Financial liabilities from securitization
Net securitized mortgage spread income 2
Spread of mortgages over liabilities 2
827,940
$
2019
Interest
Income
20,491
15,345
5,146
Average
Rate 1, 2
Average
Balance2
2.56% $
956,531 $
1.85%
972,180
$
0.71%
2018
Interest
Income
24,540
17,793
6,747
2.53%
1.83%
0.70%
Average
Rate 1, 2
2.57%
1.83%
0.74%
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 prior period adjustments are
excluded from the calculation of the average interest rate as applicable. Non-recurring items were immaterial for the quarters ended December 31,
2019, September 30, 2019 and December 31, 2018 and the years ended December 31, 2019 and December 31, 2018.
2 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
- 20 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Provisions for Credit Losses
Table 9: Provisions for Credit Losses and Write-offs
(in thousands except basis points and %)
For the Periods Ended
Q4
2019
Q4
Change
Annual
Annual
Change
2018
(%)
2019
2018
(%)
Provision (recovery) on impaired corporate mortgages
Single family mortgages uninsured
$
6 $
Construction
Provision (recovery) on performing corporate mortgages
Single family mortgages insured
Single family mortgages uninsured
Single family mortgages uninsured - completed inventory
Construction loans
Commercial loans
Multi family residential
Other commercial
—
6
—
60
27
29
162
217
379
(96%) $
62 $
(100%)
(98%)
(217)
(155)
336
217
553
(82%)
(200%)
(128%)
(1)
(100%)
241
20
(75%)
35%
(155)
(119%)
(4)
23
135
(192)
(167)
(254)
(98%)
(114%)
(153%)
19
(305)
140
474
(346)
(269)
(287)
9
111%
667
(146%)
(356)
(139%)
(40)
(1,285%)
(127)
(458)
(305)
172%
(41%)
(6%)
Other provisions (recoveries)
(8)
1
(900%)
(19)
(60)
(68%)
Total corporate provision for (recovery of) credit losses
133
126
6%
(461)
188
(345%)
Provision (recovery) on performing securitized mortgages
Total provisions for (recoveries of) credit losses
Corporate mortgage portfolio data:
Provisions for (recoveries of) credit losses, net
Net write offs
Net write offs (basis points)
$
$
$
(1)
132 $
141 $
58 $
2.1
2
128
125
—
—
(150%)
(10)
(2)
400%
3% $
(471) $
186
(353%)
13% $
n/a $
n/a
(442) $
99 $
1.0
248
256
2.8
(278%)
(61%)
(64%)
Provisions on performing mortgages reflect changes in portfolio balances, macroeconomic conditions and characteristics of the
mortgages held in the portfolio. Additionally, we may incorporate management judgment, where appropriate, in the calculation
of mortgage allowances. Accordingly, provisions on performing mortgages are expected to vary between periods.
All write-offs noted in the table above relate to the uninsured single family mortgage portfolio.
Operating Expenses
Table 10: Operating Expenses
(in thousands except %)
For the Periods Ended
Salaries and benefits
General and administrative
Q4
2019
Q4
2018
Change
(%)
Annual
2019
Annual
2018
Change
(%)
$
$
3,870 $
1,744
5,614 $
2,700
2,812
5,512
43% $ 13,905 $ 11,118
7,804
7,292
(38%)
2% $ 21,197 $ 18,922
25%
(7%)
12%
The increase in salaries and benefits in Q4 2019 and 2019 from Q4 2018 and 2018 is primarily due to additional resources to support
our increased focus on single family originations, internal infrastructure and systems initiatives.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
The decrease in general and administrative expenses in Q4 2019 from Q4 2018 is primarily due to higher professional fees incurred
in Q4 2018.
Taxable Income
The table below provides a reconciliation between consolidated net income for accounting purposes and non-consolidated taxable
income. The adjustments below represent the difference between the 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 XMC and other subsidiaries
as it does not directly impact MCAN’s non-consolidated taxable income.
As a Mortgage Investment Corporation (“MIC”), we expect to pay out all of our taxable income over time through dividends. As a
MIC, we are entitled to deduct dividends paid up to 90 days after year end from taxable income. Dividends that are deducted in
the calculation of taxable income are not included in the table below.
Taxable income is considered to be a non-IFRS measure. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
Table 11: Taxable Income Reconciliation ¹
(in thousands)
For the Periods Ended
Consolidated net income for accounting purposes
Adjustments to calculate taxable income:
Reverse: Equity income from MCAP - accounting purposes
Add: MCAP taxable income
Reverse: Provision for (recovery of) credit losses 2
Add: Amortization of upfront securitization program costs 3
Deduct: Securitization program mortgage origination costs 3
Reverse: Net (gain)/loss on securities 4
Add: Capital gains
Reverse: (Income)/loss earned in subsidiaries 5
Deduct: Gain on dilution of MCAP 7
Deduct: Accounting gain on partial sale of MCAP 6
Add: Taxable gain on partial sale of MCAP 6
Other items
Taxable Income
Q4
2019
Q4
2018
Annual
2019
Annual
2018
$
10,550 $
3,547 $
48,294 $
36,293
(4,032)
2,176
135
1,349
(1,553)
636
3,625
(1,342)
—
—
—
(365)
11,179 $
(3,292)
6,896
(211)
1,941
(1,042)
4,162
142
562
—
—
—
(1,008)
11,697 $
(15,759)
7,590
(313)
6,204
(7,874)
(10,780)
4,043
1,108
(187)
—
—
456
32,782 $
(13,188)
3,620
(289)
7,106
(2,755)
3,521
992
(2,023)
(314)
(1,701)
1,425
(2,220)
30,467
$
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 Provisions on performing mortgages are excluded from the calculation of taxable income; provisions on impaired mortgages are 90% deductible
for tax purposes.
3 Securitization program mortgage origination costs are deductible in full for tax purposes as mortgages are securitized but are capitalized and
amortized for accounting purposes. Therefore, amortization is added back in the calculation of taxable income.
4 Excluded from the calculation of taxable income; only includes net gains and losses recognized in the MIC entity.
5 Represents the component of consolidated income that is earned outside of the MIC entity, therefore excluded in the calculation of taxable income.
6 For tax purposes, the accounting gain is excluded and only 50% of the taxable gain is included.
7 Not recognizable in the calculation of taxable income.
The change in taxable income in 2019 from 2018 is primarily due to three factors:
1) Higher taxable income allocation from MCAP driven by increased income and by the timing differences between
accounting and taxable income related to securitization transactions;
2) Dispositions of securities within our REIT portfolio; and
3) Increased securitization activity, resulting in higher mortgage origination costs.
During 2019, we incurred $7.9 million of origination costs on securitized mortgages (including market MBS held by MCAN) (2018
- $2.8 million) due to higher insured single family origination volumes and increased participation in the securitization market (both
single family and multi family). These costs are deductible for income tax purposes in the period that the mortgages are securitized;
however, for accounting purposes they are capitalized and amortized over the term of the mortgages. As at December 31, 2019,
the unamortized origination fee balance was $9.8 million (December 31, 2018 - $9.0 million), which represents costs that are still
to be expensed for accounting purposes but will be added back in the calculation of taxable income in the MIC in future periods.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
We expect our business activities to continue to impact the timing and amount of differences between taxable income and
accounting income in the MIC. We believe that MCAP’s taxable income may increase over the midterm from timing differences
between accounting income and taxable income due to MCAP’s growth and strategic direction. MCAN’s taxable income may also
be impacted by the upfront costs of our securitization activities and our ongoing business activities. As a result, we may recognize
higher taxable income in the MIC.
FINANCIAL POSITION
Table 12: Assets
(in thousands except %)
As at
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Non-marketable securities
Equity investment in MCAP Commercial LP
Deferred tax asset
Other assets
Securitization Assets
Cash held in trust
Mortgages
Other assets
December 31 September 30
2019
2019
Change December 31
2018
(%)
Change
(%)
$
$
54,452 $
46,170
1,089,401
93,689
69,844
132
7,771
1,361,459
58,778
62,490
1,096,719
72,982
68,076
129
11,530
1,370,704
28,575
784,296
5,011
817,882
2,179,341 $
53,202
770,728
4,927
828,857
2,199,561
(7%) $
(26%)
(1%)
28%
3%
2%
(33%)
(1%)
98,842
53,247
922,390
71,813
61,593
2,961
13,493
1,224,339
(46%)
2%
2%
(1%)
(1%) $
26,002
887,252
3,479
916,733
2,141,072
(45%)
(13%)
18%
30%
13%
(96%)
(42%)
11%
10%
(12%)
44%
(11%)
2%
During 2019, we exceeded our targeted annual growth in corporate assets over the long term of 10%, with growth at 11%, primarily
driven by strong origination volumes in our mortgage portfolio. This increase in corporate assets was offset by mortgage maturities
in the securitized mortgage portfolio which exceeded the impact of new securitization issuances in 2019.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Mortgages - Corporate & Securitized
Corporate Mortgages
Single family mortgages
Insured and Uninsured
We invest in insured and uninsured residential single family mortgages in select markets across Canada, primarily originated by
XMC through its strategic relationships with mortgage brokers for our own corporate portfolio and for securitization activities. We
focus our uninsured mortgage lending on a niche borrower market concentrated in larger urban centres that include customers
with credit challenges. 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, the value at the time of funding is the lower of the appraised value of the property as
determined by a qualified appraiser or purchase price (if applicable). Residential mortgages insured by CMHC or other private
insurers may exceed this ratio.
Uninsured - Completed inventory loans
Uninsured - completed inventory loans are extended to developers to provide interim mortgage financing on residential units
(condominium or freehold) that are completed or close to completion. Qualification criteria for the completed inventory
classification include no substantial remaining construction risk, commencement of occupancy permits, potential sale and closing
with a purchaser within 3-4 months or units near completion. We invest in this product type opportunistically and given the nature
of unit closings, originations and repayments can be unpredictable.
Construction loans
Residential construction loans are made to developers to finance residential construction projects. These loans generally have a
floating interest rate, with a floor interest rate set at origination and loan terms of 24 months or less with extensions requiring
additional underwriting and approval. Non-residential construction loans provide construction financing for retail shopping
developments, office buildings and industrial developments.
In selecting residential construction projects to finance, we focus more on the affordable segments of the housing market, such
as first time or first move-up buyers characterized by affordable price points, lower price volatility and steady sales volumes based
on continued family formation and migration. This approach mitigates the impact of price volatility and tightened sales activity in
the event of market corrections. We only invest in markets where we have experience and local expertise, consisting primarily of
major urban markets and their surrounding areas with a preference for proximity to transit. We target experienced developers
with a successful track record of project completion and loan repayment and smaller multi-phased projects requiring evidence of
strong pre-sales prior to loan funding. As at December 31, 2019, the average outstanding construction loan balance was $9 million
(September 30, 2019 - $8 million; December 31, 2018 - $6 million) with a maximum individual loan commitment of $30 million.
We utilize our relationships with strategic partners for loan participation, servicing and workout expertise.
Commercial loans
Commercial loans include multi family residential loans (e.g. loans secured by apartment buildings), and other commercial loans,
which consist of term mortgages (e.g. loans secured by retail or industrial buildings) and high ratio mortgage loans (e.g. loans that
do not meet conventional residential construction loan parameters).
Securitized Mortgages
Securitization assets consist primarily of single family insured mortgages that have been securitized through the NHA MBS program.
We issue MBS through our internal market MBS program and the Canada Housing Trust (“CHT”) CMB program.
For further information related to our securitization activities, refer to the “Securitization Programs” section of this MD&A.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 13: Mortgage Summary
(in thousands except %)
As at
Corporate portfolio:
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Commercial loans
Multi family residential
Other commercial
Securitized portfolio
Single family insured - Market MBS program
Single family insured - CMB program
December 31 September 30
2019
2019
Change December 31
2018
(%)
Change
(%)
$
$
110,181 $
382,820
45,455
504,520
128,637
363,949
48,958
500,295
14,032
32,393
1,089,401
18,281
36,599
1,096,719
(14%) $
5%
(7%)
1%
(23%)
(11%)
(1%)
111,419
255,545
7,703
433,579
50,133
64,011
922,390
449,935
334,361
784,296
1,873,697 $
454,088
316,640
770,728
1,867,447
(1%)
6%
2%
0% $
722,726
164,526
887,252
1,809,642
(1%)
50%
490%
16%
(72%)
(49%)
18%
(38%)
103%
(12%)
4%
We continue to be selective and will reposition our loan portfolio in terms of product composition, geographic mix and exposure
as required to meet changing market conditions and align to our risk appetite. We have strong strategic partnerships for origination
and expect to continue to maintain the quality of underwriting our investments in these portfolios. The decrease in the commercial
loan portfolio during 2019 was primarily due to the movement of certain loans to the construction and uninsured completed
inventory portfolios and reduced new originations compared to 2018.
Figure 1: Total Corporate and Securitized Mortgage Portfolio (in thousands)
$1,150,000
$1,050,000
$950,000
$850,000
$750,000
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
Securitized
Corporate
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Figure 2: Corporate Mortgage Portfolio Composition by Product Type (in thousands)
l
a
p
i
c
n
i
r
P
t
e
N
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Construction loans
Single family mortgages
uninsured
Single family mortgages
insured
Commercial loans
multi family residential
Commercial loans
other
Construction loans
Single family
mortgages
uninsured
Single family
mortgages
insured
Commercial loans
multi family
residential
Commercial loans
other
Single family mortgages
uninsured -
completed
inventory
Single family
mortgages
uninsured -
completed
inventory
Dec 31, 2018
Mar 31, 2019
Jun 30, 2019
$433,579 (47%)
$255,545 (28%)
$111,419 (12%)
$50,133 (5%)
$64,011 (7%)
$7,703 (1%)
$437,099 (44%)
$307,539 (31%)
$124,857 (13%)
$50,108 (5%)
$56,636 (6%)
$19,884 (2%)
$429,911 (43%)
$344,621 (34%)
$121,084 (12%)
$43,332 (4%)
$50,510 (5%)
$11,879 (1%)
Sept 30, 2019
$500,295 (46%)
$363,949 (33%)
$128,637 (12%)
$18,281 (2%)
$36,599 (3%)
$48,958 (4%)
Dec 31, 2019
$504,520 (46%)
$382,820 (35%)
$110,181 (10%)
$14,032 (1%)
$32,393 (3%)
$45,455 (4%)
Note: Amounts in parentheses represent the percentage of the corporate portfolio represented by the individual product type.
Figure 3: Mortgage Portfolio Geographic Distribution as at December 31, 2019 (December 31, 2018)
Corporate
Securitized
Other 1% (1%)
Atlantic 1% (1%)
Quebec 2% (2%)
Alberta 10% (10%)
BC 33% (32%)
Ontario 54% (54%)
Other 2% (4%)
Atlantic 4% (4%)
Quebec 2% (3%)
BC 4% (7%)
Alberta 15% (22%)
Ontario 73% (60%)
- 26 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Credit Quality
Table 14: Arrears and Impaired Mortgages
December 31 September 30
2019
2019
Change December 31
2018
(%)
Change
(%)
(in thousands except %)
As at
Impaired mortgages
Corporate
Single family mortgages - insured
Single family mortgages - uninsured
Construction loans
Securitized
Total impaired mortgages
Impaired mortgage ratio (corporate) 1,2
Impaired mortgage ratio (total) 1,2
Mortgage arrears (past due) 3
Corporate
Single family mortgages - insured
Single family mortgages - uninsured
Construction loans
Total corporate mortgage arrears 1
Total securitized mortgage arrears 1
Total mortgage arrears 1
Staging analysis - corporate portfolio
Stage 2
Single family mortgages - insured
Single family mortgages - uninsured
Single family mortgages - uninsured -
completed inventory
Construction loans
Commercial loans - multi-family
Commercial - other
Stage 3
Single family mortgages - insured
Single family mortgages - uninsured
Construction loans
$
$
$
$
$
$
$
$
$
$
1,783
1,739
—
3,522
761
4,283
0.32%
0.23%
3,340
8,821
—
12,161
3,750
15,911
11,815
64,790
2,411
44,504
947
—
124,467
1,783
1,739
—
3,522
923
2,086
—
3,009
378
3,387
93% $
(17%)
n/a
17%
101%
26% $
1,004
1,602
548
3,154
1,801
4,955
0.27%
0.18%
0.05%
0.05%
0.34%
0.27%
2,417
10,597
—
13,014
3,367
16,381
12,769
60,843
—
49,179
987
—
123,778
923
2,086
—
3,009
38% $
(17%)
n/a
(7%)
11%
(3%) $
1,594
7,293
548
9,435
6,527
15,962
(7%) $
6%
7,743
49,493
n/a
(10%)
(4%)
n/a
1%
93%
(17%)
n/a
17%
—
60,929
2,079
3,535
123,779
1,004
1,602
548
3,154
Total stage 2 and 3 corporate mortgages
$
127,989
$
126,787
1% $
126,933
Allowance for credit losses
Corporate
Allowance on performing mortgages
Allowance on impaired mortgages
Securitized - allowance on performing
mortgages
Total allowance for credit losses
$
$
$
4,119
194
4,313
4
3,984
246
4,230
5
4,317
$
4,235
3% $
(21%)
2%
(20%)
2% $
4,424
430
4,854
14
4,868
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 Effective January 1, 2019, we revised the impaired mortgage ratios to include insured mortgages in the numerator such that the ratios are equal
to impaired mortgages divided by portfolio balance. Prior period ratios have been restated.
3 Mortgage arrears consists of mortgages that are at least one day past due and impaired mortgages.
- 27 -
78%
9%
(100%)
12%
(58%)
(14%)
(0.02%)
(0.04%)
110%
21%
(100%)
29%
(43%)
—%
53%
31%
n/a
(27%)
(54%)
(100%)
1%
78%
9%
(100%)
12%
1%
(7%)
(55%)
(11%)
(71%)
(11%)
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Arrears and Impaired Mortgage Summary
The majority of single family and securitized arrears activity occurs in the 1-30 day category, in which the bulk of arrears are resolved
and do not migrate to arrears categories over 30 days. We closely monitor and actively manage these arrears.
We have historically had low arrears and impaired balances related to our construction and commercial loan portfolios due to our
prudent and selective lending methodology and our default management processes in these product types.
The classification of mortgages into stage 2 and stage 3 involves consideration of additional criteria such as credit score and internal
risk rating. Accordingly, stage 2 and stage 3 balances are expected to vary between periods.
Figure 4: Impaired Corporate Mortgage Ratio
0.50%
0.40%
0.30%
0.20%
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
The impaired corporate ratio, as presented above, incorporates impaired (stage 3) mortgages under IFRS 9. The impaired mortgage
ratios are considered to be “Non-IFRS Measures”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
For further information regarding corporate mortgages by risk rating, refer to Note 7 to the consolidated financial statements.
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 individual mortgages that are insured by CMHC or other approved mortgage insurers at origination and
mortgages that are portfolio-insured after origination. Uninsured mortgages include both single family uninsured and single family
uninsured - completed inventory loans.
The HELOC balances displayed below relate to insured single family mortgages that were acquired by MCAN previously. We do
not originate HELOCs.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 15: Single Family Mortgages by Province as at December 31, 2019
(in thousands
except %)
Insured
% Uninsured
% HELOCs
%
Corporate
Securitized
Insured
%
Total
%
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
Total
$
68,006
25,353
4,203
5,245
5,853
1,460
61.8% $ 292,206
48,021
23.0%
74,157
3.8%
3,417
4.8%
4,656
5.3%
5,818
1.3%
68.2% $
11.2%
17.3%
0.8%
1.1%
1.4%
$ 110,120 100.0% $ 428,275 100.0% $
55.7% $ 575,122
114,509
44.3%
34,442
—%
17,183
—%
28,864
—%
14,176
—%
70.7%
34
14.2%
27
8.5%
—
2.0%
—
3.0%
—
—
1.6%
61 100.0% $ 784,296 100.0% $ 1,322,752 100.0%
73.3% $
14.6%
4.4%
2.2%
3.7%
1.8%
935,368
187,910
112,802
25,845
39,373
21,454
Table 16: Single Family Mortgages by Province as at December 31, 2018
(in thousands
except %)
Insured
% Uninsured
% HELOCs
%
Corporate
Securitized
Insured
%
Total
%
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
Total
$
71,381
21,599
3,872
5,331
7,523
1,547
64.1% $ 167,998
37,616
19.4%
41,829
3.5%
3,657
4.8%
5,471
6.8%
6,677
1.4%
63.8% $
14.3%
15.9%
1.4%
2.1%
2.5%
$ 111,253 100.0% $ 263,248 100.0% $
136
30
—
—
—
—
81.9% $ 532,817
195,414
18.1%
65,229
—%
29,952
—%
38,287
—%
25,553
—%
61.1%
20.2%
8.8%
3.1%
4.1%
2.7%
166 100.0% $ 887,252 100.0% $ 1,261,919 100.0%
60.1% $
22.0%
7.4%
3.4%
4.3%
2.8%
772,332
254,659
110,930
38,940
51,281
33,777
Table 17: Single Family Mortgages by Amortization Period as at December 31, 2019
(in thousands except %)
Up to 20
Years
>20 to 25
Years
>25 to 30
Years
>30 to 35
Years
Total
Corporate
Securitized
Total
$
$
$
100,323
$
148,600
$
257,469
$
32,064
$
538,456
18.6%
27.6%
47.8%
6.0%
100.0%
165,064
$
516,884
$
96,205
$
6,143
$
784,296
21.0%
65.9%
12.3%
0.8%
100.0%
265,387
$
665,484
$
353,674
$
38,207
$ 1,322,752
20.1%
50.3%
26.7%
2.9%
100.0%
Table 18: Single Family Mortgages by Amortization Period as at December 31, 2018
(in thousands except %)
Up to 20
Years
>20 to 25
Years
>25 to 30
Years
>30 to 35
Years
Total
Corporate
Securitized
Total
$
$
$
56,025
$
109,615
$
203,510
$
5,517
$
374,667
15.0%
29.2%
54.3%
1.5%
100.0%
196,325
$
461,363
$
192,786
$
36,778
$
887,252
22.1%
52.1%
21.7%
4.1%
100.0%
252,350
$
570,978
$
396,296
$
42,295
$ 1,261,919
20.0%
45.2%
31.4%
3.4%
100.0%
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 19: Average Loan to Value (LTV) Ratio for Uninsured Single Family Mortgage Originations
(in thousands except %)
For the Periods Ended
Ontario
Alberta
British Columbia
Other
Q4 Average
LTV
2019
Q4 Average
LTV
2018
Annual Average
LTV
2019
Annual Average
LTV
2018
$ 52,180
497
5,023
—
$ 57,700
70.2% $ 38,799
4,786
52.6%
68.8% 10,874
200
69.9% $ 54,659
—%
70.8% $199,412
62.0% 21,558
70.8% 48,720
79.7%
528
70.1% $270,218
70.6% $ 87,924
60.7% 12,530
63.7% 31,471
71.9%
2,025
68.6% $133,950
69.8%
62.6%
67.6%
72.3%
68.4%
Table 20: Average Mortgage Loan to Value (LTV) Ratios at Origination
As at
Corporate portfolio:
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Residential
Non-residential
Commercial loans
Multi family residential
Other commercial
Securitized portfolio
Single family insured - Market MBS Program
Single family insured - CMB Program
December 31 September 30 December 31
2018
2019
2019
78.8%
68.1%
63.9%
46.2%
—%
58.0%
58.4%
58.4%
82.9%
83.9%
83.3%
80.2%
67.8%
62.2%
46.2%
38.2%
48.2%
53.7%
58.3%
84.1%
83.6%
83.9%
79.8%
64.8%
59.6%
46.9%
46.2%
62.8%
51.0%
57.0%
84.3%
82.9%
84.0%
68.8%
68.8%
70.2%
Based on 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 could include, for example, changes to
unemployment rates, income levels and consumer confidence and spending which we would expect to increase single family
defaults and arrears. MCAN utilizes a number of risk assessment and mitigation strategies to lessen the potential impact for loss
on single family mortgages.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Other Corporate Assets
Cash and Cash Equivalents
As at December 31, 2019, our cash balance was $54 million (September 30, 2019 - $59 million; December 31, 2018 - $99 million).
As part of liquidity management, we align our liquidity position to our liquidity and funding requirements. Cash and cash equivalents,
which include cash balances with banks and overnight term deposits, provide liquidity to meet maturing term deposit and new
mortgage funding commitments. We actively manage our cash and cash equivalents in the context of our prudent liquidity and
cash management practices.
Marketable Securities
Marketable securities, consisting primarily of REITs, provide additional liquidity at yields in excess of cash and cash equivalents. As
at December 31, 2019, the portfolio balance was $46 million (September 30, 2019 - $62 million; December 31, 2018 - $53 million).
During 2019, we recognized a $11 million increase in the fair value of the portfolio. As a result of dispositions during 2019, we
realized $18 million of proceeds from dispositions of REITs.
Non-Marketable Securities
We invest in the KSHYF, in which we have a 7.3% equity interest as at December 31, 2019 (September 30, 2019 - 7.8%; December
31, 2018 - 7.9%). At December 31, 2019, the carrying value of our investment was $43 million (September 30, 2019 - $43 million;
December 31, 2018 - $42 million). The KSHYF invests in mortgages secured by real estate including mezzanine, subordinate and
bridge mortgages. During 2019, we increased our commitment in the KSHYF by $3.75 million. This commitment is expected to
be invested in the next 18 months.
We have a 14.1% equity interest in Crown LP as at December 31, 2019 (September 30, 2019 - 14.1%; December 31, 2018 - 14.1%).
At December 31, 2019, the carrying value of our investment was $33 million (September 30, 2019 - $30 million; December 31,
2018 - $30 million). Crown LP invests primarily in commercial office buildings. The carrying value of our investment in Crown LP
increased by $3.2 million during 2019 based on the fair value assessed on its cashflows and current market capitalization rates.
Subsequent to December 31, 2019, we sold our investment in the core fund units of Crown LP for $33 million representing fair
value as at year end.
During Q4 2019, we invested in Class A securitization notes (the “Securitization Notes”). As at December 31, 2019, the carrying
value of the Securitization Notes was $18 million. The issuer of the Securitization Notes is a wholly-owned subsidiary of MCAP.
The Securitization Notes may have the right to future fee income from the renewals of a securitized insured mortgage portfolio.
The expected final distribution date is no earlier than November 15, 2022.
Equity Investment in MCAP
We hold a 14.02% equity interest in MCAP (September 30, 2019 - 14.02%; December 31, 2018 - 14.08%), which represents 4.0
million units held by MCAN as at December 31, 2019 (September 30, 2019 - 4.0 million; December 31, 2018 - 4.0 million) of the
28.5 million total outstanding MCAP partnership units (September 30, 2019 - 28.5 million; December 31, 2018 - 28.4 million).
During 2019 and 2018, MCAP issued new class B units at a price in excess of MCAN’s carrying value per unit, resulting in a dilution
gain of $0.2 million (2018 - $0.3 million).
The investment had a net book value of $70 million as at December 31, 2019 (September 30, 2019 - $68 million; December 31,
2018 - $62 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 $37 million as at December 31, 2019 (September 30, 2019 - $37 million; December 31, 2018
- $36 million). The difference between the net book value and the LP ARA reflects an unrealized gain that, if realized, would be
recognized as a capital gain and may be applied against any tax loss carry forward. The LP ARA is considered to be a “Non-IFRS
Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
During 2019, we received $7.7 million of unitholder distributions from MCAP (2018 - $8.3 million). As we account for this investment
using the equity method, the receipt of distributions reduces the carrying value of the investment in MCAP.
Amongst the interparty rights in the MCAP partnership agreement, the majority partner in MCAP has the right to acquire MCAN’s
entire partnership interest in MCAP at “fair market value”, which would be determined by an independent valuator agreed upon
by both parties.
Other Securitization Assets
Other securitization assets include cash held in trust, which represents securitized mortgage principal and interest collections from
borrowers that are payable to MBS holders.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Liabilities and Shareholders’ Equity
Table 21: Liabilities and Shareholders' Equity
(in thousands except %)
As at
Corporate Liabilities
Term deposits
Loans payable
Current taxes payable
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Term Deposits
December 31 September 30
2019
2019
Change December 31
2018
(%)
Change
(%)
$
$
1,034,299 $
5,053
—
21
15,996
1,055,369
1,065,087
—
—
272
11,018
1,076,377
(3%) $
n/a
n/a
(92%)
45%
(2%)
919,623
—
173
3,478
13,169
936,443
793,660
793,660
1,849,029
795,673
795,673
1,872,050
—%
—%
(1%)
897,935
897,935
1,834,378
228,008
510
101,794
330,312
2,179,341 $
228,008
510
98,993
327,511
2,199,561
—%
—%
3%
1%
(1%) $
221,869
510
84,315
306,694
2,141,072
12%
n/a
(100%)
(99%)
21%
13%
(12%)
(12%)
1%
3%
—%
21%
8%
2%
Our primary source of funding for our corporate operations is the issuance of term deposits that are eligible for Canada Deposit
Insurance Corporation (“CDIC”) deposit insurance. We source term deposits through a broker distribution network across Canada
consisting of third party deposit agents and financial advisors. Deposits cannot be cashed prior to maturity or paid on demand
except in the event of the death of a depositor. We believe that our term deposits provide a reliable low-cost funding source that
can be strategically matched against the corporate mortgage portfolio. The role of term deposits in managing liquidity and funding
risk is discussed in the “Liquidity and Funding Risk” sub-section of the “Risk Management” section of this MD&A.
Financial Liabilities from Securitization
Financial liabilities from securitization relate to our participation in the market MBS program and CMB program, where we have
sold MBS to third parties but have not derecognized the related mortgages from our balance sheet. For further information on the
market MBS and CMB programs, refer to the “Securitization Programs” section of this MD&A.
Share Capital
Share capital activity for 2019 reflects new common shares issued through the DRIP. The DRIP participation rate for 2019 dividends
was 20% (2018 - 19%). For further information, refer to Note 17 to the consolidated financial statements.
Retained Earnings
Retained earnings activity for 2019 consists of net income of $48.3 million (2018 - $36.3 million) less dividends of $30.8 million
(2018 - $33.8 million).
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
SELECTED QUARTERLY FINANCIAL DATA
Table 22: Selected Quarterly Financial Data
(in thousands except per share amounts, %
and where indicated)
Income Statement Highlights
Q4/19
Q3/19
Q2/19
Q1/19
Q4/18
Q3/18
Q2/18
Q1/18
Net investment income - corporate assets
$ 14,839
$ 18,557
$ 13,104
$ 18,747
$ 7,872
$ 13,430
$ 15,063
$ 13,774
Net investment income - securitization assets
$ 1,015
$
962
$
965
$ 1,052
$ 1,082
$ 1,276
$ 1,317
$ 1,301
Net income
$ 10,550
$ 14,551
$ 8,888
$ 14,305
$ 3,547
$ 11,006
$ 11,125
$ 10,615
Basic and diluted earnings per share
Dividends per share
$
$
0.44
0.32
$
$
0.60
0.32
$
$
0.37
0.32
$
$
0.60
0.32
$
$
0.15
0.32
$
$
0.47
0.37
$
$
0.47
0.37
$
$
0.45
0.37
Return on average shareholders’ equity 1
12.84%
18.05%
11.27%
18.36%
4.66%
14.29%
14.54%
14.10%
Taxable income per share 1,2
$
0.46
$
0.28
$
0.28
$
0.34
$
0.49
$
0.13
$
0.48
$
0.19
Yields
Spread of corporate mortgages over term deposit
interest 1
Spread of securitized mortgages over liabilities 1
2.63%
0.72%
2.48%
0.72%
2.66%
0.70%
2.73%
0.69%
2.93%
0.70%
2.92%
0.74%
3.17%
0.76%
3.34%
0.74%
Average term to maturity (in months)
Mortgages - corporate
Term deposits
Balance Sheet Highlights ($ million)
Total assets
Mortgages - corporate
Mortgages - securitized
Total liabilities
Shareholders’ equity
Capital Ratios
Income tax assets to capital ratio 1
CET 1, Tier 1 and Total Capital ratios 1
Leverage ratio 3
Credit Quality
Impaired mortgage ratio (corporate) 1, 4
Impaired mortgage ratio (total) 1, 4
Mortgage Arrears
Corporate 1
Securitized 1
Total 1
10.7
18.4
11.3
19.1
11.6
20.1
11.9
17.2
11.5
18.7
12.8
19.2
13.2
20.5
11.3
19.0
$ 2,179
$ 2,200
$ 2,130
$ 2,167
$ 2,141
$ 2,189
$ 2,206
$ 2,154
$ 1,089
$ 1,097
$ 1,001
$
784
$
771
$
816
$
$
996
871
$
$
922
887
$
$
966
919
$
$
919
965
$
859
$ 1,013
$ 1,849
$ 1,872
$ 1,811
$ 1,850
$ 1,834
$ 1,887
$ 1,900
$ 1,852
$
330
$
328
$
319
$
317
$
307
$
302
$
306
$
302
4.93
22.52%
12.58%
5.13
21.77%
12.28%
4.71
22.40%
12.16%
4.69
22.09%
12.05%
4.64
21.66%
11.79%
4.90
20.58%
11.35%
4.60
21.47%
11.55%
4.33
21.29%
11.74%
0.32%
0.23%
0.27%
0.18%
0.27%
0.19%
0.30%
0.24%
0.34%
0.27%
0.23%
0.24%
0.24%
0.20%
0.44%
0.26%
$ 12,161
$ 13,014
$ 11,334
$ 11,251
$ 9,435
$ 8,398
$ 6,739
$ 9,204
3,750
3,367
4,122
7,431
6,527
8,472
13,979
9,554
$ 15,911
$ 16,381
$ 15,456
$ 18,682
$ 15,962
$ 16,870
$ 20,718
$ 18,758
Common Share Information (end of period)
Number of common shares outstanding
Book value of common share 1
Common share price - close
Market capitalization ($ million) 1
24,215
24,215
24,129
24,040
23,798
23,746
23,652
23,559
$ 13.64
$ 13.53
$ 13.23
$ 13.18
$ 12.89
$ 12.74
$ 12.94
$ 12.82
$ 17.10
$ 15.95
$ 15.95
$ 15.93
$ 13.32
$ 17.50
$ 17.90
$ 17.61
$
414
$
386
$
385
$
383
$
317
$
416
$
423
$
415
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 For further information refer to the “Taxable Income” section of this MD&A.
3 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. For further
information, refer to the “Capital Management” section of this MD&A.
4 Effective January 1, 2019, we revised the impaired mortgage ratios to include insured mortgages in the numerator such that the ratios are equal to impaired mortgages divided by portfolio
balance. Prior period ratios have been restated.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Corporate net investment income has been driven by changes in the corporate mortgage portfolio composition, market dynamics
and net gains and losses on marketable and non-marketable securities. Additionally, corporate net investment income is impacted
by equity income from MCAP, which can vary significantly from quarter to quarter.
Since the adoption of IFRS 9 effective January 1, 2018, we have experienced increased variability as a result of the recognition of
net gains and losses on certain securities through net income.
Since mid-2018, the corporate portfolio mix has shifted towards single family mortgages amidst a competitive market and
experienced growth. Term deposit funding and related costs also increased through this period to support corporate asset growth.
The combination of these two factors has contributed to the gradual decrease in the spread of corporate mortgages over term
deposit interest1. Higher gross coupon and penalty income in our uninsured single family originations during Q4 2019 contributed
to a higher corporate mortgage portfolio average interest rate1 relative to Q3 2019.
The size of the securitized mortgage portfolio has steadily decreased with mortgage maturities exceeding the impact of new
securitization issuances in recent years. The overall economics of securitization have been relatively flat and are impacted by
competitive and market driven pressures.
Capital ratios have remained steady across the last eight quarters as the gradual increase in corporate assets has generally been
matched by a growing capital base. Capacity tightened in Q3 2018 as a result of the accrual of the fourth quarter dividend during
this period.
Total arrears and impaired ratios, while low by historical standards, have varied on a quarterly basis given the nature of the 1-30
day arrears classification and seasonality in our portfolios.
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
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 asset growth, economic conditions, housing market activity, the interest rate environment and changes
to credit quality to determine appropriate levels of capital. We expect to pay out all of our taxable income over time through
dividends subject to final review and declaration by the Board. Capital growth is achieved through retained earnings, the DRIP,
rights offerings and public share offerings. Our capital management is driven by the guidelines set out by 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 maximum 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.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 23: Income Tax Capital ¹
(in thousands except ratios)
As at
Income tax assets 1
Consolidated assets
Adjustment for assets in subsidiaries
Non-consolidated assets in MIC entity
Add: corporate mortgage allowances
Less: securitization assets 2
Adjustments to equity investments in MCAP and subsidiaries
Other adjustments
Income tax liabilities 1
Consolidated liabilities
Adjustment for liabilities in subsidiaries
Non-consolidated liabilities in MIC entity
Less: securitization liabilities 2
Income tax capital 1
Income tax capital ratios 1
Income tax assets to capital ratio
Income tax liabilities to capital ratio
December 31
2019
September 30
2019
December 31
2018
$
$
$
$
$
2,179,341 $
11,250
2,190,591
4,135
(804,569)
(60,146)
(8,461)
1,321,550 $
2,199,561 $
13,423
2,212,984
4,005
(806,236)
(57,151)
(16,141)
1,337,461 $
2,141,072
6,743
2,147,815
4,466
(908,367)
(52,450)
(4,328)
1,187,136
1,849,029 $
(3,055)
1,845,974
(792,425)
1,053,549 $
1,872,050 $
(1,049)
1,871,001
(794,476)
1,076,525 $
1,834,378
(6,194)
1,828,184
(896,641)
931,543
268,001 $
260,936 $
255,593
4.93
3.93
5.13
4.13
4.64
3.64
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 The majority of securitization assets and liabilities on the balance sheet are excluded from income tax assets, liabilities and capital as they are
derecognized for income tax purposes.
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 above.
Both OSFI and the Basel Committee on Banking Supervision promote a resilient banking sector and strong global capital standards.
Key components of Basel III impact MCAN through the Capital Adequacy Requirements and Leverage Requirements Guidelines.
Our CET 1 capital consists of share capital, contributed surplus and retained earnings. OSFI expects all federally regulated financial
institutions to meet the minimum capital to risk-weighted asset ratios of 7% CET 1 Capital, 8.5% Tier 1 Capital and 10.5% Total
Capital. We do not hold any additional Tier 1 or Tier 2 capital instruments; therefore, our CET 1 capital is equal to our Tier 1 and
Total Capital.
As at December 31, 2019, we were in compliance with our internal target minimum CET 1, Tier 1 and Total Capital to risk weighted
asset and leverage ratios. We maintain prudent capital planning practices to ensure that we are adequately capitalized and continue
to satisfy minimum standards and internal targets.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 24: Regulatory Capital
(in thousands except %)
As at
Regulatory Ratios (OSFI)
Share capital
Contributed surplus
Retained earnings
Deduction from equity investment in MCAP 2
Common Equity Tier 1, Tier 1 and Total Capital 1
Total Exposure/Regulatory Assets 1
Consolidated assets
Less: deduction for equity investment in MCAP 2
Other adjustments 3
Total On-Balance Sheet Exposures
Mortgage and investment funding commitments (50%)
Letters of credit (50%)
Total Off-Balance Sheet Items
December 31
2019
September 30
2019
December 31
2018
$
$
$
$
$
$
228,008
510
101,794
(36,813)
293,499
2,179,341
(36,813)
3,804
2,146,332
170,148
16,982
187,130
$
$
$
228,008
510
98,993
(35,325)
292,186
2,199,561
(35,325)
1,402
2,165,638
199,041
15,368
214,409
221,869
510
84,315
(30,925)
275,769
2,141,072
(30,925)
1,295
2,111,442
205,010
21,878
226,888
Total Exposure/Regulatory Assets
$
2,333,462
$
2,380,047
$
2,338,330
Leverage ratio 1
Risk-weighted assets 1
Regulatory Capital Ratios 1
Common Equity Tier 1 capital to risk-weighted assets ratio
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
12.58%
12.28%
11.79%
$
1,303,502
$
1,342,254
$
1,273,205
22.52%
22.52%
22.52%
21.77%
21.77%
21.77%
21.66%
21.66%
21.66%
1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A.
2 The deduction for the equity investment in MCAP is equal to the equity investment balance less 10% of shareholders’ equity.
3 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 25: Regulatory Risk-Weighted Assets
(in thousands except %)
December 31, 2019
December 31, 2018
As at
Per Balance
Sheet
Average
Rate
Risk-
Weighted
Assets
Per Balance
Sheet
Average
Rate
Risk-
Weighted
Assets
On-Balance Sheet Assets
Cash and cash equivalents
Cash held in trust
Marketable securities
Mortgages - corporate
Mortgages - securitized
Non-marketable securities
Equity investment in MCAP Commercial LP
Deferred tax asset
Other assets
$
54,452
28,575
46,170
1,089,401
784,296
93,689
69,844
132
12,782
21% $
20%
100%
67%
4%
175%
47%
100%
100%
11,651 $
5,715
46,170
734,680
31,457
163,601
33,031
132
12,782
1,039,219
98,842
26,002
53,247
922,390
887,252
71,813
61,593
2,961
16,972
20% $
20%
100%
70%
3%
214%
50%
100%
100%
Off-Balance Sheet Items
Letters of credit
Commitments
Charge for operational risk 1
33,965
340,297
50%
41%
16,983
139,437
156,420
107,863
43,757
410,020
50%
45%
20,028
5,200
53,247
648,833
28,368
153,692
30,669
2,961
16,972
959,970
21,878
182,744
204,622
108,613
Risk-Weighted Assets
$ 1,303,502
$ 1,273,205
1 We use the basic indicator approach for operational risk, which is equal to 15% of the previous three-year average of net investment income from
corporate and securitized assets excluding provisions for credit losses multiplied by a factor of 12.5.
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 sufficient capital to support our business plan and risk appetite. The ICAAP
assesses the capital necessary to support the various inherent risks that we face, including liquidity and funding, credit, interest
rate, market, operational, regulatory compliance, strategic and reputational risks. Our business plan is also stress-tested under
various adverse scenarios 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.
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 CHT CMB program. For further information, refer to Note 11 to the consolidated financial
statements.
Market MBS Program
During 2019, we securitized $116 million of MBS through the market MBS program (2018 - $141 million). In 2019, we retained
none of the MBS securitized in 2019 on our corporate balance sheet (2018 - $46 million) with the remainder sold to third parties.
We may issue market MBS through the NHA MBS program and retain the underlying MBS security for liquidity purposes rather
than selling the MBS to a third party. As at December 31, 2019, we held $49 million of retained MBS on our balance sheet (December
31, 2018 - $68 million), which is included in the insured single family classification within corporate mortgages.
CMB Program
During 2019, we securitized $191 million of insured single family mortgages through the CMB program (2018 - $28 million) and
$14 million of insured multi family mortgages (2018 - $nil). At the time of the insured multi family securitization, the Company
derecognized the mortgages from its balance sheet and recorded an upfront gain of $71,000 (2018 - $nil).
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Other Considerations
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.
However, for income tax purposes, all mortgages securitized by MCAN are excluded from 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.
RISK MANAGEMENT
Effective risk management and an established risk management framework support a strong risk culture and help the Company
provide sustainable growth and returns for our shareholders while maintaining an appropriate balance between risk and return.
The Enterprise Risk Management Framework (“ERMF”) outlines the Company’s risk management structure, including the Three-
Lines-of-Defence model, emphasizes accountabilities, and supports a common understanding among all key stakeholders of how
the Company manages its risks.
Roles and Accountabilities
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Risk Governance
The Board of Directors oversees the design and implementation of our ERMF, while employees at all levels of the organization are
accountable for managing day-to-day risks. The Company’s Board is supported by Board Committees, senior management
committees and an experienced senior management team.
MCAN’s Risk Governance structure is illustrated in the following diagram:
SFMC: Single-Family Management Committee; CCC: Capital Commitments Committee; ITMC: IT Management Committee
The Board oversees the Company’s strategic direction, the implementation of an effective risk management culture and the internal
control framework across the Company, both directly and indirectly, through its committees within a written mandate. The Board
is responsible for overseeing the identification, measurement, monitoring and reporting of the major risks types affecting the
business, and satisfying itself that management has implemented appropriate policies, procedures and practices to manage risks
adequately and effectively.
The Enterprise Risk Management and Compliance Committee (“ERM&CC”) is accountable for overseeing the management of the
risk profile and the implementation of an effective risk management culture throughout the organization. The ERM&CC is
accountable for reviewing and recommending the risk appetite framework (“RAF”) for approval by the Board annually, regularly
reviewing the risk profile against the Board-approved risk appetite, satisfying itself that policies are in place and operating effectively
to manage the major risk types to which the Company is exposed, providing a forum for analysis of an enterprise view of risk
including trends and emerging risks, regularly assessing the Company’s capacity to withstand potential adverse events and ensuring
management allocates the appropriate resources to risk management.
The Audit Committee is accountable for the oversight of financial reporting and the information technology function, the adequacy
and effectiveness of internal controls and the performance of the finance, internal audit and information technology functions.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
The Conduct Review, Corporate Governance and Human Resources Committee (“CR,CG&HR”) is accountable for the oversight of
corporate governance and conduct, including potential conflicts of interest, policies, practices and processes, Board and
management succession, development and compensation, and the effectiveness of the Board and its committees.
The Executive Committee consists of the Chief Executive Officer (“CEO”) and senior management and is accountable for developing
and reporting performance relative to the Board approved strategic plan and a comprehensive set of enterprise wide policies and
frameworks for approval by the Board, including the RAF and ERMF. It is accountable for fostering a strong risk culture through
“tone at the top” and for identifying and reporting significant risks to the ERM&CC.
Three-Lines-of-Defence
The three-lines-of-defence model is employed to provide clarity with respect to the risk management structure and assigns roles
and accountabilities to enhance effective risk management and control.
First Line (Business Units):
•
Accountable for known and emerging risks and is accountable for planning, directing and controlling the day-to-day operations
of their respective business unit and establishing appropriate internal controls for managing risk.
Accountable for identifying, measuring, monitoring, and reporting risks within established risk appetite, regulatory guidelines
and relevant policies and frameworks.
Accountable for escalating risk issues and promoting a strong risk culture within their respective business unit.
•
•
Second Line (Oversight Functions):
•
•
Provides independent objective oversight of the First Line of Defence through monitoring and challenge.
Accountable for objectively identifying, measuring, monitoring and reporting known and emerging risks on an enterprise-
wide basis and escalating risk issues in a timely manner to the Board and/or senior management.
Identifies and assesses relevant regulatory changes and develops and implements risk measurement tools.
Promotes a strong risk culture and establishes effective training material.
•
•
• Monitors and reports on compliance with the RAF and ensures compliance with the ERMF and related policies and procedures.
These activities are overseen by:
•
•
•
The Risk function, under the leadership of the Chief Risk Officer (“CRO”), provides independent oversight, governance
and objective challenge with respect to identifying, measuring, monitoring and reporting on enterprise-wide risks. The
CRO has accountability for maintaining and managing the RAF, which includes reporting on significant business risks
and for fostering a strong risk culture throughout the Company.
The Finance function, under the leadership of the Chief Financial Officer (“CFO”), is accountable for the accuracy and
integrity of the Company’s accounting and financial reporting systems, including financial internal controls, financial
statements, planning and budgeting systems and all other financial matters. The CFO is accountable for developing and
monitoring performance and compliance against the Company’s capital management strategy.
The Chief Compliance Officer, Chief Anti Money Laundering Officer & Privacy Officer is accountable for identifying,
measuring, monitoring and reporting on the Company’s compliance with applicable laws and regulations as well as
identifying and ensuring controls are adequately designed to mitigate risks, including compliance and regulatory risk.
Third Line (Internal Audit):
•
•
•
Independent from both the First and Second Lines of Defence and headed by the Chief Audit Officer who reports to the Chair
of the Audit Committee
Provides reasonable assurance to senior management and the Board that the First and Second Lines of Defence are effectively
managing and controlling risks
Reviews the design and use of risk management tools, programs and systems in both the First and Second Lines of Defence
to ensure compliance with the ERMF, related policies and procedures, and applicable laws and regulations, including the
appropriateness of independent challenge.
Risk Appetite
The RAF governs the risk activities undertaken by the Company on an enterprise-wide basis. The RAF articulates the aggregate
level and types of risk MCAN is willing to accept, or to avoid, in order to achieve its business objectives.
Key inputs into the RAF include MCAN’s strategy and risk capacity, while the foundational components include risk appetite
statements, risk appetite limits, and roles and accountabilities for the Board and senior management in relation to overseeing the
implementation and monitoring of the RAF.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
MCAN’s overarching risk appetite statement is as follows:
1.
2.
3.
4.
5.
6.
7.
Focus on sustainable and stable growth of earnings.
Maintain a conservative liquidity profile and a strong capital base.
Always maintain MIC status.
Maintain balance in the corporate mortgage portfolio for managed risk and returns.
Maintain access to adequate funding and capital markets at all times.
Ensure sound management of regulatory compliance and operational risk and maintain a strong risk culture.
Ensure financial resiliency in a stressed scenario.
MCAN’s RAF includes risk appetite metrics to measure and monitor whether MCAN is operating within its established risk appetite.
Risk Culture
Risk culture is the system of values and behaviors present in an organization that shapes risk decisions of management and
employees. Within MCAN’s Three-Lines-of-Defence risk governance structure, all employees at all levels of the organization are
responsible for managing the day-to-day risks that arise in the context of their role. Senior management plays a critical role in
shaping risk culture by communicating the importance of risk management and ensuring that employees are aware of how their
behaviors may impact the organization.
Stress Testing
Stress testing is a key risk management tool that supplements risk management practices by providing an assessment of our capacity
to withstand potential adverse events and aids in refining our risk limits and chosen strategies. At least quarterly, MCAN conducts
enterprise-wide stress testing covering a wide range of risks and correlations among risks.
Results of stress testing are interpreted in the context of our risk appetite and our specific risk appetite metrics including metrics
for capital ratios, earnings volatility and level of stress losses. Enterprise-wide stress testing, recovery, capital and financial planning
processes are integrated within the Company.
Monitoring and Reporting
Risk monitoring and reporting are key components of MCAN’s ERMF and allow both the Board and senior management to execute
their oversight and challenge responsibilities with respect to business operations. Risk Management reports risk exposures to
senior management and the ERM&CC on a quarterly basis, to ensure business operations are within established risk appetite limits,
policy level limits and policy guidelines. Reports include an enterprise-wide view of risks, risk profile, trend analysis, emerging risks,
stress testing, including scenarios and sensitivity analysis, and ad hoc reporting, as applicable.
Major Risk Types
MCAN’s major risk types include: Liquidity & Funding, Credit, Interest Rate, Market, Operational, Regulatory Compliance, Strategic
and Reputational risk. Incidents related to these risks can adversely affect our ability to achieve our business objectives or execute
our business strategies, and may result in a loss of earnings, capital and/or damage to our reputation. The ERMF addresses how
we mitigate these risks by establishing effective policies, limits, and internal controls to monitor and mitigate these risks.
The shaded areas of this MD&A represent a discussion of risk factors and risk management policies and procedures relating to
liquidity, credit, 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.
Liquidity and Funding Risk
Liquidity and funding risk is the risk that cash inflows, including the ability to raise deposits and access to other sources of funding,
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.
On a daily basis, we monitor our liquidity position to ensure that the level of liquid assets held (including insured single family
mortgages, which are readily marketable within a time frame of one to three months), together with our ability to raise new
deposits and other funding sources, is sufficient to meet our funding commitments, deposit maturity obligations, and other financial
obligations.
The Board is accountable for the approval of the Liquidity Risk Management Framework (“LRMF”). The LRMF establishes a
framework to maintain sufficient liquidity, including holding a portfolio of high-quality liquid assets to meet commitments as they
come due. The LRMF details the daily, monthly and quarterly analyses that are performed by management, and includes a framework
for daily funding requirements, gap analysis between assets and liabilities, deposit concentration levels, liquidity risk limits, and
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
stress testing requirements, in alignment with both the standards set under the Trust Act and regulations or guidelines issued by
OSFI. Further to the LRMF, we maintain a Contingency Funding Plan that details the strategies and action plans to respond to stress
events that could materially impair our access to funding and liquidity.
The Asset and Liability Committee (“ALCO”), which is comprised of management, is accountable for liquidity management oversight.
On a monthly basis, ALCO reviews the Company’s liquidity risk profile, reviews funding strategies and regularly monitors
performance against established liquidity risk limits. Monitoring of liquidity risk is reported to the Board and any exceptions or
breach of key limits are immediately reported by ALCO to the ERM&CC. As at December 31, 2019 and 2018, we were in full
compliance with the LRMF, key liquidity risk limits and regulatory requirements.
Stress testing is reviewed monthly by ALCO and quarterly by the Board. Liquidity stress testing is performed on singular and
simultaneous scenarios. MCAN’s stress testing is designed to ensure that exposures remain within the liquidity risk appetite and
established Board-approved liquidity risk limits under the stress test scenarios. As at December 31, 2019 and 2018, we held sufficient
liquidity and maintained the ability to fund obligations over the forecast period under the stress test scenarios.
We have access to liquidity 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 maintain a demand loan revolver facility to meet our short-term obligations as required. Under the facility, there is a sublimit
for issued letters of credit, which may be used to support the obligations of borrowers to municipalities in conjunction with
construction loans. During 2019, the facility limit was increased from $75 million to $120 million.
We also have an agreement with a Canadian Schedule I Chartered bank that enables the Company to execute repurchase agreements
for liquidity purposes. This facility provides 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 will
execute these repurchase agreements to provide alternative sources of liquidity when it is efficient and effective to do so.
OSFI’s Liquidity Adequacy Requirements (“LAR”) guideline currently establishes two 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”) metrics. As at December 31, 2019 and 2018, we were in compliance with the LCR and NCCF metrics.
Our sources and uses of liquidity are outlined in the table below. For further information on our off-balance sheet commitment
associated with our investment in the KSHYF, refer to the “Off-Balance Sheet Arrangements” section of this MD&A.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 26: Liquidity Analysis
(in thousands)
Sources of liquidity
Cash and cash equivalents
Marketable securities
Mortgages - corporate
Non-marketable securities
Other loans
Uses of liquidity
Term deposits
Loans payable
Other liabilities
Within
3 months
3 Months
to 1 Year
1 to 3
Years
3 to 5
Years
Over 5
Years
December 31
2019
December 31
2018
$
54,452 $
46,141
289,240
—
882
390,715
— $
—
473,737
—
217
473,954
— $
—
256,583
17,619
—
274,202
— $
29
59,380
—
—
59,409
— $
—
10,461
76,070
—
86,531
54,452 $
46,170
1,089,401
93,689
1,099
1,284,811
98,842
53,247
922,390
71,813
2,640
1,148,932
63,540
5,053
9,538
78,131
380,295
—
529
380,824
467,820
—
1,512
469,332
122,644
—
1,679
124,323
—
—
2,738
2,738
1,034,299
5,053
15,996
1,055,348
919,623
—
13,169
932,792
Net liquidity surplus (deficit)
$ 312,584 $
93,130 $ (195,130) $ (64,914) $
83,793 $
229,463 $
216,140
Off-Balance Sheet
Unfunded mortgage
commitments
Commitment - KSHYF
$ 116,945 $ 113,205 $
86,126 $
—
—
$ 116,945 $ 113,205 $
1,827
87,953 $
— $
—
— $
— $
316,276 $
22,194
22,194 $
24,021
340,297 $
389,072
20,948
410,020
Note: The above table excludes securitized assets and liabilities and pledged assets as their use is restricted to securitization program operations.
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 investments 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 risk is managed through prudent risk management policies and procedures that emphasize the quality and diversification
of our investments and lending activities. Credit policies include credit risk limits in alignment with the RAF. These credit risk limits
include, but are not limited to, concentration by asset class, geographic region, dollar amount and borrower. These policies are
amended on an ongoing basis and approved by the Board to reflect changes in market conditions and risk appetite.
The Capital Commitments Committee (“CCC”), which is comprised of management, is accountable for decision-making on credit
risk issues and provides oversight of proposed investments for the construction, commercial and marketable and non-marketable
securities portfolios.
Credit and commitment exposure are closely monitored by the First and Second Line of Defence. The Risk and Compliance
Committee, which is comprised of management, monitors and challenges credit risk exposures, monitors portfolio and underwriting
quality and performance against credit risk limits on a monthly basis, and the ERM&CC reviews all material risks affecting the
Company on a quarterly basis, which includes the identification, assessment, and monitoring of material credit risks.
We identify potential risks in our mortgage portfolio by way of regular review of market and portfolio metrics, which are a key
component of quarterly market reports provided to the Board by management. Existing risks in our mortgage portfolio are identified
by arrears reporting, portfolio diversification analysis, post funding monitoring and risk rating trends of the entire mortgage
portfolio. The aforementioned reporting and analysis provide adequate monitoring of and control over our exposure to credit risk.
We assign a credit score and risk rating for all mortgages at the time of underwriting based on the assessed credit quality of the
borrower and the value of the underlying real estate. Risk ratings are reviewed annually at a minimum, and more frequently
whenever there is an amendment, or a material change such as a default or impairment.
As part of our credit risk management process, we monitor our loan portfolio for early indicators of potential concerns. The
“monitored/arrears” category includes construction and commercial loans that may experience events such as slow sales, cost
overruns or are located in geographic markets in which concerns have arisen. Loans in this category are included in stage 2.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Considering factors such as borrower equity, portfolio loan to value ratios and project liquidity, as at December 31, 2019 and 2018
there have been no indications at the portfolio level of potential loss of principal in excess of the allowances for credit losses
recorded for mortgages in stage 1 and 2. These collective allowances are based on forward-looking economic assumptions and
other factors discussed in Note 4 to the consolidated financial statements.
Our maximum credit exposure on our individual financial assets is equal to the carrying value of the respective assets, except for
our corporate mortgage portfolio, where maximum credit exposure also includes outstanding commitments for future mortgage
fundings and our investment in the KSHYF, where maximum credit exposure includes our total remaining commitment.
Credit Risk - Impairment Assessment Under IFRS 9
The analysis of MCAN’s IFRS 9 impairment assessment and measurement approach discussed below should be read in conjunction
with Note 4 to the consolidated financial statements.
Impairment calculations are based on a forward-looking Expected Credit Loss (“ECL”) methodology. ECL is composed of 3 submodels;
Probability of Default (“PD”), Loss Given Default (“LGD”) and Exposure at Default (“EAD”). Each of these submodels produce quarterly
projections of the respective metric under various macroeconomic scenarios.
Probability of Default
The PD model is comprised of 1) forward looking macroeconomic projections and 2) internal risk rating based segmentation.
Forward looking macroeconomic projections are built utilizing statistical regression to determine relationships between default
rates and macroeconomic variables. Internal risk rating based segmentation views the portfolio by internal risk rating and credit
scores to provide PD differentiation at the borrower level.
Loss given default
LGD is built utilizing statistical regression to determine a relationship between LGD and macroeconomic variables, using external
LGD data from comparable historical portfolios to forecast LGD under macroeconomic scenarios.
Exposure at default
EAD is the borrower level exposure in the event of default, determined by forecasting advances and repayments on the portfolio.
The forecast is determined utilizing historical advance and repayment trends and segmented by product type. EAD is forecast up
to the expected lifetime of each individual loan, capped at 12 months for IFRS 9 stage 1 loans.
Grouping financial assets measured on a collective basis
The Company calculates ECLs either on a collective or specific basis for the corporate mortgage portfolio based on the line of
business (per Note 7 to the consolidated financial statements). ECLs are calculated on a specific basis for all mortgages in stage 3
and are calculated on a collective basis for all mortgages in stage 1 and stage 2.
Analysis of inputs into the ECL model under multiple economic scenarios
An overview of the approach to estimating ECLs is set out in Notes 4 and 5 to the consolidated financial statements. As part of the
model input process, macroeconomic data are obtained from third party sources (e.g. rating agencies, bank economic forecasts),
and our Risk Management department assesses the quality of data and assumptions in the Company’s ECL models including
determining the weights attributable to the multiple scenarios.
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 and maturity dates. Changes in interest rates
where we have mismatched repricing and maturity dates may have an adverse effect on our financial condition and results of
operations. Risk factors that MCAN regularly considers are credit spread, gap, basis and yield curve risks.
The Interest Rate Risk Management Framework, which is reviewed and approved by the Board, details MCAN’s interest rate risk
measurement tools, including stress testing, roles and accountabilities, and monitoring and reporting requirements. Additionally,
it establishes appropriate interest rate risk limits and articulates appetite for interest rate exposures.
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 strategically matching the terms of corporate assets and
term deposits, 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
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
an interest rate spread and gap analysis as well as an interest rate sensitivity analysis based on various scenarios. This information
is also formally reviewed by the Board 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, and, 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 employ various hedging strategies.
An immediate and sustained parallel 1% increase to market interest rates on interest-bearing financial instruments as at December
31, 2019 would have an estimated positive effect of $3.8 million (September 30, 2019 - $4.6 million; December 31, 2018 - $4.8
million) to net income over the following twelve month period. An immediate and sustained parallel 1% decrease to market interest
rates as at December 31, 2019 would have an estimated adverse effect of $3.4 million (September 30, 2019 - $4.1 million; December
31, 2018 - $4.4 million) to net income over the following twelve month period.
We have an integrated balance sheet approach to interest rate risk and our management of liquidity and funding risk. We expect
that the impact of an immediate and sustained interest rate change would be substantially mitigated by the effect of changes in
interest rates on the value of other financial instruments, such as marketable securities, given our balance sheet composition.
Taking our other financial instruments into consideration, an immediate and sustained parallel 1% increase to market interest rates
as at December 31, 2019 would have an estimated positive effect of $2.1 million (September 30, 2019 - $2.2 million; December
31, 2018 - $2.8 million) to net income over the following twelve month period. An immediate and sustained parallel 1% decrease
to market interest rates as at December 31, 2019 would have an estimated adverse effect of $1.6 million (September 30, 2019 -
$1.7 million; December 31, 2018 - $2.4 million) to net income over the following twelve month period.
The following tables present the assets and liabilities of the Company by interest rate sensitivity as at December 31, 2019 and
December 31, 2018 and do not incorporate mortgage and loan prepayments. This 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 changing interest rates while other assets are sensitive to changing
interest rates periodically, either as they mature or as contractual repricing events occur. Yield spread represents the difference
between the weighted average interest rate of the assets and liabilities in a certain category.
Table 27: Interest Rate Sensitivity as at December 31, 2019
As at December 31, 2019
(in thousands except %)
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
$ 515,859
28,575
544,434
$ 72,041
96,448
168,489
$ 297,675
151,711
449,386
$ 208,596
185,248
393,844
$ 58,030
350,889
408,919
$ 53,348
—
53,348
$ 155,910
5,011
160,921
$ 1,361,459
817,882
2,179,341
5,053
—
5,053
63,540
74,682
138,222
380,295
178,982
559,277
467,820
182,610
650,430
122,644
357,386
480,030
—
—
—
—
16,017
—
16,017
1,055,369
793,660
1,849,029
330,312
330,312
Shareholders’ Equity
—
—
—
—
—
GAP
$ 539,381
$ 30,267
$(109,891) $(256,586) $ (71,111) $ 53,348
$ (185,408) $
—
YIELD SPREAD
1.31%
1.85%
1.69%
1.50%
1.04%
12.58%
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Table 28: Interest Rate Sensitivity as at December 31, 2018
As at December 31, 2018
(in thousands except %)
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
$ 604,741
26,002
630,743
$ 43,522
23,040
66,562
$ 203,181
309,887
513,068
$ 117,245
401,423
518,668
$ 50,588
152,902
203,490
$ 46,826
—
46,826
$ 158,236
3,479
161,715
$ 1,224,339
916,733
2,141,072
—
—
—
—
41,664
8,373
50,037
317,006
315,263
632,269
472,342
409,435
881,777
88,611
164,864
253,475
—
—
—
—
—
—
—
—
16,820
—
16,820
936,443
897,935
1,834,378
306,694
306,694
GAP
$ 630,743
$ 16,525
$(119,201) $(363,109) $ (49,985) $ 46,826
$ (161,799) $
—
YIELD SPREAD
5.12%
2.31%
1.32%
0.76%
0.36%
10.57%
Future Regulatory Changes
In May 2019, OSFI issued revisions to Guideline B-12 - Interest Rate Risk Management, which provides guidance on the Basel
Committee on Banking Supervision’s interest rate risk in the banking book measures, standardized stress scenarios, and
enhancements to governance processes, controls and modelling. The Company will adopt these revised requirements on January
1, 2021.
Market Risk
Market risk is the exposure to adverse changes in the value of financial assets. Market risk includes price risk on marketable
securities, 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.
Our marketable and non-marketable securities portfolios are 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. Portfolio reporting is submitted to management on a regular basis and to the Board on a quarterly basis.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Operational Risk
Operational risk is the potential for loss resulting from people, inadequate or failed internal processes, systems, or from external
events.
The Operational Risk Management Framework (“ORMF”) covers all components of MCAN’s operational risk management including
processes and control activities to ensure adherence with business and regulatory requirements. The ORMF sets out an integrated
approach to identify, measure, monitor, manage and report on known and emerging operational risks. Senior management and
the Board review operational risk assessments on a quarterly basis.
Outsourcing Risk
Within operational risk, outsourcing risk is the risk of losses resulting from: a) inadequate levels of services provided by third parties;
or b) suddenly unavailable services by third parties that are not readily replaceable. We outsource the majority of our construction
and commercial mortgage origination, mortgage servicing and collections to MCAP and other third parties. There is a risk that the
services provided by third parties will fail to adequately meet our standards.
The Company’s Outsourcing Policy, which is approved by the Board, incorporates the relevant requirements of OSFI Guideline B-10,
Outsourcing of Business Activities, Functions and Processes. We regularly review our outsourced arrangements to determine if an
arrangement is material and to assess the overall risk inherent in that arrangement. All outsourced arrangements are subject to
a risk management program, which includes detailed monitoring activities. If an outsourced arrangement is material, it is subjected
to an enhanced risk management program.
Information Technology and Cybersecurity Risk
Within operational risk, information technology (“IT”) and cybersecurity risk is the risk of loss resulting from clients’ private and
confidential information being compromised, and unauthorized access to MCAN’s systems, which could lead to disruption to
business as usual practices.
We collect and store confidential and personal information to the extent needed for operational purposes. Risk factors include
unauthorized access to the Company’s computer systems which could result in the theft or publication of confidential information,
the deletion or modification of records or could otherwise cause interruptions in the Company’s operations.
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 the Company’s network security is penetrated or its sensitive data is misappropriated, 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.
The IT Management Committee, which is comprised of management, is accountable for overseeing technology and cybersecurity
risk exposures and management activities. The IT Management Committee reports IT and cybersecurity risks to the Audit
Committee. We also use external third party advisors and service providers to provide technical expertise, to assist with periodic
cybersecurity assessments and to continuously monitor our IT infrastructure for cybersecurity risks. We have undertaken external
vulnerability tests performed by an independent external party. We maintain an incident response plan and have designated
officers responsible for the oversight over cybersecurity risks. We also maintain cybersecurity insurance coverage for both direct
and third party coverage in the event of a cybersecurity incident that would result in a loss.
Model Risk
Model risk is the risk of potential adverse consequences from decisions based upon inaccurate or inappropriate model outputs,
taking into account all errors at any point from design through implementation.
The Model Risk Management Policy describes the overarching principles that provide the framework for managing model risk in
a sound and prudent manner. All models are subject to a periodic review based on model complexity and model materiality ratings.
Periodic assessment of models is a key element of the ongoing validation phase of the model life-cycle.
Risk of Accuracy and Completeness of Borrower Information
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.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
We frequently review and enhance our underwriting procedures and control processes to strengthen our ability to detect such
inaccurate and misleading information and to manage this risk. These enhancements include improvements to underwriting staff
training, independent income verification procedures, and other quality control and quality assurance processes.
The Canadian mortgage industry periodically experiences falsification of supporting documents provided to lenders in the mortgage
underwriting process, and we have observed instances of this activity in our own underwriting processes. The implementation of
significant changes to regulatory requirements reduces the number of borrowers that qualify for new mortgages, which increases
the risk of document falsification.
To date, this document falsification has not had a material impact on MCAN or its financial position or performance. We do not
expect to experience any material impact to our financial position or performance in the future relating to such document
falsification.
Regulatory Compliance Risk
Regulatory compliance risk arises from the Company’s potential non-conformance with existing and new laws, rules, regulations,
prescribed practices, or ethical standards in any jurisdiction in which it operates. Regulatory compliance risk also arises from the
exercise of discretionary oversight by regulatory or other competent authorities that may adversely affect us, including by limiting
the products or services that we provide, restricting the scope of our operations or business lines, limiting pricing and availability
of products in the market, increasing the ability of competitors to compete with our products and services or requiring us to cease
carrying on business. 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. Increasing regulations and expectations, both globally and
domestically, have increased the cost and resources necessary to meet regulatory expectations for the Company.
The Company’s Chief Compliance Officer, Chief Anti Money Laundering Officer & Privacy Officer independently oversees the
adequacy of, adherence to, and effectiveness of day-to-day compliance procedures in alignment with the Company’s Regulatory
Compliance Management Framework. Additionally, the Risk and Compliance Committee and the Board review and effectively
challenge regulatory compliance risk-related reports on a quarterly basis.
Strategic Risk
Strategic risk is the risk of loss due to fluctuations in the external business environment, and the failure of management to adjust
its strategies, business model and business activities to adapt or respond appropriately.
Strategic risk is managed by the CEO and senior management. The Board approves the Company’s strategies at least annually and
reviews results and needed changes as applicable against those strategies regularly. Strategies are aligned to be consistent with
the RAF, regulatory and other internal requirements.
As a result of this risk, there can be no assurance that the Company will generate any returns or be able to pay dividends to our
shareholders in the future.
Reputational Risk
Reputational risk is a risk of loss or adverse impacts resulting from damages to MCAN’s reputation, regardless of whether the facts
that underlie the event are true or not.
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, borrowers, depositors, employees, suppliers, regulators, brokers and strategic partners.
Perceptions may be impacted by various events including financial performance, specific adverse occurrences from events such
as cybersecurity issues, unfavourable media coverage, and changes or actions of the Company’s leadership. Failure to effectively
manage reputational risk can result in reduced market capitalization, loss of client loyalty, reduced access to deposit funding and
the inability to achieve our strategic objectives.
We believe that the most effective way for the Company to safeguard its public reputation is through embedding successful processes
and controls, along with the promotion of appropriate conduct, risk culture and risk management. Reputational risk is mitigated
by management of the underlying risks in the business and is monitored and reported to the Board on a quarterly basis.
Other Risk Factors
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
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
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.
Mortgage Renewal and Prepayment 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, in the case of insured single family mortgages,
proceeds are received from mortgage insurers following the sale of mortgaged properties.
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 obligation. For further information on the Timely
Payment obligation, refer to Note 11 to the consolidated financial statements. Prepayment risk includes the acceleration of the
amortization of mortgage premiums, as applicable, as a result of early payouts.
Economic and Geopolitical Conditions
Factors that could impact the overall market and economic stability of the Company’s operations include changes in short-term
and long-term interest rates, commodity prices, international trade, inflation, consumer confidence, business and government
spending, real estate market activity, real estate prices and adverse economic events. Though the nature and extent of these risks
may vary depending on circumstances, an increased level of uncertainty for economic growth and market volatility in interest rates
may arise. Our inability to respond to changes effectively may have an adverse effect on our financial condition and results of
operations.
Competition Risk
Our operations and income are a function of the interest rate environment, the availability and acceptance of mortgage products
at reasonable yields and the availability of term deposits at reasonable cost. The availability and acceptance 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 at reasonable rates,
there may be an adverse effect on our financial condition and results of operations.
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.
Capital Adequacy Risk
Capital adequacy risk is the risk that the Company does not hold sufficient capital to manage Company-wide risks and unexpected
financial losses. Refer to the “Capital Management” section of this MD&A for further information. Oversight of the Company’s
capital adequacy risk is monitored and managed by the CFO.
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.
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.
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.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
DESCRIPTION OF CAPITAL STRUCTURE
Our authorized share capital consists of an unlimited number of common shares with no par value. These common shares are the
only voting securities of MCAN. At December 31, 2019, there were 24,215,383 common shares outstanding (December 31, 2018
- 23,798,464). As at February 26, 2020, there were 24,292,882 common shares outstanding.
During 2019, we issued no new common shares through the Executive Share Purchase Plan (2018 - 52,737).
During 2019, we issued 416,919 new common shares under the DRIP (2018 - 367,942), which has historically provided 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% until further notice from MCAN.
For additional information related to share capital, refer to Note 17 to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have contractual obligations relating to outstanding commitments for future fundings of corporate mortgages and our
investment in the KSHYF. Only a portion of the mortgage commitments that we issue are expected to fund. Accordingly, these
amounts do not necessarily represent the future cash requirements of the Company.
Table 29: Contractual Obligations
(in thousands)
Less than 1
Year
1 to 3
Years
3 to 5
Years
Over 5
Years
December 31
2019
December 31
2018
Mortgage funding commitments
Commitment - KSHYF
$
$
230,150 $
—
230,150 $
86,126 $
1,827
87,953 $
— $
—
— $
— $
22,194
22,194 $
316,276 $
24,021
340,297 $
389,072
20,948
410,020
We retain mortgage servicing obligations relating to securitized mortgages where balance sheet derecognition has been achieved.
For further information on our securitization activities, refer to Note 11 to the consolidated financial statements.
We provide letters of credit, which are not reflected on the consolidated balance sheet, for the purpose of supporting borrower
obligations to municipalities in conjunction with residential construction loans. If the developer defaults in its obligation to the
municipalities, the municipalities may draw on the letters of credit, in which case we are obligated to fund the letters of credit.
For further information, refer to Note 23 to the consolidated financial statements.
MCAP is actively defending a claim arising from a power of sale process with respect to a defaulted land development loan previously
funded by MCAN. The plaintiff has claimed improvident sale and has claimed damages of approximately $6 million. MCAP was
awarded a judgment for approximately $500,000 against the same plaintiff in related proceedings. We may be subject to the
indemnification of MCAP for certain liabilities that may be incurred as part of the proceedings under a mortgage servicing agreement
between the two parties. Based on, among other things, the current status of the proceedings, we do not expect to incur any
material liability arising out of this indemnification obligation to MCAP and accordingly have not recorded a provision.
DVIDEND POLICY AND RECORD
Our dividend policy is to pay out substantially all of our taxable income to our shareholders. These dividends are taxable to our
shareholders as interest income. In addition, as a MIC, we can pay certain capital gains dividends which are taxed as capital gains
to our shareholders. We intend to continue to declare and pay dividends on a quarterly basis. The Company has historically paid
out dividends in cash but has the option to pay out its dividends in the form of cash or shares. In the event of a significant increase
in taxable income relative to accounting income, the Company may look to pay out a combination of regular dividends in the form
of cash and special dividends in the form of shares. This is consistent with our dividend policy and our obligations as a MIC, while
at the same time providing a cost effective source of capital for the Company to support future growth and business operations.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Dividends per share paid over the past three years are indicated in the table below:
Table 30: Dividend Per Share
For the Years Ended December 31
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Figure 5: Dividend History
2019
2018
$
$
0.32 $
0.32
0.32
0.32
1.28 $
0.37 $
0.37
0.37
0.32
1.43 $
2017
0.30
0.32
0.32
0.37
1.31
Regular Dividend per Share
Extra Dividend per Share
$1.81
$1.42
$1.19
$1.15
$1.12
$1.13
$1.17
$1.43
$1.31
$1.28
$1.04
$1.08
$1.09
$1.12
$1.12
$1.13
$1.17
$1.31
$1.43
$1.28
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
TRANSACTIONS WITH RELATED PARTIES
Related party transactions for the quarters and years ended December 31, 2019 and December 31, 2018 and related party balances
as at December 31, 2019 and December 31, 2018 are discussed in Notes 9 and 22 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, non-marketable securities, 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 liquidity and funding, credit, interest rate and market risk. A discussion of these
risks and how they are managed is found in the “Risk Management” section of this MD&A.
Information on the financial statement classification and amounts of income, expenses, gains and losses associated with financial
instruments are located in the “Results of 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, 2019, we had 98 team members (September 30, 2019 - 95; December 31, 2018 - 89).
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the Company’s consolidated financial statements requires management to make judgments, 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, changes in 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 may include the use of mathematical models.
The inputs to these models are derived from observable market data where possible, but where observable market data is 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 by 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. Allowances on impaired mortgages include all of the
accumulated provisions for losses to reduce the assets to their estimated realizable value. Allowances depend on asset class, as
different classes have varying underlying risks. Future changes in circumstances could materially affect net realizable values and
lead to an increase or decrease in the allowance for credit losses.
The measurement of impairment losses under IFRS 9 across all categories of financial assets requires judgment, in particular, the
estimation of the amount and timing of future cash flows and collateral values and the assessment of a significant increase in credit
risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.
The Company’s ECL calculations are model outputs with a number of underlying assumptions regarding the choice of variable
inputs and their interdependencies. Elements of the ECL models that are considered accounting judgments and estimates include:
•
•
The Company’s criteria for assessing if there has been a significant increase in credit risk which results in allowances
being measured on a lifetime versus 12 month ECL basis;
The segmentation of financial assets for the purposes of assessing ECL on a collective basis;
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
•
•
•
Development of ECL models, including the various formulas and the choice of inputs;
Determination of associations between macroeconomic scenarios and economic inputs such as unemployment levels
and collateral values, and the effect on PDs, EADs and LGDs; and
Forward-looking information used as economic inputs.
We review our ECL models on a quarterly basis. We continue to monitor asset performance and economic conditions, including
considering regionally specific issues to assess the adequacy of the current provisioning policies.
The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the
consolidated financial statements. To reflect this, we may make temporary qualitative adjustments or overlays using expert credit
judgment when such differences are material.
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, as applicable, using the
effective interest rate method.
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 associated with these assets 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
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 method investments.
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 DC&P. As of December 31, 2019, 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 Administrators
– 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 in accordance
with the Integrated (2013) 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, 2019.
Ernst & Young LLP, our Independent Registered Chartered Professional Accountants, have audited our consolidated financial
statements for the year ended December 31, 2019.
Changes in ICFR
There were no changes in our ICFR that occurred during the period beginning on January 1, 2019 and ending on December 31,
2019 that have materially affected, or are reasonably likely to materially affect, our control framework.
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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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2019 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 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 interest rate of an asset or
liability. Mortgage portfolio average interest rate (corporate and securitized), average term deposit interest rate,
financial liabilities from securitization average interest rate, spread of corporate mortgages over term deposit interest
and spread of securitized mortgages over liabilities are examples of average interest rates. The average asset or
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 or liability. Please refer to the applicable tables containing average balances
for further details.
Net Corporate Mortgage Spread Income and Net Securitized Mortgage Spread Income
Net corporate mortgage spread income is calculated as the difference between corporate mortgage interest and term
deposit interest and expenses. Net securitized mortgage spread income is calculated as the difference between
securitized mortgage interest and interest on financial liabilities from securitization.
Impaired Mortgage Ratios
The impaired mortgage ratios represent the ratio of impaired mortgages to mortgage principal for both the corporate
and total (corporate and securitized) portfolios.
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 and Risk-Weighted
Asset Ratios
These measures are calculated in accordance with guidelines issued by OSFI and are located on Table 24 of this MD&A
and Note 24 to the consolidated financial statements.
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.
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 as of that date.
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, 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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2019 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 are 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 (Canada) 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 fulfills 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.
Karen Weaver
President and Chief Executive Officer
Dipti Patel
Vice President and Chief Financial Officer
Toronto, Canada
February 26, 2020
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
INDEPENDENT AUDITOR’S REPORT
To the Shareholders and Directors of MCAN Mortgage Corporation
Opinion
We have audited the consolidated financial statements of MCAN Mortgage Corporation and its subsidiaries
(the “Company”), which comprise the consolidated balance sheets as at December 31, 2019 and 2018, and
the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash
flows for the years then ended, and notes to the consolidated financial statements, including a summary of
significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Company as at December 31, 2019 and 2018, and its consolidated
financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of
the Consolidated Financial Statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon,
in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information, and in doing so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
We obtained Management’s Discussion & Analysis and the Annual Report prior to the date of this auditor’s
report. If, based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact in this auditor’s report. We have nothing to report in
this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated
Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements
in accordance with IFRSs, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due
to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless management either intends to liquidate the Company or to
cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian generally accepted auditing standards will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of
not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures
•
•
•
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Company’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in our
auditor’s report to the related disclosures in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor’s report. However, future events or conditions may cause the
Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal control
that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Michael Cox.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 26, 2020
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2019 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
Non-marketable securities
Equity investment in MCAP Commercial LP
Deferred tax assets
Other assets
Securitization Assets
Cash held in trust
Mortgages
Other assets
Liabilities and Shareholders’ Equity
Liabilities
Corporate Liabilities
Term deposits
Demand loan payable
Current taxes payable
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Note
2019
2018
6
7
8
9
14
10
12
12
13
23
14
14
15
16
17
$
$
$
$
54,452 $
46,170
1,089,401
93,689
69,844
132
7,771
1,361,459
28,575
784,296
5,011
817,882
2,179,341 $
1,034,299 $
5,053
—
21
15,996
1,055,369
793,660
793,660
1,849,029
228,008
510
101,794
330,312
2,179,341 $
98,842
53,247
922,390
71,813
61,593
2,961
13,493
1,224,339
26,002
887,252
3,479
916,733
2,141,072
919,623
—
173
3,478
13,169
936,443
897,935
897,935
1,834,378
221,869
510
84,315
306,694
2,141,072
The accompanying notes and shaded areas of the “Risk Management” section of Management’s Discussion and Analysis of Operations are an
integral part of these consolidated financial statements.
On behalf of the Board:
Karen Weaver
President and CEO
Gordon Herridge
Director, Chair of the Audit Committee
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars except for per share amounts)
Years Ended December 31
Note
2019
2018
Net Investment Income - Corporate Assets
Mortgage interest
Equity income from MCAP Commercial LP
Non-marketable securities
Marketable securities
Fees
Interest on cash and other income
Net gain (loss) on securities
Gain on sale of investment in MCAP Commercial LP
Gain on dilution of investment in MCAP Commercial LP
Term deposit interest and expenses
Mortgage expenses
Interest on loans payable
Other financial expenses
Provision for (recovery of) credit losses
Net Investment Income - Securitization Assets
Mortgage interest
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Recovery of credit losses
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
9
19
9
9
20
21
20
21
14
14
$
$
$
$
56,379 $
15,759
6,416
3,027
2,002
1,101
14,008
—
187
98,879
29,321
4,078
638
360
(461)
33,936
64,943
20,491
792
21,283
15,345
1,954
(10)
17,289
3,994
13,905
7,292
21,197
47,740
73
(627)
(554)
48,294 $
2.01 $
1.28 $
24,077
51,610
13,188
5,357
3,464
1,909
1,284
(512)
1,701
314
78,315
23,814
4,031
143
—
188
28,176
50,139
24,540
360
24,900
17,793
2,133
(2)
19,924
4,976
11,118
7,804
18,922
36,193
283
(383)
(100)
36,293
1.54
1.43
23,615
The accompanying notes and shaded areas of the “Risk Management” section of Management’s Discussion and Analysis of Operations are an
integral part of these consolidated financial statements.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
Years Ended December 31
Share Capital
Balance, beginning of year
Share capital issued
Balance, end of year
Contributed Surplus
Balance, beginning of year
Changes to contributed surplus
Balance, end of year
Retained Earnings
Balance, beginning of year
IFRS 9 transitional adjustment
Net income
Dividends declared
Balance, end of year
Accumulated Other Comprehensive Income
Balance, beginning of year
IFRS 9 transitional adjustment
Balance, end of year
Note
17
2019
2018
$
221,869 $
6,139
228,008
214,664
7,205
221,869
510
—
510
84,315
—
48,294
(30,815)
101,794
—
—
—
510
—
510
65,365
16,420
36,293
(33,763)
84,315
16,438
(16,438)
—
Total Shareholders’ Equity
$
330,312 $
306,694
The accompanying notes and shaded areas of the “Risk Management” section of Management’s Discussion and Analysis of Operations are an
integral part of these consolidated financial statements.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Years Ended December 31
Cash flows from (for):
Operating Activities
Net income
Adjustments to determine cash flows relating to operating activities:
Deferred taxes
Equity income from MCAP Commercial LP
Gain on sale of investment in MCAP Commercial LP
Gain on dilution of investment in MCAP Commercial LP
Provision for (recovery of) credit losses
Net (gain) loss on securities
Amortization of securitized mortgage and liability transaction costs
Amortization of other assets
Amortization of mortgage discounts
Changes in operating assets and liabilities:
Marketable securities
Corporate and securitized mortgages
Non-marketable securities
Other assets
Cash held in trust
Term deposits
Financial liabilities from securitization
Current taxes payable
Other liabilities
Cash flows for operating activities
Investing Activities
Distributions from MCAP Commercial LP
Proceeds on sale of investment in MCAP Commercial LP
Acquisition of capital and intangible assets
Cash flows from investing activities
Financing Activities
Proceeds from issuance of common shares
Proceeds from demand loan
Repayment of premises lease liability
Dividends paid
Cash flows for financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of year
Supplementary Information
Interest received
Interest paid
Distributions received from securities
2019
2018
$
48,294 $
36,293
(627)
(15,759)
—
(187)
(471)
(14,008)
3,746
766
—
17,857
(66,432)
(18,648)
6,540
(2,573)
114,676
(105,174)
(173)
278
(31,895)
7,695
—
(440)
7,255
6,139
5,053
(261)
(30,681)
(19,750)
(44,390)
98,842
54,452 $
(383)
(13,188)
(1,701)
(314)
186
512
4,950
504
(17)
5,750
66,717
(615)
(4,203)
(12,561)
35,163
(119,146)
173
(1,859)
(3,739)
8,278
4,521
(197)
12,602
7,205
—
—
(34,797)
(27,592)
(18,729)
117,571
98,842
77,649 $
42,427
8,520
75,496
38,965
7,867
$
$
The accompanying notes and shaded areas of the “Risk Management” section of Management’s Discussion and Analysis of Operations are an
integral part of these consolidated financial statements.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Corporate Information
Basis of Preparation
Basis of Consolidation
Summary of Significant Accounting Policies
Summary of Significant Accounting Judgments and Estimates
Marketable Securities
Mortgages - Corporate
Non-Marketable Securities
Equity Investment in MCAP Commercial LP
Term Deposits
Income Taxes
Note
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Other Assets
Securitization Activities
11.
12. Mortgages - Securitized
13.
14.
15. Other Liabilities
16.
17.
18.
19. Net Gain (Loss) on Securities
20. Mortgage Expenses
21.
22.
23.
24.
25.
26.
27.
28.
Provision for (Recovery of) Credit Losses
Related Party Disclosures
Credit Facilities
Capital Management
Financial Instruments
Commitments and Contingencies
Comparative Amounts
Subsequent Events
Financial Liabilities from Securitization
Share Capital
Dividends
64
64
64
65
70
71
72
78
79
79
80
81
83
83
84
84
85
85
85
85
86
86
88
88
89
91
91
91
- 63 -
2019 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 is incorporated in Canada with its head office located at 200
King Street West, Suite 600, Toronto, Ontario, Canada. MCAN is a public company listed on the Toronto Stock Exchange under
the symbol MKP.
MCAN’s objective is to generate a reliable stream of income by investing in a diversified portfolio of Canadian mortgages,
including single family residential, residential construction, non-residential construction and commercial loans, as well as
other types of securities, loans and real estate investments, including our investment in MCAP Commercial LP (“MCAP”).
MCAN employs leverage by issuing term deposits that are eligible for Canada Deposit Insurance Corporation deposit insurance
and are sourced through a network of independent financial agents. The Company manages its capital and asset balances
based on the regulations and limits of both the Tax Act and OSFI.
MCAN’s wholly-owned subsidiary, XMC Mortgage Corporation, is an originator of single family residential mortgage products
across Canada.
The consolidated financial statements were approved in accordance with a resolution of the Board of Directors (the “Board”)
on February 26, 2020.
2. Basis of Preparation
The consolidated financial statements of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.
The consolidated financial statements have been prepared on a historical cost basis, except for certain items carried at fair
value as discussed in Note 4. 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 accounting judgments and estimates (Note 5) applicable to the preparation of the consolidated financial
statements. Certain disclosures are included in the shaded sections of the “Risk Management” section of Management’s
Discussion and Analysis of Operations (the “MD&A”), as permitted by IFRS, and form an integral part of the consolidated
financial statements.
The Company separates its assets into its corporate and securitization portfolios for reporting purposes. Corporate assets are
funded by term deposits and share capital. Securitization assets consist primarily of mortgages that have been securitized
through the National Housing Act (“NHA”) Mortgage-Backed Securities (“MBS”) program and subsequently sold to third parties.
These assets are funded by the cash received from the sale of the associated securities, from which the Company records a
financial liability from securitization.
3. Basis of Consolidation
The consolidated financial statements include the balances of MCAN and its wholly owned subsidiaries, after the elimination
of intercompany transactions and balances. The Company consolidates those entities which it controls. The Company has
control 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.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies
The following are the significant accounting policies applied by the Company in the preparation of its consolidated financial
statements. Certain policies adopted in or relevant to fiscal 2019 and 2018 are also discussed below.
(1) Accounting for financial instruments under IFRS 9, Financial Instruments (“IFRS 9”)
Classification and measurement
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. To determine their classification
and measurement category, IFRS 9 requires all financial assets to be assessed based on a combination of the entity’s business model
for managing the assets and the instruments’ contractual cash flow characteristics.
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.
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 effective interest
rate method (“EIM”), except for transaction costs which are related to financial assets or financial liabilities at fair value through
profit and loss (“FVPL”), which are expensed.
a.
Debt instruments at amortized cost
The Company only measures debt instruments at amortized cost if both of the following conditions are met:
•
•
The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual
cash flows.
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal
and interest (“SPPI”) on the principal amount outstanding.
Business model assessment
The Company determines its business model at the level that best reflects how it manages groups of financial assets to achieve
its business objective. The business model is not assessed on an instrument-by-instrument basis, but at a higher level of
aggregated portfolios and is based on observable factors such as:
•
•
•
•
How the performance of the business model and the financial assets held within that business model are evaluated and
reported to the entity’s key management personnel;
The risks that affect the performance of the business model (and the financial assets held within that business model)
and, in particular, the way those risks are managed;
How managers of the business are compensated (for example, whether the compensation is based on the fair value of
the assets managed or on the contractual cash flows collected); and
The expected frequency, value and timing of sales.
The SPPI test
As a second step of its classification process, the Company assesses the contractual terms of financial instruments to identify
whether they meet the SPPI test.
“Principal” for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change
over the life of the financial asset (for example, if there are repayments of principal or amortization of the premium/discount).
In contrast, contractual terms that introduce more than a minimal exposure to risks or volatility in the contractual cash flows
that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are SPPI on the principal
amount outstanding. In such cases, the financial asset is required to be measured at FVPL.
b.
Financial assets and liabilities at FVPL
Financial assets and financial liabilities in this category are those that are not held for trading purposes and have been either
designated by management upon initial recognition or are mandatorily required to be measured at fair value under IFRS 9. This
includes all marketable and non-marketable securities held by the Company.
Financial assets at FVPL are recorded in the consolidated balance sheets at fair value. Changes in fair value are recorded in
profit and loss. Interest earned on instruments designated at FVPL is accrued in interest income. Interest earned on assets
mandatorily required to be measured at FVPL is recorded using contractual interest rates. Dividend income from equity
instruments measured at FVPL is recorded in profit and loss when the right to the payment has been established.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
c.
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, fees or other 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.
Impairment
IFRS 9 requires the Company to record an allowance for expected credit loss (“ECL”) for all mortgages and other debt financial assets
not held at FVPL, together with mortgage commitments and financial guarantee contracts not measured at FVPL.
Overview of ECL principles
The ECL allowance is based on the 12 month ECL of the asset, unless there has been a significant increase in credit risk (“SICR”) since
origination in which case the allowance is based on the lifetime ECL.
The Company groups its financial assets into stage 1, stage 2 and stage 3, as described below:
•
•
•
Stage 1: When mortgages are first recognized, the Company recognizes an allowance based on 12 month ECLs, which
represent ECLs which would occur over the life of the mortgage related to default events that are expected to occur within
12 months after the reporting date. Stage 1 mortgages also include facilities reclassified from stage 2 or stage 3 where
the credit risk has subsequently improved such that the increase in credit risk since initial recognition is no longer significant.
Stage 2: When a mortgage has shown a SICR since origination, the Company records an allowance for the ECLs related to
default events that are expected to occur over the life of the asset. Stage 2 mortgages also include facilities reclassified
from stage 3 where the credit risk has improved or the facility is no longer credit impaired.
Stage 3: The Company records an allowance for the lifetime ECLs for mortgages considered to be credit-impaired (as
outlined below in “Definition of default and cure”).
Both lifetime ECLs and 12 month ECLs are calculated on either an individual basis or a collective basis, depending on the nature of
the underlying portfolio of financial instruments.
Significant increase in credit risk (“SICR”)
The Company has established a policy to assess, at the end of each reporting period, whether a financial instrument’s credit risk
has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life
of the financial instrument. The primary indicators of SICR are relative changes in credit scores for single family mortgages and
changes in internal risk ratings for construction and commercial mortgages. The Company also applies a secondary qualitative
method for identifying a SICR, such as changes in macroeconomic circumstances or the application of management’s judgment. In
certain cases, the Company may also consider that certain events are a SICR as opposed to a default. For a definition of default and
cure, refer to the “Definition of default and cure” sub-section of this note. IFRS 9 provides a rebuttable presumption that a SICR
has occurred if contractual payments are more than 30 days past due. The Company has not rebutted this presumption.
Calculation of ECLs
The Company calculates ECLs based on three probability-weighted scenarios to measure the expected cash shortfalls, discounted
at an approximation to the effective interest rate. The cash shortfall is the difference between the cash flows that are due to the
Company in accordance with the contract and the cash flows that the Company expects to receive.
The mechanics of the ECL calculations are outlined below and the key elements are as follows:
•
•
•
PD: The Probability of Default (“PD”) is an estimate of the likelihood of default over a given time horizon. Default is only
assessed if the facility has not been previously derecognized and is still in the portfolio. The PD model is comprised of
forward looking macroeconomic projections and internal risk rating based segmentation.
LGD: The Loss Given Default (“LGD”) is an estimate of the loss arising in the case where a default occurs. It is based on
the difference between the contractual cash flows due and those that the lender would expect to receive, including from
the realization of any collateral.
EAD: The Exposure at Default (“EAD”) is an estimate of the exposure at a future default date at the borrower level, taking
into account expected changes in the exposure after the reporting date, including advances and repayments of principal
and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued
interest from missed payments.
The ECLs are calculated through three probability-weighted forward-looking scenarios (base, favourable, and unfavourable). Each
of these is associated with different PDs, EADs and LGDs. When relevant, the assessment of multiple scenarios also incorporates
how defaulted mortgages are expected to be recovered, including the probability that the mortgages will cure and the value of
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
collateral or the amount that might be received from selling the asset. Outcomes under the favourable and unfavourable scenarios
are generated based on management judgment, looking at a range of possible outcomes. A cross-functional internal management
committee reviews the proposed probability weights assigned to each of the three scenarios. The above committee may apply
judgment to adjust the weights when changes are noted in relevant macroeconomic variables.
The maximum period for which the credit losses are determined is the contractual life of a financial instrument unless the Company
has the legal right to call the instrument earlier.
Mortgage commitments and letters of credit
Undrawn mortgage commitments and letters of credit are commitments under which, over the duration of the commitment, the
Company is required to advance funds to the borrower. These contracts are in the scope of the ECL requirements. The nominal
contractual value of letters of credit and undrawn mortgage commitments, where the mortgage agreed to be provided is on market
terms, are not recorded in the consolidated balance sheet. When estimating lifetime ECLs for undrawn mortgage commitments, the
Company estimates the portion of the mortgage commitment that will be drawn down over its expected life.
Definition of default and cure
The Company considers a financial instrument defaulted and therefore stage 3 (credit-impaired) for ECL calculations in all cases
when the borrower becomes 90 days past due on its contractual payments. In certain other cases, where qualitative thresholds
indicate unlikeliness to pay as a result of a credit event, the Company carefully considers whether the event should result in an
assessment at stage 2 or 3 for ECL calculations.
The combined impact of several events may cause financial assets to become defaulted as opposed to one discrete event. It is the
Company’s policy to consider a financial instrument as “cured” and, therefore, reclassified out of stage 3 when none of the default
criteria remain present at the end of each quarter. The decision whether to classify an asset as stage 1 or stage 2 once cured depends
on the current assessment of SICR.
Forward-looking information
In its ECL models, the Company relies on a broad range of forward-looking information as macroeconomic variables, such as but
not limited to:
Single Family
•
•
•
•
House price indices
Unemployment rates
Gross domestic product
Interest rates
Commercial and Construction
• Market mortgage rates
House price indices
•
Unemployment rates
•
Interest rates
•
The macroeconomic variables and models used for calculating ECLs may not always capture all characteristics of the market at the
dates of the consolidated financial statements. To reflect this, the Company may make temporary qualitative adjustments or overlays
using expert credit judgment.
Modified financial assets
In a case where the borrower experiences financial difficulties, the Company may grant certain concessionary modifications to the
terms and conditions of a mortgage. If the Company determines that a modification results in an expiry of cash flows, the original
financial asset is derecognized while a new asset is recognized based on the new contractual terms. SICR is assessed relative to the
risk of default on the date of modification. If the Company determines that a modification does not result in derecognition, SICR is
assessed based on the risk of default at initial recognition of the original asset. Expected cash flows arising from the modified
contractual terms are considered when calculating the ECL for the modified asset. For mortgages that have been modified while
having a lifetime ECL, the mortgages can revert to having a 12-month ECL after a period of performance and improvement in the
borrower’s financial condition.
Write-offs
Financial assets are written off either partially or in their entirety only when the Company believes that there are no reasonably
expected future recoveries. If the amount to be written off is greater than the accumulated loss allowance, the difference is first
treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are
credited to provisions for losses.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
(2) 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 directly or indirectly observable inputs
other than quoted prices (Level 2) and fair value based on inputs that are not based on observable data (Level 3).
For financial instruments not traded in active markets, 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 risk and liquidity discounts or premiums and limitations in the models.
Changes in fair value are recognized in net gain (loss) on securities in the consolidated statements of income.
(3) Derecognition of financial assets and financial liabilities
(i)
Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized
when:
•
•
The rights to receive cash flows from the asset have expired; or
The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the
received cash flows in full without material delay to a third party under a qualifying “pass-through” arrangement; and
either:
•
•
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, 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.
Realized gains and losses from the derecognition of financial assets and financial liabilities are recognized in net gain (loss) on
securities in the consolidated statements of income.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
(4) 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 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 or deferred
taxes within the MIC entity; however, provisions are recorded as applicable in all subsidiaries of MCAN.
(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 dates.
(ii) Deferred tax
The Company follows the asset and liability method of accounting for income taxes, whereby deferred tax assets and liabilities are
recognized for the expected future tax impact of temporary differences between the carrying amounts of certain assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates
applicable to taxable income in the period in which those temporary differences are expected to be recovered or settled. Deferred
tax assets are only recognized for deductible temporary differences and the carry forward of unused tax losses to the extent that it
is probable that taxable income will be available and the carry forward of unused tax losses can be used.
(5) Dividends on common shares
Dividends on common shares are deducted from shareholders’ equity at the time 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.
(6)
Investment in associate
The Company’s investment in MCAP is accounted for using the equity method. An associate is an entity over 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.
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 Company 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 Company,
adjustments are made for the effects of significant transactions or events that occur between that date and the date of the Company’s
consolidated financial statements.
Where necessary, adjustments are made to harmonize the accounting policies of the associate with those of the Company.
The Company determines at each consolidated financial statement date whether there is any objective evidence that the investment
in the associate is impaired. The Company calculates the amount of impairment as the difference between the recoverable amount
of the investment in 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.
(7) Revenue recognition
Interest income or expense
For all financial assets measured at amortized cost and interest-bearing financial assets measured at FVPL under IFRS 9, interest
income or expense is accrued in interest income or expense. 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.
Revenue from contracts with customers
Revenue from contracts with customers is recognized at an amount that reflects the consideration that the Company expects to
receive in exchange for transferring goods or services to a customer.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
(8) 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.
(9) Share-based compensation payment transactions
The cost of cash-settled transactions is measured initially at fair value at the grant date. 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 remeasured at fair value at each
consolidated financial statement date up to and including the settlement date.
(10) 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.
(11) Provisions
Provisions for legal claims are recognized when (a) the Company 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.
(12) Significant changes in accounting policies
IFRS 16, Leases (“IFRS 16”)
On January 1, 2019, the Company adopted IFRS 16 which 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”). 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, the adoption of IFRS 16 eliminated the classification of leases as either operating leases or finance
leases as was required by IAS 17, Leases and, instead, introduced a single lessee accounting model. Applying that model, a lessee
is now 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 consolidated statements of
income.
On the adoption of IFRS 16, the Company recognized a right-of-use asset of $2,677 relating to its premises lease which will be
amortized over the term of the lease. This asset is included in other assets (refer to Note 10). The Company also increased the
existing liability for the principal component of future lease payments by $3,400, which will be repaid over the term of the lease.
This liability is included in other liabilities (Note 15).
IFRIC 23, Uncertainty over Income Tax Treatments (“IFRIC 23”)
On January 1, 2019, the Company adopted IFRIC 23. This interpretation clarifies how to apply the recognition and measurement
requirements in IAS 12, Income Taxes (“IAS 12”) when there is uncertainty over income tax treatments. In such a circumstance, the
Company shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on
taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined by applying this Interpretation.
There was no impact to the consolidated financial statements as a result of the adoption of IFRIC 23.
5.
Summary of 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 affected assets or liabilities in future periods.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
Significant influence
Significant influence represents the power to participate in the financial and operating policy decisions of an investee but
does not represent control or joint control over the entity. In determining whether it has significant influence over an entity,
the Company makes certain judgments to form the basis for the Company’s policies in accounting for its equity investments.
Although MCAN’s voting interest in MCAP was less than 20% as at December 31, 2019, 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.
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 may include the use of
mathematical models. The inputs to these models are derived from observable market data where possible, but where
observable market data is 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 of financial assets
The measurement of impairment losses under IFRS 9 across all categories of financial assets requires judgment, in particular,
the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses.
These estimates are driven by a number of factors, changes in which can result in different levels of allowances.
The Company’s ECL calculations are model outputs with a number of underlying assumptions regarding the choice of variable
inputs and their interdependencies. Elements of the ECL models that are considered accounting judgments and estimates
include:
•
•
•
•
•
The Company’s criteria for assessing if there has been a SICR which results in allowances being measured on a
lifetime versus 12-month ECL basis;
The segmentation of financial assets for the purposes of assessing ECL on a collective basis;
Development of ECL models, including the various formulas and the choice of inputs;
Determination of associations between macroeconomic scenarios and economic inputs, such as unemployment
levels and collateral values, and the effect on PD, EAD, and LGD; and
Forward-looking information used as economic inputs.
The Company may also make qualitative adjustments or overlays using expert credit judgment in the calculations of ECLs,
which represent accounting judgments and estimates.
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.
6. Marketable Securities
As at December 31
Real estate investment trusts
Corporate bonds
For details of net gains and losses on marketable securities, refer to Note 19.
2019
46,141 $
29
46,170 $
2018
53,218
29
53,247
$
$
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
7. Mortgages - Corporate
(a) Summary
As at December 31, 2019
Corporate Portfolio:
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Commercial loans
Multi family residential
Other
As at December 31, 2018
Corporate Portfolio:
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Commercial loans
Multi family residential
Other
Gross
Principal
Allowance
Stage 1
Stage 2
Stage 3
Total
Net
Principal
110,181
382,820
45,455
504,520
Net
Principal
111,419
255,545
7,703
433,579
$
110,182 $
383,638
45,708
507,643
405
226
2,731
14,075
32,468
$ 1,093,714 $
35
75
3,473 $
1 $
— $
— $
1 $
194
—
—
818
253
3,123
—
—
194 $
43
75
14,032
32,393
4,313 $ 1,089,401
219
27
392
8
—
646 $
Allowance
Gross
Principal
$
$
111,419 $
256,687
7,747
436,354
50,613
64,424
927,244 $
Stage 1
Stage 2
Stage 3
Total
— $
— $
— $
— $
738
44
2,210
468
393
3,853 $
191
—
348
12
20
571 $
213
—
217
1,142
44
2,775
—
—
430 $
480
413
4,854 $
50,133
64,011
922,390
Gross principal as presented in the tables above includes unamortized capitalized transaction costs and accrued interest.
(b) Mortgages by risk rating
The Company’s internal risk rating system involves judgment and combines multiple factors to arrive at a borrower-specific
score to assess the borrower’s probability of default and ultimately classify the mortgage into one of the categories listed
below. For single family mortgages, these factors include, but are not limited to, the loan to value ratio, the borrower’s ability
to service debt, property location and credit score. For construction, commercial and uninsured completed inventory loans,
these factors include, but are not limited to, borrower net worth, project presales, experience with the borrower, project
location, debt serviceability and loan to value ratio.
The internal risk ratings presented below are defined as follows:
•
•
•
•
Insured Performing: Mortgages that are insured by a federally regulated mortgage insurer that are not in arrears
or default.
Very Low/Low: Mortgages that have below average probability of default with credit risk that is lower than the
Company’s risk appetite and risk tolerance levels.
Normal/Moderate: Mortgages that have a standard probability of default with credit risk that is within the
Company’s risk appetite and risk tolerance.
High/Higher: Mortgages that may have a higher probability of default but are within the Company’s risk appetite
or have subsequently experienced an increase in credit risk. The proportion of mortgages originated in this category
is managed to the Company’s overall risk appetite and tolerance levels.
• Monitored/Arrears: For single family mortgages, mortgages that are past due but less than 90 days in arrears or
mortgages for which an escalated concern has arisen. For construction, commercial and uninsured completed
inventory loans, mortgages where the performance trend is negative or where debt serviceability may be in jeopardy.
Impaired/Default: Mortgages that are over 90 days past due or mortgages for which there is objective evidence of
impairment.
•
- 72 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
The table below shows the credit quality of the Company’s corporate mortgage portfolio based on the Company’s internal
risk rating system and stage classification. The Company’s policy that outlines whether ECL allowances are calculated on an
impaired or performing basis are set out in Note 4.
As at
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
December 31, 2019
December 31, 2018
Single family mortgages
Insured
Insured performing
Monitored/Arrears
Impaired/Default
Uninsured
Very low/Low
Normal/Moderate
High/Higher
Monitored/Arrears
Impaired/Default
$
95,026 $
11,815 $
— $ 106,841 $ 102,672 $
7,153 $
— $ 109,825
1,557
—
—
—
96,583
11,815
—
1,783
1,783
1,557
1,783
—
—
590
—
110,181
102,672
7,743
—
1,004
1,004
590
1,004
111,419
$ 143,740 $
32,912 $
— $ 176,652 $
99,272 $
19,282 $
— $ 118,554
154,952
26,705
13,978
3,621
—
1,712
3,461
—
316,291
64,790
—
—
—
1,739
1,739
181,657
15,690
7,082
1,739
91,640
13,538
—
—
22,959
1,561
5,691
—
382,820
204,450
49,493
—
—
—
1,602
1,602
114,599
15,099
5,691
1,602
255,545
Uninsured - completed inventory
Normal/Moderate
High/Higher
$
— $
— $
— $
— $
3,760 $
— $
— $
43,044
43,044
2,411
2,411
—
—
45,455
45,455
3,943
7,703
—
—
—
—
3,760
3,943
7,703
Construction loans
Normal/Moderate
High/Higher
Monitored/Arrears
Commercial loans
Multi family residential
Normal/Moderate
High/Higher
Monitored/Arrears
Other
Very low/Low
Normal/Moderate
High/Higher
$
43,427 $
— $
— $
43,427 $
49,161 $
— $
— $
49,161
416,589
—
460,016
21,555
22,949
44,504
—
—
—
438,144
322,941
22,949
—
504,520
372,102
32,167
28,762
60,929
—
548
548
355,108
29,310
433,579
$
13,085 $
— $
— $
13,085 $
24,183 $
—
—
13,085
947
—
947
—
—
—
947
—
23,871
—
14,032
48,054
$
— $
— $
— $
— $
3,081 $
31,043
1,350
32,393
—
—
—
—
—
—
31,043
1,350
32,393
30,859
26,536
60,476
— $
—
2,079
2,079
— $
—
3,535
3,535
— $
24,183
—
—
—
23,871
2,079
50,133
— $
3,081
—
—
—
30,859
30,071
64,011
$ 961,412 $ 124,467 $
3,522 $1,089,401 $ 795,457 $ 123,779 $
3,154 $ 922,390
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
(c) Mortgage allowances
For the Years Ended
Single family mortgages
Insured
Allowance, beginning of year
Net remeasurement of allowance 1
Mortgages derecognized or repaid 2
Total provision
Write-offs
Allowance, end of year
Uninsured
Allowance, beginning of year
Transfer to stage 1 3
Transfer to stage 2 3
Transfer to stage 3 3
Net remeasurement of allowance 1
Originations 4
Mortgages derecognized or repaid 2
Total provision (recovery)
Write-offs
Allowance, end of year
Uninsured - completed inventory
Allowance, beginning of year
Transfer to stage 2 3
Net remeasurement of allowance 1
Originations 4
Mortgages derecognized or repaid 2
Total provision (recovery)
Reclassification of mortgages
Allowance, end of year
Construction loans
December 31, 2019
Stage 3
Stage 2
Stage 1
Total
Stage 1
December 31, 2018
Stage 3
Stage 2
Total
$
— $
— $
— $
— $
2 $
— $
— $
2
21
(2)
19
(18)
1
—
—
—
—
—
—
—
—
—
—
21
(2)
19
(18)
1
11
(2)
9
(11)
—
—
—
—
—
—
—
—
—
—
—
11
(2)
9
(11)
—
$
738 $
191 $
213 $
1,142 $
205 $
58 $
121 $
384
282
(485)
(78)
(517)
536
(71)
(333)
—
405
(282)
505
—
(150)
—
(45)
28
—
219
—
(20)
78
186
—
(182)
62
(81)
194
—
—
—
(481)
536
(298)
(243)
(81)
818
164
(276)
(9)
302
440
(87)
534
(1)
738
(164)
276
(71)
125
—
(33)
133
—
191
—
—
80
460
—
(204)
336
(244)
213
—
—
—
887
440
(324)
1,003
(245)
1,142
$
44 $
— $
— $
44 $
338 $
62 $
— $
400
(27)
(21)
212
(51)
113
69
226
27
—
—
—
27
—
27
—
—
—
—
—
—
—
—
(21)
212
(51)
140
69
253
—
(42)
73
(325)
(294)
—
44
—
—
—
(62)
(62)
—
—
—
—
—
—
—
—
—
—
(42)
73
(387)
(356)
—
44
Allowance, beginning of year
$
2,210 $
348 $
217 $
2,775 $
2,293 $
335 $
— $
2,628
Transfer to stage 1 3
Transfer to stage 2 3
Transfer to stage 3 3
Net remeasurement of allowance 1
Originations 4
Mortgages derecognized or repaid 2
Total provision (recovery)
683
(839)
—
1,128
101
(643)
430
(683)
839
—
10
—
(122)
44
Reclassification of mortgages
91
—
Allowance, end of year
2,731
392
—
—
—
—
—
(217)
(217)
—
—
—
—
—
1,138
101
(982)
257
113
(125)
(27)
193
832
(1,039)
(53)
(91)
125
—
(8)
—
(13)
13
(22)
—
27
212
—
—
217
—
—
—
397
832
(1,052)
177
91
(30)
—
—
(30)
3,123
2,210
348
217
2,775
- 74 -
2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
For the Years Ended
Commercial loans
Multi family residential
Allowance, beginning of year
Transfer to stage 1 3
Net remeasurement of allowance 1
Originations 4
Mortgages derecognized or repaid 2
Total recovery
Reclassification of mortgages
Allowance, end of year
Other
Allowance, beginning of year
Transfer to stage 1 3
Transfer to stage 2 3
Net remeasurement of allowance 1
Originations 4
Mortgages derecognized or repaid 2
Total recovery
Reclassification of mortgages
Allowance, end of year
Total
December 31, 2019
Stage 3
Stage 2
Stage 1
Total
Stage 1
December 31, 2018
Stage 3
Stage 2
Total
$
468 $
12 $
— $
480 $
563 $
44 $
— $
607
25
(337)
—
(26)
(338)
(95)
35
(25)
17
—
—
(8)
4
8
—
—
—
—
—
—
—
—
(320)
—
(26)
(346)
(91)
43
—
(70)
314
(339)
(95)
—
468
—
(4)
—
(28)
(32)
—
12
—
—
—
—
—
—
—
—
(74)
314
(367)
(127)
—
480
$
393 $
20 $
— $
413 $
597 $
244 $
— $
841
—
(37)
(183)
—
(33)
(253)
(65)
75
—
37
(33)
—
(20)
(16)
(4)
—
—
—
—
—
—
—
—
—
—
—
(216)
—
(53)
(269)
(69)
75
53
(76)
(383)
458
(286)
(234)
30
393
(53)
76
(85)
—
(162)
(224)
—
20
—
—
—
—
—
—
—
—
—
—
(468)
458
(448)
(458)
30
413
Allowance, beginning of year
$
3,853 $
571 $
430 $
4,854 $
3,998 $
743 $
121 $
4,862
Transfer to stage 1 3
Transfer to stage 2 3
Transfer to stage 3 3
Net remeasurement of allowance 1
Originations 4
Mortgages derecognized or repaid 2
Total provision (recovery)
Write-offs
990
(1,388)
(78)
91
849
(826)
(362)
(18)
(990)
1,408
—
(156)
—
(187)
75
—
—
(20)
78
186
—
(399)
(155)
—
—
—
121
849
330
(476)
(36)
11
2,116
(1,412)
(2,078)
(442)
(133)
(308)
476
(71)
28
1
(298)
(172)
(22)
—
107
672
—
(204)
553
—
—
—
711
2,117
(2,580)
248
(81)
(99)
(12)
—
(244)
(256)
Allowance, end of year
$
3,473 $
646 $
194 $
4,313 $
3,853 $
571 $
430 $
4,854
1 Represents the change in the allowance related to changes in model parameters, inputs, and assumptions. This includes remeasurement
between twelve-month and lifetime ECLs following stage transfers, changes to forward-looking macroeconomic conditions, changes in the
level of risk, and changes to other parameters used in the ECL model.
2 Reflects the decrease in the allowance related to mortgages that were repaid or derecognized during the period.
3 Represents movements between ECL stages and excludes the impact to the allowance of remeasurement between twelve-month and lifetime
ECLs and changes in risk.
4 Reflects the increase in allowance related to mortgages newly recognized during the period. This includes mortgages that were newly
originated, purchased, or re-recognized following a modification of terms.
The allowance for credit losses is sensitive to the macroeconomic variables used in the three forward-looking scenarios and
the probability weights assigned to those forecasts. The macroeconomic variables used in these scenarios are projected over
the forecast period and could have a material impact in determining ECLs. Changes in these items would have an impact on
the measurement of ECLs.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
The following table represents the average values of the macroeconomic variables used in these forecasts:
As at December 31, 2019
Macroeconomic variables
Base
Favourable
Unfavourable
Next 12
months 1
2 to 5 Next 12
years 1 months 1
2 to 5 Next 12
years 1 months 1
2 to 5
years 1
Housing Price Index (annual change)
Canada
Greater Toronto Area
Greater Vancouver Area
Gross domestic product (annual change)
Unemployment rate
Interest rates
Prime rate
5 year mortgage rate 2
2.10%
1.60%
1.00%
1.62%
5.80%
3.75%
3.89%
2.10%
2.69%
2.72%
1.85%
5.80%
3.81%
3.95%
3.31%
4.25%
4.28%
2.74%
5.05%
4.25%
4.39%
2.25% (3.36%)
2.89% (4.29%)
2.91% (4.32%)
2.51% (0.18%)
6.40%
5.26%
4.31%
4.45%
3.50%
3.64%
1.92%
2.47%
2.49%
0.61%
6.14%
3.56%
3.70%
As at December 31, 2018
Macroeconomic variables
Base
Favourable
Unfavourable
Next 12
months 1
2 to 5 Next 12
years 1 months 1
2 to 5 Next 12
years 1 months 1
2 to 5
years 1
Housing Price Index (annual change)
Canada
Greater Toronto Area
Greater Vancouver Area
Gross domestic product (annual change)
Unemployment rate
Interest rates
Prime rate
5 year Government of Canada bond
2.00%
3.30%
0.90%
1.78%
5.73%
2.00%
2.57%
2.93%
1.78%
5.87%
6.56%
8.45%
9.68%
2.32%
5.11%
2.56% (6.78%)
3.29% (8.62%)
3.76% (9.78%)
1.84% (2.35%)
7.19%
4.79%
(0.87%)
(1.11%)
(1.26%)
1.26%
7.92%
4.33%
2.50%
4.51%
1.31
4.76%
2.86%
4.61%
1.28
4.83%
2.50%
4.49%
1.44
5.26%
3.35%
4.93%
1.42
$
4.08%
1.31%
4.14%
4.51%
0.51%
3.32%
$ 1.63
$ 1.74
5 year mortgage rate 2
Canadian/US dollar exchange rate 2
$
1 The numbers represent the average values over the quoted period.
2 Variables are derived from regression models which consider the other macroeconomic variables.
$
$
Assuming a 100% base case economic forecast with the incorporation of the impact of the migration of mortgages between
stages, with all other assumptions held constant, the allowance for performing mortgages as at December 31, 2019 would be
approximately $3,655 (December 31, 2018 - $3,953) compared to the reported allowance for performing mortgages of $4,119
(December 31, 2018 - $4,424).
Assuming a 100% unfavourable economic forecast with the incorporation of the impact of the migration of mortgages between
stages, with all other assumptions held constant, the allowance for performing mortgages as at December 31, 2019 would be
approximately $5,066 (December 31, 2018 - $5,541) compared to the reported allowance for performing mortgages of $4,119
(December 31, 2018 - $4,424).
(d) Arrears and impaired mortgages
Mortgages past due but not impaired are as follows:
As at December 31, 2019
1 to 30 days
31 to 60 days
61 to 90 days
Total
Single family mortgages
Insured
Uninsured
$
$
1,557 $
5,571
7,128 $
— $
1,248
1,248 $
— $
263
263 $
1,557
7,082
8,639
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
As at December 31, 2018
1 to 30 days
31 to 60 days
61 to 90 days
Total
Single family mortgages
Insured
Uninsured
$
$
490 $
5,097
5,587 $
100 $
311
411 $
— $
283
283 $
590
5,691
6,281
Impaired mortgages (net of individual allowances) are as follows:
As at
December 31, 2019
December 31, 2018
Single Family Mortgages Construction
Loans
Uninsured
Insured
Total
Single Family Mortgages Construction
Loans
Uninsured
Insured
Total
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
— $
423 $
— $
423 $
146 $
323 $
548 $ 1,017
1,565
—
170
48
—
416
545
88
127
140
— 1,981
—
—
—
—
545
258
175
140
276
—
165
417
—
312
488
—
—
479
—
—
—
—
—
588
488
165
417
479
$
1,783 $
1,739 $
— $ 3,522 $
1,004 $
1,602 $
548 $ 3,154
(e) Geographic analysis
As at December 31, 2019
Single Family
Mortgages
Construction
Loans
Commercial
Loans
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
As at December 31, 2018
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
$
$
$
$
360,245 $
73,401
78,359
8,662
10,509
7,280
538,456 $
182,378 $
30,948
281,088
10,106
—
—
504,520 $
45,478 $
947
—
—
—
—
46,425 $
Single Family
Mortgages
Construction
Loans
Commercial
Loans
239,515 $
59,245
45,701
8,988
12,994
8,224
374,667 $
195,662 $
28,943
197,322
11,652
—
—
433,579 $
64,891 $
2,079
47,174
—
—
—
114,144 $
Total
588,101
105,296
359,447
18,768
10,509
7,280
1,089,401
Total
500,068
90,267
290,197
20,640
12,994
8,224
922,390
53.9%
9.7%
33.0%
1.7%
1.0%
0.7%
100.0%
54.2%
9.8%
31.5%
2.2%
1.4%
0.9%
100.0%
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
(f) Other information
Outstanding commitments for future fundings of mortgages are as follows:
As at December 31
Single family mortgages
Insured
Uninsured
Uninsured - completed inventory
Construction loans
Commercial loans
Multi family residential
Other
2019
2018
$
$
55,670 $
10,549
2,012
248,045
—
—
316,276 $
26,875
27,954
209
332,989
630
415
389,072
Of the total outstanding commitments for future fundings, only a portion issued are expected to fund. Accordingly, these
amounts do not necessarily represent future cash requirements of the Company.
The fair value of the corporate mortgage portfolio as at December 31, 2019 was $1,091,545 (December 31, 2018 - $927,079).
Fair values are calculated on a discounted cash flow basis using the prevailing market rates for similar mortgages.
As at December 31, 2019, single family insured mortgages included $48,996 (December 31, 2018 - $67,972) 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.
8. Non-Marketable Securities
As at December 31
KingSett High Yield Fund
Crown Realty II Limited Partnership
Securitization Notes
2019
42,949 $
33,121
17,619
93,689 $
2018
42,202
29,611
—
71,813
$
$
The Company holds an investment in the KingSett High Yield Fund (“KSHYF”), in which it has a 7.3% equity interest (December
31, 2018 - 7.9%). The KSHYF invests in mortgages secured by real estate including mezzanine, subordinate and bridge
mortgages. As mortgage advances are made by the KSHYF, the Company advances its proportionate share. The KSHYF pays
a base distribution of 9% per annum, and distributes any additional income earned on a quarterly basis. As at December 31,
2019, the Company’s total remaining commitment to the KSHYF was $24,021 (December 31, 2018 - $20,948), consisting of
$1,827 available for capital advances for the KSHYF (December 31, 2018 - $nil) and $22,194 that supports credit facilities
throughout the life of the KSHYF (December 31, 2018 - $20,948). The fair value of the KSHYF is based on its redemption value.
The Company holds an investment in Crown Realty II Limited Partnership (“Crown LP”), in which it has a 14.1% equity interest
(December 31, 2018 - 14.1%). 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 based on building rental rates and current market
capitalization rates. During 2018, Crown LP sold the last remaining property in its opportunity fund and paid a distribution
of $5,070 which reduced the carrying value of the investment in Crown LP. As at December 31, 2019, the remaining properties
held by Crown LP are held in its core fund. Subsequent to December 31, 2019, the Company sold its core fund units (refer to
Note 28).
During 2019, the Company invested $18,000 in Class A securitization notes (the “Securitization Notes”). The issuer of the
Securitization Notes is a wholly-owned subsidiary of MCAP. The Securitization Notes may have the right to future fee income
from the renewals of a securitized insured mortgage portfolio. The expected final distribution date is no earlier than November
15, 2022. As at December 31, 2019, the Company has accrued $62 of interest on the Securitization Notes.
For details of net gains and losses on non-marketable securities, refer to Note 19.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
9. Equity Investment in MCAP Commercial LP
As at December 31, 2019, the Company held a 14.02% equity interest in MCAP (December 31, 2018 - 14.08%), representing
4.0 million units held by MCAN (December 31, 2018 - 4.0 million) of the 28.5 million total outstanding MCAP partnership units
(December 31, 2018 - 28.4 million).
MCAP issued new class B units at a price in excess of MCAN’s carrying value per unit, resulting in a dilution gain of $187 in
2019 (2018 - $314).
During 2019, MCAN sold no partnership units in MCAP. During 2018, MCAN sold 200,000 partnership units in MCAP at a price
of $22.60 per unit, recognizing a gain on sale of $1,701.
Amongst the interparty rights in the MCAP partnership agreement, the majority partner in MCAP has the right to acquire
MCAN’s entire partnership interest in MCAP at “fair market value”, which would be determined by an independent valuator
agreed upon by both parties.
Years Ended December 31
Balance, beginning of year
Equity income
Dilution gain
Carrying value of portion of investment sold
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’s revenue and net income:
Revenue
Net income
10. Other Assets
As at December 31
Corporate assets:
Intangible assets, net
Capital assets, net
Right-of-use asset
Prepaid expenses
Other loans
Related party receivable - MCAP
Receivables
Foreclosed real estate
2019
2018
$
$
61,593 $
15,759
187
—
(7,695)
69,844 $
59,189
13,188
314
(2,820)
(8,278)
61,593
2019
2018
$ 38,853,655 $ 34,919,316
34,458,933
460,383
38,343,981
509,674
2019
2018
$
$
579,080 $
112,153 $
522,930
94,555
2019
2018
613 $
743
2,371
1,897
1,099
175
438
435
7,771 $
581
794
—
985
2,640
8,032
26
435
13,493
$
$
The Company recorded a right-of-use asset of $2,677 upon the adoption of IFRS 16 on January 1, 2019. For further details
on the adoption of IFRS 16, refer to Note 4. During the year ended December 31, 2019, the Company recognized $306 of
depreciation expense on the right-of-use asset.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
The related party receivable from MCAP consists primarily of net principal and interest collected by MCAP in its role as a
mortgage servicer, which is remitted to MCAN on the next business day.
The capital assets and intangible assets continuity is as follows:
Furniture &
Fixtures
Computer
Hardware
Leasehold
Improvements
Capital Asset
Total
Intangible
Assets
Cost
As at January 1, 2018
Additions
As at December 31, 2018
Additions
As at December 31, 2019
Amortization
As at January 1, 2018
Amortization for the year
As at December 31, 2018
Amortization for the year
As at December 31, 2019
Net Book Value
As at December 31, 2018
As at December 31, 2019
$
$
11. Securitization Activities
824 $
5
829
—
829
805
7
812
7
819
1,780 $
173
1,953
96
2,049
1,578
104
1,682
108
1,790
1,867 $
9
1,876
17
1,893
1,322
48
1,370
49
1,419
4,471 $
187
4,658
113
4,771
3,705
159
3,864
164
4,028
17
10 $
271
259 $
506
474 $
794
743 $
5,473
7
5,480
327
5,807
4,555
344
4,899
295
5,194
581
613
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 Canada Mortgage Bonds (“CMB”) 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.
Pursuant to the NHA MBS program, MBS investors 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 guarantee to investors. All MBS issuers
(including the Company) are required to remit scheduled mortgage principal and interest payments to Computershare, the
designated Central Payor and Transfer Agent (“CPTA”) for the program, even if these mortgage payments have not been
collected from mortgagors. Similarly, at the maturity of the MBS pools that have been issued by the Company, any outstanding
principal must be paid to the CPTA. If the Company fails to make a scheduled principal and interest payment to CPTA, CMHC
may enforce the assignment of the mortgages included in all MBS pools in addition to other assets backing the MBS issued.
In the case of mortgage defaults, MCAN is required to make scheduled principal and interest payments to the CPTA until legal
enforcement proceedings are terminated at which time MCAN is required to transfer the full amount of any outstanding
principal to the CPTA as part of the Timely Payment obligation 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.
Market MBS program
During 2019, MCAN securitized $116,166 of MBS through the market MBS program (2018 - $140,525) and sold the MBS to a
third party. In 2019, we retained none of the MBS securitized in 2019 on our corporate balance sheet (2018 - $46,352) with
the remainder sold to third parties.
CMB program
During 2019, MCAN securitized $191,372 of insured single family mortgages through the CMB program (2018 - $28,417) and
$14,187 of insured multi family mortgages (2018 - $nil). At the time of the insured multi family securitization, the Company
derecognized the mortgages from its consolidated balance sheet and recorded an upfront gain of $71 (2018 - $nil).
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
Other accounting considerations
The primary risks associated with the market MBS program and CMB program are prepayment, liquidity and funding risk,
including the requirement to fund 100% of any cash shortfall related to the above-noted Timely Payment obligation. Please
refer to the “Risk Management” section of the MD&A where these risks are discussed further.
Transferred financial assets that are not derecognized in their entirety
Since MCAN neither transfers nor retains substantially all of the risks and rewards of ownership on sale and retains significant
continuing involvement through the provision of the Timely Payment obligation with respect to the majority of the market
MBS program and single family CMB program sale transactions, MCAN continues to recognize the securitized mortgages (Note
12) and financial liabilities from securitization (Note 16) on its consolidated balance sheets.
Transferred financial assets that are derecognized in their entirety but where the Company has a continuing involvement
MCAN securitizes insured multi family mortgages through the market MBS program and CMB program, and in some cases,
sells MBS and the associated interest-only strips to third parties. In these instances, where MCAN transfers control of the
asset or substantially all risks and rewards on sale, MCAN derecognizes the mortgages from its consolidated balance sheets.
MCAN’s continuing involvement is the ongoing obligation in its role as MBS issuer to service the mortgages and MBS until
maturity.
In these circumstances, the derecognized MBS balance related to the market MBS program and CMB program are not reflected
as an asset or liability on MCAN’s consolidated balance sheets. As at December 31, 2019, the derecognized MBS mature as
follows:
2020
2021
2026
2029
Total
December 31, 2019
December 31, 2018
$
80,332 $
94,348
70,995 $
72,403
9,196 $
9,440
14,100 $
—
174,623
176,191
12. Mortgages - Securitized
(a) Summary
As at December 31, 2019
Single family insured - Market MBS program
Single family insured - CMB program
As at December 31, 2018
Single family insured - Market MBS program
Single family insured - CMB program
(b) Mortgages by risk rating
Gross
Principal
449,937 $
334,363
784,300 $
Gross
Principal
722,730 $
164,536
887,266 $
$
$
$
$
Allowance
Stage 1
Stage 2
Total
Net
Principal
2 $
2
4 $
— $
—
— $
Allowance
2 $
2
4 $
449,935
334,361
784,296
Net
Principal
Stage 1
Stage 2
Total
4 $
4
8 $
— $
6
6 $
4 $
10
14 $
722,726
164,526
887,252
The Company’s internal risk rating system involves judgment and combines multiple factors to arrive at a borrower-specific
score to assess the borrower’s probability of default and ultimately classify the mortgage into one of the categories listed in
the table below. For single family mortgages, these factors include, but are not limited to, the loan to value ratio, the borrower’s
ability to service debt, property location and credit score. For a definition of internal risk ratings, refer to Note 7.
The table below shows the credit quality of the Company’s securitized mortgage portfolio based on the Company’s internal
risk rating system and stage classification. The Company’s policy that outlines whether ECL allowances are calculated on an
impaired or performing basis is discussed in Note 4.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
As at
December 31, 2019
December 31, 2018
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
Insured Performing
Monitored/Arrears
Impaired/Default
$ 706,498 $
1,051
—
$ 707,549 $
74,048 $
1,938
—
75,986 $
(c) Mortgage allowances
— $ 780,546 $ 811,259 $
—
761
761 $ 784,296 $ 811,259 $
2,989
761
—
—
69,466 $
4,726
—
74,192 $
— $ 880,725
4,726
—
1,801
1,801
1,801 $ 887,252
The allowance for credit losses on the securitized portfolio as at December 31, 2019 was $4 (December 31, 2018 - $14). There
was a recovery of credit losses on this portfolio recorded during 2019 of $10 (2018 - recovery of $2).
(d) Arrears and impaired mortgages
Securitized mortgages past due but not impaired are as follows:
As at
December 31, 2019
December 31, 2018
1 to 30 days
31 to 60 days
61 to 90 days
$
2,298 $
3,184
691 $
905
— $
637
Impaired securitized mortgages are as follows:
Total
2,989
4,726
2018
311
852
205
—
433
1,801
2019
— $
561
—
200
—
761 $
$
$
2019
2018
$
$
575,122
114,509
34,442
17,183
28,864
14,176
784,296
73.3% $
14.6%
4.4%
2.2%
3.7%
1.8%
100.0% $
532,817
195,414
65,229
29,952
38,287
25,553
887,252
60.1%
22.0%
7.4%
3.4%
4.3%
2.8%
100.0%
As at December 31
Ontario
Alberta
British Columbia
Quebec
Other
(e) Geographic analysis
As at December 31
Ontario
Alberta
British Columbia
Quebec
Atlantic Provinces
Other
(f) Other information
Capitalized transaction costs are included in mortgages and are amortized using the EIM. As at December 31, 2019, the
unamortized capitalized transaction cost balance was $4,106 (December 31, 2018 - $3,932).
The fair value of the securitized mortgage portfolio as at December 31, 2019 was $795,732 (December 31, 2018 - $891,938).
Other assets of $5,011 as at December 31, 2019 (December 31, 2018 - $3,479), consist of interest-only strips from the
Company’s CMB program multi family securitizations and prepaid expenses.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
13. Term Deposits
As at December 31
Maturity Date
Within 3 Months
3 Months to 1 Year
1 to 3 Years
3 to 5 Years
2019
2018
$
$
63,540 $
380,295
467,820
122,644
1,034,299 $
41,664
317,006
472,342
88,611
919,623
The estimated fair value of term deposits as at December 31, 2019 was $1,039,732 (December 31, 2018 - $917,663) and is
determined by discounting the contractual cash flows using market interest rates currently offered for deposits of similar
remaining maturities.
14. 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 1
Tax provision (recovery) before the following:
Provision related to income subject to tax in subsidiaries
2019
2018
47,740
$
0%
36,193
0%
—
(554)
(554) $
—
(100)
(100)
$
$
1 MCAN is subject to tax at a statutory tax rate of 38% to the extent that it does not pay sufficient dividends to eliminate its taxable income.
As MCAN has historically paid sufficient dividends such that it does not have taxable income, a 0% tax rate is used above.
Years Ended December 31
Current tax
Current tax provision
Deferred tax provision (recovery)
Non-marketable securities
Relating to loss carry forward benefit
Other
A summary of temporary differences by type is as follows:
Years Ended December 31
Deferred tax assets
Loss carry forward benefit
Other
Deferred tax liabilities
Non-marketable securities
Other
2019
2018
73
450
(918)
(159)
(627)
(554) $
283
(80)
(696)
393
(383)
(100)
2019
2018
3,671 $
334
4,005 $
3,894 $
—
3,894 $
2,754
207
2,961
3,444
34
3,478
$
$
$
$
$
Deferred tax assets and liabilities are assessed for each entity and presented as deferred tax assets of $132 (December 31,
2018 - $2,961) and deferred tax liabilities of $21 (December 31, 2018 - $3,478) on the consolidated balance sheets.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
The loss carry forward benefit reflected in the deferred tax asset relates to losses in subsidiaries to which the Company has
attributed a future benefit.
The Company has loss carry forward amounts in the non-consolidated MIC entity of $9,286 (December 31, 2018 - $8,250),
the benefit of which has not been recorded in deferred tax assets. This balance only includes assessed fiscal years and does
not incorporate taxable income for 2019. The tax loss carry forward amounts expire beginning in 2033.
15. Other Liabilities
As at December 31
Accounts payable and accrued charges
Premises lease liability
Dividends payable
2019
5,108 $
3,139
7,749
15,996 $
2018
5,553
—
7,616
13,169
$
$
Upon the adoption of IFRS 16 on January 1, 2019, the Company increased its premises lease liability by $3,400. For further
details on the adoption of IFRS 16, refer to Note 4.
The premises lease liability as at January 1, 2019 can be reconciled to the premises lease commitment as of December 31,
2018 as follows:
Premises lease commitment as at December 31, 2018
Weighted average incremental borrowing rate as at January 1, 2019
Discounted premises lease commitment at January 1, 2019
$
$
3,975
3.5%
3,400
During the year ended December 31, 2019, the Company recognized $137 of interest expense and $398 of payments relating
to the premises lease liability.
The maturity of the premises lease liability as at December 31, 2019, is as follows:
Less than one year
One to five years
More than 5 years
Total premises lease liability
16. Financial Liabilities from Securitization
As at December 31
Financial liabilities - Market MBS program
Financial liabilities - CMB program
Financial liabilities from securitization mature as follows:
As at December 31
2019
2020
2021
2022
2023
2024
$
$
332
1,964
843
3,139
2019
2018
457,593 $
336,067
793,660 $
734,525
163,410
897,935
2019
2018
— $
253,663
86,188
96,423
80,851
276,535
793,660 $
323,635
310,763
98,671
78,060
86,806
—
897,935
$
$
$
$
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
17. Share Capital
Balance, January 1
Issued
Dividend reinvestment plan
Executive Share Purchase Plan
2019
Number
of Shares
2018
Share
Capital
Number
of Shares
Share
Capital
23,798,464 $
221,869
23,377,785 $
214,664
416,919
—
6,139
367,942
—
228,008
52,737
23,798,464 $
6,462
743
221,869
Balance, December 31
The authorized share capital of the Company consists of unlimited common shares with no par value.
24,215,383 $
The Company issues 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% until further notice from MCAN. The DRIP participation rate
for the 2019 fourth quarter dividend was 17% (2018 fourth quarter - 18%).
For details on the Executive Share Purchase Plan, refer to Note 22.
The Company had no potentially dilutive instruments as at December 31, 2019 or December 31, 2018.
18. Dividends
On February 26, 2020, the Board declared a quarterly dividend of $0.34 per share payable on March 30, 2020 to shareholders
of record as of March 13, 2020.
19. Net Gain (Loss) on Securities
Years Ended December 31
Net gain (loss) on marketable securities
Net gain (loss) on non-marketable securities
2019
2018
$
$
10,780 $
3,228
14,008 $
(3,521)
3,009
(512)
For the year ended December 31, 2019, proceeds from dispositions in the Company’s REIT portfolio were $17,857 (2018 -
$7,463), resulting in a $6,273 realized gain (2018 - $1,857).
20. Mortgage Expenses
Corporate assets
Years Ended December 31
Mortgage servicing expense
Letter of credit expense
Other mortgage expenses
2019
2018
$
$
3,025 $
678
375
4,078 $
2,918
732
381
4,031
Letter of credit expense relates to outstanding letters of credit under the Company’s credit facility, discussed in Note 23.
Securitization assets
Mortgage expenses associated with securitization assets of $1,954 (2018 - $2,133) consist primarily of mortgage servicing
expenses.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
21. Provision for (Recovery of) Credit Losses
Years Ended December 31
Corporate portfolio:
Stage 1 - provisions for (recoveries of) performing mortgages
Stage 2 - provisions for (recoveries of) performing mortgages
Stage 3 - provisions for (recoveries of) impaired mortgages
Other provisions (recoveries), net
Provision for (recovery of) credit losses
Securitized portfolio:
Stage 1 - provisions for (recoveries of) performing mortgages
Stage 2 - provisions for (recoveries of) performing mortgages
Recovery of credit losses
22. Related Party Disclosures
Note
2019
2018
7
7
7
12
12
$
$
(362) $
75
(155)
(442)
(19)
(461)
(4)
(6)
(10) $
(133)
(172)
553
248
(60)
188
(7)
5
(2)
Transactions between the Company and its subsidiaries meet the definition of related party transactions. As these transactions
are eliminated on consolidation, they are not disclosed as related party transactions.
Transactions with MCAP
In 2019, the Company entered into related party transactions with MCAP as follows:
•
•
•
•
Purchase of mortgage origination and administration services of $3,660 (2018 - $3,338)
Purchase of uninsured single family mortgages of $21,386 (2018 - $12,744)
Purchase of insured multi family mortgages of $14,187 (2018 - $nil)
Purchase of Securitization Notes of $18,000 (2018 - $nil) (Note 8)
All related party transactions noted above were in the normal course of business.
Compensation
Key management personnel of the Company consist of individuals that have authority and accountability for planning, directing
and controlling the activities of the Company, directly or indirectly. Key management personnel include 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)
Termination benefits
Executive Share Purchase Plan
2019
3,895 $
239
422
4,556 $
2018
3,590
(271)
570
3,889
$
$
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. During
2019, the Board approved an amendment that precludes the granting of awards under the Share Purchase Plan before the
sixth day after the end of a black-out period.
As at December 31, 2019, $727 of loans were outstanding under the Share Purchase Plan (December 31, 2018 - $1,784).
During 2019, the Company did not advance new loans under the Share Purchase Plan (2018 - $743). The loans under the
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
Share Purchase Plan bear interest at prime plus 1% (4.95%) as at December 31, 2019 (December 31, 2018 - prime plus 1%
(4.95%)) and have a five-year term. The shares are pledged as security for the loans and had a fair value of $1,509 as at
December 31, 2019 (December 31, 2018 - $2,563). In 2019, MCAN recognized $57 of interest income (2018 - $54) on the
Share Purchase Plan loans.
Share Unit Plans
Restricted Share Units Plan
The Company has a Restricted Share Units Plan (the “RSU Plan”) whereby the Board grants 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.
Performance Share Units Plan
The Company has established a Performance Share Units Plan (the “PSU Plan”) whereby the Board grants 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. Issuances prior to 2019 vest three years subsequent to the awarding of the units subject
to continued employment with the Company. Units issued in 2019 and thereafter vest annually over a three year period,
however these units are not payable until three years from the issuance date. 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 performance metrics in the 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 issued prior to 2019 are paid in cash at the time of vesting. Holders of PSU units issued in 2019 and thereafter
are paid in cash three years from the issuance date. Holders of PDSU units are paid in cash at their individual retirement or
termination, whichever is earlier, provided that the units have vested. Additionally, the PDSU units earn dividends subsequent
to vesting until the retirement or termination, whichever is earlier.
Deferred Share Units Plan
The Company has a Deferred Share Units Plan (the “DSU Plan”) whereby the Board grants units under the DSU Plan to certain
members of senior management of the Company (the “DSU Participants”). Each unit is equivalent in value to one common
share of the Company. The DSU Participants are entitled to receive cash for each unit following their individual retirement
or termination dates, whichever is earlier. The individual unit values are based on the average market value of the Company’s
common shares for the five days preceding the retirement/termination date.
The tables below outline activity relating to the RSU Plan, the PSU Plan and DSU Plan. As at December 31, 2019, none of the
outstanding units from the RSU, PSU or DSU Plans had vested (December 31, 2018 - nil). During 2019, the Company paid the
RSU Participants $76 (2018 - $581) upon vesting of the 4,882 RSU Plan units (2018 - 31,429 units). During 2019, the Company
paid the PSU Participants $nil (2018 - $nil) upon vesting of the 16,802 PSU Plan units (2018 - nil). During 2019, there were no
payments to DSU Participants (2018 - $1,029).
For the Years Ended December 31
Units outstanding, beginning of year
New units granted
Units issued as dividends
Units vested
Units forfeited
Units outstanding, end of year
RSU
15,322
43,284
3,303
(4,882)
(6,571)
50,456
2019
PSU
59,104
39,359
6,162
(16,802)
DSU
RSU
12,250
40,014
—
560
—
5,508
3,053
2018
PSU
74,791
31,446
8,010
DSU
57,790
12,250
4,933
(31,429)
—
(62,723)
(8,970)
(12,810)
(1,824)
(55,143)
—
78,853
—
15,322
59,104
12,250
Compensation expense for the year
Outstanding liability, end of year
$
$
261 $
292 $
130 $
130 $
52 $
— $
235 $
107 $
(492) $
— $
23
16
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
23. Credit Facilities
The Company has a demand loan revolver facility from a Canadian Schedule I Chartered bank bearing interest at prime plus
0.75% (4.70%) (December 31, 2018 - prime plus 0.75% (4.70%)). During 2019, the facility limit was increased from $75,000
to $120,000. The facility is due and payable upon demand. As at December 31, 2019, the outstanding demand loan payable
was $5,053 (December 31, 2018 - $nil).
Under the facility, there is a sublimit for issued letters of credit. 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. If the
developer defaults in its obligation to the municipalities, the municipalities may draw on the letters of credit, in which case
the Company is obligated to fund the letters of credit. As at December 31, 2019, there were letters of credit in the amount of
$33,965 issued (December 31, 2018 - $43,757) and additional letters of credit in the amount of $17,950 committed but not
issued (December 31, 2018 - $28,541).
The Company has 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. As at December 31, 2019, the outstanding facility balance was $nil (December 31, 2018 - $nil).
24. 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 further information, refer to the “Capital Management” section of the
MD&A.
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.
For further information on the Company’s regulatory capital management, refer to the “Regulatory Capital” sub-section of
the “Capital Management” section of the MD&A.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
As at December 31
Regulatory ratios (OSFI)
Share capital
Contributed surplus
Retained earnings
Deduction for equity investment in MCAP 1
Common Equity Tier 1, Tier 1 and Total Capital
Total exposures/Regulatory assets
Consolidated assets
Less: Deduction for equity investment in MCAP 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
$
$
$
2019
2018
$
$
$
228,008
510
101,794
(36,813)
293,499
2,179,341
(36,813)
3,804
2,146,332
340,297
(170,149)
33,965
(16,983)
187,130
221,869
510
84,315
(30,925)
275,769
2,141,072
(30,925)
1,295
2,111,442
410,020
(205,010)
43,757
(21,879)
226,888
Total exposures/Regulatory assets
$
2,333,462
$
2,338,330
Leverage ratio
12.58%
11.79%
1 The deduction for the equity investment in MCAP is equal to the equity investment balance less 10% of shareholders’ equity.
2 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets.
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.
25. 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, non-marketable securities, other loans, financial liabilities from securitization,
term deposits and demand loan payable.
To measure financial instruments that are carried at fair value on the consolidated balance sheets, or for which fair value is
disclosed, the following fair value hierarchy is used based on the inputs to the valuation:
Level 1: Quoted market prices observed in active markets for identical assets and liabilities.
Level 2: Directly or indirectly observable inputs for the assets or liabilities not included in Level 1.
Level 3: Unobservable market inputs.
Financial instruments are classified at the lowest level of the hierarchy for which a significant input has been used. The fair
value hierarchy requires the use of observable market inputs whenever obtainable.
There were no transfers between levels during the years ended December 31, 2019 and 2018.
The following tables summarize the fair values of financial assets measured at FVPL and financial assets and liabilities measured
at amortized cost for which fair values are disclosed.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
As at December 31, 2019
Level 1
Level 2
Level 3
Total
Carrying
Value
$
$
$
$
$
$
$
$
$
Assets measured at FVPL
Marketable securities
Non-marketable securities - Crown LP 1
Non-marketable securities - KSHYF 2
Non-marketable securities - Securitization
Notes 3
Assets measured at amortized cost
for which fair values are disclosed
Cash and cash equivalents
Mortgages - corporate 4
Other loans 5
Securitization program cash held in trust
Mortgages - securitized 4
Liabilities measured at amortized cost
for which fair values are disclosed
Term deposits 7
Demand loan payable 6
Other liabilities - corporate 6
Financial liabilities from securitization 8
As at December 31, 2018
Assets measured at FVPL
Marketable securities
Non-marketable securities - Crown LP 1
Non-marketable securities - KSHYF 2
Assets measured at amortized cost
for which fair values are disclosed
Cash and cash equivalents
Mortgages - corporate 4
Other loans 5
Securitization program cash held in trust
Mortgages - securitized 4
Liabilities measured at amortized cost
for which fair values are disclosed
Term deposits 7
Other liabilities - corporate 6
Financial liabilities from securitization 8
46,141 $
—
—
29 $
—
—
— $
33,121
42,949
46,170 $
33,121
42,949
46,170
33,121
42,949
—
—
17,619
17,619
17,619
46,141 $
29 $
93,689 $
139,859 $
139,859
54,452 $
—
—
28,575
—
83,027 $
— $
—
—
—
— $
— $
54,452 $
54,452
— $
1,089,401
—
1,099
—
28,575
—
—
784,296
— $ 1,888,376 $ 1,971,403 $ 1,957,823
1,091,545
1,099
—
795,732
1,091,545
1,099
28,575
795,732
— $ 1,039,732 $ 1,039,732 $ 1,034,299
5,053
—
—
15,996
793,660
—
— $ 1,858,575 $ 1,858,575 $ 1,849,008
5,053
15,996
797,794
5,053
15,996
797,794
Level 1
Level 2
Level 3
Total
Carrying
Value
53,218 $
—
—
53,218 $
98,842 $
—
—
26,002
—
$
124,844 $
$
$
— $
—
—
— $
29 $
—
—
29 $
— $
29,611
42,202
71,813 $
53,247 $
29,611
42,202
125,060 $
53,247
29,611
42,202
125,060
— $
98,842 $
— $
98,842
—
922,390
—
2,640
—
26,002
887,252
—
— $ 1,821,657 $ 1,946,501 $ 1,937,126
927,079
2,640
26,002
891,938
927,079
2,640
—
891,938
917,663 $
13,169
894,038
919,623
— $
13,169
—
—
897,935
— $ 1,824,870 $ 1,824,870 $ 1,830,727
917,663 $
13,169
894,038
1 Fair value of investment is based on the underlying real estate properties determined by the discounted 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 KSHYF.
3 Fair value of investment in securitized notes is based on the transaction price.
4 Fair value of 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.
5 Fair value is assumed to be the carrying value as underlying loans are variable rate.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
(Dollar amounts in thousands except for per share amounts)
6 The carrying value of the asset/liability approximates fair value.
7 As term deposits are non-transferable by the deposit holders, there is no observable market. As such, the fair value of the term deposits is
determined by discounting expected future cash flows of the deposits at current offered rates for deposits with similar terms.
8 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:
Years Ended December 31
Balance, beginning of year
Advances
Repayments
Changes in fair value, recognized in net income
Balance, end of year
Risk management
2019
2018
$
$
71,813 $
19,089
(441)
3,228
93,689 $
68,190
5,685
(5,071)
3,009
71,813
The types of risks to which the Company is exposed include but are not limited to liquidity and funding risk, credit risk, interest
rate risk 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 periodically by the Board. The nature of these risks and how they are managed is provided in the
“Risk Management” section of the MD&A. The shaded sections of the MD&A relating to liquidity and funding, credit, interest
rate and market risks inherent in financial instruments form an integral part of these consolidated financial statements.
26. Commitments and Contingencies
MCAP is actively defending a claim arising from a power of sale process with respect to a defaulted land development loan
previously funded by MCAN. The plaintiff has claimed improvident sale and has claimed damages of approximately $6,000.
MCAP was awarded a judgment for approximately $500 against the same plaintiff in related proceedings. We may be subject
to the indemnification of MCAP for certain liabilities that may be incurred as part of the proceedings under a mortgage servicing
agreement between the two parties. Based on, among other things, the current status of the proceedings, we do not expect
to incur any material liability arising out of this indemnification obligation to MCAP and accordingly have not recorded a
provision.
The shaded section of the MD&A relating to commitment liquidity risk forms an integral part of these consolidated financial
statements.
27. 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.
28. Subsequent Events
On January 1, 2020, the Company sold its Crown LP core fund units for $33,090 representing the fair value as at December
31, 2019.
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2019 ANNUAL REPORT | MCAN MORTGAGE CORPORATION
DIRECTORS AND EXECUTIVE OFFICERS - AS AT DECEMBER 31, 2019
DIRECTORS
Verna Cuthbert
Corporate Director, MCAN Mortgage Corporation
Member of Enterprise Risk Management and Compliance Committee
Member of Conduct Review, Corporate Governance and Human
Resources Committee
Director since September 2013
EXECUTIVE OFFICERS
Karen Weaver
President and Chief Executive Officer
Dipti Patel
Vice President and Chief Financial Officer
Martin Beaudry
Vice President, Single Family Mortgage Operations
Carl Brown
Vice President, Investments
Emily Randle
Vice President and Chief Risk Officer
Mike Jensen
Vice President and Chief Compliance Officer
(Chief Anti Money Laundering & Privacy Officer)
Sylvia Pinto
Vice President, Corporate Secretary & Governance Officer
Milica Pejic
Vice President and Chief Audit Officer
Paul Gill
Vice President, Information Technology
Susan Doré
Corporate Director, MCAN Mortgage Corporation
Chair of Conduct Review, Corporate Governance and Human
Resources Committee
Member of Audit Committee
Director since May 2010
Gordon Herridge
Corporate Director, MCAN Mortgage Corporation
Chair of Audit Committee
Member of Enterprise Risk Management and Compliance Committee
Director since May 2018
Loraine McIntosh
Corporate Director, MCAN Mortgage Corporation
Chair of Enterprise Risk Management and Compliance Committee
Member of Audit Committee
Director since May 2017
Gaelen Morphet
Corporate Director, MCAN Mortgage Corporation
Member of Audit Committee
Member of Conduct Review, Corporate Governance and Human
Resources Committee
Director since January 2018
Derek Sutherland
President, Canadazil Capital Inc.
Member of Enterprise Risk Management and Compliance Committee
Member of Conduct Review, Corporate Governance and Human
Resources Committee
Director since May 2017
Ian Sutherland
Chair of the Board, MCAN Mortgage Corporation
Director since January 1991
Karen Weaver
President and Chief Executive Officer, MCAN Mortgage Corporation
Director since November 2011
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2019 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.xmcmortgage.com
Dividend Reinvestment Plan (DRIP)
For further information regarding MCAN’s Dividend
Reinvestment Plan, please visit:
www.mcanmortgage.com/investors/dividends.
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 2019 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 & Governance Officer, or e-mail
mcanexecutive@mcanmortgage.com.
General Information
For general enquiries about MCAN Mortgage Corporation,
please write to Ms. Sylvia Pinto, Corporate Secretary &
Governance Officer (head office details at left) or e-mail
mcanexecutive@mcanmortgage.com.
Annual General Meeting of Shareholders
Tuesday, May 12, 2020
4:30pm (local time)
The meeting will be held in a virtual only format
via live audio webcast.
All shareholders and prospective investors
are invited to attend.
- 93 -
MCAN Mortgage Corporation
600-200 King Street West, Toronto, ON M5H 3T4
(855) 213-6226 | mcanmortgage.com | mcanexecutive@mcanmortgage.com