MCAN Mortgage Corporation
Annual Report 2020

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ANNUAL REPORT 2020 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, including our investment in MCAP Commercial LP (“MCAP”). 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 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 8 63 67 98 99 - 2 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 2020 HIGHLIGHTS $42.9 million NET INCOME $1.75 EARNINGS PER SHARE 13.13% RETURN ON SHAREHOLDERS’ EQUITY1 14.31% CORPORATE ASSET GROWTH $1.36 DIVIDENDS PER SHARE • 28 year track record of dividend distribution • Cash dividend of $0.34 per share and a special stock dividend of $0.85 per share to be paid in Q1 2021 1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of the MD&A. - 3 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION MESSAGE TO SHAREHOLDERS March, and we have been very pleased with our business since then. MCAN, On many levels, 2020 was a very challenging year. Canada saw lockdowns effectuated in March 2020. like most other businesses, initiated work-from-home protocols. Through all of this, our business thrived and grew, and we are very pleased with our solid results and team performance. In the fourth quarter, MCAN earned net income of $22.1 million ($0.89 per share), an increase of 109% from $10.6 million ($0.44 per share) in the fourth quarter of 2019. Our return on average shareholders’ equity was 26% compared to 13% in the prior year. Increases in the fourth quarter came from all parts of our business. Year over year, we were negatively impacted by a large mark-to-market adjustment to our REIT portfolio in March and with higher provisions recorded for credit losses as a result of the pandemic and uncertain economic environment. Our investment in MCAP partially offset these impacts to our results. We reported net income of $42.9 million ($1.75 per share) for the year ended December 31, 2020 compared to $48.3 million ($2.01 per share) earned in 2019. Return on average shareholders’ equity was 13%, compared to 15% in the prior year. The Board of Directors (the “Board”) declared a quarterly cash dividend of $0.34 per share and a special stock dividend of $0.85 per share, on February 23, 2021, both to be paid March 31, 2021 to shareholders of record as of March 15, 2021. As a MIC, we are entitled to deduct the dividends that we pay to shareholders from our taxable income so that we eliminate income taxes at the company level. Our taxable income is higher in 2020 mainly due to higher taxable income from MCAP. The special stock dividend represents the true up of our regular dividends to taxable loss carryforwards used. for 2020, net of income 2020 Year in Review The Company’s business activities in late 2019 and early 2020 provided a strong position for MCAN entering into the COVID-19 crisis in mid- - 4 - assets growth exceeded Corporate our expectations for the year ended 2020 at $1.6 billion, a 14% increase since the end of 2019. This is the second consecutive year where we have exceeded our target 10% growth. Our corporate mortgages increased 15% to $1.3 billion at year end. We also achieved our objective of balancing the risk profile of our balance sheet. Growth in our single family mortgages creates additional capacity for further growth in our construction and commercial portfolio and our investments. We gained market share in our single family business, as we continued to in our platform and expand our geographic and broker partner strategy. invest Single family originations and acquisitions totalled $954 million, comprised of $616 million of insured mortgages, a 166% increase over 2019, and $283 million of uninsured mortgages, a 27% increase over 2019. During the year, we securitized $685 million of insured single family mortgages through the National Housing Act Mortgage-Backed Securities program, a 123% increase compared to 2019. We also securitized $52 million of insured multi family mortgages. We achieved all of our growth objectives for our single family business in 2020 and we will continue to advance our capabilities and customer service to support continued growth. In 2020, our growth was achieved during a global pandemic, a testament to our ability and agility as a company. We are pleased with our construction and commercial portfolio terms of product in composition, geographic mix and exposure. Our lending criteria continues to generate a strong loan book and in fact, a significant amount of our construction loans repaid in this very abnormal economic environment, showing the strength of our business. We have strong strategic partnerships for loan originations and expect to the quality of our continue investments in this portfolio. to maintain We are proactively managing all of our income in capital earning corporate assets resulting recycling, growth and better balance sheet 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION return on equity. optimization and Our marketable securities, comprised of real estate investment trusts, saw some recovery in the last quarter of 2020, amid optimism around the impending economic outlook given the COVID-19 vaccine, after negative volatility in early 2020. Consistent with our focus on capital recycling and growing our investments, we continued to invest in marketable securities the year and committed to a new non marketable security investment that will be closed in 2021. in During 2020, our equity investment in MCAP increased to $88.3 million as a result of its earnings and growth less distributions during 2020. With the growth its assets under management and its market leadership position, we expect that MCAP will continue to provide solid returns for MCAN. in 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%. During the year, we selectively enhanced select systems and processes in our infrastructure. Our 2020 activities were only the beginning of a multi- year strategic focus on our internal operations to deliver enhanced customer service and drive sustainable, profitable growth. inevitably occur Looking forward, we do not know the full depth, duration and breadth of the impact and changes that will in the Canadian economy, housing markets and our business as a result of the pandemic. We at MCAN are focused on stepping up to the business challenges and seizing the opportunities, backed by strong business partnerships and a talented and committed team. 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 continued shareholders participation in our Dividend Reinvestment Plan. through their Our strategic partnerships with brokers, originators and service providers is foundational to our business model. We appreciate their support in meeting our growth and business objectives and we strive to enhance their business as well. I would also like to recognize the members of our team for their dedication and work during the year particularly in light of requirements to balance family and other life matters in the pandemic. The executive team provided exemplary leadership and focus on achievement of our strategic objectives during the various challenges and opportunities. We believe that a business culture anchored by customer service delivered by a high performing team who have opportunity to develop and contribute to the business, will enhance our growth. We believe in an inclusive, diverse and equal environment and strong support of our community. We call this #MCANLIFE. We are pleased with our accomplishments in these elements of our business so far. But, we have Company growth and team more to do. development will be the foundations of the MCAN journey to provide our target returns to our shareholders. We are also committed to good environmental, social and governance practices and these initiatives will advance over time. look forward to reporting on our achievements in the future. I Lastly, we thank the Board for their continuing support during this past very challenging yet very successful year. Karen Weaver President and CEO - 5 - VISION  Our  vision  is  to  be  the  preferred  mortgage  lender and investor within our chosen real estate  markets in Canada.  We focus on:  • first time and move up buyers, self‐employed  professionals and bruised credit in the single family  mortgage markets; and  • experienced borrowers and developers for  construction and commercial loans and  investments.  We strive:  • to help our stakeholders meet their goals.  MISSION  Our mission at work every day is to provide sustainable  growth and returns for all of our stakeholders:   through relationship‐driven mortgage lending and  investing;   anchored by delivering quality work through an expert,  engaged and committed team; and   focused on servicing our customers, both  internal and external,  and our partners' needs.  CULTURE  MCAN is committed to cultivating an inclusive, collaborative  and diverse culture. We are dedicated to  achieving our mission  every day and our vision over the long term.  MCAN’s culture is shaped around a shared mission of customer  excellence, powered by genuine collaboration. Our diverse  team members are energized by having ownership over their  work with an environment rich in active learning, teamwork,  inclusion and belonging.  We call this #MCANLIFE.  ‐ 6 ‐                                Environmental • Social • Governance  Our values and culture are rooted in our people – customers, colleagues and communities ‐ and we  are committed to good environmental, social and governance practices. Our objective over time is  to advance these initiatives throughout our business operations with a focus on:  ENVIRONMENTAL  working  with  real  estate  development  partners  as  part  of our  investment strategy, that are committed to responsible  corporate citizenship   working with originators to source lending opportunities  supported by local governments or CMHC sponsored community‐  based lending   reducing the environmental footprint in our office  SOCIAL   cultivating an inclusive and diverse team, including having an Executive Officer Diversity Policy  o Globe and Mail’s Report on Business “Women Lead Here” awards honouree for 2020  o proud of our diverse workforce where our diversity surveys indicate that  > 70% of respondents identified as diverse ethnicities and > 50% as women   being supportive by working with borrowers most affected by the COVID‐19 pandemic by  instituting deferral and other programs   creating a supportive work environment and benefits for team members during the    COVID‐19 pandemic  o our fully remote operations during COVID‐19 will be supported post‐COVID‐19, allowing   for a flex working structure   enriching the development of our team including professional development, volunteer days and a  robust benefits plan  o introduced an Executive Leadership Development program   supporting various charitable organizations  GOVERNANCE   sustainable  infrastructure  that  ensures  that  strong  governance  practices  and  protocols, including high ethical standards through  our Code of Conduct,  are  embedded  within  MCAN   strong  governance and risk culture supported  by  an  integrated  risk management framework, including  our  Three‐Lines‐of‐  Defence model  ‐ 7 ‐                            2020 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 at December 31, 2020 and December 31, 2019 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 of February 23, 2021. 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.............................................................................................................. DIVIDEND POLICY AND RECORD......................................................................................................................... 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.......................................................................................................................................... 9 11 13 16 18 26 36 37 41 53 53 54 55 55 55 56 57 58 - 8 - 2020 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; the impact of global health pandemics on the Canadian economy and globally, including the continuing impact of COVID-19; 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; performance of our investments; factors affecting our competitive position within the housing markets; international trade and geopolitical uncertainties and their impact on the Canadian economy; 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: • • • • • • • • • • • • • • • • • • • our ability to successfully implement and realize on our business goals and strategy; government regulation of our business and the cost to us of such regulation, including the anticipated impact of government actions related to COVID-19; the economic and social impact, management, duration and potential worsening of the impact of COVID-19 or any other future pandemic virus; factors and assumptions regarding interest rates; housing sales and residential mortgage borrowing activities; the effect of competition; 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. The COVID-19 pandemic has cast particular uncertainty on the Company’s internal expectations, estimates, projections, assumptions and beliefs, including with respect to the Canadian economy, employment conditions, interest rates, levels of housing activity and household debt service levels. There can be no assurance that they will continue to be valid. Given the rapid pace of change with respect to the impact of the COVID-19 pandemic, it is premature to make further assumptions about these matters. The duration, extent and severity of the impact the COVID-19 pandemic, including measures to prevent its - 9 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION spread and related government actions adopted in response, will have on our business is highly uncertain and difficult to predict at this time. 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, the risks and uncertainties referred to in our Annual Information Form for the year ended December 31, 2020, this MD&A and our other public filings 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. - 10 - 2020 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 2020 2019 Change (%) Change (%) 2018 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 cash dividend per share Next quarter’s special stock 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 Average term to maturity (in months) Mortgages - corporate Term deposits 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 capital ratio 4 Total capital ratio 4 Leverage ratio 3 Credit Quality Impaired mortgage ratio (corporate) 1 Impaired mortgage ratio (total) 1 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 (7%) $ 1% $ (11%) $ (13%) $ 6% $ 50,139 4,976 36,293 1.54 1.43 20% (19%) 18% 14% (5%) $ $ $ $ $ 60,294 4,033 42,893 1.75 1.36 0.34 0.85 13.13 % 15.11 % (1.98%) 2.45 $ 1.36 80% $ 11.90 % 1.29 1.23% 90% 2.62 % 0.71 % 14.2 18.3 2.62 % 0.71 % —% —% 3.07 % 0.74 % (0.45%) (0.03%) 10.7 18.4 33% (1%) 11.5 18.7 23% (2%) 2020 2019 Change (%) Change (%) 2018 2,728,715 1,252,762 1,135,745 2,382,203 346,512 $ $ $ $ $ 2,179,341 1,089,401 784,296 1,849,029 330,312 25% $ 2,141,072 15% $ 45% $ 922,390 887,252 29% $ 1,834,378 5% $ 306,694 27% 36% 28% 30% 13% 5.09 21.67 % 22.02 % 10.17 % 0.30 % 0.18 % 4.93 22.52 % 22.52 % 12.58 % 3% (0.85%) (0.50%) (2.41%) 4.64 21.66 % 21.66 % 11.79 % 10% 0.01% 0.36% (1.62%) 0.32 % 0.23 % (0.02%) (0.05%) 0.34 % 0.27 % (0.04%) (0.09%) 24,288 $ 5,660 29,948 $ 12,161 3,750 15,911 100% $ 51% 9,435 6,527 88% $ 15,962 24,727 14.01 15.77 389,945 $ $ $ 24,215 13.64 17.10 414,077 2% 3% $ (8%) $ (6%) $ 23,798 12.89 13.32 316,989 157% (13%) 88% 4% 9% 18% 23% 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 March 31, 2020, the total capital ratio reflects the inclusion of stage 1 and stage 2 allowances on the Company’s mortgage portfolio in Tier 2 capital. In accordance with OSFI’s transitional arrangements for capital treatment of ECL issued March 27, 2020, a portion of stage 1 and stage 2 allowances that would otherwise be included in Tier 2 capital are included in CET 1 capital. The adjustment to CET 1 capital will be measured each quarter as the increase, if any, in stage 1 and stage 2 allowances compared to the corresponding allowances at December 31, 2019. The increase, if any, is subject to a scaling factor that will decrease over time and is currently set at 70% in fiscal 2020, 50% in fiscal 2021 and 25% in fiscal 2022. Prior period ratios have not been restated. - 11 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Net income was higher in 2019 compared to 2018 due to higher realized and unrealized fair value gains on our REIT portfolio and Crown LP. Taxable income was much higher in 2020 compared to 2019, mainly due to higher income from MCAP as a result of non- recurring new contracts and higher origination and processing fees related to higher whole loan sales volumes at wider spreads. As a result of this increase in taxable income, the Board declared a $0.85 per share special stock dividend on February 23, 2021, to be paid March 31, 2021 to shareholders of record as of March 15, 2021, in order to distribute all of MCAN’s taxable income, net of loss carryforwards used. Such special dividends declared annually (whether in cash or stock) are likely to continue in the near term, although not likely to be as high as the current level given the non-recurring nature of certain of MCAP’s taxable earnings. Table 2: Financial Statement Highlights - Quarter (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 cash dividend per share Next quarter’s special stock 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 2020 Q3 2020 Change (%) Q4 2019 Change (%) $ $ $ $ $ $ $ $ 25,704 1,694 22,086 0.89 0.34 0.34 0.85 25.92 % 1.05 $ $ $ $ $ 26,963 1,149 22,741 0.92 0.34 (5%) $ 47% $ (3%) $ (3%) $ —% $ 14,839 1,015 10,550 0.44 0.32 73% 67% 109% 102% 6% 28.04 % (2.12%) $ 0.48 119% $ 12.84 % 13.08% 128% 0.46 2.76 % 0.89 % 2.63 % 0.81% 0.13% 0.08% 2.63 % 0.72% 0.13% 0.17% 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. - 12 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION HIGHLIGHTS Q4 2020 • • • • • • • • Net income of $22.1 million in Q4 2020, an increase of $11.5 million (109%) from $10.6 million in Q4 2019. Earnings per share totalled $0.89 in Q4 2020, an increase of $0.45 (102%) from $0.44 per share in Q4 2019. Return on average shareholders’ equity1 was 25.92% in Q4 2020, an increase of 13.08% from 12.84% in Q4 2019. Net corporate mortgage spread income1 increased by $2.2 million from Q4 2019. The net corporate mortgage spread income1 increased due to a higher average corporate mortgage portfolio balance1 of $1,315 million in Q4 2020 compared to $1,094 million in Q4 2019 and an increase in the spread of corporate mortgages over term deposit interest1 to 2.76% in Q4 2020 from 2.63% in Q4 2019. The increase in the spread of corporate mortgages over term deposit interest1 is due to a larger reduction in term deposit rates compared to mortgage rates. The decline in our mortgage rate is due to a portfolio mix with a greater proportion of lower-yield single family to higher-yield construction and commercial loans, continued market competition which has compressed rates and a reduction in the prime rate since the onset of COVID-19. Net securitized mortgage spread income1 increased by $0.9 million from Q4 2019. The net securitized mortgage spread income1 increased due to a higher average securitized mortgage portfolio balance1 from significantly higher originations of insured single family mortgages and an increase in the spread of securitized mortgages over liabilities1. Our provision for credit losses on our corporate mortgage portfolio decreased by $0.1 million from Q4 2019. Increases due to the potential economic impacts of COVID–19 and growth in the portfolio were offset by refinements in model parameters to reflect our policies and business practices in our commercial and construction portfolio and various economic assumptions made during 2020. Equity income from MCAP totalled $9.4 million in Q4 2020, an increase of $5.4 million (133%) from $4.0 million in Q4 2019, which was primarily due to higher origination and processing fees related to higher whole loan sales volumes at wider spreads. MCAP also recorded fees from non-recurring new contracts in 2020. We expect that MCAP will continue to have strong earnings, however, more normal market and business dynamics are anticipated in 2021. In Q4 2020, we recorded a $5.7 million net gain on securities compared to a $2.1 million net gain on securities in Q4 2019. Activity in Q4 2020 related to unrealized fair value gains on our real estate investment trust (“REIT”) portfolio and in Q4 2019 related to realized and unrealized fair value gains on both our REIT portfolio and Crown Reality II Limited Partnership (“Crown LP”). We continue to see volatility in the market value of our REIT portfolio due to COVID-19 with Q4 2020 posting a partial rebound amid optimism around the impending economic outlook given the COVID-19 vaccine. Year to Date 2020 • • • • Net income of $42.9 million for 2020 year to date, a decrease of $5.4 million (11%) from $48.3 million net income in 2019. Earnings per share totalled $1.75 for 2020 year to date, a decrease of $0.26 (13%) from $2.01 earnings per share in 2019. Return on average shareholders’ equity1 was 13.13% for 2020 compared to 15.11% in 2019. Net corporate mortgage spread income1 increased by $5.0 million from 2019. The net corporate mortgage spread income1 increased due to a higher average corporate mortgage portfolio balance1 of $1,217 million in 2020 from $1,041 million in 2019. The spread of corporate mortgages over term deposit interest1 was 2.62% in both 2020 and 2019. The initial impact of COVID-19 caused a temporary higher demand for liquidity by financial institutions in the term deposit market resulting in higher term deposit funding costs primarily in the second quarter. During the second half of the year, the term deposit market dynamics were stable and spreads over mortgages normalized. Within the mortgage portfolio, there was a portfolio mix with a greater proportion of lower-yield single family to higher-yield construction and commercial loans, continued market competition which has compressed rates, and the yield on our primarily floating-rate construction loan portfolio decreased. - 13 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION • • • • Net securitized mortgage spread income1 increased by $0.5 million from 2019. The net securitized mortgage spread income1 increased due to a higher average securitized mortgage portfolio balance1 from significantly higher originations of insured single family mortgages partially offset by higher indemnity expense on early repaid mortgages that was higher than penalty income occurring mainly in the second quarter of the year. Our provision for credit losses on our corporate mortgage portfolio increased by $2.5 million from 2019. Increases due to the potential economic impacts of COVID–19 and growth in the portfolio were partly offset by refinements in model parameters to reflect our policies and business practices in our commercial and construction portfolio and various economic assumptions made during 2020. Equity income from MCAP totalled $33.9 million for 2020 year to date, an increase of $18.2 million (115%) from $15.8 million in 2019. For 2020 year to date, MCAP primarily realized higher mortgage origination and processing fees related to higher whole loan sales volumes at wider spreads. MCAP also recorded fees from non-recurring new contracts in 2020. We expect that MCAP will continue to have strong earnings, however, more normal market and business dynamics are anticipated in 2021. Year to date net loss on securities was $9.1 million for 2020 compared to a year to date net gain on securities of $14.0 million for 2019. Activity in 2020 related to unrealized fair value losses net of some realized fair value gains on our REIT portfolio and in 2019 related to realized and unrealized fair value gains on our REIT portfolio and Crown LP. In 2020, market prices for REITs were severely impacted by COVID-19 in March and we continued to see high market volatility during the year. Business Activity and Balance Sheet • • • • • • • Corporate assets totalled $1.56 billion at December 31, 2020, a decrease of $16 million (1%) from September 30, 2020 and an increase of $195 million (14%) from December 31, 2019. Corporate mortgage portfolio totalled $1.3 billion at December 31, 2020, a decrease of $57 million (4%) from September 30, 2020 and an increase of $163 million (15%) from December 31, 2019. Uninsured single family portfolio totalled $483 million at December 31, 2020, an increase of $47 million (11%) from September 30, 2020 and an increase of $101 million (26%) from December 31, 2019. Uninsured single family originations totalled $283 million in 2020, an increase of $61 million (27%) from 2019. Uninsured single family originations were $113 million in the fourth quarter of 2020, an increase of $56 million (98%) from the fourth quarter of 2019. Insured single family originations totalled $616 million in 2020, an increase of $384 million (166%) from 2019. Insured single family originations were $218 million in the fourth quarter of 2020, an increase of $158 million (266%) from the fourth quarter of 2019. Securitization volumes totalled $736 million in 2020, an increase of $415 million (129%) from $322 million in 2019. Securitization volumes in 2020 consisted of $685 million of insured single family mortgages (2019 - $308 million) and $52 million of insured multi family mortgages (2019 - $14 million). This increase in securitization volumes was partially offset by mortgage maturities for a net increase in our securitized portfolio of 43% from 2019. Our construction and commercial portfolio totalled $547 million at December 31, 2020, a decrease of $88 million (14%) from September 30, 2020 and a decrease of $4 million (1%) from December 31, 2019. Our construction portfolio totalled $487 million at December 31, 2020, a decrease of $106 million (18%) from September 30, 2020 and a decrease of $18 million (4%) from December 31, 2019. In 2020, the movement in the portfolio is attributed to originations of $498 million in new construction and commercial mortgages, an increase of 66% from December 31, 2019, offset by maturities and repayments. Dividend • The Board declared a first quarter cash dividend of $0.34 per share and a special stock dividend of $0.85 per share both to be paid March 31, 2021 to shareholders of record as of March 15, 2021. The special stock dividend represents the true up of our regular dividends to taxable income for 2020, net of loss carryforwards used. As a MIC, we are entitled to deduct the dividends that we pay to shareholders from our taxable income so that we pay no income taxes at the corporate level. The special dividend will be paid in stock in accordance with our plan and conforms with OSFI’s current restriction on increasing cash dividends. - 14 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Credit Quality The impaired corporate mortgage ratio1 was 0.30% at December 31, 2020 compared to 0.27% at September 30, 2020 and 0.32% at December 31, 2019. The impaired total mortgage ratio1 was 0.18% at December 31, 2020 compared to 0.17% at September 30, 2020 and 0.23% at December 31, 2019. Total mortgage arrears1 were $30 million at December 31, 2020 compared to $14 million at September 30, 2020 and $16 million at December 31, 2019. The increase in total mortgage arrears1 in the fourth quarter is primarily due to one construction mortgage where an asset recovery program has since been initiated. We anticipate full recovery of past due interest and principal. The impairment of this construction mortgage is not related to COVID-19. At December 31, 2020, there were no mortgages remaining in our payment deferral program. Net write-offs were $32,000 (1.0 basis point of the average corporate portfolio) in Q4 2020 compared to $58,000 (2.1 basis points) in Q4 2019; annual write-offs were $184,000 (1.5 basis points) in 2020 and $99,000 (1.0 basis point) in 2019. All write-offs relate to the uninsured single family mortgage portfolio. Average loan to value ratio (“LTV”) of our uninsured single family portfolio based on an industry index of current real estate values was 60.6% at December 31, 2020 compared to 61.5% at September 30, 2020 and 64.0% at December 31, 2019. • • • • • • 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”) and Tier 1 Capital to risk-weighted assets ratios1 were 21.67% at December 31, 2020 compared to 20.45% at September 30, 2020 and 22.52% at December 31, 2019. Total Capital to risk-weighted assets ratio1,2 was 22.02% at December 31, 2020 compared to 20.80% at September 30, 2020 and 22.52% at December 31, 2019. The leverage ratio1 was 10.17% at December 31, 2020 compared to 10.26% at September 30, 2020 and 12.58% at December 31, 2019. The income tax assets to capital ratio1 was 5.09 at December 31, 2020 compared to 5.44 at September 30, 2020 and 4.93 at December 31, 2019. • We issued 417,384 new common shares through the Dividend Reinvestment Plan (“DRIP”) in 2020 compared to 416,919 in 2019. The DRIP participation rate was 17% for the 2020 fourth quarter dividend (2019 fourth quarter dividend - 17%). The DRIP participation rate for 2020 dividends was 17% (2019 - 20%). 1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. 2 Effective March 31, 2020, the total capital ratio reflects the inclusion of stage 1 and stage 2 allowances on the Company’s mortgage portfolio in Tier 2 capital. In accordance with OSFI’s transitional arrangements for capital treatment of ECL issued March 27, 2020, a portion of stage 1 and stage 2 allowances that would otherwise be included in Tier 2 capital are included in CET 1 capital. The adjustment to CET 1 capital will be measured each quarter as the increase, if any, in stage 1 and stage 2 allowances compared to the corresponding allowances at December 31, 2019. The increase, if any, is subject to a scaling factor that will decrease over time and is currently set at 70% in fiscal 2020, 50% in fiscal 2021 and 25% in fiscal 2022. Prior period ratios have not been restated. - 15 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION OUTLOOK Market Outlook The COVID-19 pandemic has impacted the Canadian and global economy for perhaps a longer period of time than originally anticipated 11 months ago, when Canada first imposed its lockdown measures. We now find ourselves squarely amid the second wave of infections, with new strains of the virus having entered the country and further lockdowns being the normal course. Many non-essential businesses and services that initially had reopened in Canada earlier with appropriate safety measures, are now closed or operating under new restrictions. International borders continue to either be closed or have restrictions. Vaccine approval and rollout had boosted confidence in medium-term forecasts; however, with a shortage of supply, this confidence has dampened somewhat. It is still too early to determine the impacts of this second wave or even the full impacts of the first wave of COVID-19 on the Canadian economy. Prior to the pandemic, we were expecting an interest rate increase and the Canadian markets where we do business were strong, with a housing shortage, strong employment and were experiencing a positive impact from growing immigration. Since March and continuing into the fourth quarter, Canadian governments at all levels, as well as the Bank of Canada, have taken extraordinary measures, by injecting a significant amount of fiscal stimulus into the economy through various support measures. These measures have been both direct to individuals and businesses affected through various benefits, subsidies and credit support, as well as indirect through various methods to improve liquidity conditions and ensure that that the economy is functioning properly. Many of these measures have been extended. By the end of March, the Bank of Canada had decreased its overnight rate by 150 basis points to 0.25% - where it continues to stand currently and is expected to remain in the near to mid-term. All these measures have helped support Canadians and the Canadian economy thus far. Canada’s Q3 2020 GDP made up almost three quarters of the decline experienced in the first half of the year and Q4 GDP is expected to continue to grow despite lockdown measures instituted in December in various parts of the country. That said, many economists don’t expect GDP to be back to its pre-pandemic level until at least 2022. Employment numbers also continue to take a positive direction as almost 80% of pre-COVID-19 level employment has recovered by the end of November 2020. Employment did fall, however, in December 2020 for the first time since April. Economic impacts have been uneven, with a very clear k-shaped recovery, with some industries having recovered quickly from the pandemic, and others with a very slow and long recovery that have been very hard hit. It should also be noted that the Canadian household savings rate has increased significantly since COVID-19 began due to living and travel expenses falling as a result of lockdown measures, credit deferrals extended by lenders, government stimulus and many households not being affected by job losses. It is still unclear, however, what Canada’s economic and employment future will be - particularly when key support measures end and the hoard of savings that have accumulated in many households begins to deplete. Business Outlook We conduct our business based on our expectations of the market, economic outlook, demand for housing, asset quality and financial health of the Canadian economy. Since mid-March, the Company has been focused on managing all of its business activities and risks in the context of the COVID-19 pandemic and the new economic, business and daily living environment in Canada. We efficiently mobilized to remote operations within one week in early March and since then continue to execute our business effectively. The timing and speed of the recovery of the Canadian economy is uncertain as previously mentioned, and the Bank of Canada has indicated that interest rates will remain low for the foreseeable future. We had initially seen a decline in housing starts after the pandemic. Starting in the latter part of Q2 2020 that trend reversed. Housing continues to be a hot spot for the Canadian economy despite the pandemic. In fact, housing starts hit 13-year highs in both Q3 and Q4 2020. On the resale side of the housing business, 2020 ended with a record high number of units sold. Home prices also increased during 2020 due to the high demand, and supply is extremely tight, particularly for single family homes. Historically low interest rates and remote working has been the main reason for this outcome. Remote working has also meant that prices of houses have increased outside of the major urban markets as well. All of this has been the opposite of what many predicted would be the outcome at the start of the spring 2020 lockdowns. We believe that our strategy will continue to serve us well during the pandemic and beyond. We believe that we are a prudent and disciplined lender and investor and that we have strong relationships with our brokers, borrowers, servicers and strategic partners. We continue to see strong deal flow in all our product lines, as well as loan repayments from completed construction projects and maturing residential mortgages. Our business activities will continue, with enhanced focus on all key lending metrics given the heightened uncertainty in the economy and outlook. Single Family Business The Canadian housing markets, particularly in Vancouver, Toronto and Ottawa, were very active prior to the implementation of emergency government containment measures across Canada in mid-March. While social distancing protocols changed and slowed the real estate sales process initially, these activities did not stop. In fact, as previously mentioned, the 2020 housing market remained extremely strong and extremely active, fueled by the low interest rates and families seeking to advance their lives and homes. In our portfolios, we continued to see an increase in new insured and uninsured mortgage volumes relating to home purchases and uninsured mortgage refinances across our target markets. - 16 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION We have capitalized on this and in fact we have grown our market share significantly over 2019. We have had some of the highest origination volumes in our history and our pipeline continues to grow in 2021. In February 2021, we have signed a term sheet with a Canadian Schedule I Chartered bank for a new $50 million senior secured mortgage warehouse facility to provide improved funding in response to our continued growth. The low interest rate environment also created an increase in early repaid mortgages in our existing securitized pools resulting in higher indemnity expense. This activity within our securitized pools subsided in Q3 2020. New mortgage volumes relating to uninsured home purchases and refinances have also increased across our target markets. Through the latter part of 2020 and currently, we are seeing a much more competitive environment in both the insured and uninsured mortgage market. We expect this to continue for much of the balance of 2021. In these unprecedented times our risk management, credit monitoring and assessment activities have increased. We have worked with some of our borrowers on a case-by-case basis to provide effective alternatives that have allowed them to manage the challenges they are facing due to COVID-19. This support had included payment deferrals of up to six months on existing mortgages and by the end of December there were no mortgages remaining in the payment deferral program. We have also implemented appropriate measures to support these borrowers after their payment deferral periods ended, which has included increased amortizations and other payment arrangements. We continue to be prudent in our approach to income confirmation and assessing creditworthiness over the long term. We are focused on keeping abreast of the many changes in the market and in our portfolios that could negatively impact our business or that could create opportunities in line with our risk appetite. Construction and Commercial Business While there have been some construction site delays and a slowdown in sales activity initially after the pandemic began, our construction project finance loans are progressing forward without major delays or credit issues in the markets where we do business. We have seen some slowdowns in interior unit finishing in particular, due to social distancing protocols and workplace safety rules, as well as supply chain challenges for key components such as plumbing fixtures, lighting fixtures, and mechanical units. Furthermore, certain municipal staff inspections have been delayed. These delays have, and may continue to, impact the timing of repayments, however, they have not changed the overall expected outcome of project successes or loan performances. In fact, through the year, we have seen a significant amount of timely repayments within our construction and commercial book as loans matured. We entered this pandemic with strong underlying demand for new residential units in Toronto and Vancouver. Initially after the pandemic, there were changes in demand and sales slowed, however as previously indicated, the housing market has been strong since then. Compared to 2019, we increased the amount of construction originations and currently our pipeline remains active. We will of course continue to monitor the Canadian economic landscape as we move through the pandemic. We will continue to apply our prudent approach to underwriting criteria in line with our risk appetite, with a focus on well-located and affordable residential product with experienced borrowers where we have existing relationships. We have approached our underwriting with an even more conservative lens in light of COVID-19 and will continue to do so as we move forward. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will continue to depend on the scope and duration of this crisis, this second wave of COVID-19 and the overall effectiveness of actions that have been taken by various governmental agencies. We support the actions taken by the government and regulators as we believe that to date, they have been positive for the economy, consumers and our business. While certain parts of our business have experienced significant declines due to COVID-19 related factors, such as the large decline in the market value of our marketable securities recorded in Q1 2020, we are encouraged by the strength of other segments of our business such as our insured single family business, and our construction and commercial business, all fueled by the interest rate markets and our credit risk profile. MCAP has recorded enhanced earnings from non-recurring new business contracts and higher origination and processing fees related to higher whole loan sales volumes at wider spreads. Our other non-marketable securities also had solid performance which is expected to continue. MCAN’s management and Board continue to be committed to proactively and effectively managing and evolving the Company’s strategy, business activities and team through the pandemic into the future. Our targeted annual growth in corporate assets over the long term is 10%. We believe that we are well positioned in terms of capital and liquidity to support our targeted growth within our risk appetite into 2021. 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. - 17 - 2020 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 Q4 2020 Q4 Change Annual Annual Change 2019 (%) 2020 2019 (%) $ 17,115 $ 14,910 15% $ 64,070 $ 56,379 14% 9,378 1,483 668 691 104 4,032 1,802 680 382 247 133% 33,918 15,759 115% (18%) (2%) 81% (58%) 5,908 2,430 1,767 611 6,416 3,027 2,002 1,101 (8%) (20%) (12%) (45%) 5,702 2,067 176% (9,091) 14,008 (165%) Gain on dilution of investment in MCAP Commercial LP — — n/a 33 187 (82%) 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 35,141 24,120 46% 99,646 98,879 1% 7,918 1,300 199 — 20 7,960 1,111 77 — (1%) 32,006 29,321 17% 158% n/a 4,588 4,078 683 — 638 360 9% 13% 7% (100%) 133 (85%) 2,075 (461) 550% 9,437 9,281 2% 39,352 33,936 16% 25,704 14,839 73% 60,294 64,943 (7%) 6,461 112 6,573 4,232 637 10 4,950 31% 21,534 20,491 5% 208 (46%) 595 792 (25%) 5,158 27% 22,129 21,283 4% 3,650 494 16% 29% 15,898 15,345 2,177 1,954 4% 11% (1) 1,100% 21 (10) 310% 4,879 4,143 18% 18,096 17,289 5% 1,694 1,015 67% 4,033 3,994 1% 4,509 1,601 6,110 3,870 1,744 5,614 17% 15,047 13,905 (8%) 6,631 7,292 9% 21,678 21,197 8% (9%) 2% 21,288 10,240 108% 42,649 47,740 (11%) (798) (310) (157%) (244) (554) 56% $ 22,086 $ 10,550 109% $ 42,893 $ 48,294 (11%) $ $ 0.89 $ 0.34 $ 0.44 0.32 102% $ 1.75 $ 6% $ 1.36 $ 2.01 1.28 (13%) 6% - 18 - 2020 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, 2020 September 30, 2020 December 31, 2019 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 $ 199,861 $ 1,266 2.50 % $ 189,505 $ 1,351 2.84 % $ 121,690 $ 928 460,027 5,552 4.81 % 425,881 5,194 4.87 % 371,487 4,416 Uninsured - completed inventory 52,175 805 6.14 % 38,613 609 6.27 % 47,964 769 Construction loans Residential Non residential Commercial loans 543,869 8,682 6.35 % 533,617 8,392 6.25 % 497,878 7,993 2,486 51 8.15 % 1,613 38 9.24 % 4,060 95 Multi family residential 24,425 327 5.32 % 10,089 142 5.58 % 15,917 237 Other Mortgages - corporate portfolio 31,882 432 $ 1,314,725 $ 17,115 5.38 % 423 32,336 5.18 % $ 1,231,654 $ 16,149 5.19 % 472 35,350 5.22 % $ 1,094,346 $ 14,910 Term deposit interest and expenses 1,217,436 7,918 2.42 % 1,116,772 7,774 2.59 % 1,019,641 7,960 3.07 % 4.76 % 6.36 % 6.38 % 9.31 % 5.90 % 5.35 % 5.43 % 2.80 % Net corporate mortgage spread income2 Spread of mortgages over term deposit interest 2 $ 9,197 $ 8,375 $ 6,950 2.76 % 2.63 % 2.63 % Average term to maturity (months) Mortgages - corporate Term deposits 14.2 18.3 13.5 19.2 10.7 18.4 Table 5: Net Mortgage Interest Income and Average Rate by Mortgage Portfolio - Annual Average Balance2 2020 Interest Income Average Rate 1, 2 Average Balance2 2019 Interest Income Average Rate 1, 2 For the Years Ended December 31 (in thousands except %) Single family mortgages Insured Uninsured $ 178,782 $ 4,975 2.78 % $ 134,839 $ 4,252 418,656 20,151 4.81 % 335,057 15,409 Uninsured - completed inventory 42,826 2,689 6.27 % 24,691 1,629 Construction loans Residential Non residential Commercial loans Multi family residential Other commercial 528,477 33,524 6.35 % 451,416 29,199 1,235 121 9.76 % 6,565 526 14,459 32,230 873 1,737 5.71 % 38,394 5.05 % 49,998 2,143 3,221 Mortgages - corporate portfolio $ 1,216,665 $ 64,070 5.25 % $ 1,040,960 $ 56,379 Term deposit interest and expenses Net corporate mortgage spread income2 Spread of mortgages over term deposit interest 2 1,117,299 32,006 2.63 % 969,121 29,321 $ 32,064 $ 27,058 2.62 % 3.13 % 4.60 % 6.41 % 6.47 % 7.79 % 5.58 % 6.44 % 5.41 % 2.79 % 2.62 % 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, 2020, September 30, 2020 and December 31, 2019 and the years ended December 31, 2020 and December 31, 2019. 2 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. - 19 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 6: Mortgage Originations (in thousands except %) For the Periods Ended Originations Single family - insured Single family - uninsured Single family - uninsured completed inventory 1 Residential construction 1 Non-residential construction 1 Commercial 1 Renewals of securitized mortgages 2 Single family - insured Q4 2020 Q4 Change Annual Annual Change 2019 (%) 2020 2019 (%) $ 217,780 $ 59,553 266% $ 615,664 $ 231,823 166% 113,358 57,276 98% 283,045 222,301 8,920 424 2,004% 55,249 47,917 121,676 104,745 16% 474,475 295,264 1,283 20,000 — n/a 3,340 2,000 900% 20,075 760 3,037 $ 483,017 $ 223,998 116% $ 1,451,848 $ 801,102 27% 15% 61% 339% 561% 81% $ 25,063 $ 27,229 (8%) $ 135,285 $ 82,808 63% 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 Balancing of the risk profile of the mortgages on our balance sheet was a focus of the Company during the year partly due to COVID-19. The lower interest rate environment impacted both mortgages and term deposits. For Q4 2020, the increase in the spread of mortgages over term deposit interest1 from Q4 2019 was due to a larger decrease in term deposit rates and expenses compared to mortgages, partly offset by a portfolio mix with a greater proportion of lower-yield single family to higher-yield construction and commercial loans and continued market competition which compressed rates. For the year, the spread was consistent with the prior year, with an equal decline in term deposit rates and mortgage rates. Continued market competition and the aforementioned portfolio mix contributed to a decline in the average mortgage rate, as well as a decline in the yield on the primarily floating rate construction loan portfolio. With respect to term deposits, it should be noted that although the average rate is lower than in the prior year, rates remained high and even increased for several weeks immediately following the COVID-19 impact on Canada in March 2020, notwithstanding the significant decrease in Bank of Canada overnight rates. Single Family We continue to focus on growing our single family originations in our corporate and securitized mortgage portfolio and accordingly our total volumes increased from 2019. This increase was a result of the reduced interest rate environment, 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 CMHC National Housing Act (“NHA”) MBS program. The significant increase in insured single family originations in 2020 supported a 123% increase in single family securitization volumes to $685 million in 2020 from $308 million in 2019. Single family mortgages provide comparatively lower yields given the lower risk profile. For the quarter and year to date, higher gross coupon in our uninsured single family originations and higher average balances in single family (both insured and uninsured) in 2020 contributed to a higher corporate mortgage interest compared to 2019. We will continue to focus on our target markets and risk profile while anticipating a challenging environment in 2021 given the economic conditions under COVID-19. We have taken a prudent underwriting approach since COVID-19 and will continue to do so. We opportunistically invest in our single family uninsured completed inventory portfolio which generally migrate from our own construction book. As we are in unprecedented times, we have been committed to working with our borrowers on a case-by-case basis to provide effective alternatives that have helped them manage the challenges they are facing due to COVID-19. This support included up to a six-month payment deferral for mortgages. Active deferrals had decreased throughout the year and by December 31, 2020 there were no mortgages remaining in the payment deferral program. - 20 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Construction and Commercial During 2020, we continued to focus on originations in our residential construction portfolio in selected markets, with our preferred borrowers and risk profile. We have seen a significant increase in originations, especially in Q3 2020 after briefly pausing new fundings during the initial onset of the pandemic. The increase in the commercial portfolio in 2020 from 2019 was mainly due to new originations particularly in Q4 2020. Construction delays for some projects may occur due to the COVID-19 pandemic which may lead to an increase in loan extension requests and project cost overruns. To date, sites with the appropriate permits in place continue to progress toward completion. Our prudent underwriting approach requires satisfactory borrower liquidity, guarantor net worths and presale requirements as applicable to the respective markets to mitigate impacts from slower expected sales or project delays. 1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. 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. At December 31, 2020, we had the renewal rights to $1.7 billion of single family mortgages (September 30, 2020 - $1.5 billion; December 31, 2019 - $1.2 billion). Equity Income from MCAP The $18.2 million increase in equity income from MCAP in 2020 from 2019 was due to higher mortgage origination and processing fees related to higher whole loan sales volumes at wider spreads. MCAP also recorded fees from non-recurring new contracts in 2020. In Q4 2020, MCAP’s origination volumes were $6.5 billion, an increase from $4.7 billion in Q4 2019. For 2020, MCAP’s origination volumes were $19.3 billion, an increase from $16.9 billion in 2019. At November 30, 2020, MCAP had $111.4 billion of assets under management compared to $109.0 billion at August 31, 2020 and $105.5 billion at November 30, 2019. We recognize equity income from MCAP on a one-month lag such that our 2020 equity income from MCAP is based on MCAP’s net income for the year ended November 30, 2020. 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 2020 compared to $1.2 million in Q4 2019 and $nil from Crown LP in Q4 2020 compared to $0.3 million in Q4 2019. For 2020, we received $4.6 million of distribution income from the KSHYF compared to $4.7 million during 2019 and $0.1 million from Crown LP compared to $1.4 million during 2019. We sold our investment in Crown LP in January 2020. Marketable Securities Marketable securities income consists primarily of distributions from the REIT portfolio. The yield on this portfolio increased to 5.46% in Q4 2020 compared to 4.79% in Q4 2019. During 2020, the yield was 6.14% compared to 5.19% during 2019. The yield has been calculated based on the average portfolio balance. The net loss on the REIT portfolio discussed below contributed to the higher 2020 yield by decreasing the average portfolio balance. Fees Fee income can vary between quarters given the fact that not all fees occur on a routine basis. Net Gain (Loss) on Securities In Q4 2020, we recorded a $5.7 million net gain on securities compared to a $2.1 million net gain in Q4 2019 as we saw a partial rebound amid optimism around the impending economic outlook given the COVID-19 vaccine. During 2020, we recorded a $9.1 million net loss almost entirely related to unrealized fair value losses on our REIT portfolio due to COVID-19, compared to a $14.0 million net gain in 2019, $6.3 million of which related to realized gains on dispositions within our REIT portfolio, $3.2 million of which related to our investment in Crown LP and the balance related to unrealized fair value gains in our REIT portfolio. - 21 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Gain on Dilution of Investment in MCAP In 2020 and 2019, 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 $33,000 in 2020 (2019 - $187,000). Term Deposit Interest and Expenses The increase in term deposit interest and expenses from 2019 was partly due to the increase in deposit funding required to support growth in our mortgage portfolio. As well, although the average rate is lower than in the prior year, rates remained high and even increased for several weeks immediately following the COVID-19 impact on Canada in March 2020, notwithstanding the significant decrease in Bank of Canada overnight rates. We have seen rates since come down and stabilize. 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. Term deposit expenses include costs related to insurance, operating infrastructure and administration. In Q4 2020, term deposit interest and expenses were relatively consistent from Q4 2019 and this was due to a decrease in term deposit rates offset by an increase in term deposit funding levels. Net Investment Income - Securitization Assets Net investment income from securitization assets relates to our participation in the market MBS program and the Canada Housing Trust (“CHT”) CMB program. Our total new securitization volumes were $266 million in Q4 2020 (Q4 2019 - $104 million) and $736 million in 2020 (2019 - $322 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, 2020 September 30, 2020 December 31, 2019 (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 $ 1,019,780 $ 6,461 2.54 % $ 847,399 $ 5,504 2.61 % $ 773,136 $ 4,950 Financial liabilities from securitization 1,030,716 4,232 1.65 % 859,683 3,841 1.80 % 793,569 3,650 Net securitized mortgage spread income 2 Spread of mortgages over liabilities 2 $ 2,229 $ 1,663 $ 1,300 0.89 % 0.81 % 2.56 % 1.84 % 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 2020 Interest Income Average Rate 1, 2 Average Balance2 2019 Interest Income Average Rate 1, 2 Mortgages - securitized portfolio $ 840,151 $ 21,534 2.58 % $ 802,970 $ 20,491 2.56 % 15,898 856,413 Financial liabilities from securitization Net securitized mortgage spread income 2 Spread of mortgages over liabilities 2 0.71 % 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, 2020, September 30, 2020 and December 31, 2019 and the years ended December 31, 2020 and December 31, 2019. 2 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. 827,940 1.87 % 15,345 0.71 % 1.85 % 5,636 5,146 $ $ As a result of a decline in rates during 2020, there was an increase in the number of early repaid mortgages. This impacted the net securitized mortgage spread income2 and spread of mortgages over liabilities2 during late Q1 2020 and into Q2 2020 due to indemnity expenses on early repaid mortgages that were higher than penalty income. Since Q2 2020, the number of early repaid mortgages has declined and the spread of mortgages over liabilities2 has widened consistent with the broader mortgage market. - 22 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Provision for (Recovery of) Credit Losses Table 9: Provision for (Recovery of) Credit Losses and Write-offs (in thousands except basis points and %) For the Periods Ended Q4 2020 Q4 Change Annual Annual Change 2019 (%) 2020 2019 (%) Provision for (recovery of) on impaired corporate mortgages Single family mortgages uninsured Construction Provision for (recovery of) 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 $ (3) $ — (3) (5) 776 (25) (812) 105 (17) 22 6 — 6 — 60 27 29 (150%) $ 46 $ 62 (26%) n/a (150%) — 46 (217) (155) 100% 130% n/a (3) 19 (116%) 1,193% 1,653 (305) 642% (193%) 452 (2,900%) (323) 140 474 223% (168%) (4) 2,725% (174%) 103 142 (84%) 2,024 23 135 (346) (269) (287) 130% 153% 805% Other provisions (recoveries) Total corporate provision for (recovery of) credit losses 1 20 (8) 113% 5 133 (85%) 2,075 (19) (461) 126% 550% Provision for (recovery of) on performing securitized mortgages 10 (1) 1,100% 21 (10) Total provision for (recovery of) credit losses $ 30 $ 132 (77%) $ 2,096 $ (471) 310% 545% Corporate mortgage portfolio data: Provision for (recovery of) credit losses, net Net write offs Net write offs (basis points) $ $ 19 $ 32 $ 1.0 141 58 2.1 (87%) $ 2,070 $ (442) 568% (45%) $ 184 $ (52%) 1.5 99 1.0 86% 50% Provisions are based on a statistical modelling methodology incorporating both internal portfolio characteristics and forward- looking macroeconomic information. Loans are segmented into homogenous risk bands based on internal risk characteristics including (but not limited to) credit scores, delinquency history, loan type and location. Historical regression methodology is used to relate expected credit loss (“ECL”) to key macroeconomic indicators including house price indices, unemployment rates, interest rates and gross domestic product. Economic forecasts of these variables are then used to produce forward-looking estimates of expected credit loss under multiple scenarios. Scenarios are probability weighted by management to obtain an aggregated forward looking view. 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. The increase in the provision for credit losses on our corporate mortgage portfolio in 2020 (both quarter and year to date) compared to 2019 is due to current macroeconomic scenarios and economic inputs being affected by COVID-19, along with qualitative adjustments including, but not limited to, the effectiveness of various government support programs, partly offset by refinements in model parameters relating to our construction and commercial portfolio to better reflect our policies and practices on asset management. In Q4 2020, the provision for credit losses was largely unchanged from Q3 2020. Updated single family macroeconomic scenarios and economic inputs and higher portfolio balances that increased ECL were offset by updated commercial and construction macroeconomic scenarios and economic inputs and lower portfolio balances that decreased ECL. Key judgments include the speed and shape of economic recovery and the impact of government stimulus. These judgments have been made with reference to the facts, projections and other circumstances at December 31, 2020. IFRS 9 does not permit the use of hindsight in measuring provisions for credit losses. Since December 31, 2020, forecasts around the impact of COVID-19 on the economy and the timing of recovery have continued to evolve. Any new forward-looking information subsequent to December 31, 2020, will be reflected in the measurement of provisions for credit losses in future periods, as appropriate. This may add significant variability to provisions for credit losses in future periods. - 23 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION We continue to monitor our portfolio in arrears on a regular basis to detect COVID-19-specific significant stress or deterioration and note that government support programs are still in effect. The increase in arrears in the fourth quarter is mainly due to one construction mortgage where an asset recovery program has since been initiated and is not related to COVID-19. We anticipate full recovery of past due interest and principal. We also note that notwithstanding COVID-19 and the loan mentioned previously, we continued to receive contractual repayments of mortgages within our construction and commercial portfolio. 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 2020 Q4 2019 Change (%) Annual 2020 Annual Change (%) 2019 $ $ 4,509 $ 1,601 6,110 $ 3,870 1,744 5,614 17% $ 15,047 $ 13,905 (8%) 7,292 6,631 9% $ 21,678 $ 21,197 8% (9%) 2% The increase in salaries and benefits for the quarter and year to date is primarily due to additional resources to support our increased focus on single family originations, internal infrastructure and systems initiatives. The decrease in general and administrative expenses for the quarter and year to date is primarily due to a reduction in professional fees compared to those incurred in 2019. Taxable Income The table below provides a reconciliation between consolidated net income (loss) for accounting purposes and non- consolidated taxable income. The adjustments below represent the difference between the components of net income (loss) 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. In order to take advantage of the tax benefits of a Mortgage Investment Corporation (“MIC”) status, we typically pay out substantially all of MCAN’s non-consolidated taxable income to shareholders 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. - 24 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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 Add: Securitization program premium (discount) Reverse: Net unrealized (gain)/loss on securities 4 Add: Capital gains Reverse: (Income)/loss earned in subsidiaries 5 Deduct: Gain on dilution of MCAP6 Other items Taxable Income Q4 2020 Q4 2019 YTD 2020 YTD 2019 $ 22,086 $ 10,550 $ 42,893 $ 48,294 (9,378) 18,519 32 1,295 (5,558) 1,334 (5,702) 274 3,596 — (723) 25,775 $ (4,032) 2,176 135 1,349 (1,553) (244) 636 3,625 (1,342) — (121) 11,179 $ (33,918) 38,616 2,047 4,989 (16,546) 5,110 9,091 274 7,982 (33) (411) 60,094 $ (15,759) 7,590 (313) 6,204 (7,874) 1,118 (10,780) 4,043 1,108 (187) (662) 32,782 $ 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 realized 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 Not recognizable in the calculation of taxable income. The increase in taxable income in 2020 from 2019 is primarily due to higher taxable income allocation from MCAP as well as our core operations partially offset by increased securitization activity which results in higher mortgage origination costs. During 2020, we incurred $16.5 million of origination costs on securitized mortgages (including market MBS held by MCAN) (2019 - $7.9 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. At December 31, 2020, the unamortized origination fee balance was $21.4 million (December 31, 2019 - $9.8 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. - 25 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION FINANCIAL POSITION Assets Table 12: Assets (in thousands except %) December 31 September 30 2020 2020 Change December 31 2019 (%) Change (%) Corporate Assets $ Cash and cash equivalents Marketable securities Mortgages Non-marketable securities Equity investment in MCAP Commercial LP Deferred tax asset Other assets 88,929 $ 49,613 1,252,762 56,117 88,263 407 20,218 1,556,309 71,257 34,254 1,309,605 57,340 89,138 368 10,551 1,572,513 Securitization Assets Cash held in trust Mortgages Other assets 29,610 1,135,745 7,051 1,172,406 2,728,715 $ 26,252 960,874 6,338 993,464 2,565,977 $ 25% $ 45% (4%) (2%) (1%) 11% 92% (1%) 54,452 46,170 1,089,401 93,689 69,844 132 7,771 1,361,459 13% 18% 11% 18% 6% $ 28,575 784,296 5,011 817,882 2,179,341 63% 7% 15% (40%) 26% 208% 160% 14% 4% 45% 41% 43% 25% Our corporate asset portfolio increased from December 31, 2019 primarily due to strong origination volumes in the insured and uninsured single family portfolios. Our securitized mortgage portfolio has increased from September 30, 2020 and December 31, 2019 due to the impact of new securitization issuances as a result of higher volumes of insured single family originations. Mortgages - Corporate & Securitized Corporate Mortgages Single Family Mortgages Insured and uninsured We invest in insured and uninsured residential single family mortgages across Canada primarily focused on first time and move up buyer markets in the greater urban regions in Ontario and to a lesser extent in Alberta and Vancouver. These mortgages are primarily originated by our XMC subsidiary through its strategic relationships with mortgage brokers for our own corporate portfolio and for securitization activities. We focus our uninsured mortgage lending to those customers with credit challenges and to those who are self-employed. 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. - 26 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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 typically ranging between 24 and 36 months, with extensions requiring additional underwriting and approval. Non-residential construction loans provide construction financing for retail shopping developments, office buildings and industrial developments. We expect that some of our construction portfolio projects may experience delays as a result of the impact of COVID-19 on the construction industry. We expect that this may lengthen the time these loans are outstanding. We continue to be prudent and selective in our credit adjudication and we have enhanced our portfolio management given the fluid situation of the pandemic. 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 focus investments 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. At December 31, 2020, the average outstanding construction loan balance was $7 million (September 30, 2020 - $9 million; December 31, 2019 - $9 million) with a maximum individual loan commitment of $30 million (September 30, 2020 - $30 million; December 31, 2019 - $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 higher yielding 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 CHT CMB program. Securitized mortgages that were in the deferred payment program as a result of COVID-19 were eligible for renewal with payments calculated based on the outstanding principal at maturity, which could include capitalized interest from the payment deferral period. These mortgages remained eligible for future NHA MBS securitizations and issuers were 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 had not been collected from mortgagors. The insurers have issued guidance for addressing the deferrals in the securitized pools following the deferral period. At December 31, 2020, there were no remaining securitized mortgages in the deferral program. For further information related to our securitization activities, refer to the “Securitization Programs” section of this MD&A. Market MBS Program 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. During Q4 2020, we securitized $84 million (Q4 2019 - $77 million) of MBS through the market MBS program and retained $4 million (Q4 2019 - $nil) of the MBS on our corporate balance sheet and sold $80 million (Q4 2019 - $77 million) to third parties. Year to date 2020, we securitized $273 million (year to date 2019 - $116 million) of MBS through the market MBS program and retained $8 million (year to date 2019 - $nil) of the MBS on our corporate balance sheet and sold $265 million (year to date 2019 - $116 million) to third parties. At December 31, 2020, we held $48 million of MBS on our balance sheet for liquidity purposes (September 30, 2020 - $48 million; December 31, 2019 - $49 million), which is included in the insured single family portfolio within corporate mortgages. CMB Program During Q4 2020, we securitized $165 million (Q4 2019 - $26 million) of insured single family mortgages through the CMB program and $17 million (Q4 2019 - $nil) of insured multi family mortgages. At the time of the insured multi family securitization, the Company derecognized the mortgages from its balance sheet and recorded a gain on the sale of the mortgages of $0.1 million (Q4 2019 - $nil). Year to date 2020, we securitized $412 million (year to date 2019 - $191 million) of insured single family mortgages through the CMB program and $52 million (year to date 2019 - $14 million) of insured multi family mortgages. At the time of the insured multi family securitization, the Company derecognized the mortgages from its balance sheet and recorded an upfront gain of $0.2 million (2019 - $0.1 million). - 27 - 57% 26% 8% (4%) 113% (6%) 15% (3%) 109% 45% 27% 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 13: Mortgage Summary (in thousands except %) Corporate portfolio: Single family mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Multi family residential Other commercial December 31 September 30 2020 2020 Change December 31 2019 (%) Change (%) $ 173,373 $ 483,432 48,949 486,632 183,556 436,417 54,607 592,778 (6%) $ 11% (10%) (18%) 110,181 382,820 45,455 504,520 29,839 30,537 1,252,762 10,031 32,216 1,309,605 197% (5%) (4%) 14,032 32,393 1,089,401 Securitized portfolio Single family insured - Market MBS program Single family insured - CMB program $ 437,831 697,914 1,135,745 2,388,507 $ 406,040 554,834 960,874 2,270,479 8% 26% 18% 5% $ 449,935 334,361 784,296 1,873,697 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 related to our investments in these portfolios. The increase in the insured and uninsured single family corporate mortgages was primarily due to increased new originations as a result of a buoyant housing market propelled by a very low interest rate environment. Our securitized mortgage portfolio has increased due to the impact of new securitization issuances as a result of higher volumes of insured single family originations. Figure 1: Total Corporate and Securitized Mortgage Portfolio (in thousands) - 28 - Index ValueSecuritizedCorporateDec 2018Mar 2019Jun 2019Sep 2019Dec 2019Mar 2020Jun 2020Sep 2020Dec 2020$700,000$800,000$900,000$1,000,000$1,100,000$1,200,000$1,300,000$1,400,000 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Figure 2: Corporate Mortgage Portfolio Composition by Product Type (in thousands) Construction loans Single family mortgages uninsured Single family mortgages insured Commercial loans multi family residential Commercial loans other Single family mortgages uninsured - completed inventory Dec 31, 2019 Mar 31, 2020 Jun 30, 2020 Sep 30, 2020 Dec 31, 2020 $504,520 (46%) $382,820 (35%) $110,181 (10%) $14,032 (1%) $32,393 (3%) $45,455 (4%) $546,967 (46%) $395,833 (33%) $161,017 (14%) $10,436 (1%) $32,440 (3%) $41,638 (4%) $475,274 (42%) $410,014 (37%) $157,333 (14%) $10,350 (1%) $32,380 (3%) $33,962 (3%) $592,778 (46%) $436,417 (33%) $183,556 (14%) $10,031 (1%) $32,216 (2%) $54,607 (4%) $486,632 (39%) $483,432 (39%) $173,373 (14%) $29,839 (2%) $30,537 (2%) $48,949 (4%) Note: Amounts in parentheses represent the percentage of the corporate portfolio represented by the individual product type. Figure 3: Mortgage Portfolio Geographic Distribution at December 31, 2020 (December 31, 2019) Ontario British Columbia Alberta Atlantic Provinces Quebec Other December 31, 2020 December 31, 2019 Corporate Securitized Corporate Securitized 67.5 % 23.2 % 7.5 % 0.7 % 0.6 % 0.5 % 100.0 % 84.3 % 3.2 % 8.4 % 2.2 % 1.0 % 0.9 % 100.0 % 53.9 % 33.0 % 9.7 % 1.0 % 1.7 % 0.7 % 100.0 % 73.3 % 4.4 % 14.6 % 3.7 % 2.2 % 1.8 % 100.0 % - 29 - Net PrincipalConstruction loansSingle familymortgagesuninsuredSingle familymortgagesinsuredCommercial loansmulti familyresidentialCommercial loansotherSingle familymortgagesuninsured -completedinventory$0$50,000$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000$500,000$550,000$600,000 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Credit Quality Table 14: Arrears and Impaired Mortgages (in thousands except %) December 31 September 30 2020 2020 Change December 31 2019 (%) Change (%) Impaired mortgages Corporate Single family mortgages - insured Single family mortgages - uninsured Securitized Total impaired mortgages Impaired mortgage ratio (corporate) 1 Impaired mortgage ratio (total) 1 Mortgage arrears 1 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 residential Commercial - other Stage 3 Single family mortgages - insured Single family mortgages - uninsured $ $ $ $ $ $ $ $ $ $ 1,266 2,505 3,771 472 4,243 0.30 % 0.18 % 1,948 10,540 11,800 24,288 5,660 29,948 8,054 68,517 13,290 20,235 — 17,200 127,296 1,266 2,505 3,771 1,087 2,465 3,552 410 3,962 16% $ 2% 6% 15% 7% $ 1,783 1,739 3,522 761 4,283 (29%) 44% 7% (38%) (1%) 0.27 % 0.17 % 0.03% 0.01% 0.32 % 0.23 % (0.02%) (0.05%) 2,305 7,924 — 10,229 3,522 13,751 6,648 61,027 1,881 22,818 — 18,866 111,240 1,087 2,465 3,552 (15%) $ 33% n/a 137% 61% 118% $ 3,340 8,821 — 12,161 3,750 15,911 21% $ 12% 607% (11%) n/a (9%) 14% 11,815 64,790 2,411 44,504 947 — 124,467 16% 2% 6% 1,783 1,739 3,522 Total stage 2 and 3 corporate mortgages $ 131,067 $ 114,792 14% $ 127,989 Allowance for credit losses Corporate Allowance on performing mortgages Allowance on impaired mortgages Securitized - allowance on performing mortgages Total allowance for credit losses $ $ $ 6,047 157 6,204 25 6,229 $ 6,053 160 6,213 15 6,228 —% $ (2%) —% 67% —% $ 4,119 194 4,313 4 4,317 1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. - 30 - (42%) 19% n/a 100% 51% 88% (32%) 6% 451% (55%) (100%) n/a 2% (29%) 44% 7% 2% 47% (19%) 44% 525% 44% 2020 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 increase in arrears in the fourth quarter is mainly due to one construction mortgage where an asset recovery program has since been initiated and is not related to COVID-19. We anticipate full recovery of past due interest and principal. 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. Consistent with a government-sponsored initiative and with industry practice, the Company offered up to a six-month payment deferral program for borrowers as a result of COVID-19. On August 31, 2020, OSFI issued revisions to the treatment of mortgage deferrals. If the mortgage deferral was granted before August 30, 2020, non-payment of these mortgages under the deferral program did not affect the performing status of mortgage payments up to six calendar months from the effective date of the deferral. For deferrals granted from August 30, 2020 to September 30, 2020, non-payment of these mortgages under the deferral program did not affect the performing status of mortgage payments up to three calendar months from the effective date of the deferral. As such, these mortgages are not considered past due and do not migrate stages within the ECL methodology due to this deferral, nor are they considered modifications because interest continues to accrue. Additionally, mortgages in the payment deferral program do not trigger a significant increase in credit risk (“SICR”). When the deferral period expires, mortgage payments are to resume as per the agreed terms of the contract. At renewal, the mortgage will be re- amortized and payments will be based on the outstanding balance at that time. At December 31, 2020, no mortgages remained in the payment deferral program. Total mortgages previously in our payment deferral program that are now included in total mortgage arrears1 represent less than 1% of our single family and securitized portfolio on a dollar basis. Of the total mortgage arrears1, 31% represents mortgages previously in our payment deferral program on a dollar basis. We will closely monitor and actively manage these arrears related to our payment deferral program. We would expect to observe an increase in overall mortgage default and arrears rates in the event of a protracted economic downturn due to COVID-19 as realization periods on collateral become longer and borrowers adjust to the new economic conditions and potentially changing real estate values. This could also result in an 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 not fully compensated for by government stimulus measures which we would expect would 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; however, given the systemic nature of the COVID-19 impacts, traditional actions may not be available or effective. Figure 4: Impaired Corporate Mortgage Ratio1 The impaired corporate mortgage ratio1, as presented above, reflects impaired (stage 3) mortgages under IFRS 9. The increase in the impaired corporate mortgage ratio1 at June 30, 2020 mainly relates to one construction mortgage where an asset recovery program was initiated. In Q3 2020, we received full recovery of past due interest and principal. The impairment of this construction mortgage was not related to COVID-19. - 31 - Dec 2018Mar 2019Jun 2019Sep 2019Dec 2019Mar 2020Jun 2020Sep 2020Dec 20200.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%1.00%1.10%1.20%1.30%1.40% 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION For further information regarding corporate mortgages by risk rating, refer to Note 7 to the consolidated financial statements. 1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. 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. Table 15: Single Family Mortgages by Province at December 31, 2020 (in thousands except %) Insured % Uninsured % HELOCs % Corporate Securitized Insured % Total % Ontario Alberta British Columbia Quebec Atlantic Provinces Other Total $ 137,757 18,930 5,156 5,069 4,991 1,379 $ 173,282 79.5 % $ 414,231 54,628 10.9 % 51,955 3.0 % 2,914 2.9 % 3,733 2.9 % 4,920 0.8 % 100.0 % $ 532,381 77.8 % $ 10.3 % 9.8 % 0.5 % 0.7 % 0.9 % 100.0 % $ 67 24 — — — — 91 73.6 % $ 956,980 95,958 26.4 % 36,082 — % 11,840 — % 25,124 — % 9,761 — % 84.3 % $ 1,509,035 169,540 93,193 19,823 33,848 16,060 100.0 % $ 1,135,745 100.0 % $ 1,841,499 8.4 % 3.2 % 1.0 % 2.2 % 0.9 % 81.9 % 9.2 % 5.1 % 1.1 % 1.8 % 0.9 % 100.0 % Table 16: Single Family Mortgages by Province 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 $ 110,120 61.8 % $ 292,206 48,021 23.0 % 74,157 3.8 % 3,417 4.8 % 4,656 5.3 % 5,818 1.3 % 100.0 % $ 428,275 68.2 % $ 11.2 % 17.3 % 0.8 % 1.1 % 1.4 % 100.0 % $ 34 27 — — — — 61 55.7 % $ 575,122 44.3 % 114,509 34,442 17,183 28,864 14,176 100.0 % $ 784,296 — % — % — % — % 73.3 % $ 935,368 187,910 14.6 % 112,802 4.4 % 25,845 2.2 % 39,373 3.7 % 21,454 1.8 % 100.0 % $ 1,322,752 70.7 % 14.2 % 8.5 % 2.0 % 3.0 % 1.6 % 100.0 % Table 17: Single Family Mortgages by Amortization Period at December 31, 2020 (in thousands except %) Up to 20 Years >20 to 25 Years >25 to 30 Years >30 Years Total Corporate Securitized Total $ 116,987 $ 209,702 $ 287,265 $ 91,800 $ 705,754 16.6 % 29.7 % 40.7 % 13.0 % 100.0 % $ 224,111 $ 881,872 $ 29,762 $ 19.8 % 77.6 % 2.6 % — — % $ 1,135,745 100.0 % $ 341,098 $ 1,091,574 $ 317,027 $ 91,800 $ 1,841,499 18.5 % 59.3 % 17.2 % 5.0 % 100.0 % - 32 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 18: Single Family Mortgages by Amortization Period at December 31, 2019 (in thousands except %) Up to 20 Years >20 to 25 Years >25 to 30 Years >30 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 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 2020 Q4 Average LTV 2019 Annual Average LTV 2020 Annual Average LTV 2019 $ 105,758 9,120 7,400 — $ 122,278 72.1 % $ 52,180 497 63.4 % 5,023 72.8 % — — % 71.5 % $ 57,700 70.2 % $ 276,340 52.6 % 29,708 68.8 % 32,136 110 69.9 % $ 338,294 — % 70.8 % $ 199,412 60.7 % 21,558 74.5 % 48,720 61.8 % 528 70.7 % $ 270,218 70.6 % 60.7 % 63.7 % 71.9 % 68.6 % Table 20: Average Mortgage Loan to Value (LTV) Ratios at Origination Corporate portfolio: Single family mortgages Insured Uninsured1 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 2020 December 31 2019 78.5 % 68.6 % 62.3 % 59.0 % 64.7 % 74.0 % 53.7 % 65.7 % 81.1 % 82.8 % 82.1 % 78.8 % 68.1 % 63.9 % 46.2 % 0.0 % 58.0 % 58.4 % 58.4 % 82.9 % 83.9 % 83.3 % 73.5 % 68.8 % 1 MCAN’s corporate uninsured single family mortgage portfolio (including completed inventory loans) is secured with a weighted average LTV at origination of 68.0% at December 31, 2020 (December 31, 2019 - 67.4%). Based on an industry index that incorporates current real estate values, the ratios would be 60.6% and 64.0%, respectively. - 33 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Other Corporate Assets Cash and Cash Equivalents At December 31, 2020, our cash balance was $89 million (September 30, 2020 - $71 million; December 31, 2019 - $54 million). As part of liquidity management, we align our liquidity position to our liquidity and funding requirements. In times of uncertainty, we ensure that we take a prudent approach to liquidity management which may result in holding additional liquidity. 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. We actively manage our portfolio, as appropriate. At December 31, 2020, the portfolio balance was $50 million (September 30, 2020 - $34 million; December 31, 2019 - $46 million). During 2020, we purchased $14 million and sold $1 million of REITs. Non-Marketable Securities We invest in the KSHYF, in which we have a 6.8% equity interest at December 31, 2020 (September 30, 2020 - 6.8%; December 31, 2019 - 7.3%). At December 31, 2020, the carrying value of our investment was $44 million (September 30, 2020 - $44 million; December 31, 2019 - $43 million). The KSHYF invests in mortgages secured by real estate including mezzanine, subordinate and bridge mortgages. During Q4 2019, we invested in Securitization Notes. At December 31, 2020, the carrying value of the Securitization Notes was $13 million (September 30, 2020 - $14 million; December 31, 2019 - $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. During 2020, we sold our investment in Crown LP core fund units for $33 million representing its fair value and received a final distribution of $31,000 on our investment in Crown LP opportunity fund units. Equity Investment in MCAP We hold a 14.03% equity interest in MCAP (September 30, 2020 - 14.03%; December 31, 2019 - 14.02%), which represents 4.0 million units held by MCAN at December 31, 2020 (September 30, 2020 - 4.0 million; December 31, 2019 - 4.0 million) of the 28.5 million total outstanding MCAP partnership units (September 30, 2020 - 28.5 million; December 31, 2019 - 28.5 million). The investment had a net book value of $88 million at December 31, 2020 (September 30, 2020 - $89 million; December 31, 2019 - $70 million). The Limited Partner’s At-Risk Amount (“LP ARA”)1, which represents the cost base of the equity investment in MCAP for income tax purposes, was $60 million at December 31, 2020 (September 30, 2020 - $51 million; December 31, 2019 - $37 million). The difference between the net book value and the LP ARA1 reflects an unrealized gain that, if realized, would be recognized as a capital gain. During Q4 2020, we received $10.3 million of unitholder distributions from MCAP (Q4 2019 - $2.3 million). For year to date 2020, we have received $15.5 million of unitholder distributions from MCAP (year to date 2019 - $7.7 million) which is reflective of MCAP’s higher income. 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. 1 Considered to be a “Non-IFRS Measure”. For further details, refer to the “Non-IFRS Measures” section of this MD&A. 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. - 34 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Liabilities and Shareholders’ Equity Table 21: Liabilities and Shareholders' Equity (in thousands except %) December 31 September 30 2020 2020 Change December 31 2019 (%) Change (%) $ 1,234,769 $ — — — 4,825 1,239,594 1,229,423 25,116 758 — 8,970 1,264,267 —% $ (100%) (100%) n/a (46%) (2%) 1,034,299 5,053 — 21 15,996 1,055,369 1,142,609 1,142,609 2,382,203 968,877 968,877 2,233,144 18% 18% 7% 793,660 793,660 1,849,029 234,635 510 111,367 346,512 2,728,715 $ 234,635 510 97,688 332,833 2,565,977 $ —% —% 14% 4% 6% $ 228,008 510 101,794 330,312 2,179,341 19% (100%) n/a (100%) (70%) 17% 44% 44% 29% 3% —% 9% 5% 25% 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 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 or financial hardship. 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 2020 reflects new common shares issued through the DRIP and Executive Share Purchase Plan. The DRIP participation rate for 2020 dividends was 17% (2019 - 20%). For further information, refer to Note 17 to the consolidated financial statements. Retained Earnings Retained earnings activity for 2020 consists of net income of $42.9 million (2019 - $48.3 million) less dividends of $33.3 million (2019 - $30.8 million). - 35 - 2020 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 Mortgage interest - corporate assets Q4/20 Q3/20 Q2/20 Q1/20 Q4/19 Q3/19 Q2/19 Q1/19 $ 17,115 $ 16,149 $ 15,409 $ 15,397 $ 14,910 $ 14,609 $ 13,656 $ 13,204 Net investment income (loss) - corporate assets $ 25,704 $ 26,963 $ 12,649 $ (5,022) $ 14,839 $ 18,207 $ 13,124 $ 18,773 Mortgage interest - securitization assets $ 6,461 $ 5,504 $ 4,786 $ 4,783 $ 4,950 $ 4,800 $ 5,241 $ 5,500 Net investment income - securitization assets $ 1,694 $ 1,149 $ 389 $ 801 $ 1,015 $ 962 $ 965 $ 1,052 Net income (loss) $ 22,086 $ 22,741 $ 7,796 $ (9,730) $ 10,550 $ 14,551 $ 8,888 $ 14,305 Basic and diluted earnings (loss) per share $ 0.89 $ 0.92 $ 0.32 $ (0.40) $ 0.44 $ 0.60 $ 0.37 $ 0.60 Dividends per share Return on average shareholders’ equity 1 Taxable income per share 1,2 $ 0.34 $ 0.34 $ 0.34 $ 0.34 $ 0.32 $ 0.32 $ 0.32 $ 0.32 25.92 % 28.04 % 9.96 % (11.84) % 12.84 % 18.05 % 11.27 % 18.36 % $ 1.05 $ 0.48 $ 0.21 $ 0.71 $ 0.46 $ 0.28 $ 0.28 $ 0.34 Spreads 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 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 Capital ratios 1,5 Total Capital ratio 1,5 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 2.76 % 0.89 % 2.63 % 0.81 % 2.48 % 0.44 % 2.62 % 0.63 % 2.63 % 0.72 % 2.48 % 0.72 % 2.66 % 0.70 % 2.73 % 0.69 % 14.2 18.3 13.5 19.2 12.3 18.7 12.2 17.0 10.7 18.4 11.3 19.1 11.6 20.1 11.9 17.2 $ 2,729 $ 2,566 $ 2,248 $ 2,212 $ 2,179 $ 2,200 $ 2,130 $ 2,167 $ 1,253 $ 1,310 $ 1,119 $ 1,188 $ 1,089 $ 1,097 $ 1,001 $ 996 $ 1,136 $ 961 $ 812 $ 752 $ 784 $ 771 $ 816 $ 871 $ 2,382 $ 2,233 $ 1,931 $ 1,897 $ 1,849 $ 1,872 $ 1,811 $ 1,850 $ 347 $ 333 $ 317 $ 315 $ 330 $ 328 $ 319 $ 317 5.09 5.44 4.95 5.03 4.93 5.13 4.71 4.69 21.67 % 20.45 % 23.01 % 21.80 % 22.52 % 21.77 % 22.40 % 22.09 % 22.02 % 20.80 % 23.40 % 22.17 % 22.52 % 21.77 % 22.40 % 22.09 % 10.17 % 10.26 % 11.46 % 11.70 % 12.58 % 12.28 % 12.16 % 12.05 % 0.30 % 0.18 % 0.27 % 0.17 % 1.26 % 0.77 % 0.39 % 0.28 % 0.32 % 0.23 % 0.27 % 0.18 % 0.27 % 0.19 % 0.30 % 0.24 % $ 24,288 5,660 $ 10,229 3,522 $ 36,083 4,005 $ 31,289 5,016 $ 12,161 3,750 $ 13,014 $ 11,334 $ 11,251 7,431 4,122 3,367 $ 29,948 $ 13,751 $ 40,088 $ 36,305 $ 15,911 $ 16,381 $ 15,456 $ 18,682 24,129 24,215 $ 390 $ 12.65 $ 15.77 $ 13.64 $ 12.90 $ 12.88 $ 14.01 $ 13.41 24,215 24,420 24,621 24,727 $ 13.46 24,727 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 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. 5 Effective March 31, 2020, the total capital ratio reflects the inclusion of stage 1 and stage 2 allowances on the Company’s mortgage portfolio in Tier 2 capital. In accordance with OSFI’s transitional arrangements for capital treatment of ECL issued March 27, 2020, a portion of stage 1 and stage 2 allowances that would otherwise be included in Tier 2 capital are included in CET 1 capital. The adjustment to CET 1 capital will be measured each quarter as the increase, if any, in stage 1 and stage 2 allowances compared to the corresponding allowances at December 31, 2019. The increase, if any, is subject to a scaling factor that will decrease over time and is currently set at 70% in fiscal 2020, 50% in fiscal 2021 and 25% in fiscal 2022. Prior period ratios have not been restated. $ 12.18 $ 17.10 $ 332 $ 311 $ 297 $ 414 24,040 $ 13.53 $ 13.23 $ 13.18 $ 15.95 $ 15.95 $ 15.93 $ 383 $ 386 $ 385 - 36 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Corporate net investment income (loss) has been driven by multiple factors. The main drivers during 2020 relate to COVID-19 impacts, causing a lower interest rate environment, a large unrealized fair value loss on our REIT portfolio recorded in Q1 2020 and an increase in our provision for credit losses. Offsetting these were higher average corporate mortgage portfolio balances and higher equity income from MCAP, particularly in the second half of 2020. Since 2019, the corporate portfolio mix has shifted towards single family mortgages mainly due to our objective of balancing the risk profile of our balance sheet and amidst COVID-19 and a competitive market. Term deposit funding and related costs also increased through this period to support corporate asset growth. In Q2 2020, the combination of these two factors as well as market disruption experienced in the term deposit market due to COVID-19 contributed to the decrease in the spread of corporate mortgages over term deposit interest1. In late 2020, term deposit funding and related costs began to decrease through this period and we saw a gradual increase in the spread of corporate mortgages over term deposit interest1. The size of the securitized mortgage portfolio has begun to increase with the impact of new securitization issuances exceeding mortgage maturities. The overall economics of securitization has been impacted by competitive and market driven pressures. We participate in this market opportunistically. Capital ratios have remained relatively steady across the last eight quarters as the gradual increase in corporate assets has generally been matched by a growing capital base. The additional Tier 2 capital introduced in Q1 2020 was offset by the net loss incurred. Total arrears and impaired ratios have varied on a quarterly basis given the nature of the 1-30 day arrears. Higher balances in Q2 2020 were due to an impaired construction mortgage where an asset recovery program was initiated and subsequently completed in Q3 2020 recovering fully all past due interest and principal. The increase in arrears in Q4 2020 is mainly due to one construction mortgage where an asset recovery program has since been initiated. We anticipate full recovery of past due interest and principal. The circumstances of both construction mortgages were unrelated to COVID-19. 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 MCAN’s non- consolidated taxable income over time through dividends subject to final review and declaration by the Board. Capital growth is achieved through retained earnings, the DRIP, Executive Share Purchase Plan, rights offerings, public share offerings and stock dividends. Our capital management is primarily 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. - 37 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 23: Income Tax Capital ¹ (in thousands except ratios) 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 2020 December 31 2019 $ 2,728,715 $ 16,117 2,744,832 6,061 (1,160,073) (55,581) 2,013 $ 1,537,252 $ 2,179,341 11,250 2,190,591 4,135 (804,569) (60,146) (8,461) 1,321,550 $ $ $ 2,382,203 $ (6,183) 2,376,020 (1,140,991) 1,235,029 $ 1,849,029 (3,055) 1,845,974 (792,425) 1,053,549 302,223 $ 268,001 5.09 4.09 4.93 3.93 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. We do not hold any additional Tier 1 capital instruments; therefore, our CET 1 capital is equal to our Tier 1 capital. Our Tier 2 capital consists of Stage 1 and Stage 2 mortgage allowances calculated under IFRS, a portion of which is allowed to be included in CET 1 under new OSFI transitional arrangements issued March 27, 2020. Total Capital equals CET 1 or Tier 1 capital plus Tier 2 capital. 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. At December 31, 2020, 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. - 38 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 24: Regulatory Capital (in thousands except %) Regulatory Ratios (OSFI) Share capital Contributed surplus Retained earnings Deduction from equity investment in MCAP 2 Eligible Stage 1 and Stage 2 mortgage allowances 4 Common Equity Tier 1 and Tier 1 Capital 4 (A) Tier 2 Capital 4 Total Capital 4 (D) 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 2020 December 31 2019 $ $ $ $ $ $ 234,635 510 111,367 (53,475) 1,364 294,401 4,707 299,108 2,728,715 (53,475) 3,018 2,678,258 197,069 19,552 216,621 228,008 510 101,794 (36,813) — 293,499 — 293,499 2,179,341 (36,813) 3,804 2,146,332 170,148 16,982 187,130 Total Exposure/Regulatory Assets (B) $ 2,894,879 $ 2,333,462 Leverage ratio 1 (A / B) Risk-weighted assets 1 (C) Regulatory Capital Ratios 1 Common Equity Tier 1 capital to risk-weighted assets ratio (A / C) Tier 1 capital to risk-weighted assets ratio (A / C) Total capital to risk-weighted assets ratio (D / C) 10.17 % 12.58 % $ 1,358,261 $ 1,303,502 21.67 % 21.67 % 22.02 % 22.52 % 22.52 % 22.52 % 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 and eligible stage 1 and stage 2 mortgage allowances. 3 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets. 4 Effective March 31, 2020, the total capital ratio reflects the inclusion of stage 1 and stage 2 allowances on the Company’s mortgage portfolio in Tier 2 capital. In accordance with OSFI’s transitional arrangements for capital treatment of ECL issued March 27, 2020, a portion of stage 1 and stage 2 allowances that would otherwise be included in Tier 2 capital are included in CET 1 capital. The adjustment to CET 1 capital will be measured each quarter as the increase, if any, in stage 1 and stage 2 allowances compared to the corresponding allowances at December 31, 2019. The increase, if any, is subject to a scaling factor that will decrease over time and is currently set at 70% in fiscal 2020, 50% in fiscal 2021 and 25% in fiscal 2022. Prior period ratios have not been restated. - 39 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 25: Regulatory Risk-Weighted Assets (in thousands except %) December 31, 2020 December 31, 2019 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 $ 88,929 29,610 49,613 1,252,762 1,135,745 56,117 88,263 407 27,269 21 % $ 20 % 100 % 62 % 5 % 173 % 39 % 100 % 100 % 18,389 $ 5,922 49,613 775,093 59,146 97,020 34,788 407 27,269 1,067,647 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 Off-Balance Sheet Items Letters of credit Commitments Charge for operational risk 1 39,105 394,139 50 % 38 % 19,553 151,598 171,151 119,463 33,965 340,297 50 % 41 % 16,983 139,437 156,420 107,863 Risk-Weighted Assets $ 1,358,261 $ 1,303,502 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 2020, we securitized $273 million of MBS through the market MBS program (2019 - $116 million). 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. At December 31, 2020, we held $48 million of retained MBS on our balance sheet (December 31, 2019 - $49 million), which is included in the insured single family classification within corporate mortgages. CMB Program During 2020, we securitized $412 million of insured single family mortgages through the CMB program (2019 - $191 million) and $52 million of insured multi family mortgages (2019 - $14 million). At the time of the insured multi family securitization, the Company derecognized the mortgages from its balance sheet and recorded an upfront gain of $0.2 million (2019 - $0.1 million). - 40 - 2020 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 - 41 - 2020 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. - 42 - 2020 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 Board is supported by management level committees, including but not limited to: • The Executive Committee: ensures the orderly flow of business, provides governance over business activities, and oversees strategic, emerging and reputational risk. ▪ Executive Committee Business Group: provides oversight of key strategic activities with the primary focus on the market, business development and alignment with the strategy and annual plan. Risk and Compliance Committee (“RCC”): provides a forum for enterprise-wide risk management and compliance oversight and facilitates objective and independent challenge over risk taking activities. The Committee provides oversight of the Company’s risk profile, risk mitigation strategies, and reviews business activities in relation to the established risk appetite framework. Asset-Liability Committee (“ALCO”): provides a forum for oversight and management of assets and liabilities of the Company in the context of balance sheet structure and size. The Committee serves as an important component of liquidity and interest rate risk management by providing strategic direction of these risk types. Capital Commitments Committee (“CCC”): is mandated to govern, evaluate and approve the construction & commercial lending activities and investments in marketable & non-marketable securities. • • • 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 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. 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. 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. - 43 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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. 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 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. The Company’s operations could also be adversely affected by the impact of global health pandemics such as the outbreak and continuing impact of COVID-19. As indicated previously, the COVID-19 pandemic has cast uncertainty on the Company’s internal expectations, estimates, projections, assumptions and beliefs, including with respect to the Canadian economy, employment conditions, interest rates, level of housing activity and household debt service levels. Significant uncertainties - 44 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION exist with respect to the severity and duration of the pandemic, and regulations and restrictions and the effectiveness of stimulus and other policy measures implemented by the government in muting the impact of the pandemic. As a response to COVID-19, the Company enhanced the oversight of its portfolio and operations with more frequent monitoring and management activities to proactively identify and address emerging risks. The Company is monitoring the evolving pandemic and has oversight with respect to its effects on operations and the Company. Additionally, we increased the frequency of reporting to and interaction with the Board to facilitate their role in providing oversight as information and developments are fluid. The Company’s management is prepared to continue to adapt to the situation and will take necessary actions to protect the Company’s business while keeping the safety of the Company’s employees and other stakeholders at the centre of all decision-making. To date, we have prioritized protecting our capital and liquidity, as well as ensuring core business activities are uninterrupted. Liquidity and Funding Risk Liquidity and funding risk is the risk that cash inflows including the ability to raise term 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 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, the Company maintains a Contingency Funding Plan that details the strategies and action plans to respond to stress events that could materially impair its access to funding and liquidity. As a result of COVID-19, the Company’s Contingency Funding Plan was invoked. ALCO, which is comprised of management, is accountable for liquidity management oversight. On a monthly basis, or more frequently as required, ALCO reviews the Company’s liquidity risk profile, reviews funding strategies and regularly monitors performance against established liquidity risk limits. Results of the monitoring of liquidity risk is reported to the Board and any exceptions or breach of key limits are immediately reported by ALCO to the Enterprise Risk Management and Compliance Committee (“ERM&CC”). At December 31, 2020 and 2019, the Company was 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. At December 31, 2020 and 2019, the Company 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. The Company maintains a demand loan revolver facility to meet its 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. The facility limit is $120 million. During 2020, there were temporarily increases of the facility limit from $120 million to $150 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, 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. The Company will execute these repurchase agreements to provide alternative sources of liquidity when it is efficient and effective to do so. In February 2021, the Company signed a term sheet with a Canadian Schedule I Chartered bank for $50 million for a senior secured mortgage warehouse facility that will bear interest at either prime plus 0.05% or BAs plus 1.05%. The facility will be used to fund insured single family mortgages prior to securitization activities. This facility will provide improved funding in response to our continued growth. - 45 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION As a response to COVID-19, the Company has enhanced monitoring and reporting of its liquidity risk profile, its respective funding markets such as the term deposit and securitization market and its liquidity risk position. 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. At December 31, 2020 and 2019, 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. 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 2020 December 31 2019 $ 88,929 $ 49,583 247,910 — 2,382 388,804 — $ — 510,966 — — 510,966 — $ 30 385,307 12,534 — 397,871 — $ — 71,876 — — 71,876 — $ — 36,703 43,583 — 80,286 88,929 $ 49,613 1,252,762 56,117 2,382 1,449,803 54,452 46,170 1,089,401 93,689 1,099 1,284,811 123,727 — (922) 122,805 426,047 — 556 426,603 519,630 — 1,586 521,216 165,365 — 1,822 167,187 — — 1,783 1,783 1,234,769 — 4,825 1,239,594 1,034,299 5,053 15,996 1,055,348 Net liquidity surplus (deficit) $ 265,999 $ 84,363 $ (123,345) $ (95,311) $ 78,503 $ 210,209 $ 229,463 Off-Balance Sheet Unfunded mortgage commitments Commitment - KSHYF $ 173,853 $ 105,466 $ 91,414 $ — — 1,212 $ 173,853 $ 105,466 $ 92,626 $ — $ — $ — — $ 22,194 $ 22,194 370,733 $ 23,406 394,139 $ 316,276 24,021 340,297 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 Risk Appetite Framework (“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. 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 Lines of Defence. The RCC, 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. - 46 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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 concern. 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. Considering factors such as borrower equity, portfolio loan to value ratios and project liquidity, at December 31, 2020 and 2019 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. The 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. As a response to COVID-19, the Company has increased the frequency of monitoring and reporting of our credit risk profile, including enhanced arrears and mortgage deferral reporting and pipeline monitoring. Employment levels have, and may continue to be, impacted due to the national response to the pandemic, which may adversely impact the ability of borrowers to make timely payments on mortgages. The Company was participating in mortgage deferral programs to borrowers. On August 31, 2020, OSFI issued revisions to the treatment of mortgage deferrals. If the mortgage deferral was granted before August 30, 2020, non-payment of these mortgages under the deferral program did not affect the performing status of mortgage payments up to six calendar months from the effective date of the deferral. For deferrals granted from August 30, 2020 to September 30, 2020, non-payment of these mortgages under the deferral program did not affect the performing status of mortgage payments up to three calendar months from the effective date of the deferral. As at December 31, 2020, there were no mortgages remaining in the deferral program. We have also implemented appropriate measures to support these borrowers after their payment deferral periods ended, which has included increased amortizations and other payment arrangements. We continue to be prudent in our approach to income confirmation and assessing creditworthiness over the long term. 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 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 PD is an estimate of the likelihood of default over a given time horizon. 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 an estimate of the loss arising in the case where a default occurs. 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. Like the PD model, the construction and commercial LGD model also segments the portfolio by internal risk ratings to differentiate LGDs at the borrower level. Exposure at default EAD is the estimate of exposure at a future default date at the borrower level, taking into account expected changes in the exposure after the reporting date. 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 - 47 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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 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 at December 31, 2020 would have an estimated positive effect of $4.1 million (September 30, 2020 - $5.5 million; December 31, 2019 - $3.8 million) to net income over the following twelve month period. An immediate and sustained parallel 1% decrease to market interest rates at December 31, 2020 would have an estimated adverse effect of $0.1 million (September 30, 2020 - $1.6 million; December 31, 2019 - $3.4 million) to net income over the following twelve month period. The reason for the large differential between our downside risk and our upside risk is due to our construction portfolio, which mostly all have interest rate floors. 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 normally 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. Under normal circumstances, an immediate and sustained parallel 1% increase to market interest rates would be expected to have a negative impact on our marketable securities (which mostly consist of our REIT portfolio); however, given these unprecedented times as a result of COVID-19, an immediate and sustained parallel 1% increase to market interest rates could signal a stronger economy and lead to an increase in the value of our marketable securities. The following tables present the assets and liabilities of the Company by interest rate sensitivity at December 31, 2020 and December 31, 2019 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. - 48 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Table 27: Interest Rate Sensitivity at December 31, 2020 At December 31, 2020 (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 $ 413,977 29,610 443,587 $ 199,490 5,198 204,688 $ 393,550 78,310 471,860 $ 242,439 168,243 410,682 $ 70,568 883,994 954,562 $ 80,196 — 80,196 $ 156,089 $ 1,556,309 1,172,406 2,728,715 7,051 163,140 — — — — 123,727 8,617 132,344 426,047 69,403 495,450 519,630 173,141 692,771 165,365 891,448 1,056,813 — — — — — — — — 4,825 — 4,825 1,239,594 1,142,609 2,382,203 346,512 346,512 GAP $ 443,587 $ 72,344 $ (23,590) $ (282,089) $ (102,251) $ 80,196 $ (188,197) $ — YIELD SPREAD 4.08 % 2.71 % 2.05 % 1.86 % 1.13 % 6.56 % Table 28: Interest Rate Sensitivity at December 31, 2019 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 $ 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 $ 1,361,459 817,882 2,179,341 5,011 160,921 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 % 9.54 % 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, 2022. 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. - 49 - Assets Corporate Securitization Liabilities Corporate Securitization 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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. The pandemic impacted and disrupted global economic activities, resulting in a decline in equity prices, including in the REIT sector. In Q4 2020, there was a partial rebound in REIT prices amid optimism around the impending economic outlook given the COVID-19 vaccine, however, high volatility is expected to continue as a result of the pandemic. 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. Management and the Board review operational risk on a quarterly basis. As a response to COVID-19, the Company has taken proactive actions to protect the health and well-being of our employees by implementing a company-wide remote working policy. To ensure operational resiliency, the Company has enhanced and implemented its Business Continuity Plan, bolstered its employee communications, provided effective tools to work from home, and has increased training on cybersecurity risks and other areas where appropriate. 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 outbreak of COVID-19 may also have an adverse impact on the operations of third parties and their abilities to meet their obligations with the Company. The Company’s Outsourcing Policy 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 due to the inability of MCAN’s IT systems, tools and practices to support business and user needs and loss due to the compromise of client confidentiality, unauthorized access and use of MCAN’s systems, and 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 or data 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-attacks 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. In order to protect our employees’ well-being during the COVID-19 pandemic, our business operations are being conducted remotely, which may impact the physical security of Company devices, employee access to Company networks and systems and an increased risk of unauthorized access to, or disclosure of, personal information. 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 a Cybersecurity Incident Response Plan and have designated officers responsible for the oversight of 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. - 50 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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. 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. 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. Employment levels have, and may continue to be, adversely impacted due to the national response to the COVID-19 pandemic. This may adversely impact the ability of borrowers to 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 the Company, including by limiting the products or services that the Company provides, restricting the scope of its operations or business lines, limiting pricing and availability of products in the market, increasing the ability of competitors to compete with its products and services or requiring it to cease carrying on business. The Company’s failure to comply with applicable laws and regulations may result in sanctions and financial penalties that could adversely impact its earnings and damage its 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 factors generally arise from either choosing the wrong strategy, or poor execution of the right strategy. The inability to proactively develop business strategies, plans or clearly define objectives, or failure to develop internal capabilities can also result in strategic risk. Strategic risk is managed by the CEO and 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. - 51 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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 the Company’s strategic objectives. The Company believes that the most effective way 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 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. - 52 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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. The Company’s capital adequacy risk is monitored and managed by the CFO and overseen by the Board. 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 an 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. 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, 2020, there were 24,727,145 common shares outstanding (December 31, 2019 - 24,215,383). At February 23, 2021, there were 24,821,671 common shares outstanding. During 2020, we issued 94,378 new common shares through the Executive Share Purchase Plan (2019 - nil). We issued 417,384 new common shares in 2020 (2019 - 416,919) under the DRIP, 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) Mortgage funding commitments Commitment - KSHYF Less than 1 Year 1 to 3 Years 3 to 5 Years Over 5 Years December 31 2020 $ 279,319 $ — $ 279,319 $ 91,414 $ 1,212 92,626 $ — $ — — $ — $ 22,194 22,194 $ 370,733 23,406 394,139 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 - 53 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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. On December 11, 2020, a trial on this matter resulted in a court judgment to dismiss the claim with $300,000 in costs to be paid by the plaintiff. On January 11, 2021, the plaintiff appealed. MCAP was awarded a judgment for approximately $500,000 against the same plaintiff in related proceedings. We may be obligated to indemnify 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. DIVIDEND 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. On March 13, 2020 OSFI instructed all federally regulated financial institutions that dividend increases should be halted for the time being. An increase in dividends is defined as an increase in the total dollar amount of dividends paid after March 13, 2020. Non-cash dividends such as stock dividends are not included in the limitation. On February 23, 2021, the Board declared a quarterly cash dividend of $0.34 per share and a special stock dividend of $0.85 per share both to be paid on March 31, 2021 to shareholders of record as of March 15, 2021. The special stock dividend will be paid to shareholders in common shares (with fractional shares paid in cash) issued out of treasury at the weighted average trading price for the five days preceding the record date. The special stock dividend represents the true up of our regular dividends to taxable income for 2020, net of loss carryforwards used. The special dividend will be paid in stock in accordance with our plan and conforms with OSFI’s current restriction on increasing cash dividends. The increase in taxable income in 2020 is primarily due to higher taxable income allocation from MCAP as well as our core operations partially offset by increased securitization activity which results in higher mortgage origination costs. 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 2020 2019 0.34 $ 0.34 0.34 0.34 1.36 $ 0.32 $ 0.32 0.32 0.32 1.28 $ 2018 0.37 0.37 0.37 0.32 1.43 $ $ - 54 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION Figure 5: Dividend History TRANSACTIONS WITH RELATED PARTIES Related party transactions for the years ended December 31, 2020 and December 31, 2019 and related party balances at December 31, 2020 and December 31, 2019 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 (loss) 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 At December 31, 2020, we had 112 team members (September 30, 2020 - 105; December 31, 2019 - 98). - 55 - $1.81$1.81$1.42$1.42$1.15$1.15$1.12$1.12$1.13$1.13$1.17$1.17$1.31$1.31$1.43$1.43$1.28$1.28$1.36$1.36$1.08$1.09$1.12$1.12$1.13$1.17$1.31$1.43$1.28$1.36Regular Dividend per ShareExtra Cash Dividend per Share2011201220132014201520162017201820192020 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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; 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. - 56 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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, 2020, 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, 2020. Ernst & Young LLP, our Independent Registered Chartered Professional Accountants, have audited our consolidated financial statements for the year ended December 31, 2020. Changes in ICFR There were no changes in our ICFR that occurred during the period beginning on January 1, 2020 and ending on December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our control framework. 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. - 57 - 2020 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 (loss attributable) to shareholders as a percentage of the capital deployed to earn the income (loss). 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, Tier 2 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 on a tax basis, increased by the amount of capital contributions into the partnership and reduced by distributions received from the partnership. - 58 - 2020 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 Floriana Cipollone Vice President and Chief Financial Officer Toronto, Canada February 23, 2021 - 59 - 2020 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, 2020 and 2019, and the consolidated statements of 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, 2020 and 2019, 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. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming the auditor’s opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Allowance for expected credit loss Key audit matter MCAN describes its significant accounting judgments and estimates in relation to the allowance for expected credit loss (ECL) in Note 5 of the 2020 consolidated financial statements. As disclosed in Note 7 and Note 12 to the 2020 consolidated financial statements, MCAN recognized $6.2 million in ECL on its consolidated balance sheet using an ECL model. ECLs represent an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Forward-looking information (FLI), which involves significant judgment, is explicitly incorporated into the estimation of ECLs. ECLs are measured at amounts equal to either (i) 12 month ECL; or (ii) lifetime ECL for those financial instruments that have experienced a significant increase in credit risk (SICR) since initial recognition or when there is objective evidence of impairment. Auditing the ECLs was complex and required the application of significant judgment because of the forward- looking nature of the key assumptions, and the inherent interrelationship of the critical variables used in measuring the ECLs. Key areas of judgment include evaluating: (i) the models and methodologies used for measuring both the 12 month and lifetime expected credit losses; (ii) the assumptions used in the ECL scenarios including FLI and assigning probability weights; (iii) assessing SICR; and (iv) the qualitative adjustments applied to the modelled ECL based on management's expert credit judgment. Management has applied a significant level of judgment in the areas noted above in determining the impact of COVID-19 on the ECLs. - 60 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION How our audit addressed the key audit matter We obtained an understanding and evaluated the design of management's controls over the ECLs. We tested the controls over data completeness and accuracy of information used in determining the ECLs. To test the ECLs, our audit procedures included, among others, involving our credit risk modelling specialists to assist in assessing the methodology and assumptions used in the models that estimate the ECLs across various portfolios and to assess management’s SICR triggers. For a sample of key FLI variables, we compared the base forecasts produced by management against publicly available information, and also assessed the reasonability of the upside and downside scenarios given the current environment due to COVID-19. We independently recalculated the ECLs and reperformed the staging to validate that the model methodology and staging triggers were correctly applied. We evaluated management's methodology over the qualitative adjustments contributing to the ECLs based on the application of expert credit judgment including management’s assessment of government stimulus and the anticipated impact on key macroeconomic factors. Furthermore, we assessed the adequacy of the presentation and disclosures of the ECLs in the notes to the consolidated financial statements. 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. 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. - 61 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION 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. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 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. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Michael Cox. Toronto, Canada February 23, 2021 - 62 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars) 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 Deferred tax liabilities Other liabilities Securitization Liabilities Financial liabilities from securitization Shareholders’ Equity Share capital Contributed surplus Retained earnings Note 2020 2019 6 7 8 9 14 10 12 12 13 23 14 15 16 17 $ $ 88,929 $ 49,613 1,252,762 56,117 88,263 407 20,218 1,556,309 29,610 1,135,745 7,051 1,172,406 2,728,715 $ $ 1,234,769 $ — — 4,825 1,239,594 1,142,609 1,142,609 2,382,203 234,635 510 111,367 346,512 2,728,715 $ $ 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 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 - 63 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands of Canadian dollars except for per share amounts) Years Ended December 31 Note 2020 2019 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 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 Current Deferred Net Income Basic and diluted earnings per share Dividends per share Weighted average number of basic and diluted shares (000’s) $ 9 19 9 20 21 20 21 14 14 64,070 $ 33,918 5,908 2,430 1,767 611 (9,091) 33 99,646 32,006 4,588 683 — 2,075 39,352 60,294 21,534 595 22,129 15,898 2,177 21 18,096 4,033 15,047 6,631 21,678 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 42,649 47,740 52 (296) (244) 42,893 $ 73 (627) (554) 48,294 1.75 $ 1.36 $ 24,517 2.01 1.28 24,077 $ $ $ 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. - 64 - 2020 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 Retained Earnings Balance, beginning of year Net income Dividends declared Balance, end of year Total Shareholders’ Equity Note 2020 2019 $ 17 228,008 $ 6,627 234,635 221,869 6,139 228,008 510 510 101,794 42,893 (33,320) 111,367 84,315 48,294 (30,815) 101,794 $ 346,512 $ 330,312 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. - 65 - 2020 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 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 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 from (for) operating activities Investing Activities Distributions from MCAP Commercial LP Acquisition of capital and intangible assets Cash flows from investing activities Financing Activities Net repayment of demand loan Repayment of premises lease liability Dividends paid Cash flows for financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplementary Information Interest received Interest paid Distributions received from securities Note 2020 2019 9 9 21 19 $ 42,893 $ 48,294 (296) (33,918) (33) 2,096 9,091 2,259 779 (12,534) (519,353) 37,572 (14,958) (1,035) 200,470 349,136 — (3,052) 59,117 (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) 9 15,532 (307) 15,225 7,695 (440) 7,255 (5,053) (369) (34,443) (39,865) 34,477 54,452 88,929 $ 5,053 (261) (24,542) (19,750) (44,390) 98,842 54,452 83,208 $ 44,387 7,618 77,649 42,427 8,520 $ $ 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. - 66 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note Corporate Information.............................................................................................................................. 1. Basis of Preparation.................................................................................................................................. 2. Basis of Consolidation............................................................................................................................... 3. Summary of Significant Accounting Policies............................................................................................. 4. Summary of Significant Accounting Judgments and Estimates................................................................ 5. Marketable Securities............................................................................................................................... 6. Mortgages - Corporate............................................................................................................................. 7. Non-Marketable Securities....................................................................................................................... 8. 9. Equity Investment in MCAP Commercial LP............................................................................................. 10. Other Assets............................................................................................................................................. Securitization Activities............................................................................................................................ 11. 12. Mortgages - Securitized............................................................................................................................ Term Deposits........................................................................................................................................... 13. 14. Income Taxes............................................................................................................................................ 15. Other Liabilities......................................................................................................................................... Financial Liabilities from Securitization.................................................................................................... 16. 17. Share Capital............................................................................................................................................. 18. Dividends.................................................................................................................................................. 19. Net Gain (Loss) on Securities.................................................................................................................... 20. Mortgage Expenses.................................................................................................................................. Provision for (Recovery of) Credit Losses................................................................................................. 21. Related Party Disclosures......................................................................................................................... 22. Credit Facilities......................................................................................................................................... 23. Capital Management................................................................................................................................ 24. Financial Instruments............................................................................................................................... 25. Commitments and Contingencies............................................................................................................. 26. Comparative Amounts.............................................................................................................................. 27. 68 68 68 69 75 76 76 83 83 84 85 86 88 88 89 89 89 90 90 90 90 91 93 93 95 97 97 - 67 - 2020 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 23, 2021. 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 in transactions that do not achieve derecognition of the mortgages. 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. - 68 - 2020 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. (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 or 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 Company’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. Debt instruments at amortized cost include all corporate and securitized mortgages held by the Company. b. Financial assets at FVPL Financial assets 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. 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 - 69 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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. Financial assets at FVPL include all marketable and non-marketable securities held by the Company. c. Financial liabilities After initial recognition, interest-bearing financial liabilities other than those classified at FVPL 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. Financial liabilities include all term deposits and financial liabilities from securitization held by the Company. 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 the portion of ECLs which would occur over the life of the mortgage related to default events that are possible 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 that result from all possible default events over the expected 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 may also apply 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 if the borrower defaults. - 70 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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 in the event of default, 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. 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 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 the likelihood of a range of macroeconomic variables. A cross-functional internal management committee reviews the proposed probability weights assigned to each of the three scenarios. The above committee applies 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 sheets. 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 House price indices Unemployment rates Gross domestic product 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. - 71 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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. (2) Determination of fair value 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. In these circumstances, 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. - 72 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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. (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 a subsequent event. (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. - 73 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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. (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 accrued over the vesting period and 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) Leases A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets and lease liabilities are recognized at the lease commencement date, that is, on the date when the underlying asset is available for use by the Company. The Company’s right-of-use asset relating to its premises lease does not meet the definition of investment property. Right-of-use assets are initially and subsequently measured at cost and depreciated over the shorter of the asset’s useful life and the lease term, on a straight-line basis. The right-of-use assets are remeasured in the event of impairment in accordance with IAS 36, Impairment of Assets. Lease liabilities are initially and subsequently measured at the present value of the lease payments which are unpaid as of the commencement date. The future lease payments are discounted using the interest rate implicit in the lease, if readily determinable. If not readily determinable, the Company’s incremental borrowing rate is used, which is the rate to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset. After the commencement date, the carrying amount of lease liabilities are remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the - 74 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) underlying asset. Adjustments to the carrying amount of the lease obligation as a result of remeasurement are accounted for as a corresponding adjustment to the right-of-use asset. 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. 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% at December 31, 2020, 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 which have been heightened due to the COVID-19 environment. Key judgments will be heavily influenced by the extent and severity of the pandemic and the offsetting impact of government stimulus measures. These judgments have been made with reference to the facts, projections and other circumstances at the consolidated balance sheet dates. IFRS 9 does not permit the use of hindsight in measuring provisions for credit losses. Any new forward-looking information subsequent to the consolidated balance sheet dates are reflected in the measurement of provisions for credit losses in future periods, as appropriate. Consistent with a government-sponsored initiative and with industry practice, the Company offered up to a six-month payment deferral program for borrowers as a result of COVID-19. On August 31, 2020, OSFI issued revisions to the treatment of mortgage deferrals. If the mortgage deferral was granted before August 30, 2020, non-payment of these mortgages under the deferral program did not affect the performing status of mortgage payments up to six calendar months from the effective date of the deferral. For deferrals granted from August 30, 2020 to September 30, 2020, non- payment of these mortgages under the deferral program did not affect the performing status of mortgage payments up to three calendar months from the effective date of the deferral. As such, these mortgages are not considered past due and do not migrate stages within the ECL methodology due to this deferral, nor are they considered modifications because interest continues to accrue. Additionally, mortgages in the payment deferral program do not trigger a SICR. When the - 75 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) deferral period expires, mortgage payments are to resume as per the agreed terms of the contract. At renewal, the mortgage will be re-amortized and payments will be based on the outstanding balance at that time. At December 31, 2020, there were no mortgages remaining in the payment deferral program. 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 At December 31 Real estate investment trusts Corporate bonds 2020 49,583 $ 30 49,613 $ 2019 46,141 29 46,170 $ $ For details of net gains and losses on marketable securities, refer to Note 19. 7. Mortgages - Corporate (a) Summary At December 31, 2020 Corporate Portfolio: Single family mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Multi family residential Other commercial At December 31, 2019 Corporate Portfolio: Single family mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Multi family residential Other commercial Gross Principal Allowance Stage 1 Stage 2 Stage 3 Total Net Principal $ 173,376 $ 485,765 49,654 489,432 3 $ — $ — $ 1,513 500 2,609 663 205 191 157 — — 3 $ 173,373 483,432 48,949 486,632 2,333 705 2,800 29,985 30,754 $ 1,258,966 $ 146 36 4,807 $ — 181 1,240 $ — — 157 $ 146 217 29,839 30,537 6,204 $ 1,252,762 Gross Principal Allowance Stage 1 Stage 2 Stage 3 Total Net Principal 1 $ — $ — $ $ 110,182 $ 383,638 45,708 507,643 405 226 2,731 14,075 32,468 $ 1,093,714 $ 35 75 3,473 $ 219 27 392 8 — 646 $ 194 — — 1 $ 110,181 382,820 45,455 504,520 818 253 3,123 — — 194 $ 43 75 14,032 32,393 4,313 $ 1,089,401 Gross principal as presented in the tables above includes unamortized capitalized transaction costs and accrued interest. - 76 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) (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 levels. 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. • 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 ECLs are calculated on an impaired or performing basis are set out in Note 4. - 77 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) At December 31 2020 2019 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Single family mortgages Insured Insured performing Monitored/Arrears Impaired/Default Uninsured Very low/Low Normal/Moderate High/Higher Monitored/Arrears Impaired/Default $ 163,371 $ 8,054 $ — $ 171,425 $ 95,026 $ 11,815 $ — $ 106,841 682 — — — — 1,266 682 1,266 1,557 — — — — 1,783 1,557 1,783 164,053 8,054 1,266 173,373 96,583 11,815 1,783 110,181 176,324 215,895 17,427 2,764 — 28,924 31,139 3,183 5,271 — 205,248 143,740 — 247,034 154,952 — — 20,610 8,035 2,505 13,978 3,621 — 32,912 26,705 1,712 3,461 — 2,505 — 1,739 — 176,652 — 181,657 — — 15,690 7,082 1,739 412,410 68,517 2,505 483,432 316,291 64,790 1,739 382,820 Uninsured - completed inventory High/Higher 35,659 35,659 13,290 13,290 — — 48,949 48,949 43,044 43,044 2,411 2,411 — — 45,455 45,455 Construction loans Normal/Moderate High/Higher Monitored/Arrears Commercial loans Multi family residential Normal/Moderate High/Higher Other Normal/Moderate High/Higher Monitored/Arrears 12,842 453,555 — 466,397 — 4,676 15,559 20,235 — 12,842 43,427 — 458,231 416,589 — 15,559 — — 486,632 460,016 — 21,555 22,949 44,504 — 43,427 — 438,144 — 22,949 — 504,520 29,839 — 29,839 13,337 — — 13,337 — — — — — 17,200 17,200 — — — — — — — 29,839 13,085 — — 29,839 13,085 13,337 — 17,200 30,537 31,043 1,350 — 32,393 — 947 947 — — — — — — — — — — — 13,085 947 14,032 31,043 1,350 — 32,393 $ 1,121,695 $ 127,296 $ 3,771 $ 1,252,762 $ 961,412 $ 124,467 $ 3,522 $ 1,089,401 - 78 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) (c) Mortgage allowances Years Ended December 31 2020 2019 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Single family mortgages Insured Allowance, beginning of year Net remeasurement of allowance 1 Originations 4 Mortgages derecognized or repaid 2 Total provision (recovery) Write-offs Reclassification of mortgages 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) $ 1 $ — $ — $ 1 $ — $ — $ — $ — 1 5 (9) (3) — 5 3 — — — — — — — — — — — — — — 1 5 (9) (3) — 5 3 21 — (2) 19 (18) — 1 — — — — — — — — — — — — — — 21 — (2) 19 (18) — 1 $ 405 $ 219 $ 194 $ 818 $ 738 $ 191 $ 213 $ 1,142 446 (733) (73) 607 1,106 (144) 1,209 (446) 736 — 268 — (114) 444 — (3) 73 84 — (108) 46 — — — 959 1,106 (366) 1,699 282 (485) (78) (517) 536 (71) (333) (282) 505 — (150) — (45) 28 — (20) 78 186 — (182) 62 (81) 194 — — — (481) 536 (298) (243) (81) 818 Write-offs Allowance, end of year (101) 1,513 — 663 (83) 157 (184) 2,333 — 405 — 219 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 Reclassification of mortgages Allowance, end of year Construction loans5 $ 226 $ 27 $ — $ 253 $ 44 $ — $ — $ 44 (186) 296 241 (77) 274 — 500 186 (8) — — 178 — 205 — — — — — — — — 288 241 (77) 452 — 705 (27) (21) 212 (51) 113 69 226 27 — — — 27 — 27 — — — — — — — — (21) 212 (51) 140 69 253 Allowance, beginning of year $ 2,731 $ 392 $ — $ 3,123 $ 2,210 $ 348 $ 217 $ 2,775 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) 549 (424) (192) 178 1,323 (1,556) (122) (549) 587 — (42) — (197) (201) — (163) 192 (29) — — — — — — 107 1,323 (1,753) (323) 683 (839) — 1,128 101 (643) 430 (683) 839 — 10 — (122) 44 — — — — — (217) (217) — — — 1,138 101 (982) 257 Reclassification of mortgages Allowance, end of year — 2,609 — 191 — — — 2,800 91 2,731 — 392 — — 91 3,123 - 79 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) Years Ended December 31 2020 2019 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Commercial loans5 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 provision (recovery) Reclassification of mortgages Allowance, end of year Other Allowance, beginning of year Transfer to stage 2 3 Net remeasurement of allowance 1 Mortgages derecognized or repaid 2 Total provision (recovery) Reclassification of mortgages Allowance, end of year Total 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) $ 35 $ 8 $ — $ 43 $ 468 $ 12 $ — $ 480 — (20) 140 (9) 111 — 146 — (2) — (6) (8) — — — — — — — — — — (22) 140 (15) 103 — 146 25 (337) — (26) (338) (95) 35 (25) 17 — — (8) 4 8 — — — — — — — — (320) — (26) (346) (91) 43 $ 75 $ — $ — $ 75 $ 393 $ 20 $ — $ 413 (66) 27 — (39) — 36 66 115 — 181 — 181 — — — — — — — 142 — 142 — 217 (37) (183) (33) (253) (65) 75 37 (33) (20) (16) (4) — — — — — — — — (216) (53) (269) (69) 75 $ 3,473 $ 646 $ 194 $ 4,313 $ 3,853 $ 571 $ 430 $ 4,854 995 (995) — (1,409) 1,575 (166) (265) 1,089 2,815 — 331 — 265 55 — — — — 1,475 2,815 (1,795) (317) (108) (2,220) 1,430 594 46 2,070 990 (990) (1,388) 1,408 (78) — (156) — 91 849 (826) (362) — (20) 78 186 — — — — 121 849 (187) (399) (1,412) 75 (155) (442) Write-offs Reclassification of mortgages Allowance, end of year (101) 5 — — (83) (184) — 5 (18) — — — (81) — (99) — $ 4,807 $ 1,240 $ 157 $ 6,204 $ 3,473 $ 646 $ 194 $ 4,313 1 Represents the change in the allowance related to changes in model parameters, inputs, and assumptions. This includes remeasurement between 12 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 12 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. 5 Refinements to the model for the determination of LGDs relating to the construction and commercial portfolio were undertaken beginning Q2 2020 to use internal information rather than external loss data. The ECLs are calculated through three probability-weighted forward-looking scenarios (base, favourable, and unfavourable). 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 specified forecast period and could have a material impact in determining ECLs. - 80 - 2020 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: At December 31, 2020 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 At December 31, 2019 Macroeconomic variables 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 5.46% 7.79% 2.74% 5.24% 7.68% 1.82% 2.38% 2.39% 3.42% 6.37% 12.93% 16.77% 16.91% 6.24% 6.68% 2.33% 2.99% 3.01% 3.55% 6.25% (6.49) % (8.24) % (8.31) % 2.35 % 9.50% 1.32% 2.46% 2.48% 3.42 % 6.50% 2.45% 2.45% 2.95% 2.95% 2.20% 2.20% 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 2.10% 1.60% 1.00% 1.62% 5.80% 2.10% 2.69% 2.72% 1.85% 5.80% 3.31% 4.25% 4.28% 2.74% 5.05% 2.25% 2.89% 2.91% 2.51% 5.26% (3.36) % (4.29) % (4.32) % (0.18) % 6.40% 1.92% 2.47% 2.49% 0.61% 6.14% 3.75% 3.89% 3.81% 3.95% 4.25% 4.39% 4.31% 4.45% 3.50% 3.64% 3.56% 3.70% 1 The numbers represent the average values over the quoted period. 2 Variables are derived from regression models which consider the other macroeconomic variables. Historical regression methodology is used to relate ECL to key macroeconomic indicators including housing price indices, gross domestic product, unemployment rate and interest rates. Economic forecasts are determined based on a combination of external information and internal management judgment at the reporting date. The base scenario represents management’s best estimate using all available economic forecasts in light of COVID-19. It assumes a gradual decrease in unemployment as the strictest COVID-19 lockdown measures are removed. Gross domestic product is expected to gradually increase following the sharp decline in Q2 2020 and the sharp recovery in Q3 2020. Housing prices have remained stable or increased under COVID-19 and are expected to continue to grow moderately. The favourable scenario represents a speedier recovery with a faster decrease in unemployment and faster increases in gross domestic product and the housing price index. The unfavourable scenario represents the possibility of another wave of COVID-19 emerging, resulting in a reversal of current economic reopening plans and higher unemployment rates and another drop in gross domestic product. Another key judgment is the effectiveness of various government support programs and their impact on the speed and shape of economic recovery. Since December 31, 2020, forecasts around the impact of COVID-19 on the economy and the timing of recovery have continued to evolve. Any new forward-looking information subsequent to December 31, 2020, will be reflected in the measurement of provisions for credit losses in future periods, as appropriate. This may add significant variability to provisions for credit losses in future periods. 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 at December 31, 2020 would be approximately $3,971 (December 31, 2019 - $3,655) compared to the reported allowance for performing mortgages of $6,047 (December 31, 2019 - $4,119). 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 at December 31, 2020 would be approximately $7,501 (December 31, 2019 - $5,066) compared to the reported allowance for performing mortgages of $6,047 (December 31, 2019 - $4,119). - 81 - 682 8,035 11,800 20,517 Total 1,557 7,082 8,639 Total 423 1,981 545 258 175 140 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) (d) Arrears and impaired mortgages Mortgages past due but not impaired are as follows: At December 31, 2020 1 to 30 days 31 to 60 days 61 to 90 days Total Single family mortgages Insured Uninsured Construction At December 31, 2019 Single family mortgages Insured Uninsured $ $ $ $ 682 $ 4,370 11,800 16,852 $ — $ 2,511 — 2,511 $ — $ 1,154 — 1,154 $ 1 to 30 days 31 to 60 days 61 to 90 days 1,557 $ 5,571 7,128 $ — $ 1,248 1,248 $ — $ 263 263 $ Impaired mortgages (net of individual allowances) are as follows: At December 31 2020 2019 Single Family Mortgages Uninsured Insured Single Family Mortgages Uninsured Insured Total Ontario Alberta British Columbia Quebec Atlantic Provinces Other (e) Geographic analysis At December 31, 2020 Ontario Alberta British Columbia Quebec Atlantic Provinces Other At December 31, 2019 Ontario Alberta British Columbia Quebec Atlantic Provinces Other $ — $ 919 $ 919 $ — $ 423 $ 1,111 — 45 110 — 237 941 — 258 150 1,348 1,565 941 45 368 150 — 170 48 — 416 545 88 127 140 $ 1,266 $ 2,505 $ 3,771 $ 1,783 $ 1,739 $ 3,522 Single Family Mortgages Construction Loans Commercial Loans $ $ 552,055 $ 73,582 57,111 7,983 8,724 6,299 705,754 $ 232,563 $ 20,142 233,927 — — — 486,632 $ 60,376 $ — — — — — 60,376 $ Single Family Mortgages Construction Loans Commercial Loans $ $ 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 $ Total 844,994 93,724 291,038 7,983 8,724 6,299 1,252,762 Total 588,101 105,296 359,447 18,768 10,509 7,280 1,089,401 67.5 % 7.5 % 23.2 % 0.6 % 0.7 % 0.5 % 100.0 % 53.9 % 9.7 % 33.0 % 1.7 % 1.0 % 0.7 % 100.0 % - 82 - 2020 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: At December 31 Single family mortgages Insured Uninsured Uninsured - completed inventory Construction loans 2020 2019 $ $ 79,048 $ 24,728 2,794 264,163 370,733 $ 55,670 10,549 2,012 248,045 316,276 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 at December 31, 2020 was $1,266,785 (December 31, 2019 - $1,091,545). Fair values are calculated on a discounted cash flow basis using the prevailing market rates for similar mortgages. At December 31, 2020, single family insured mortgages included $48,304 (December 31, 2019 - $48,996) 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 At December 31 KingSett High Yield Fund Crown Realty II Limited Partnership Securitization Notes 2020 43,583 $ — 12,534 56,117 $ 2019 42,949 33,121 17,619 93,689 $ $ The Company holds an investment in the KingSett High Yield Fund (“KSHYF”), in which it has a 6.8% equity interest (December 31, 2019 - 7.3%). 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. At December 31, 2020, the Company’s total remaining commitment to the KSHYF was $23,406 (December 31, 2019 - $24,021), consisting of $1,212 available for capital advances for the KSHYF (December 31, 2019 - $1,827) and $22,194 that supports credit facilities throughout the life of the KSHYF (December 31, 2019 - $22,194). The fair value of the KSHYF is based on its redemption value. 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. At December 31, 2020, the Company has recorded $1,217 (December 31, 2019 - $290) of interest income at the contractual rate of the Securitization Notes in net investment income - non-marketable securities on the consolidated statements of income. During 2020, the Company sold its entire investment in Crown Realty II Limited Partnership (“Crown LP”) for $33,090 representing its fair value. For details of net gains and losses on non-marketable securities, refer to Note 19. 9. Equity Investment in MCAP Commercial LP At December 31, 2020, the Company held a 14.03% equity interest in MCAP (December 31, 2019 - 14.02%), representing 4.0 million units held by MCAN (December 31, 2019 - 4.0 million) of the 28.5 million total outstanding MCAP partnership units (December 31, 2019 - 28.5 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 $33 in 2020 (2019 - $187). - 83 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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. At December 31 Balance, beginning of year Equity income Dilution gain Distributions received Balance, end of year Selected MCAP financial information is as follows: 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 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 2020 2019 $ $ 69,844 $ 33,918 33 (15,532) 88,263 $ 61,593 15,759 187 (7,695) 69,844 2020 2019 $ 41,506,506 $ 38,853,655 38,343,981 509,674 40,866,696 639,810 2020 2019 $ $ 824,761 $ 241,658 $ 579,080 112,153 2020 2019 $ $ 487 $ 703 2,065 1,420 2,382 12,611 115 435 20,218 $ 613 743 2,371 1,897 1,099 175 438 435 7,771 During the year ended December 31, 2020, the Company recognized $306 (2019 - $306) of depreciation expense on the right-of-use asset. 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. - 84 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) The capital assets and intangible assets continuity is as follows: Furniture & Fixtures Computer Hardware Leasehold Improvements Capital Asset Total Intangible Assets $ 829 $ — 829 6 835 812 7 819 5 824 1,953 $ 96 2,049 12 2,061 1,682 108 1,790 86 1,876 1,876 $ 17 1,893 86 1,979 1,370 49 1,419 53 1,472 4,658 $ 113 4,771 104 4,875 3,864 164 4,028 144 4,172 $ 10 11 $ 259 185 $ 474 507 $ 743 703 $ 5,480 327 5,807 203 6,010 4,899 295 5,194 329 5,523 613 487 Cost At January 1, 2019 Additions At December 31, 2019 Additions At December 31, 2020 Amortization At January 1, 2019 Amortization for the year At December 31, 2019 Amortization for the year At December 31, 2020 Net Book Value At December 31, 2019 At December 31, 2020 11. Securitization Activities The Company is an NHA MBS issuer, which involves the securitization of insured mortgages to create MBS. The Company issues MBS through its internal market MBS program and the Canada Housing Trust 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 2020, MCAN securitized $272,509 of insured single family mortgages through the market MBS program (2019 - $116,166) and retained $8,298 of the MBS securitized in 2020 on our consolidated balance sheets (2019 - $nil) with the remainder sold to third parties. CMB program During 2020, MCAN securitized $412,085 of insured single family mortgages through the CMB program (2019 - $191,372) and $51,864 of insured multi family mortgages (2019 - $14,187). At the time of the insured multi family securitization, the Company derecognized the mortgages from its consolidated balance sheets and recorded an upfront gain of $243 (2019 - $71). - 85 - 2020 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. The derecognized MBS mature as follows: 2021 2025 2026 2029 2030 Total At December 31, 2020 $ 69,558 $ 16,820 $ 8,947 $ 13,834 $ 34,519 $ 143,678 12. Mortgages - Securitized (a) Summary At December 31, 2020 Gross Principal Allowance Stage 1 Stage 2 Total Net Principal Single family insured - Market MBS program $ Single family insured - CMB program 437,841 $ 697,929 $ 1,135,770 $ 9 $ 14 23 $ 1 $ 1 2 $ 437,831 10 $ 15 697,914 25 $ 1,135,745 At December 31, 2019 Single family insured - Market MBS program $ Single family insured - CMB program $ Gross Principal 449,937 $ 334,363 784,300 $ Allowance Stage 1 Stage 2 Total Net Principal 2 $ 2 4 $ — $ — — $ 2 $ 2 4 $ 449,935 334,361 784,296 (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 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 ECLs are calculated on an impaired or performing basis is discussed in Note 4. - 86 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) At December 31 2020 2019 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Insured Performing Monitored/Arrears Impaired/Default $ 1,063,294 $ 66,791 $ 2,650 — 2,538 — $ 1,065,944 $ 69,329 $ (c) Mortgage allowances — $ 1,130,085 $ 706,498 $ 74,048 $ — 472 472 $ 1,135,745 $ 707,549 $ 75,986 $ 1,051 — 1,938 — 5,188 472 — $ 780,546 2,989 — 761 761 761 $ 784,296 The allowance for credit losses on the securitized portfolio at December 31, 2020 was $25 (December 31, 2019 - $4). The provision for credit losses recorded during 2020 was $21 (2019 - recovery of $10). As described in Note 5, the Company had offered up to a six-month payment deferral program for securitized mortgages. Securitized mortgages that were in the deferred payment program as a result of COVID-19 were eligible for renewal with payments calculated based on the outstanding principal at maturity, which could include capitalized interest from the payment deferral period. These mortgages remained eligible for future NHA MBS securitizations and issuers were required to remit scheduled mortgage principal and interest payments to Computershare, the designated CPTA for the program, even if these mortgage payments had not been collected from mortgagors. At December 31, 2020, there were no mortgages remaining in the payment deferral program. (d) Arrears and impaired mortgages Securitized mortgages past due but not impaired are as follows: At December 31, 2020 At December 31, 2019 $ 3,403 $ 2,298 336 $ 691 1,449 $ — 1 to 30 days 31 to 60 days 61 to 90 days Total 5,188 2,989 Impaired securitized mortgages are as follows: At December 31 Alberta Atlantic Provinces Quebec (e) Geographic analysis At December 31 Ontario Alberta British Columbia Quebec Atlantic Provinces Other (f) Other information 2020 2019 $ $ 175 $ 60 237 472 $ 2019 84.3 % $ 8.4 % 3.2 % 1.0 % 2.2 % 0.9 % 100.0 % $ 575,122 114,509 34,442 17,183 28,864 14,176 784,296 561 — 200 761 73.3 % 14.6 % 4.4 % 2.2 % 3.7 % 1.8 % 100.0 % 2020 $ $ 956,980 95,958 36,082 11,840 25,124 9,761 1,135,745 Capitalized transaction costs are included in mortgages and are amortized using the EIM. At December 31, 2020, the unamortized capitalized transaction cost balance was $9,016 (December 31, 2019 - $4,106). The fair value of the securitized mortgage portfolio at December 31, 2020 was $1,194,167 (December 31, 2019 - $795,732). - 87 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) Other assets of $7,051 at December 31, 2020 (December 31, 2019 - $5,011), consist of interest-only strips from the Company’s CMB program insured multi family securitizations and prepaid expenses. 13. Term Deposits At December 31 Maturity Date Within 3 Months 3 Months to 1 Year 1 to 3 Years 3 to 5 Years 2020 2019 $ $ 123,728 $ 426,047 519,630 165,364 1,234,769 $ 63,540 380,295 467,820 122,644 1,034,299 The estimated fair value of term deposits at December 31, 2020 was $1,259,433 (December 31, 2019 - $1,039,732) 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 2020 2019 $ 42,649 $ 47,740 0 % 0 % — (244) (244) $ — (554) (554) $ 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: At December 31 Deferred tax assets Loss carry forward benefit Other Deferred tax liabilities Non-marketable securities Other - 88 - 2020 2019 52 73 (3,894) 3,528 70 (296) (244) $ 450 (918) (159) (627) (554) 2020 2019 145 $ 262 407 $ — $ — — $ 3,671 334 4,005 3,894 — 3,894 $ $ $ $ $ 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) Deferred tax assets and liabilities are assessed for each entity and presented as deferred tax assets of $407 (December 31, 2019 - $132) and deferred tax liabilities of $0 (December 31, 2019 - $21) on the consolidated balance sheets. 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 $7,551 (December 31, 2019 - $9,286), 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 2020. The tax loss carry forward amounts expire beginning in 2033. 15. Other Liabilities At December 31 Accounts payable and accrued charges Premises lease liability Dividends payable 2020 2,055 $ 2,770 — 4,825 $ 2019 5,108 3,139 7,749 15,996 $ $ During 2020, the Company recognized $67 (2019 - $137) of interest expense and $436 (2019 - $398) of payments relating to the premises lease liability. The maturity of the premises lease liability is as follows: Less than one year One to five years More than 5 years Total premises lease liability 16. Financial Liabilities from Securitization At December 31 Financial liabilities - Market MBS program Financial liabilities - CMB program Financial liabilities from securitization mature as follows: At December 31 2020 2021 2022 2023 2024 2025 17. Share Capital At December 31 Balance, January 1 Issued Dividend reinvestment plan Executive Share Purchase Plan Balance, December 31 $ $ 344 2,058 368 2,770 2020 2019 437,762 $ 704,847 1,142,609 $ 457,593 336,067 793,660 2020 2019 — $ 72,233 87,352 85,789 248,159 649,076 1,142,609 $ 253,663 86,188 96,423 80,851 276,535 — 793,660 $ $ $ $ 2020 Number of Shares Share Capital 2019 Number of Shares Share Capital 24,215,383 $ 228,008 23,798,464 $ 221,869 417,384 94,378 24,727,145 $ 5,442 1,185 234,635 416,919 — 24,215,383 $ 6,139 — 228,008 - 89 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) The authorized share capital of the Company consists of unlimited common shares with no par value. 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 2020 fourth quarter dividend was 17% (2019 fourth quarter dividend - 17%). For details on the Executive Share Purchase Plan, refer to Note 22. The Company had no potentially dilutive instruments at December 31, 2020 or December 31, 2019. 18. Dividends On February 23, 2021, the Board declared a quarterly cash dividend of $0.34 per share and a special stock dividend of $0.85 per share both to be paid on March 31, 2021 to shareholders of record as of March 15, 2021. 19. Net Gain (Loss) on Securities Years Ended December 31 Net gain (loss) on marketable securities Net gain on non-marketable securities 2020 2019 $ $ (9,091) $ — (9,091) $ 10,780 3,228 14,008 For the year ended December 31, 2020, proceeds from disposition in the Company’s REIT portfolio were $1,247 (2019 - $17,857), resulting in a $296 realized gain (2019 - $6,273). 20. Mortgage Expenses Corporate assets Years Ended December 31 Mortgage servicing expense Letter of credit expense Other mortgage expenses 2020 2019 $ $ 3,378 $ 623 587 4,588 $ 3,025 678 375 4,078 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 $2,177 (2019 - $1,954) consist primarily of mortgage servicing expenses. 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 Provision for (recovery of) credit losses - 90 - Note 2020 2019 $ 7 7 7 1,430 $ 594 46 2,070 5 2,075 12 12 $ 19 2 21 $ (362) 75 (155) (442) (19) (461) (4) (6) (10) 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 22. Related Party Disclosures Transactions with MCAP In 2020, the Company entered into related party transactions with MCAP as follows: • • • Purchase of mortgage origination and administration services of $4,063 (2019 - $3,660) Purchase of uninsured single family mortgages of $18,820 (2019 - $21,386) Purchase of insured multi family mortgages of $51,864 (2019 - $14,187) 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 2020 4,032 $ 495 — 4,527 $ 2019 3,895 239 422 4,556 $ $ 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. At December 31, 2020, $1,742 of loans were outstanding under the Share Purchase Plan (December 31, 2019 - $727). During 2020, the Company advanced new loans under the Share Purchase Plan of $1,185 (2019 - $nil). The loans under the Share Purchase Plan bore interest at 3.45% at December 31, 2020 (December 31, 2019 - 4.95%) which represents prime plus 1% and have a five-year term. The shares are pledged as security for the loans and had a fair value of $2,589 at December 31, 2020 (December 31, 2019 - $1,509). In 2020, MCAN recognized $46 of interest income (2019 - $57) on the Share Purchase Plan loans. Employee Share Ownership Plan The Company has an Employee Share Ownership Plan whereby employees can elect to purchase common shares of the Company up to 6% of their annual earnings. The Company matches 50% of the each employee’s contribution amount. During each pay period, all contributions are used by the plan’s trustee to purchase the common shares in the open market. The common shares acquired with the Company’s contributions fully vest immediately. The Company’s contributions are expensed as paid and totalled $157 for 2020 (2019 - $142). 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. - 91 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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 table below outlines activity relating to the RSU Plan, PSU Plan and DSU Plan. During 2020, the Company paid the RSU Participants $55 (2019 - $76) upon vesting of the 3,434 RSU Plan units (2019 - 4,882 units). During 2020, the Company paid the PSU Participants $nil (2019 - $nil) upon vesting of the 26,447 PSU Plan units (2019 - 16,802). Of the total outstanding PSU units at December 31, 2020, the Company has recorded a liability on all of these units. At December 31, 2019, the Company did not record a liability on 40,819 units as it did not expect any payout on these units. During 2020 and 2019, there were no payments to DSU Participants. At December 31 2020 2019 DSU RSU PSU DSU RSU PSU Units outstanding, beginning of year New units granted Units issued as dividends Units vested Units forfeited Units outstanding, end of year — — — — — — 50,456 43,604 7,134 78,853 28,999 6,839 (3,434) (26,447) 12,250 — 560 — 15,322 43,284 3,303 59,104 39,359 6,162 (4,882) (16,802) (19,446) (17,954) (12,810) (6,571) (8,970) 78,314 70,290 — 50,456 78,853 Compensation expense for the year Outstanding liability, end of year $ $ — $ — $ 249 $ 486 $ 404 $ 534 $ 52 $ — $ 261 $ 292 $ 130 130 - 92 - 2020 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% (3.20%) (December 31, 2019 - prime plus 0.75% (4.70%)). During Q3 2020, the facility limit was increased from $120,000 to $150,000 until October 30, 2020 and then again from November 3, 2020 to December 31, 2020. The facility is due and payable upon demand. At December 31, 2020, the outstanding demand loan payable was $nil (December 31, 2019 - $5,053). 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. At December 31, 2020, there were letters of credit in the amount of $39,105 issued (December 31, 2019 - $33,965) and additional letters of credit in the amount of $15,774 committed but not issued (December 31, 2019 - $17,950). 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. At December 31, 2020, the outstanding facility balance was $nil (December 31, 2019 - $nil). In February 2021, the Company signed a term sheet with a Canadian Schedule I Chartered bank for $50,000 for a senior secured mortgage warehouse facility that will bear interest at either prime plus 0.05% or BAs plus 1.05%. The facility will be used to fund insured single family mortgages prior to securitizations activities. 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. - 93 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) At December 31 Regulatory ratios (OSFI) Share capital Contributed surplus Retained earnings Deduction for equity investment in MCAP 1 Eligible stage 1 and stage 2 allowances 3 Common Equity Tier 1 and Tier 1 Capital 3 (A) Tier 2 Capital 3 Total Capital 3 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 $ $ $ 2020 2019 234,635 $ 510 111,367 (53,475) 1,364 294,401 4,707 299,108 $ 2,728,715 $ (53,475) 3,018 2,678,258 394,139 (197,070) 39,105 (19,553) 216,621 228,008 510 101,794 (36,813) — 293,499 — 293,499 2,179,341 (36,813) 3,804 2,146,332 340,297 (170,149) 33,965 (16,983) 187,130 Total exposures/Regulatory assets (B) $ 2,894,879 $ 2,333,462 Leverage ratio (A / B) 10.17 % 12.58 % 1 The deduction for the equity investment in MCAP is equal to the equity investment balance less 10% of shareholders’ equity and eligible stage 1 and stage 2 allowances. 2 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets. 3 Effective March 31, 2020, the total capital ratio reflects the inclusion of stage 1 and stage 2 allowances on the Company’s mortgage portfolio in Tier 2 capital. In accordance with OSFI’s transitional arrangements for capital treatment of ECL issued March 27, 2020, a portion of stage 1 and stage 2 allowances that would otherwise be included in Tier 2 capital are included in CET 1 capital. The adjustment to CET 1 capital will be measured each quarter as the increase, if any, in stage 1 and stage 2 allowances compared to the corresponding allowances at December 31, 2019. The increase, if any, is subject to a scaling factor that will decrease over time and is currently set at 70% in fiscal 2020, 50% in fiscal 2021 and 25% in fiscal 2022. Prior period ratios have not been restated. 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. - 94 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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, 2020 and 2019. 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. At December 31, 2020 Level 1 Level 2 Level 3 Total Carrying Value 30 $ — — 30 $ — $ 43,583 49,613 $ 43,583 49,613 43,583 12,534 56,117 $ 12,534 105,730 $ 12,534 105,730 — $ 88,929 $ 88,929 — $ 1,252,762 — 2,382 — 29,610 — — 1,135,745 — $ 2,463,334 $ 2,581,873 $ 2,509,428 1,266,785 2,382 — 1,194,167 1,266,785 2,382 29,610 1,194,167 — $ 1,259,433 $ 1,259,433 $ 1,234,769 — 4,825 — 1,142,609 — $ 2,428,730 $ 2,428,730 $ 2,382,203 4,825 1,164,472 1,164,472 4,825 $ Assets measured at FVPL Marketable securities 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 assets - 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 $ $ $ 49,583 $ — — 49,583 $ 88,929 $ — — 29,610 — $ 118,539 $ $ $ — $ — — — $ - 95 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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 assets - other loans 5 Securitization program cash held in trust Mortgages - securitized 4 $ $ $ $ 46,141 $ — — — 46,141 $ 54,452 $ — — 28,575 — 83,027 $ Liabilities measured at amortized cost for which fair values are disclosed 29 $ — — — 29 $ — $ 33,121 42,949 46,170 $ 33,121 42,949 46,170 33,121 42,949 17,619 93,689 $ 17,619 139,859 $ 17,619 139,859 — $ 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 28,575 795,732 1,091,545 1,099 — 795,732 $ $ 5,053 15,996 797,794 5,053 15,996 797,794 Term deposits 7 Demand loan payable 6 Other liabilities - corporate 6 Financial liabilities from securitization 8 — $ 1,039,732 $ 1,039,732 $ 1,034,299 5,053 — — 15,996 793,660 — — $ 1,858,575 $ 1,858,575 $ 1,849,008 — $ — — — — $ 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 determined by discounting the expected future cash flows of the future fee income from the renewals of a securitized insured mortgage portfolio. The significant unobservable input is the discount rate. 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, non-observable inputs include the discount rate and the assumed level of prepayments. 5 Fair value is assumed to be the carrying value as underlying loans are variable rate. 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 instruments recorded at fair value: At December 31 Balance, beginning of year Advances Repayments / Disposition Changes in fair value, recognized in net income Balance, end of year Risk management 2020 2019 $ $ 93,689 $ 635 (38,207) — 56,117 $ 71,813 19,089 (441) 3,228 93,689 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. - 96 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (Dollar amounts in thousands except for per share amounts) 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. On December 11, 2020, a trial on this matter resulted in a court judgment to dismiss the claim with $300 in costs to be paid by the plaintiff. On January 11, 2021, the plaintiff appealed. MCAP was awarded a judgment for approximately $500 against the same plaintiff in related proceedings. The Company may be obligated to indemnify 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, the Company does 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. - 97 - 2020 ANNUAL REPORT | MCAN MORTGAGE CORPORATION EXECUTIVE OFFICERS Karen Weaver President and Chief Executive Officer Floriana Cipollone Vice President and Chief Financial Officer Avish Buck Vice President, Residential Lending 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, Finance Paul Gill Vice President, Information Technology Nazeera Khan Chief Audit Officer DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS Glenn Doré President, Teff Administration Inc. Member of Audit Committee Member of Conduct Review, Corporate Governance and Human Resources Committee Director since May 2020 Philip Gillin Corporate Director, MCAN Mortgage Corporation Member of Audit Committee Member of Enterprise Risk Management and Compliance Committee Director since May 2020 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 Member of Audit Committee Chair of Enterprise Risk Management and Compliance Committee Director since May 2017 Gaelen Morphet Chief Investment Officer, Cinnamon Investments ULC Chair of Conduct Review, Corporate Governance and Human Resources Committee Director since January 2018 Derek Sutherland Chair of the Board, MCAN Mortgage Corporation President, Canadazil Capital Inc. Member of Conduct Review, Corporate Governance and Human Resources Committee Member of Enterprise Risk Management and Compliance Committee Director since May 2017 Ian Sutherland Corporate Director, MCAN Mortgage Corporation Member of Conduct Review, Corporate Governance and Human Resources Committee Director since January 1991 Karen Weaver President and Chief Executive Officer, MCAN Mortgage Corporation Director since November 2011 - 98 - 2020 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 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 General Information For general enquiries about MCAN Mortgage Corporation, please write to Ms. Sylvia Pinto, Corporate Secretary & Governance Officer (head office details above) or e-mail mcanexecutive@mcanmortgage.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 2020 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. Annual and Special Meeting of Shareholders Tuesday, May 11, 2021 4:30pm (local time) All shareholders and prospective investors are invited to attend. - 99 - MCAN Mortgage Corporation 600-200 King Street West, Toronto, ON M5H 3T4 (855) 213-6226 | mcanmortgage.com | mcanexecutive@mcanmortgage.com

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