MCAN Mortgage Corporation
Annual Report 2023

Plain-text annual report

2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) TABLE OF CONTENTS MESSAGE TO SHAREHOLDERS ............................................................................................................... OUR BUSINESS AND STRATEGY .............................................................................................................. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS ........................................................... CONSOLIDATED FINANCIAL STATEMENTS ............................................................................................. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .................................................................... DIRECTORS AND EXECUTIVE OFFICERS .................................................................................................. CORPORATE INFORMATION .................................................................................................................. 6 8 17 76 80 115 116 - 5 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) MESSAGE TO SHAREHOLDERS I am honored and excited to be taking on the role of CEO at MCAN. First and foremost, I would like to acknowledge the incredible foundation laid by my predecessors and the dedication of our talented team members. As CEO, I am able to see the high level of commitment that our executive team and our team members have for their company. It is because of their hard work that MCAN stands where it is today. Our strategy continues to be to provide attractive returns for our shareholders generated through long-term sustainable growth. Our business will continue to be conducted based on our prudent lending and investing principles with low-cost funding. While the economy and financial services market have provided uncertainty, our entire MCAN team continues to contribute successfully to our bottom line, growing our business and improving all aspects of our operations. As we embark on this journey together, I want to express my gratitude for your ongoing support and confidence in our great company. 2023 Review Through the economic uncertainty and challenges, we achieved record results in 2023 with annual net income at our highest in our history, all while maintaining a strong annual return on average shareholders’ equity above the upper end of our sustained target range of 13 to 15%. Driven by our core lending business, our annual net income is up 40% this year compared to last year. Our assets also grew 16% this year to almost $5 billion fueled by originations and renewals in all areas of our business. We have built a resilient portfolio despite challenging market conditions and other economic factors that could impact our business. We recorded a 15.05% return on average shareholders’ equity1 for the current year and delivered $51.8 million in dividends to our shareholders. Our dividend reinvestment program, at-the-market program share offerings and our core business income have helped us to grow our capital by almost 9% to fuel further asset growth. We renewed our at-the-market program in the year and it has been a successful tool over the last two years in raising incremental capital to grow our business. As well, our high dividend reinvestment program participation rate of 30% for the fourth quarter of 2023 also shows the continued support our shareholders have for our business and strategy. Our corporate and securitized mortgage portfolios have grown 18% since the beginning of the year to over $4 billion. We have achieved growth in both our residential mortgage portfolio and our construction and commercial lending portfolio, without sacrificing our bottom line. We have seen 54% growth in our net corporate mortgage spread income1 in the current year compared to prior year. This is attributed to strategically pivoting in this higher interest rate environment to originate more higher yielding construction loans and modifying our term deposit funding to more favourable maturity terms as well as executing on our term deposit and securitization hedging strategies. As mentioned, we were focused on growing our residential construction lending portfolio in selected markets, with our preferred borrowers and risk profile, as they provided comparatively higher yields. Our construction and commercial portfolio grew 20% over the year to over $1 billion, the highest level we have ever achieved. The existing book has benefitted from the rising interest rate environment as it is almost entirely at floating rates. We proactively manage investments in our construction and commercial portfolio in terms of product composition, geographic mix, and exposure. We also have strong strategic partnerships with originators. We continue to increase our lending in and around the urban markets of the Greater Vancouver area, the Greater Toronto area and, to a lesser degree, Calgary and Edmonton. There continues to be strong demand for builders to build more affordable housing and entry level homes in these markets due to household formation driven by population dynamics and immigration, and a lack of affordable housing. Our residential mortgage portfolio grew by 29% since the beginning of the year mainly as a result of continued mortgage originations and strong renewals given the current interest rate environment and minimum qualifying rates in place for new loans. We also continued our strategy of focusing on net interest margins and increasing our residential mortgage lending in the Alberta and British Columbia urban markets. Our solid results highlight our abilities and team strength, supported by outstanding service to our brokers, originators and customers. We hold our marketable securities, comprised of publicly traded REITs, for the long term and for both current return and capital appreciation. We had unrealized fair value losses for the year due to overall stock market volatility from an uncertain interest rate and macroeconomic environment. However, we saw some recovery in valuations in the current quarter and we continue to realize the benefits of solid cash flows and distributions from these investments with a year to date distribution yield1 of 6.44% on this portfolio. In the long term, we expect further relief from interest rates to help with valuations. With respect to our private real estate-based development funds, many of the fund sponsors have been sitting on the sidelines, not committing amounts to new projects given current market conditions. We believe this to be a prudent approach. The funds are either held for long-term capital appreciation or distribution income and they tend to improve the diversification and risk and reward characteristics of our overall investment portfolio; however, these funds tend to have less predictable cash flows that are predicated on the completion of the development projects within the funds. For the year, we recognized a net $0.4 million unrealized fair value loss on this portfolio consisting of both gains and losses from updated appraisals/property valuations and actual or expected executions on value-add activities on the underlying properties, net of related property debt. We have invested in these funds for long-term gains and expect good returns over the life of the funds on an overall basis. For projects currently being undertaken, we actively monitor their progress. Despite MCAP reporting lower income than the prior year, driven by lower origination volumes and higher costs, our equity investment in MCAP increased as a result of its earnings less our distributions received in 2023. MCAP is privately owned and is - 6 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Canada’s largest independent mortgage finance company. With the growth in its assets under management and its market leadership position, we expect that MCAP will continue to provide solid returns for MCAN. We implemented a new enterprise resource planning system to streamline our financial reporting and enhance our financial analysis capabilities. We also worked on our first digital GIC platform, launching it in January 2024 under our MCAN Wealth brand. This new funding channel will allow us to raise lower-cost term deposits directly from customers and capture a growing market. We will continue to make investments in our products and infrastructure with a multi-year strategic focus on our internal operations to deliver enhanced customer service and update our internal systems to drive sustainable and profitable growth in an efficient working environment for our team. For the third year in a row, we are certified as a Great Place to WorkTM based on feedback from our team members. Our strong results this year can be attributed to our strong team culture that enhances our ability to effectively tackle change and opportunity in our business. At MCAN, we are committed to our culture that we believe generates strong engagement, quality execution and service to our customers, in addition to a high quality work life for our team. We have delivered exceptional results this year through execution of our strategic priorities with our portfolio, all while navigating a challenging economic environment. We believe we provide our shareholders with a unique opportunity to invest in various channels of the Canadian real estate landscape. We finance residential construction projects in urban markets, originate residential mortgages, hold and actively curate a REIT portfolio, invest in higher yielding mortgage funds, participate in real estate equity funds focused on asset value creation and the development of commercial and residential assets in key urban markets, and hold an approximately 14% interest in MCAP Commercial LP, a strategic partner to us. Collectively, this diversified pool of quality investments is not available to typical investors and provides a portfolio for participation primarily in the residential real estate market in Canada. We believe in the resiliency of these portfolios through various economic cycles and, therefore, our financial performance and shareholder returns over the long term. While we may be seeing a peak in interest rates by the Bank of Canada with economic growth stalling and inflation easing gradually, there is still some uncertainty in the economy, the housing market, and inflation that is not currently showing sustained declines. In the year ahead, we expect new product launches, our new digital GIC platform and our hedging strategies to allow us to continue on our path of profitable growth. As we look to the future, we will continue to focus on delivering exceptional value to our stakeholders, driving operational excellence, and fostering a culture of creativity and collaboration. We are very pleased with our 2023 results and our team member performance. We look to continue to improve our market position and invest in communities and homes for Canadians. I want to thank all of our stakeholders, partners, team members and the Board for their ongoing support. Without their support, we would not be able to continue to execute on our mission of delivering sustainable growth and value for our stakeholders through: relationship-driven mortgage lending and investing; quality work from an expert, engaged and committed team; and dedication to excellence in service of our clients, our colleagues and our community. Don Coulter CEO 1 Considered to be a non-generally accepted accounting principle (“non-GAAP”) and other financial measure and incorporated by reference and defined in the "Non-GAAP and Other Financial Measures" section of our 2022 Annual MD&A available below or on SEDAR+ at www.sedarplus.ca. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. - 7 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) OUR BUSINESS AND STRATEGY MCAN is the largest Mortgage Investment Corporation (“MIC”) in Canada and the only federally regulated MIC. MCAN (TSX: MKP) provides sustainable growth and returns for our shareholders by leveraging our real estate expertise and providing our shareholders with unique access to investments in the Canadian real estate market and the returns that they generate. Our business includes real estate lending and investing, including residential mortgage lending, residential construction lending, non-residential construction and commercial lending, investing in a portfolio of REITs, and investing in and being invested in strategic private investments like (i) MCAP Commercial LP (“MCAP”) (privately-owned and Canada’s largest independent mortgage financing company) in which we own an almost 14% interest and (ii) non-marketable equity-based real estate development funds and mortgage funds. We provide a breadth of expertise in all facets of the real estate cycle that our shareholders benefit from. Our unique tax structure as a flow-through MIC allows us to not be taxed at the corporate level by distributing all of our taxable earnings annually to shareholders. It also means that 67% of our non-consolidated tax assets are to be held in residential mortgages and cash. MCAN’s lines of business include three divisions - MCAN Home, MCAN Capital and MCAN Wealth. MCAN Home is our residential mortgage lender that partners exclusively with accredited mortgage professionals to offer both insured and uninsured mortgage solutions across Canada. MCAN Home operates through MCAN’s wholly owned subsidiary, MCAN Home Mortgage Corporation. financing and focuses on unique MCAN Capital investment opportunities in construction and commercial loans, REITs, and private investment funds focused on lending to and developing Canadian communities. We also have an almost 14% equity interest in MCAP, Canada’s largest privately-owned mortgage financing company. MCAN Wealth offers investors CDIC insured investment solutions at competitive rates, differing term options, and with no fees. Business Model MCAN’s business model provides focused investing in products and markets where we have extensive expertise and that are not generally accessible to our shareholders, to generate attractive financial returns. We employ leverage by issuing term deposits. We also use our expertise to source our term deposits through a network of independent financial agents, as well as through a direct-to-consumer channel launched in January 2024. - 8 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Our business model helps us to achieve our long-term objectives: • • • Sustained 13% to 15% average return on average shareholders’ equity (“ROE”); Sustained 10% average annual growth of assets; and Sustained and prudent dividend growth. We have made significant strides over the last several years to grow our business and achieve our long-term objectives. Comparing December 31, 2023 to December 31, 2019, we have: • • • • • Increased our corporate mortgage portfolio by 122% to $2.4 billion from $1.1 billion; Increased our corporate assets by 251% to $2.8 billion from $0.8 billion; Increased our annual net income by 60% to $77.5 million from $48.3 million; Increased our regular cash dividends by 9% to 1.48 per share from 1.36 per share as well as distributed two special stock dividends of $0.97 per share in 2022 and $0.85 per share in 2021; and Delivered average ROE1 of 14.38% over the 4 year period compared to 13.88% over the previous 4 year period. Our 2023 Strategic Priorities We believe we have been successful in executing on our strategic priorities in 2023. Those priorities included: Strategic Priorities Results Grow revenue generating business lines Optimize financial, liquidity and funding management • • • • • Grew our corporate assets 21% since last year. Achieved our highest outstanding construction and commercial portfolio balance of $1.1 billion. Increased retention with uninsured residential mortgage renewals up 14% to $495 million. Increased our residential mortgage lending in the Alberta and British Columbia urban markets. Renewed our (i) Base Shelf prospectus; and (ii) at-the-market equity program to a Prospectus Supplement to our Base Shelf prospectus allowing us to issue up to $30 million common shares to the public from time to time over a 2 year period at the market prices prevailing at the time of sale. Successfully raised $2 million of capital through our ATM Program to fund growth of our business. • Launched our fair value hedging program to manage our interest rate risk. • Worked on our first digital GIC platform, allowing us to raise term deposits (“ATM Program”) established pursuant • Enhance and mature operating capabilities and effectiveness • • directly from customers, with a successful launch in January 2024. Enhanced existing efficiencies. technology applications for continued business Implemented a new enterprise resource planning system to streamline our financial reporting and enhance our financial analysis capabilities. - 9 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Strategic Priorities Enhance business partner relations and customer experience Leadership, people management and culture Results • • • • • • • Launched a new marketing cloud platform to enable data-driven marketing efforts through customized communications, campaigns and partner programs. Recognized in 2023 Great Places to WorkTM: ◦ ◦ ◦ ◦ 2023 Best Workplaces™ in Canada – 100-999 Employees 2023 Best Workplaces™ for Women 2023 Best Workplaces™ Managed by Women 2023 Best Workplaces™ for Giving Back Recognized as a Top Mortgage Employer for 2023 by Canadian Mortgage Professional. Recognized by the Globe and Mail’s 2023 Report on Business Women Lead Here list for gender diversity for the fourth straight year. Recognized as one of Canada’s Innovative HR Teams of 2023 by HR Reporter. Implemented a hybrid work policy that encompasses MCAN’s philosophy and vision for the future of work. Launched our MCAN All-Stars Recognition Program to enhance our positive work environment, reinforce high-performance behaviours and celebrate team member milestones. Our Investment Portfolio With extensive in-house expertise, MCAN is a strategic investor in the Canadian real estate market. Our portfolio is focused on residential mortgages and residential construction loans. We are also a strategic investor in REITs, MCAP and other non-marketable real estate based funds that are generally not accessible to shareholders. Total Assets at December 31, 2023 of $4.7 billion - 10 - Securitized Insured Residential Mortgages (42%)Residential Mortgages (27%)Construction Loans (22%)Commercial Loans (2%)Equity Investment in MCAP (2%)Non-Marketable Securities (2%)Marketable Securities (1%)Other Corporate Assets (1%)Other Securitized Assets (1%)2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Residential Mortgage Lending (December 31, 2023 - $3.2 billion; December 31, 2022 - $2.8 billion) We originate insured and uninsured residential mortgages across Canada primarily focused on first time and move up homebuyers. Although we lend across Canada, our geographical focus is in the major urban regions in Ontario and to a lesser extent in Alberta and Vancouver. We have in-house origination, underwriting and boots on the ground in our core markets. These residential mortgages are originated through our strategic relationships with mortgage brokers. We focus our uninsured residential mortgage lending to those customers with credit challenges and to those who are self-employed. Our products include purchases, refinances and renewals. We have strategies to either originate and securitize our on-balance sheet insured residential mortgages, which are included in securitized insured residential mortgages above, or sell our insured residential mortgage commitments, depending on market conditions. Construction Lending (December 31, 2023 - $1.0 billion; December 31, 2022 - $825 million) Residential construction loans are made to developers to finance residential construction projects. We focus our lending on the construction of more affordable housing in urban/suburban growth markets with a preference for proximity to transit. This approach aims to mitigate the impact of price volatility and tightened sales activity in the event of market corrections. As well, these markets are where we, or our originating partners, have experience and local expertise. We have long established strategic relationships with originators, partners and borrowers. In house, we apply our own seasoned experience, underwriting and monitoring. The borrowers that we like to target are experienced developers with a successful track record of project completion and loan repayment, and often repeat customers to us. These loans generally have a floating interest rate, with a floor rate set at origination and loan terms typically ranging between 24 and 36 months. We also strategically lend at the land development stage to enhance longer term relationships with borrowers. Non-residential construction loans provide similar construction financing, but for retail shopping developments, office buildings and industrial developments. Commercial Lending (December 31, 2023 - $71 million; December 31, 2022 - $105 million) 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). Investment in MCAP (December 31, 2023 - $111 million; December 31, 2022 - $106 million) We have an almost 14% equity interest in MCAP. MCAP is Canada’s largest independent mortgage finance company with assets under management of $154 billion, serving many institutional investors and over 400,000 homeowners. This investment allows us to participate in the growth of MCAP that typically provides quarterly distributions on our investment. Non-Marketable Securities (December 31, 2023 - $110 million; December 31, 2022 - $97 million) We have equity investments in various strategic private real estate development and mortgage funds or instruments. Our strategy of laddering these investments in these funds should provide above average returns on an overall basis, as the funds mature and their strategies are executed. All of the funds we invest in are backed by real estate in Canada and provide debt and equity capital to experienced and successful originators and developers. Certain of these funds focus on affordable housing, connected neighbourhoods and reducing the impact of climate change. These investments are either held for long-term capital appreciation or distribution income and they tend to improve the diversification and risk and reward characteristics of our overall investment portfolio; however, the real estate development funds tend to have less predictable cash flows that are predicated on the completion of the development projects within the funds. Marketable Securities (December 31, 2023 - $50 million; December 31, 2022 - $54 million) We have a diversified and managed REIT portfolio held for investment income and capital appreciation. We leverage our real estate investment expertise to actively manage this portfolio, with periodic recycling of capital. Our REIT investment objectives are to earn long term total returns in the range of 9 to 11%. This portfolio provides additional liquidity and diversification to our overall investment portfolio. - 11 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Our Loan Portfolio Quality We believe we have a quality loan portfolio, with minimal mortgages in arrears. The majority of residential mortgage 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 related to our construction and commercial loan portfolios due to our prudent and selective lending methodology and our account management processes in these product types. We have a strong track record with our asset recovery programs should the need arise. Our realized loan losses on our construction portfolio have been negligible in the last 10 years. Our Shareholder Returns ROE is a key performance metric for MCAN. With our diversified investment base, we believe that we are able to generate strong returns for shareholders through various cycles of the real estate market. Despite market volatility in 2023 broadly affecting public company share prices, we recorded a positive total shareholder return1 (dividends plus share price appreciation) in 2023 of 16% and a compound annual growth rate of our total shareholder return1 for the last 5 years of almost 16%. Historical ROE1 Our long-term objective is sustained 13% to 15% average ROE. The nature of our investing activities may result in fluctuations in our ROE year to year. ROE for year to date 2023 was positively impacted by growth in our core mortgage and lending business in a higher interest rate environment. In the last 10 years, we have delivered an average ROE1 of almost 14%. 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" of our 2023 MD&A available below or on SEDAR+ at www.sedarplus.ca. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. - 12 - 11.50%13.45%14.74%13.75%11.90%15.11%13.13%16.86%12.47%15.05%ROE20142015201620172018201920202021202220232023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Our Capital Strength We manage our capital and asset balances based on the regulations and limits of the Trust and Loan Companies Act (the “Trust Act”), Income Tax Act (Canada) (the “Tax Act”) and the Office of the Superintendent of Financial Institutions Canada (“OSFI”). Our strong capital base over the years has allowed us to pursue our growth strategy while achieving our long-term objectives. We have made a conscious effort over the last few years to try to optimize our balance sheet in order to position ourselves well for future growth and returns. Historical Capital Ratios Our capital ratios have adjusted over the years as we have optimized our balance sheet, growing our assets utilizing excess capital room. Capital maintenance this year has come from our dividend reinvestment program and we had some growth due to our at-the-market equity raising program. Further growth in our capital will be dependent on better equity market conditions or shareholder appetite. In 2023, our total capital and leverage ratios decreased due to OSFI’s revised rules that incorporate Basel III reforms that came into effect. All of our capital and leverage ratios are within our regulatory and internal risk appetite guidelines. - 13 - 4.935.095.294.935.5222.52%22.02%20.54%19.83%17.91%12.58%10.17%9.41%9.83%9.49%Income Tax Assets to Capital RatioTotal Capital Ratio (%)Leverage Ratio (%)201920202021202220232023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Our Dividends Uniquely structured as a MIC, 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. Should taxable income per share exceed our regular cash dividends per share, we would distribute special cash or stock dividends per our dividend policy. We have been paying regular dividends since 1992. Dividend History The Board of Directors (“Board”) declared a first quarter regular cash dividend of $0.39 per share (a 5.4% increase on an annualized basis from 2023) to be paid March 28, 2024 to shareholders of record on March 15, 2024. Largely as a result of tax timing differences on various investing strategies that we undertook in the second half of 2023, we will not need to distribute a special dividend in the first quarter of 2024. - 14 - $1.12$1.13$1.17$1.31$1.43$1.28$1.36$2.21$2.41$1.48$1.12$1.13$1.17$1.31$1.43$1.28$1.36$1.36$1.44$1.48$0.85$0.97Regular Dividend per ShareSpecial Stock Dividend per Share2014201520162017201820192020202120222023 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Our Environment, Social and Governance (“ESG”) Program People First. Purpose Driven. Performance Focused. MCAN’s values and culture are rooted in our stakeholders, including our shareholders, customers, business partners and team members, and their communities: • • Supporting sustainable residential communities by providing residential mortgages using responsible underwriting and risk management practices that deal with climate risk on our portfolio Providing capital and loans to real estate developers and investment funds who are committed to community and climate-based responsible development, primarily for residential density development in urban communities close to mass transit • Operational efficiency to reduce our carbon footprint • • • • Lending to, and investing in, the development of more affordable housing Investing in the communities where our shareholders, customers, business partners and team members call home Creating a positive experience by tailoring products and offerings for our stakeholders and customers to achieve their objectives Ensuring strong governance and risk management practices aligned with our role as a publicly traded regulated financial institution focused on all our stakeholders and their communities E S G At the core of our ESG program is our management team and the Board, who navigate the risks and opportunities in our business within our established sustainability framework. Our management team, along with our Board, have built a strong risk and governance framework by which we do business. We believe these practices are essential for the Company’s success. Information about our risk governance structure is included in the “Risk Management” section of our 2023 MD&A available below or on the System for Electronic Document Analysis and Retrieval at www.sedarplus.ca. We remain committed to supporting sustainable residential development projects, investing in our team culture and professional growth, and supporting local charities. The capital we provide for construction lending opportunities primarily focuses on affordable residential development projects in urban markets that are committed to net zero emissions frameworks by 2050, including Toronto, Vancouver and Calgary. We also work with partners who are committed to responsible corporate citizenship. Many of these partners consider ESG at every phase of the real estate lifecycle and recognize that this creates the greatest value for stakeholders. We continue to invest in learning and development opportunities for our team members and support various local charitable organizations. We also support our team members by providing a work environment that allows for a flexible working structure, and enhancing our wellness, benefit and compensation plans. Our MCAN DRIVE values support lending a hand… • • • • • To Canadians dreaming of home ownership and wealth creation through investment in Canadian real estate; To communities through support and investment in programs that connect, empower and revitalize; To developers committed to social responsibility and building a low carbon world by reducing waste, emissions, and energy consumption; To shareholders by providing transparency on ESG risks and opportunities, and actively managing and improving on reporting on ESG performance to ensure alignment with their vision; and To team members through the cultivation of a diverse, inclusive, and collaborative culture. - 15 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) We are proud of our ESG journey to date with over 95% of team members feeling good about the ways MCAN contributes to their community. As we continue to evolve our ESG efforts, we plan to incorporate more education, measurements and further continued investments in environmental programs and our social impact. Some of our key achievements in 2023 are highlighted below: 2023 ESG Achievements • • • • • • • • • • • • • • • • • E S G ◦ ◦ ◦ ◦ ◦ ◦ >90%: percentage of total capital committed in our construction and commercial businesses that is focused on density development >$55 million: amount committed for investments in equity funds focused on environmental sustainability and adapting to climate change Low environmental footprint of our operations, including a hybrid working model and mostly digital and paperless processes, allowing us to naturally have low Scope 1 and 2 emissions 7,940: number of trees planted under our partner program whereby we plant 4 trees for every deal funded under the program. Our tree plantings were done in British Columbia and Ontario regions impacted by fire and deforestation. Top Mortgage Employer for 2023 by Canadian Mortgage Professional 4: number of categories we were recognized in by 2023 Great Places to WorkTM including: 2023 Best Workplaces™ in Canada – 100-999 Employees 2023 Best Workplaces™ for Women 2023 Best Workplaces™ Managed by Women 2023 Best Workplaces™ for Giving Back Recognized as one of Canada’s Innovative HR Teams of 2023 by HR Reporter $24 million: amount funded in our residential construction portfolio in affordable housing projects $57,000: amount of free mortgage payments awarded to our customers as part of our partner program $81,000: amount of cash donations made during the year $67,000 donated on behalf of our team members to our local communities $14,000 donated on behalf of our brokers and partners as part of our partner program >60%: percentage of team members who self-identify as a visible minority Recognized by the Globe and Mail’s 2023 Report on Business Women Lead Here list for gender diversity for the fourth straight year Team member volunteer days, including participation in a Habitat for Humanity Build Day, Terry Fox run and three kit packing events to provide needs to charitable organizations within the communities we serve 100%: percentage of independent Board members serving on the Audit Committee, Conduct Review, Corporate Governance and Human Resources Committee and Enterprise Risk Management and Compliance Committee 100%: percentage of active team members who have attested to the Code of Conduct 99%: percentage of Director attendance at Board meetings 8 out of 9: number of Board members who are independent - 16 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS MCAN Mortgage Corporation is doing business as (“d/b/a”) MCAN Financial Group (“MCAN”, the “Company” or “we”). 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, 2023 and December 31, 2022 and the consolidated statements of income, comprehensive 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”), which are the Generally Accepted Accounting Principles (“GAAP”) in Canada, and presented in Canadian currency. This MD&A has been presented as of February 26, 2024. Additional information regarding MCAN, 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.sedarplus.ca and our website at www.mcanfinancial.com. TABLE OF CONTENTS - MD&A A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS .................................................... SELECTED FINANCIAL INFORMATION .................................................................................................................. BUSINESS OVERVIEW AND OUTLOOK ................................................................................................................. HIGHLIGHTS .......................................................................................................................................................... RESULTS OF OPERATIONS .................................................................................................................................... FINANCIAL POSITION ........................................................................................................................................... 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-GAAP AND OTHER FINANCIAL MEASURES .................................................................................................. GLOSSARY ............................................................................................................................................................. 18 19 22 25 29 38 49 53 65 65 66 67 67 67 67 68 69 70 - 17 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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, economic environment and outlook; possible or assumed future results; our ability to create shareholder value; our business goals and strategy; the potential impact of new regulations and changes to existing regulations; the stability of home prices; the effect of challenging conditions on us; the performance of our investments; factors affecting our competitive position within the housing lending market; international trade, international economic uncertainties, failures of international financial institutions and geopolitical uncertainties and their impact on the Canadian economy; sufficiency of our access to liquidity and capital resources; the timing and 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; factors and assumptions regarding interest rates, including the effect of Bank of Canada actions already taken; the effect of supply chain issues; the effect of inflation; housing sales and residential mortgage borrowing activities; the effect of household debt service levels; the effect of competition; systems failure or cyber and security breaches; the availability of funding and capital to meet our requirements; investor appetite for securitization products; 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, and market conditions relating to, our equity and other investments. External geopolitical conflicts, and government and Bank of Canada economic policy have resulted in uncertainty relating to the Company’s internal expectations, estimates, projections, assumptions and beliefs, including with respect to the Canadian economy, employment conditions, interest rates, supply chain issues, inflation, levels of housing activity and household debt service levels. There can be no assurance that such expectations, estimates, projections, assumptions and beliefs will continue to be valid. The impacts that any further or escalating geopolitical conflicts or infectious disease outbreaks, including measures to prevent their spread, and the related government actions adopted in response thereto, will have on our business is uncertain and difficult to predict. 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 risk that any of the above opinions, estimates or assumptions are inaccurate and the other risks and uncertainties referred to in our Annual Information Form for the year ended December 31, 2023, 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. - 18 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) SELECTED FINANCIAL INFORMATION Table 1: Financial Statement Highlights - Annual (in thousands except per share amounts, % and where indicated) At December 31 Income Statement Highlights Mortgage interest - corporate assets [A] Term deposit interest and expenses [B] Net corporate mortgage spread income1 [A-B] Equity income from MCAP Commercial LP Net loss on securities Net investment income - corporate assets Net investment income - securitization assets Net income Basic and diluted earnings per share Dividends per share - cash Dividends per share - stock Next quarter’s dividend per share - cash Return on average shareholders’ equity 1 Taxable income per share2 Yields Spread of corporate mortgages over term deposit interest and expenses 1 Spread of securitized mortgages over liabilities 1 Average term to maturity (in months) Mortgages - corporate Term deposits Balance Sheet Highlights Total assets Mortgages - corporate Mortgages - securitized Total liabilities Shareholders’ equity Capital Ratios Income tax assets to capital ratio2 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 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 ($ million) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2023 2022 Change (%) Change (%) 2021 165,997 78,219 87,778 22,010 $ $ $ $ 101,286 44,222 57,064 26,603 (3,622) $ (12,074) $ $ $ $ $ $ 107,547 4,252 77,498 2.22 1.48 — 0.39 79,805 3,898 55,354 1.77 1.44 0.97 64% $ 77% $ 54% $ (17%) $ (70%) $ 35% $ 9% $ 40% $ 25% $ 3% $ (100%) $ 71,823 31,430 40,393 25,453 14,763 85,446 5,966 64,362 2.40 1.36 0.85 131% 149% 117% (14%) 125% 26% (29%) 20% (7%) 9% (100%) 15.05 % 12.47 % 2.58% 16.86 % (1.81%) 1.31 $ 1.29 2% $ 2.63 (50%) 3.57 % 0.39 % 12.7 18.5 2.82 % 0.47 % 0.75% (0.08%) 2.80 % 0.70 % 0.77% (0.31%) 11.4 16.0 11% 16% 13.0 18.5 4,739,087 2,414,855 1,929,948 4,207,243 531,844 $ $ $ $ $ 4,078,676 1,939,494 1,751,303 3,589,366 489,310 16% $ 3,808,070 25% $ 1,806,146 10% $ 1,583,697 17% $ 3,374,812 9% $ 433,258 5.52 17.61 % 17.91 % 9.49 % 3.26 % 1.82 % 4.93 19.60 % 19.83 % 9.83 % 12% (1.99%) (1.92%) (0.34%) 5.29 20.26 % 20.54 % 9.41 % 4% (2.65%) (2.63%) 0.08% 1.66 % 0.89 % 1.60% 0.93% 0.05 % 0.03 % 3.21% 1.79% 112,789 $ 4,661 117,450 $ 35,432 15.01 15.89 563 $ $ $ 54,430 3,439 57,869 34,306 14.26 15.00 515 107% $ 36% 103% $ 3% 5% $ 6% $ 9% $ 10,826 4,865 15,691 29,621 14.63 17.23 510 942% (4%) 649% 20% 3% (8%) 10% (2%) —% 24% 34% 22% 25% 23% 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. 2 For further information refer to the “Taxable Income” and “Income Tax Capital” sections of this MD&A. Tax balances are calculated in accordance with the Tax Act. 3 This measure has been calculated in accordance with OSFI’s Leverage Requirements guidelines. 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 These measures have been calculated in accordance with OSFI’s Capital Adequacy Requirements guidelines. Effective March 31, 2020, the total capital ratios in 2021 and 2022 reflected 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 were included in CET 1 capital. The adjustment to CET 1 capital was 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, was subject to a scaling factor that decreased over time and was 50% in fiscal 2021 and 25% in fiscal 2022. Prior period ratios have not been restated. - 19 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 2: Financial Statement Highlights - Quarterly (in thousands except per share amounts, % and where indicated) Income Statement Highlights Q4 2023 Q3 2023 Q2 2023 Q1 2023 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Mortgage interest - corporate assets [A] $ 47,406 $ 44,144 $ 38,691 $ 35,756 $ 30,747 $ 27,216 $ 22,815 $ 20,508 Term deposit interest and expenses [B] Net corporate mortgage spread income1 [A-B] Equity income from MCAP Commercial LP $ 24,361 $ 21,083 $ 18,034 $ 14,741 $ 13,189 $ 12,330 $ 10,185 $ 8,518 $ 23,045 $ 23,061 $ 20,657 $ 21,015 $ 17,558 $ 14,886 $ 12,630 $ 11,990 $ 4,429 $ 4,310 $ 5,268 $ 8,003 $ 6,860 $ 8,236 $ 6,288 $ 5,219 Net gain (loss) on securities $ 1,977 $ (1,581) $ (5,017) $ 999 $ 1,735 $ (5,092) $ (9,906) $ 1,189 Net investment income - corporate assets $ 28,130 $ 25,656 $ 23,139 $ 30,622 $ 30,734 $ 18,845 $ 9,468 $ 20,758 Net investment income - securitization assets $ 1,451 $ 770 $ 1,159 $ 872 $ 838 $ 877 $ 1,068 $ 1,115 Net income $ 19,855 $ 18,479 $ 15,887 $ 23,277 $ 24,088 $ 11,650 $ 4,137 $ 15,479 Basic and diluted earnings per share $ 0.56 $ 0.53 $ 0.46 $ 0.67 $ 0.75 $ 0.37 $ 0.13 $ 0.52 Dividends per share - cash $ 0.38 $ 0.38 $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.36 Dividends per share - stock Return on average shareholders’ equity 1 Taxable income (loss) per share 2 $ — $ — $ — $ — $ — $ — $ — $ 0.97 15.01 % 14.20 % 12.47 % 18.60 % 21.17 % 10.52 % 3.75 % 14.19 % $ (0.13) $ 0.45 $ 0.66 $ 0.33 $ 1.11 $ (0.47) $ 0.30 $ 0.35 Spreads Spread of corporate mortgages over term deposit interest and expenses 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 2 CET 1 & Tier 1 capital ratios 4 Total capital ratio 4 Leverage ratio 3 Credit Quality Impaired mortgage ratio (corporate) 1 Impaired mortgage ratio (total) 1 Mortgage Arrears Corporate Securitized Total 3.34 % 0.39 % 3.49 % 0.42 % 3.63 % 0.39 % 3.78 % 0.39 % 3.32 % 0.39 % 2.83 % 0.44 % 2.50 % 0.51 % 2.59 % 0.54 % 12.7 18.5 13.1 19.2 12.7 16.1 11.5 14.9 11.4 16.0 12.9 17.1 13.9 17.7 13.8 17.7 $ 4,739 $ 4,540 $ 4,427 $ 4,152 $ 4,079 $ 4,004 $ 4,066 $ 4,000 $ 2,415 $ 2,338 $ 2,224 $ 2,037 $ 1,939 $ 1,975 $ 1,977 $ 1,902 $ 1,930 $ 1,835 $ 1,755 $ 1,724 $ 1,751 $ 1,691 $ 1,700 $ 1,659 $ 4,207 $ 4,013 $ 3,910 $ 3,645 $ 3,589 $ 3,562 $ 3,626 $ 3,558 $ 532 $ 528 $ 517 $ 507 $ 489 $ 443 $ 441 $ 442 5.52 5.14 5.22 5.02 4.93 5.76 5.53 5.53 17.61 % 17.72 % 17.90 % 19.59 % 19.60 % 18.35 % 18.82 % 19.32 % 17.91 % 17.98 % 18.14 % 19.81 % 19.83 % 18.64 % 19.09 % 19.57 % 9.49 % 9.76 % 9.71 % 9.94 % 9.83 % 8.88 % 8.82 % 8.96 % 3.26 % 1.82 % 1.76 % 0.99 % 1.70 % 0.96 % 1.92 % 1.05 % 1.66 % 0.89 % 0.00 % 0.01 % 0.01 % 0.02 % 0.03 % 0.02 % $ 112,789 $ 85,513 $ 63,651 $ 54,873 $ 54,430 $ 37,792 $ 9,908 $ 9,981 4,661 4,438 5,130 4,096 3,439 2,842 3,397 4,124 $ 117,450 $ 89,951 $ 68,781 $ 58,969 $ 57,869 $ 40,634 $ 13,305 $ 14,105 Common Share Information (end of period) Number of common shares outstanding Book value of common share 1 Common share price - close 35,432 35,432 35,068 34,788 34,306 31,855 31,715 31,373 $ 15.01 $ 14.89 $ 14.73 $ 14.58 $ 14.26 $ 13.90 $ 13.89 $ 14.08 $ 15.89 $ 15.13 $ 15.36 $ 15.00 $ 15.00 $ 14.57 $ 16.75 $ 17.85 Market capitalization ($ million) $ 563 $ 536 $ 539 $ 522 $ 515 $ 464 $ 531 $ 560 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. 2 For further information refer to the “Taxable Income” and “Income Tax Capital” sections of this MD&A. Tax balances are calculated in accordance with the Tax Act. 3 This measure has been calculated in accordance with OSFI’s Leverage Requirements guidelines. 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 These measures have been calculated in accordance with OSFI’s Capital Adequacy Requirements guidelines. Effective March 31, 2020, the total capital ratios in 2021 and 2022 reflected 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 were included in CET 1 capital. The adjustment to CET 1 capital was 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, was subject to a scaling factor that decreased over time and was 25% in fiscal 2022. - 20 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Annual Trends • • • • Net income has seen significant fluctuations over the three year period due to unrealized fair value gains and losses from our REIT portfolio as a result of the pandemic, the interest rate environment and economic uncertainty post-pandemic. Our net corporate mortgage spread income has also increased compared to the previous periods due to growth in our mortgage portfolios and higher spread of corporate mortgages over term deposit interest and expenses. For 2023 compared to 2022, our net income was positively impacted by growth in our mortgage portfolios as well as higher spread of corporate mortgages over term deposit interest and expenses. This was partially offset by unrealized fair value losses on our REIT portfolio. Our corporate and securitized assets continued to grow in 2023 compared to 2022 due to high net origination volumes, including strong renewals in our residential mortgages. For 2022 compared to 2021, our net income was positively impacted by growth in our mortgage portfolios as well as higher spread of corporate mortgages over term deposit interest and expenses. This was more than offset by unrealized fair value losses on our REIT portfolio. Our corporate and securitized assets continued to grow into 2022 compared to 2021 due to high net origination volumes in all our portfolios and increases in our capital base due to three successful rights offerings and our at-the-market equity program (“ATM Program”). Taxable income fluctuations in the three year period are mainly due to taxable income recorded from our investment in MCAP Commercial LP (“MCAP”). As a result of an increase in taxable income in 2020 and 2021, the Board of Directors (“Board”) declared special stock dividends in 2021 and 2022, respectively, in order to distribute all of MCAN’s taxable income, net of loss carryforwards used. Quarterly Trends • • • In 2022, we saw a rising interest rate environment and large unrealized losses in our REIT portfolio. In 2023, we saw some stabilization in interest rates compared to 2022 but with a total of 75 basis points increase in interest rates in 2023, as well as uncertainty on future increases by the Bank of Canada and on the Canadian economy’s risk of recession, there continued to be volatility in REIT stock prices and therefore unrealized losses recorded. In Q4 2023, we saw a re-stabilization of interest rates and a partial recovery in our REIT portfolio. Other trends impacting 2023 include (i) higher average corporate mortgage portfolio balances from net originations and renewals; and (ii) declining spreads of corporate mortgages over term deposit interest and expenses mainly from higher interest rates on our recent term deposit originations and competition in the residential mortgage market. However, spreads of corporate mortgages over term deposit interest and expenses in 2023 are higher than 2022. At the end of 2021 to mid-2022, taxable income had generally been reducing or negative and was mainly impacted by lower taxable income from MCAP due to timing differences only, arising as a result of the tax treatment on sales of their loans into certain securitization programs. This had been partially offset by higher income from our core business. In Q4 2022, we executed an internal reorganization through a transfer of our equity investment in MCAP to a wholly-owned limited partnership which increased our taxable income. In 2023, we had higher taxable income from our core business as well as from our investment in MCAP. In Q4 2023, we had lower taxable income as a result of tax timing differences on various investing strategies that we have engaged in. The spread of corporate mortgages over term deposit interest and expenses had been declining until Q3 2022. Through the end of 2021 and first half of 2022, continued market competition had kept mortgage rates low in our residential mortgage portfolio, while increased demand by financial institutions for term deposit funding in the wake of the Russia/Ukraine conflict and demand by deposit customers for higher rates due to anticipated and actual Bank of Canada rate increases had kept term deposit rates elevated, causing a decline in the spread. Beginning in Q3 2022, the rising interest rate environment had increased rates in our floating rate residential construction portfolio above their floor rates and our greater focus on changing the laddering of the duration of our term deposits had kept average term deposit rates from rising faster than our mortgage rates, which increased our spread of corporate mortgages over term deposit interest and expenses. In Q2 to Q4 2023, average term deposit rates in our portfolio increased - 21 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) faster than our mortgage rates given the higher interest rate environment and uncertainty around future Bank of Canada rate decisions. As well there was continued market competition for residential mortgages. • We have seen spreads decline on securitizations as a result of a decline in the spread of Government of Canada bond yields versus our mortgage rates. Government of Canada bond yields have risen significantly since 2021. As a result, we had reduced our securitization volumes in 2022 and 2023. 2023 volumes have also been impacted by lower insured residential mortgage originations due to the higher interest rate environment. We participate in this market opportunistically. • Common Equity Tier 1 (“CET 1”), Tier 1 Capital and Total Capital to risk-weighted assets ratio reductions are due to our growing risk-weighted assets compared to our capital base. The Company successfully initiated a capital raise by way of a rights offering in December 2022. This offering raised $34 million. In 2022 and 2023, we also raised $4 million and $2 million, respectively, of capital through our ATM Program. Our Dividend Reinvestment Program (“DRIP”) has provided us with a reliable source of capital maintenance each quarter and we have seen an increase in participation to 30%. In Q2 2023, our total capital and leverage ratios decreased due to Office of the Superintendent of Financial Institutions Canada’s (“OSFI”) revised rules that incorporate Basel III reforms that came into effect. All of our capital and leverage ratios are within our regulatory and internal risk appetite guidelines. • Mortgage arrears have varied on a quarterly basis given the nature of the 1-30 day arrears. The majority of residential mortgage 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. While greater than 30 days arrears have increased in our residential mortgages, it is still low compared to the size of our portfolio and low relative to industry norms. We believe that we have a quality residential mortgage loan portfolio. For the construction and commercial mortgage arrears, these loans have either been brought current or we expect them to be brought current, or we have initiated asset recovery programs. We have recovered or expect to recover all past due interest and principal on these loans. We have a strong track record with our default management processes and asset recovery programs should the need arise. Our realized loan losses on our construction portfolio have been negligible in the last 10 years. BUSINESS OVERVIEW AND OUTLOOK We focus over the long term on growing our business and shareholder returns. We believe that our long-term strategy will continue to serve us well, though we also consider the current market conditions in the execution of that strategy. Over the short to mid term, our focus is on maintaining solid net interest margin, managing maturities in our portfolio and investing in, and expanding, our core business within our capital requirements and risk appetite, as well as continuing to invest in our infrastructure and process improvements. We believe that we are a prudent and disciplined lender to, and investor in, real estate markets and that we have strong relationships with our brokers and strategic partners that are foundational to our strategy. This strategy and long-term outlook are based on assumptions from our experience, our market knowledge, and sources we consider reliable. Economic Outlook The Canadian economy has stalled and will likely remain that way under the weight of higher interest rates. While inflation is trending downwards, higher mortgage costs, which are directly related to higher interest rates, and wage growth continue to keep inflation above the 2% Bank of Canada target. Most economists believe that Bank of Canada rates have peaked, with interest rate cuts to begin in the second half of 2024 presuming there is further and sustained easing in core inflation. Higher leveraged households and the prospects of a weakening job market have shifted consumer spending toward debt servicing. Strong immigration is another unique factor for Canada’s economy. Most economists believe that there will be modest GDP growth and our unemployment rate will increase but still remain low. Although much of the Canadian consumer market continues to demonstrate credit strength, there is the beginning of increasing delinquency rates on non-housing-related consumer debt and some pullback on consumer spending that indicates that the tighter monetary policy and high interest rates are working their way through the economy. We expect inflation and interest rates to continue to be the dominant concern for 2024. - 22 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Housing Market Outlook High interest rates and resilient house prices remain headwinds on housing affordability in all provincial markets in the short term. That said, resale activity has declined in most markets in Canada and house prices have also followed suit. Recent forecasts of interest rate cuts will help a little with demand for housing; however, we do not expect a sustained recovery until interest rates actually fall. In the long term, we believe that eventual cuts to interest rates, strong population growth and the continued supply-demand imbalance will provide upward pressure on home prices, particularly in and around our core markets of (i) the Greater Toronto area; (ii) the Capital region; and (iii) the Greater Vancouver area. Housing affordability (including housing supply) continues to be a critical issue for all levels of government and in all provinces where we do business. Even with current government actions and proposed actions, the lack of supply of affordable housing is not easily resolved in the short term, as there are multiple factors to building new supply (i.e. local/municipal government processes, skilled labour shortages, increased construction costs, lack of new construction technologies, etc.) that limit how many homes can be built in the short term. Business Outlook We believe that our business is well structured with its focus on multiple facets of the Canadian residential real estate market, giving us some flexibility in terms of income generation and allowing us to balance out volatility that we may experience at certain points and in certain areas of our business. We believe that there is opportunity to grow our core business without taking on significantly more risk. We will also continue to place an emphasis on investing in our business infrastructure and process improvements in order to help drive efficiencies and future growth. We will remain nimble, however, in dealing with any market changes or opportunities that may arise in any of our divisions in the short term, as well as in managing interest rate risk as 2024 will likely see Bank of Canada rate cuts. MCAN Capital Division Our MCAN Capital division manages our construction and commercial lending business, as well as our investments in REITs and private real estate-based development and loan funds. Notwithstanding current headwinds in the housing market from the higher interest rate environment, we expect continued high demand for more affordable housing, which is our focus generally with our investments and construction and commercial loans. We have seen tremendous growth in our residential construction and commercial portfolio, which is over $1 billion, but we do expect runoff from maturities in 2024 and therefore we will have to carefully manage those runoffs to try to maintain invested balances. We do expect a continued solid pipeline for the year ahead. Specifically with respect to our construction lending portfolio, although there continues to be construction zoning site delays as well as the aforementioned housing market headwinds, the vast majority of our loans are progressing towards completion and the few that have stalled are being actively managed to either be brought current or we expect to recover all past due interest and principal. We continue to monitor that entire portfolio and the market very closely in general, and we will continue to exercise our strong credit management practices in the context of the market. As well, the cost of construction has increased due to inflationary pressures in the cost of building materials and labour and there continues to be a shortage of skilled labour within the construction industry. All these factors have, and may continue to have, an impact on the timing of repayments as loans remain outstanding longer; however, they have not changed the overall expected success of these construction projects or the performance of the loans within this portfolio. Our philosophy within our MCAN Capital division is to apply a prudent approach to our underwriting criteria in line with our risk appetite, with a focus on well-located and affordable residential products, near transit corridors, with experienced borrowers and developers where we have existing relationships. We will continue to remain vigilant in our underwriting and loan management practices and look to onboard new borrowers and developers that fit within our lending philosophy. With respect to our private real estate-based development funds, many of the fund sponsors have been sitting on the sidelines, not committing amounts to new projects given current market conditions. We believe this to be a prudent approach. MCAN has invested in these funds for long-term returns. For projects currently being undertaken, we actively monitor their progress and the fair values of those projects may experience volatility from quarter to quarter. With respect to our REIT portfolio, the expected relief to interest rates in the second half of 2024 and into 2025 should help valuations there. MCAN Home Division Our MCAN Home division manages our residential lending business. Given the higher interest rate environment, our risk management, credit monitoring and assessment activities will continue to have a - 23 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) heightened focus in operating our business. We currently have a portfolio with a strong credit profile and a minimal level of arrears. Residential mortgages tend to provide comparatively lower yields given their risk profile. That said, we continue to focus on proactively protecting our net interest margins. As new business is slow given higher interest rates and a decline in home purchase activity, the mortgage market has become more competitive in order to attract what smaller demand is coming in. We expect this trend to continue. We expect that forecasted interest rate cuts will create some opportunity in the second half of the year on our originations of residential mortgages. We have been experiencing, and expect to continue to experience, strong renewals of our uninsured residential mortgages as OSFI’s minimum qualifying rate for borrowers applying for new mortgages remains in place. We are looking to add new products to further broaden our offering to our customers. We remain dedicated to continuously improving our service for our borrowers and the broker community, and as such, we will continue to invest in our current and new systems and business infrastructure to further enhance our service experience. We increased our mortgage lending in 2023 in the Alberta and British Columbia urban markets and will look to expand in other urban markets within Canada. We will continue to keep abreast of the many changes in the market, the regulatory environment and in our portfolios that could impact our business or that could create opportunities in line with our risk appetite. MCAN Wealth Division Our MCAN Wealth division manages our term deposit business. We employ leverage and fund our business by issuing term deposits that are eligible for CDIC deposit insurance that are sourced through a network of independent brokers and financial agents, as well as through a newly launched digital direct-to-consumer platform. We have raised record amounts of term deposits in 2023 given the level of growth and high mortgage renewals that we have experienced. This will continue for the year ahead as we look to grow further. In the short term, there will continue to be volatility in the Government of Canada bond yield curve and, therefore, volatility in pricing in the term deposit market. In the mid term, we expect some relief in term deposit rates amid forecasted interest rate cuts, as we typically see the term deposit rates impacted first and immediately compared to residential mortgage rates that some of these term deposits fund. Given current and expected interest rates, we continue to look for opportunities to adjust the maturity terms of our term deposits relative to our corporate mortgage portfolio. We have actively utilized our hedging strategies to minimize interest rate risk in a rising rate environment and we will continue to do the same to protect our net interest margin in a forecasted declining rate environment, particularly as our floating rate construction lending portfolio floats down to floor rates. We will continue to expand our broker networks, grow our direct- to-consumer platform and look for other channels to source term deposits. We have invested in, and expect to continue to invest in, our current and new systems and business infrastructure and processes to drive efficiencies. We are expanding and maturing our capital markets, investor relations and funding strategies over the long term to continue our growth. That growth will be dependent on capital availability and, therefore, the strength of capital markets or existing shareholder demand for our shares. We will continue to leverage our ATM program and other share offerings when it makes sense. MCAN’s management and Board are committed to proactively and effectively managing and evolving all our strategies, business activities and team to achieve our targeted average annual growth in corporate assets over the long term of 10%. This Outlook contains forward-looking statements. For further information, refer to the “A Caution About Forward- Looking Information and Statements” section of this MD&A. - 24 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) HIGHLIGHTS Q4 2023 • • • • • • • • Net income totalled $19.9 million in Q4 2023, a decrease of $4.2 million (18%) from $24.1 million in Q4 2022. Results for the fourth quarter of 2023 were impacted by higher net corporate mortgage spread income offset by lower income from MCAP and a higher provision for credit losses as described below. Earnings per share totalled $0.56 in Q4 2023, a decrease of $0.19 (25%) from earnings per share of $0.75 in Q4 2022. Return on average shareholders’ equity1 was 15.01% for Q4 2023 compared to 21.17% in Q4 2022. Net corporate mortgage spread income1 is derived from both our residential lending portfolio and our construction and commercial portfolio. It increased by $5.5 million from Q4 2022. The net corporate mortgage spread income increased due to a higher average corporate mortgage portfolio balance from continued mortgage originations and renewals, and an increase in the spread of corporate mortgages over term deposit interest and expenses. The increase in the spread was mainly attributable to the rising rate environment’s impact on floating rates on residential construction loans that are now well above their floor rates. Net securitized mortgage spread income1 increased marginally by $0.1 million from Q4 2022. The net securitized mortgage spread income increased due to a higher average securitized mortgage portfolio balance from insured residential mortgage originations as we continued to increase our mortgage lending in the Alberta and British Columbia urban markets. Provision for credit losses on our corporate mortgage portfolio of $2.1 million in Q4 2023 was mainly due to growth in our portfolio, less favourable underlying economic forecasts relating to unemployment rates and housing prices, and model enhancements. In Q4 2022, we had a recovery of credit losses of $1.1 million mainly due to a more favourable provincial outlook and assumptions for our loans in Alberta, as well as improving economic forecasts from expectations that both inflation and Bank of Canada interest rate increases may be nearing a peak. Equity income from MCAP totalled $4.4 million in Q4 2023, a decrease of $2.5 million (35%) from $6.9 million in Q4 2022, which was primarily due to (i) lower mortgage origination fees from lower mortgage volumes sold; (ii) a decrease in fair value adjustments on mortgages due to the higher rate environment; and (iii) higher interest expense on credit facilities. These were partially offset by (i) higher securitized mortgage interest income from a higher average securitized portfolio; (ii) higher servicing and administration income from higher assets under management; and (iii) higher investment revenue from higher average mortgage rates on non-securitized mortgages. In Q4 2023, we recorded a $2.0 million net unrealized fair value gain on our marketable and non- marketable securities compared to a $1.7 million net unrealized fair value gain in Q4 2022. Q4 2023’s net unrealized gain is made up of an unrealized gain on marketable securities of $4.4 million and a net unrealized loss on non-marketable securities of $2.5 million. In Q4 2023, we saw REIT prices rebound as sentiment around future interest rate increases tapered. We are invested for the long-term and we continue to realize the benefits of solid cash flows and distributions from these investments. In Q4 2023, we received distributions of $0.8 million (distribution yield1 of 7.23%) from our REITs compared to $0.9 million (distribution yield1 of 6.48%) in Q4 2022. With respect to our non-marketable securities, the net unrealized loss consists of both gains and losses from certain underlying property investments as a result of (i) updated appraisals/property valuations, net of related property debt and debt service costs; and (ii) actual executions on construction and leasing stabilization and value-add activities. - 25 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Year to Date 2023 • • • • • • • • Net income totalled $77.5 million for 2023 year to date, an increase of $22.1 million (40%) from $55.4 million net income in 2022. Similar to Q4 2023, our year to date results were mainly impacted by higher net corporate mortgage spread income. Earnings per share totalled $2.22 for 2023 year to date, an increase of $0.45 (25%) from earnings per share of $1.77 in 2022. Return on average shareholders’ equity1 was 15.05% for 2023 compared to 12.47% in 2022. Net corporate mortgage spread income1 increased by $30.7 million from 2022. The net corporate mortgage spread income increased due to a higher average corporate mortgage portfolio balance from continued originations and renewals, and an increase in the spread of corporate mortgages over term deposit interest and expenses. For 2023 year to date, the increase in the spread of corporate mortgages over term deposit interest and expenses is due to the same factors as for Q4 2023 mentioned above. Net securitized mortgage spread income1 decreased by $0.7 million from 2022. The net securitized mortgage spread income decreased due to a decrease in the spread of securitized mortgages over liabilities partially offset by a higher average securitized mortgage portfolio balance from originations of insured residential mortgages. Since 2022, we have seen the spread of securitized mortgages over liabilities decline on securitizations mainly as a result of higher securitization liability interest expense from higher Government of Canada bond yields in a rising interest rate environment. Provision for credit losses on our corporate mortgage portfolio of $4.5 million for 2023 compared to a recovery of credit losses of $1.1 million for 2022 mainly due to the same factors as described above for Q4 2023 and Q4 2022. Equity income from MCAP totalled $22.0 million for 2023 year to date, a decrease of $4.6 million (17%) from $26.6 million in 2022. For 2023 year to date, the decrease is due to the same factors as for Q4 2023 mentioned above. Year to date net unrealized loss on our marketable and non-marketable securities was $3.6 million for 2023 compared to a year to date net realized and unrealized loss of $12.1 million for 2022. The 2023 net unrealized loss is made up of a $3.2 million unrealized loss on marketable securities and a $0.4 million unrealized loss on non-marketable securities. Year to date 2023 and 2022 saw REIT prices decrease due to Bank of Canada interest rate increases and uncertainty around future rate increases and recessionary pressures. Year to date, we received distributions of $3.6 million (distribution yield1 of 6.44%) from our REITs compared to $3.6 million (distribution yield1 of 6.01%) in 2022. With respect to our non-marketable securities, we recorded (i) a $3.4 million unrealized loss mainly related to two underlying properties from general commercial real estate headwinds increasing capitalization rates as well as increased debt servicing costs that impact overall returns; and (ii) a $3.0 million unrealized gain related to construction and leasing completion and value-add activity on two underlying property investments. Our non- marketable securities are either held for long-term capital appreciation or distribution income and they tend to improve the diversification and risk and reward characteristics of our overall investment portfolio; however, the real estate development funds tend to have less predictable cash flows that are predicated on the completion of the development projects within the funds. Business Activity and Balance Sheet • Our balance sheet management reflects our focus in the short to mid term on maintaining solid net interest margin within our capital requirements and risk appetite. • • Corporate assets totalled $2.76 billion at December 31, 2023, a net increase of $90 million (3%) from September 30, 2023 and a net increase of $473 million (21%) from December 31, 2022. Corporate mortgage portfolio totalled $2.4 billion at December 31, 2023, a net increase of $77 million (3%) from September 30, 2023 and a net increase of $475 million (25%) from December 31, 2022. - 26 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) • • • Construction and commercial portfolios totalled $1.12 billion at December 31, 2023, a net increase of $23 million (2%) from September 30, 2023 and a net increase of $187 million (20%) from December 31, 2022. The movement in the portfolio is attributed to originations of $666 million year to date 2023 in new construction and commercial mortgages, partly offset by maturities and repayments. Originations have been strong this year and some extensions of projects due to normal construction delays or normal delays relating to the permitting and zoning process has meant that we have not experienced as much run-off in the portfolio as expected. To date, projects continue to progress toward completion. Uninsured residential mortgage portfolio totalled $967 million at December 31, 2023, a net increase of $11 million (1%) from September 30, 2023 and a net increase of $138 million (17%) from December 31, 2022. Uninsured residential mortgage originations were $68 million in Q4 2023, a decrease of $40 million (37%) from Q3 2023 and an increase of $19 million (40%) from Q4 2022 and $352 million year to date 2023 compared to $369 million year to date 2022. The economic and interest rate environment and its impact on the housing market and borrowers has caused a slowdown in origination volumes in 2023. That said, we have seen an increase in our uninsured residential mortgage renewals with $495 million year to date 2023 compared to $435 million year to date 2022, as borrowers find it more convenient to stay with their existing lender in the current market environment. We actively manage origination and renewal volumes in order to protect our net interest margins and our bottom line. Insured residential mortgage originations were $148 million in Q4 2023, a decrease of $15 million (9%) from Q3 2023 and an increase of $59 million (67%) from Q4 2022, and $523 million year to date 2023 compared to $588 million year to date 2022. This includes no insured residential mortgage commitments originated and sold in Q4 2023 under an agreement with MCAP Securities Limited Partnership (“MSLP”), a wholly owned subsidiary of MCAP, compared to $3 million in Q3 2023 and $44 million in Q4 2022, and $25 million year to date 2023 compared to $228 million year to date 2022. Insured residential mortgage securitization volumes were $128 million in Q4 2023, a decrease of $17 million (11%) from Q3 2023 and an increase of $16 million (14%) from Q4 2022, and $359 million year to date 2023 compared to $426 million year to date 2022. Overall, for the year to date, total insured residential origination volumes (including commitments sold) were lower in 2023 as a result of the higher interest rate environment, particularly for first time home buyers, who would be a significant portion of the borrowers of insured residential mortgages. We use various channels in funding the insured residential mortgage portfolio, in the context of market conditions and net contributions over the life of the mortgages, in order to support our overall business. Dividend • The Board declared a first quarter regular cash dividend of $0.39 per share (a 5.4% increase on an annualized basis from 2023) to be paid March 28, 2024 to shareholders of record as of March 15, 2024. As a Mortgage Investment Corporation (“MIC”), we are entitled to deduct the dividends that we pay to shareholders from our taxable income. Largely as a result of tax timing differences on various investing strategies that we undertook in the second half of 2023, we will not need to distribute a special dividend in the first quarter of 2024. Credit Quality • • • Impaired corporate mortgage ratio1 was 3.26% at December 31, 2023 compared to 1.76% at September 30, 2023 and 1.66% at December 31, 2022. At December 31, 2023, impaired mortgages mainly represent five impaired construction mortgages where asset recovery programs have been initiated and we expect to recover all past due interest and principal. Impaired total mortgage ratio1 was 1.82% at December 31, 2023 compared to 0.99% at September 30, 2023 and 0.89% at December 31, 2022. The increase to our impaired total mortgage ratio is related to the same construction mortgages discussed above. Arrears total mortgage ratio1 was 2.70% at December 31, 2023 compared to 2.16% at September 30, 2023 and 1.57% at December 31, 2022. The majority of our residential mortgage 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 - 27 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 30 days. While greater than 30 days arrears have increased in our residential mortgages, it is still low compared to the size of our portfolio and low relative to industry norms. We believe that we have a quality residential mortgage loan portfolio. With respect to our construction and commercial loan portfolio, we have a strong track record with our default management processes and asset recovery programs as the need arises. Net write-offs were $341,000 (5.7 basis points of the average corporate portfolio) in Q4 2023 compared to 4,000 (0.1 basis points) in Q4 2022; annual write-offs were $341,000 (1.5 basis points) in 2023 compared to $15,053 (0.1 basis points) in 2022. Write-offs in 2023 related to one loan in our uninsured residential mortgage portfolio and interest on one paid out construction loan. Average loan to value ratio (“LTV”) of our uninsured residential mortgage portfolio based on an industry index of current real estate values was 63.4% at December 31, 2023 compared to 67.0% at September 30, 2023 and 62.1% at December 31, 2022. • • Capital • We manage our capital and asset balances based on the regulations and limits of both the Tax Act and OSFI. • In 2023, we renewed our (i) Base Shelf prospectus; and (ii) ATM Program established pursuant to a Prospectus Supplement to our Base Shelf prospectus allowing us to issue up to $30 million common shares to the public from time to time over a 2 year period at the market prices prevailing at the time of sale. The volume and timing of distributions under the ATM Program are determined at our sole discretion. Year to date 2023, we sold 153,400 common shares at a weighted average price of $16.12 for gross proceeds of $2.5 million and net proceeds of $2.1 million including $0.1 million of agent commission paid and $0.3 million of other share issuance costs under the ATM Program. • We issued $14.5 million in new common shares through the Dividend Reinvestment Plan (“DRIP”) in 2023 compared to $7.4 million in 2022. The DRIP participation rate was 30% for the 2023 fourth quarter dividend (2022 fourth quarter dividend - 28%). The DRIP participation rate for 2023 dividends was 29% (2022 - 20%). • • Income tax assets to capital ratio3 was 5.52 at December 31, 2023 compared to 5.14 at September 30, 2023 and 4.93 at December 31, 2022. CET 1 and Tier 1 Capital to risk-weighted assets ratios2 were 17.61% at December 31, 2023 compared to 17.72% at September 30, 2023 and 19.60% at December 31, 2022. Total Capital to risk-weighted assets ratio2 was 17.91% at December 31, 2023 compared to 17.98% at September 30, 2023 and 19.83% at December 31, 2022. Leverage ratio2 was 9.49% at December 31, 2023 compared to 9.76% at September 30, 2023 and 9.83% at December 31, 2022. Beginning June 30, 2023, our total capital and leverage ratios decreased due to OSFI’s revised rules that incorporate Basel III reforms that came into effect. All of our capital and leverage ratios are within our regulatory and internal risk appetite guidelines. 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. 2 These measures have been calculated in accordance with OSFI’s Leverage Requirements and Capital Adequacy Requirements guidelines. Effective March 31, 2020, the total capital ratios in 2022 reflected 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 were included in CET 1 capital. The adjustment to CET 1 capital were 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, was subject to a scaling factor that decreased over time and was 25% in fiscal 2022. 3 For further information refer to the “Income Tax Capital” section of this MD&A. Tax balances are calculated in accordance with the Tax Act. - 28 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) RESULTS OF OPERATIONS Table 3: Net Income (in thousands except for per share amounts and %) For the Periods Ended Net Investment Income - Corporate Assets Q4 2023 Q3 Change Q4 Change Annual Annual Change 2023 (%) 2022 (%) 2023 2022 (%) Mortgage interest $ 47,406 $ 44,144 7% $ 30,747 54% $ 165,997 $ 101,286 64% Equity income from MCAP Commercial LP 4,429 4,310 3% 6,860 (35%) 22,010 26,603 (17%) Non-marketable securities Marketable securities Fees Interest on cash and other income Net loss on securities 2,066 2,056 —% 2,318 (11%) 8,772 8,050 828 728 693 480 19% 52% 914 1,071 (15%) 876 870 675 (5%) 3,625 3,568 (16%) 2,417 2,713 (11%) 35% 4,061 1,533 165% 1,977 (1,581) 225% 1,735 14% (3,622) (12,074) 70% Gain on dilution of investment in MCAP Commercial LP — — n/a 1,726 (100%) 1,048 1,726 (39%) 58,348 51,173 14% 45,807 27% 204,308 133,405 53% Term deposit interest and expenses 24,361 21,083 16% 13,189 85% 78,219 44,222 Mortgage expenses Interest on loans payable Other financial expenses Provision for (recovery of) credit losses 2,098 1,794 17% 1,568 34% 7,490 6,337 1,645 2,241 (27%) 1,407 17% 6,458 3,895 — 2,114 — 399 n/a — n/a 100 210 (52%) 430% (1,091) 294% 4,494 (1,064) 522% 30,218 25,517 18% 15,073 100% 96,761 53,600 81% 28,130 25,656 10% 30,734 (8%) 107,547 79,805 35% Net Investment Income - Securitization Assets Mortgage interest Other securitization income 11,309 9,616 18% 8,607 31% 39,335 31,411 25% 958 453 111% 284 237% 2,234 667 235% 12,267 10,069 22% 8,891 38% 41,569 32,078 30% Interest on financial liabilities from securitization 9,597 8,147 18% 7,005 37% 32,769 24,101 1,219 1,152 6% 1,059 15% 4,548 4,084 — — n/a (11) 100% — (5) 100% 10,816 9,299 16% 8,053 34% 37,317 28,180 32% 1,451 770 88% 838 73% 4,252 3,898 9% General and administrative 2,873 2,527 14% 2,199 31% 10,757 9,030 8,189 8,542 (4%) 7,127 15% 33,572 28,637 5,316 6,015 (12%) 4,928 8% 22,815 19,607 Net income before income taxes 21,392 17,884 20% 24,445 (12%) 78,227 55,066 42% Provision for (recovery of) income taxes 1,537 (595) (358%) 357 331% 729 (288) (353%) Net Income $ 19,855 $ 18,479 7% $ 24,088 (18%) $ 77,498 $ 55,354 40% Basic and diluted earnings per share $ 0.56 $ 0.53 6% $ 0.75 (25%) $ 2.22 $ 1.77 Mortgage expenses Recovery of credit losses Operating Expenses Salaries and benefits Dividends per share - cash Dividends per share - stock 9% 2% 77% 18% 66% 36% 11% 16% 19% 17% 25% 3% $ 0.38 $ 0.38 —% $ 0.36 6% $ 1.48 $ 1.44 $ — $ — n/a $ — n/a $ — $ 0.97 (100%) - 29 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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, 2023 September 30, 2023 December 31, 2022 Average Balance 1 Interest Average Rate 1 Income Average Balance 1 Interest Average Rate 1 Income Average Balance 1 Interest Average Rate 1 Income (in thousands except %) Residential mortgages Insured Uninsured $ 310,538 $ 3,428 4.40 % $ 303,108 $ 3,295 4.04 % $ 178,524 $ 1,450 955,780 15,593 6.50 % 930,150 14,750 6.32 % 830,097 9,638 Uninsured - completed inventory 39,041 1,001 10.17 % 9,576 259 10.73 % 37,462 779 Construction loans Residential Non residential Commercial loans 1,011,924 25,665 9.86 % 963,016 23,450 9.87 % 789,666 16,783 2,546 65 10.15 % 3,222 55 6.71 % 4,970 109 Multi family residential 78,146 1,576 9.00 % 97,728 2,182 8.85 % 97,144 1,853 Other 4,515 78 9.40 % 6,291 153 9.62 % 2,609 135 Mortgages - corporate portfolio $ 2,402,490 $ 47,406 7.80 % $ 2,313,091 $ 44,144 7.63 % $ 1,940,472 $ 30,747 Term deposit interest and expenses 2,118,745 24,361 4.46 % 2,019,738 21,083 4.14 % 1,719,440 13,189 3.23 % 4.63 % 8.25 % 8.43 % 8.70 % 7.56 % 6.53 % 6.27 % 2.95 % Net corporate mortgage spread income1 Spread of corporate mortgages over term deposit interest and expenses 1 $ 23,045 $ 23,061 $ 17,558 3.34 % 3.49 % 3.32 % Average term to maturity (months) Mortgages - corporate Term deposits 12.7 18.5 13.1 19.2 11.4 16.0 Table 5: Net Mortgage Interest Income and Average Rate by Mortgage Portfolio - Annual Average Balance 1 2023 Interest Income Average Rate 1 Average Balance 1 2022 Interest Income Average Rate 1 For the Years Ended December 31 (in thousands except %) Residential mortgages Insured Uninsured $ 249,985 $ 9,964 3.98 % $ 199,731 $ 4,938 897,265 53,987 6.01 % 834,494 33,908 Uninsured - completed inventory 28,588 2,783 9.73 % 37,029 2,497 Construction loans Residential Non residential Commercial loans Multi family residential Other commercial 929,416 90,687 9.65 % 740,442 53,152 1,454 120 8.23 % 5,014 371 94,674 5,851 8,133 323 8.59 % 87,100 5.51 % 14,049 5,458 962 Mortgages - corporate portfolio $ 2,207,233 $ 165,997 7.47 % $ 1,917,859 $ 101,286 2.50 % 4.06 % 6.74 % 7.17 % 7.40 % 6.26 % 6.30 % 5.28 % 1,956,612 Term deposit interest and expenses Net corporate mortgage spread income1 Spread of corporate mortgages over term deposit interest and expenses 1 1 Considered to be a Non-GAAP and other financial measure. The net corporate mortgage spread income and the spread of corporate mortgages over term deposit interest and expenses are indicators of the profitability of income earning assets less the cost of funding. Net corporate mortgage spread income is calculated as the difference between corporate mortgage interest and term deposit interest and expenses, both of which are IFRS measures. Average rate is equal to income/expense divided by the average balance over the period on an annualized basis. Income/expense incorporates items such as penalty income, commitment fee income, origination expense, commission expense and hedging gains or losses. The average 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 rate as applicable. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. 3.90 % 1,737,554 44,222 78,219 87,778 57,064 3.57 % 2.46 % 2.82 % $ $ - 30 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 6: Mortgage Originations (in thousands except %) For the Periods Ended Originations Residential mortgages - insured fixed 2 Residential mortgages - insured adjustable rate 2 Residential mortgages - uninsured Residential mortgages - uninsured completed inventory 1 Residential construction 1 Non-residential construction 1 Commercial 1 Q4 2023 Q3 Change Q4 Change Annual Annual Change 2023 (%) 2022 (%) 2023 2022 (%) $ 122,397 $ 159,495 (23%) $ 69,167 77% $ 481,409 $ 274,443 75% 25,763 3,878 564% 19,566 32% 41,605 313,670 67,751 107,421 (37%) 48,462 40% 352,238 368,752 46,227 9,502 386% 286 16,063% 65,168 17,685 185,939 200,672 (7%) 117,444 58% 658,735 504,534 (87%) (4%) 268% 31% 72 — 3,311 (98%) — n/a — n/a 5,745 (100%) 3,383 3,675 32,600 115 2,842% (89%) 6% $ 448,149 $ 484,279 (7%) $ 260,670 72% $ 1,606,213 $ 1,511,799 1 Construction, commercial and completed inventory originations represent all advances on loans. 2 Includes insured residential mortgage commitments sold to MSLP that the Company originated. Overview For Q4 2023 and year to date 2023, the increase in the spread of corporate mortgages over term deposit interest and expenses from Q4 2022 and year to date 2022 was mainly attributable to the rising interest rate environment’s impact on floating rates on residential construction loans that are now well above their floor rates. Factors influencing the small decline in spread in Q4 2023 compared to Q3 2023 were (i) an increase in average term deposit rates generally exceeding the pace of increase in our mortgage portfolio, given the amount of term deposits we originated coupled with the impact of maturing lower-rate term deposits; (ii) higher competition for residential mortgage originations and forecasted interest rate cuts pushing mortgage rates lower. That said, we have been actively managing our interest rate risk during this period of higher interest rates by continually reviewing, and if necessary, changing the laddering of the duration of our term deposits relative to our corporate mortgage portfolio as well as utilizing hedging strategies to lock-in spreads. We continue to make a conscious effort to focus on residential lending spreads, which have compressed. Residential Mortgage Lending Residential mortgages provide comparatively lower yields given their risk profile, with uninsured residential mortgages providing higher yields than insured residential mortgages. We opportunistically invest in our residential uninsured completed inventory portfolio which often migrate from our own construction book. Total origination volumes year to date 2023 on our residential mortgages were slightly lower compared to year to date 2022. The economic and interest rate environment and its impact on the housing market and borrowers, has caused a slowdown in origination volumes. Origination volumes for the second half of 2023 did improve compared to earlier in the year as we continued to increase our mortgage lending in the Alberta and British Columbia urban markets. We also saw an increase in our uninsured residential mortgage renewals with $495 million year to date 2023 compared to $435 million year to date 2022, as borrowers find it more convenient to stay with their existing lender in the current market environment. Our insured adjustable rate residential mortgage product also saw a slowdown in the current year due to higher short term interest rates and uncertainty around further Bank of Canada rate increases; however, in Q4 2023 we did see more appetite for this product versus earlier in the year as many borrowers believe that interest rates may have peaked. Of note, unlike traditional insured variable rate mortgages, payments on our insured adjustable rate residential mortgages adjust as interest rates change with no changes to loan amortization. We also underwrite our insured adjustable rate mortgages for credit quality accordingly and our borrowers expect their payments under this product to change as interest rates change. We continue to enhance our internal sales and marketing capabilities, and strengthen relationships and customer service with the broker community. We will continue to invest in new technology and add new products that fit within our risk appetite to further enhance our service experience and broaden our offering to our customers. We have an agreement with MSLP, a wholly owned subsidiary of MCAP, whereby MSLP may buy our insured residential mortgage commitments. We originated and sold $nil in commitments in Q4 2023 (Q3 2023 - $3 million; Q4 2022 - $44 million) and $25 million year to date 2023 (year to date 2022 - $228 million) under this agreement. We securitize our insured residential mortgages opportunistically through the CMHC National Housing Act (“NHA”) Mortgage- Backed Securities (“MBS”) program. Our Q4 2023 residential mortgage securitization volumes were $128 million (Q3 2023 - - 31 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) $144 million; Q4 2022 - $112 million) and $359 million year to date 2023 (year to date 2022 - $426 million). Overall, for the year to date, total insured residential origination volumes (including commitments sold) were lower in 2023 as a result of the higher interest rate environment, particularly for first time home buyers, who would be a significant portion of the borrowers of insured residential mortgages. Renewals of securitized mortgages fluctuate each period depending on the maturities in the securitization portfolio. Mortgage Renewal Rights Through our origination platform, we retain the renewal rights to internally originated residential mortgages that are held as corporate or securitized mortgages or have been sold to third parties and derecognized from the consolidated balance sheet. At maturity, we have the right to renew these mortgages, which we believe will contribute to future income including renewal income. At December 31, 2023, we had the renewal rights to $3.1 billion of residential mortgages (September 30, 2023 - $3.0 billion; December 31, 2022 - $2.6 billion). Construction and Commercial We continue to focus on growing our balances in our residential construction portfolio in selected markets, with our preferred borrowers and risk profile as they tend to provide comparatively higher yields given their risk profile. Higher average balances and higher average residential construction rates from the higher interest rate environment for the quarter and year to date mainly contributed to a higher corporate mortgage interest compared to prior periods. Some projects have experienced construction delays due to labour shortages and cost overruns from higher interest costs and the inflationary impact on building supplies, which has led to some loan extension and amendment requests. To date, projects continue to progress toward completion. Current impaired construction and commercial mortgages include five construction mortgages where asset recovery programs have already been initiated and we expect to recover all past due principal and interest. We have a strong track record with our default management processes and asset recovery programs as the need arises. Our realized loan losses on our construction portfolio have been negligible in the last 10 years. Our prudent underwriting approach requires satisfactory borrower liquidity, guarantor net worth and presale requirements as applicable to the respective markets. Equity Income from MCAP As a result of the higher interest rate environment, in Q4 2023, MCAP’s origination volumes were $5.3 billion, a decrease from $5.8 billion in Q4 2022. At November 30, 2023 (we account for MCAP on a one-month lag basis), MCAP had $154.3 billion of assets under management compared to $153.7 billion at August 31, 2023 and $153.7 billion at November 30, 2022. Equity income from MCAP totalled $4.4 million in Q4 2023, a decrease of $2.5 million from $6.9 million in Q4 2022. For Q4 2023, the decrease in equity income from MCAP was primarily due to (i) lower mortgage origination fees from lower mortgage volumes sold; (ii) a decrease in fair value adjustments on mortgages due to the higher rate environment; and (iii) higher interest expense on credit facilities. These were partially offset by (i) higher securitized mortgage interest income from a higher average securitized portfolio; (ii) higher servicing and administration income from higher assets under management; and (iii) higher investment revenue from higher average mortgage rates on non-securitized mortgages. For year to date 2023, equity income from MCAP totalled $22.0 million, a decrease of $4.6 million from $26.6 million year to date 2022. For the year to date, the decrease in equity income from MCAP was due to the same factors as for Q4 2023 mentioned above. We recognize equity income from MCAP on a one-month lag such that our 2023 equity income from MCAP is based on MCAP’s net income for the period ended November 30, 2023. 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 KingSett High Yield Fund (“KSHYF”): We received distribution income of $1.7 million in Q4 2023 (Q4 2022 - $1.7 million) and $7.5 million year to date 2023 (year to date 2022 - $6.2 million). The distribution yield1 on this portfolio was 12.62% in Q4 2023 (Q4 2022 - 12.91%) and 13.90% year to date 2023 (year to date 2022 - 12.70%). KingSett Senior Mortgage Fund LP (“KSSMF”): We received distribution income of $0.3 million in Q4 2023 (Q4 2022 - $0.2 million) and $1.3 million year to date 2023 (year to date 2022 - $0.7 million). The distribution yield1 on this portfolio was 8.67% in Q4 2023 (Q4 2022 - 9.50%) and 9.37% year to date 2023 (year to date 2022 - 9.46%). The distribution yield has been calculated based on the average portfolio carrying value. For further information, refer to the “Other Corporate Assets” section of this MD&A. 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. - 32 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Marketable Securities Marketable securities income consists of distributions from the REIT portfolio. The distribution yield1 on this portfolio was 7.23% in Q4 2023 (Q4 2022 - 6.48%) and 6.44% year to date 2023 (year to date 2022 - 6.01%). For the current quarter and year to date, the higher distribution yield compared to prior year periods is mainly due to the decline in the fair market value of the REIT portfolio. The distribution yield has been calculated based on the average portfolio carrying value. Fees Fee income can vary between quarters given the fact that certain fees such as loan amendment and extension fees do not occur on a routine basis. Net Gain (Loss) on Securities In Q4 2023, we recorded a $2.0 million net unrealized gain on securities compared to a $1.7 million net unrealized gain on securities in Q4 2022. Our year to date net unrealized loss on securities was $3.6 million for 2023 compared to a year to date net realized and unrealized loss on securities of $12.1 million for 2022. Q4 2023’s net unrealized gain is made up of an unrealized gain on marketable securities of $4.4 million and an unrealized loss on non-marketable securities of $2.5 million. Year to date 2023’s net unrealized loss is made up of a $3.2 million unrealized loss on marketable securities and a $0.4 million unrealized loss on non-marketable securities. Year to date 2023 and 2022 saw REIT prices decrease due to Bank of Canada interest rate increases and uncertainty around future rate increases and recessionary pressures. In Q4 2023, we saw REIT prices rebound as sentiment around future interest rate increases tapered. We expect continued volatility in the REIT market given the economic uncertainty and interest rate environment. We are long term investors and continue to realize the benefits of solid cash flows and distributions from these investments. In 2022, we had a $1.8 million realized loss on one REIT in our portfolio that had a mandatory corporate action resulting in its privatization. With respect to our non-marketable securities, our year to date unrealized loss is comprised of (i) a $3.4 million unrealized loss mainly related to two underlying properties from general commercial real estate headwinds increasing capitalization rates as well as increased debt servicing costs that impact overall returns; and (ii) a $3.0 million unrealized gain related to construction and leasing completion and value-add activity on two underlying property investments. Our non-marketable securities are either held for long-term capital appreciation or distribution income and they tend to improve the diversification and risk and reward characteristics of our overall investment portfolio; however, the real estate development funds tend to have less predictable cash flows that are predicated on the completion of the development projects within the funds. Gain on Dilution of Investment in MCAP In 2023, MCAP issued additional class B units 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 $1.0 million (2022 - $1.7 million). Term Deposit Interest and Expenses The increase in term deposit interest and expenses for the quarters and year to date 2023 compared to prior periods was mostly due to a higher average term deposit balance and higher average term deposit rates. Since the beginning of 2022, average term deposit rates have increased mainly due to the rising interest rate environment. In Q1 2022, we also saw dislocation in the term deposit market precipitated by the Russia/Ukraine conflict causing high demand by financial institutions for term deposits. More recently, deposit customers were seeking higher rates due to actual Bank of Canada policy interest rate increases and current economic uncertainty. That said, we have been actively managing our interest rate risk during this period of higher interest rates by changing the laddering of the duration of our term deposits relative to our corporate mortgage portfolio and utilizing hedging strategies. Term deposit expenses include costs related to insurance, operating infrastructure and administration. 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”) Canada Mortgage Bonds (“CMB”) program. Our total new securitization volumes were $128 million in Q4 2023 (Q4 2022 - $112 million) and $359 million year to date 2023 (year to date 2022 - $426 million). The increase in Q4 2023 was mainly due to higher insured residential mortgage originations as we continued to increase our mortgage lending in the Alberta and British Columbia urban markets. The decrease compared to the prior year to date was mainly due to lower insured residential mortgage originations (a market trend as a result of the higher interest rate environment, making home purchases less affordable, especially for first time home buyers). For further information on the market MBS and CMB programs, refer to the “Financial Position” section of this MD&A. 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. - 33 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 7: Net Mortgage Interest Income and Average Rate for Securitized Mortgage Portfolio - Quarterly For the Quarters Ended December 31, 2023 September 30, 2023 December 31, 2022 (in thousands except %) Average Balance1 Interest Average Rate 1 Income Average Balance 1 Interest Average Rate 1 Income Average Balance 1 Interest Average Rate 1 Income Mortgages - securitized portfolio Financial liabilities from securitization 2 Net securitized mortgage spread income 1 Spread of securitized mortgages over liabilities 1 $ 1,825,364 $ 11,309 2.48 % $ 1,723,456 $ 9,616 2.28 % $ 1,706,239 $ 8,607 1,836,593 9,597 2.09 % 1,738,809 8,147 1.86 % 1,717,942 7,005 2.01 % 1.62 % $ 1,712 $ 1,469 $ 1,602 0.39 % 0.42 % 0.39 % Table 8: Net Mortgage Interest Income and Average Rate for Securitized Mortgage Portfolio - Annual For the Years Ended December 31 (in thousands except %) Average Balance 1 2023 Interest Income Average Rate 1 Average Balance 1 2022 Interest Income Average Rate 1 39,335 32,769 1,754,287 $ 1,743,170 $ 2.25 % $ 1,665,512 $ Mortgages - securitized portfolio Financial liabilities from securitization 2 Net securitized mortgage spread income 1 Spread of securitized mortgages over liabilities 1 1 Considered to be a non-GAAP and other financial measure. The net securitized mortgage spread income and spread of securitized mortgages over liabilities are indicators of the profitability of securitized assets less securitized liabilities. Net securitized mortgage spread income is calculated as the difference between securitized mortgage interest and interest on financial liabilities from securitization, both of which are IFRS measures. Average rate is equal to income/expense divided by the average balance over the period on an annualized basis. Income/expense incorporates items such as penalty income and indemnity expense. The average 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. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. 2 Beginning in Q4 2022, includes the net hedging impact. See “Derivatives and Hedging” sub-section of this MD&A. 1.86 % 1,681,607 24,101 31,411 0.39 % 1.89 % 1.42 % 0.47 % 7,310 6,566 $ $ In 2023, we have seen spreads decline on securitizations compared to 2022 as a result of a decline in the spread of Government of Canada bond yields versus our mortgage rates. Government of Canada bond yields rose significantly as we entered a higher interest rate environment. We have seen some stabilization in 2023 due to the impact of our hedging program discussed below. Derivatives and Hedging Cash Flow Hedging We may enter into Government of Canada bond forward contracts to hedge interest rate risk arising from the impact of (i) movements in interest rates between the time insured residential mortgages are funded and the time that these mortgages are securitized; and (ii) movements in interest rates between the time term deposit funding is forecasted to be required and the time that the actual funding occurs. Hedges are structured such that the fair value movements of the hedge instruments offset, within a reasonable range, the changes in fair value of either the pool of fixed-rate mortgages or term deposits due to interest rate fluctuations. The term of our cash flow hedges is generally less than 60 days. The derivative instruments are settled at either the time of securitization or funding of the term deposits, as applicable. We apply cash flow hedge accounting to these derivative transactions with the intention to recognize the effective matching of the gain or loss on the derivative transactions with the recognition of the related interest expense for either the securitization or term deposit funding. At December 31, 2023, we had $nil of derivative financial instruments outstanding relating to cash flow hedges (September 30, 2023 - $0.2 million; December 31, 2022 - $nil). In Q4 2023, we had net realized fair value losses of $2.1 million (Q3 2023 - $0.6 million fair value gains; Q4 2022 - $0.2 million fair value losses), and in 2023, we had net realized fair value gains of $0.4 million (year to date 2022 - $0.2 million fair value losses) on our derivative transactions recognized in accumulated other comprehensive income. Fair Value Hedging We may enter into interest rate swaps to hedge interest rate risk arising from fair value changes in our fixed-rate term deposits due to movements in interest rates. Hedges are structured such that the fair value movements of the hedge instruments offset, within a reasonable range, the changes in fair value of the pool of term deposits due to interest rate fluctuations. The terms of our fair value hedges are generally less than 2 years. The derivative instruments are settled at the time of maturity of the pool of term deposits. We apply fair value hedge accounting to these derivative transactions with the intention to recognize the effective matching of the fair value gain or loss on the derivative transactions with the fair value gain or loss on the pool of term - 34 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) deposits, within a reasonable range. Any unmatched fair value is recorded in term deposit interest and expenses as hedge ineffectiveness. At December 31, 2023, the Company had $0.2 million of derivative financial instruments outstanding relating to fair value hedges (September 30, 2023 - $nil; December 31, 2022 - $nil). Achieving hedge accounting for both our cash flow and fair values hedges allows us to reduce our net income volatility related to changes in interest rates. All of our derivative transactions are with highly rated Canadian financial institutions. For further information, refer to Note 13 to the consolidated financial statements. 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 Provision for (recovery of) impaired corporate mortgages Residential mortgages Uninsured Construction loans Commercial loans Other commercial Provision for (recovery of) performing corporate mortgages Residential mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Multi family residential Other commercial Q4 2023 Q3 Change Q4 Change Annual Annual Change 2023 (%) 2022 (%) 2023 2022 (%) $ 244 883 204 711 20% 24% (225) (995) 77% 902 (80) 1,228% 41 — — 41 495% $ 479 $ n/a 1,594 n/a — 2,100% 2,073 21 — — 21 2,181% n/a n/a 9,771% — 527 261 431 — 208 36 355 n/a (1) 100% 153% 625% (10) 5,370% (51) 612% — 996 147 — n/a (962) 204% (145) 201% 21% (1,170) 137% 1,527 (132) 1,257% (17) (125) (1) (3) 86% 67% 92 14 (118%) (235) 212 (211%) (107%) (31) (58) 47% 1,201 471 155% (1,126) 207% 2,404 (1,085) 322% Other provisions (recoveries) 11 8 38% (6) 283% 17 — n/a Total corporate provision for (recovery of) credit losses 2,114 399 430% (1,091) 294% 4,494 (1,064) 522% Provision for (recovery of) performing securitized mortgages — — n/a (11) 100% — (5) 100% Total provision for (recovery of) credit losses $ 2,114 $ 399 430% $ (1,102) 292% $ 4,494 $ (1,069) 520% Corporate mortgage portfolio data: Provision for (recovery of) credit losses, net Net write offs Net write offs (basis points) $ 2,103 $ 391 438% $ (1,085) 294% $ 4,477 $ (1,064) 521% $ 341 $ — 5.7 — n/a $ n/a 4 8,425% $ 341 $ 15 2,173% 0.1 5,600% 1.5 0.1 1,400% 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 ECL 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 provisions. Accordingly, provisions are expected to vary between periods. - 35 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) We had a provision for credit losses on our corporate mortgage portfolio of $2.1 million in Q4 2023, which was mainly due to growth in our portfolio, less favourable underlying economic forecasts relating to unemployment rates and housing prices, and model enhancements. In Q4 2022, we had a recovery of credit losses of $1.1 million mainly due to a more favourable provincial outlook and assumptions for our loans in Alberta, as well as improving economic forecasts from expectations that both inflation and Bank of Canada interest rate increases may be nearing a peak. We had a provision for credit losses on our corporate mortgage portfolio of $4.5 million for year to date 2023 mainly due to the same factors as described for Q4 2023. The current inflationary and higher interest rate environment has increased the level of uncertainty with respect to management’s judgements and estimates including the probability weights assigned to each scenario, the impacts of monetary policy on macroeconomic indicators and the mortgage portfolio. These judgments and uncertainties have been made or assessed with reference to the facts, projections and other circumstances at December 31, 2023. IFRS 9, Financial Instruments (“IFRS 9”) does not permit the use of hindsight in measuring provisions for credit losses. Since December 31, 2023, forecasts around these uncertainties have continued to evolve. Any new forward-looking information subsequent to December 31, 2023, 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. We continue to monitor our portfolio in arrears on a regular basis to detect specific significant stress or deterioration. Operating Expenses Table 10: Operating Expenses (in thousands except %) For the Periods Ended Salaries and benefits General and administrative Q4 2023 Q3 2023 Change (%) Q4 2022 Change (%) Annual 2023 Annual Change (%) 2022 $ $ 5,316 $ 2,873 8,189 $ 6,015 2,527 8,542 (12%) $ 14% (4%) $ 4,928 2,199 7,127 8% $ 22,815 $ 19,607 31% 9,030 15% $ 33,572 $ 28,637 10,757 16% 19% 17% The increase in salaries and benefits in 2023 is due to additional resources as well as pay increases, enhancements to our wellness, benefit and compensation plans and higher share unit plan accruals. The increase in general and administrative expenses in 2023 is primarily due to professional fees and technology costs relating to new system enhancements for our business operations and customer experience. - 36 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Taxable Income The table below provides a reconciliation between consolidated net income (loss) for accounting purposes and non- consolidated taxable income (loss). Taxable income is calculated in accordance with the Tax Act. In order to take advantage of the tax benefits of our MIC status, we pay out 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. Table 11: Taxable Income Reconciliation (in thousands) For the Periods Ended Consolidated net income for accounting purposes Adjustments to calculate taxable income (loss): Reverse: Equity income from MCAP - accounting purposes Add: MCAP taxable income (loss) Add: Taxable capital gain on re-organization of investment in MCAP 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 loss (gain) on securities 4 Add: Capital gains (losses) Reverse: Loss (income) earned in subsidiaries 5 Deduct: Gain on dilution of MCAP 6 Other items Taxable Income (Loss)1 Q4 2023 Q4 2022 Annual 2023 Annual 2022 $ 19,855 $ 24,088 $ 77,498 $ 55,354 32,951 — 2,747 11,114 (1,135) 2,740 (238) (17,249) (4,429) (5,574) — 1,428 2,957 (15,210) (522) (4,449) — 2,012 — (512) (6,860) (22,010) (26,603) (5,264) (21,893) (9,122) 32,951 (1,085) 9,880 (78) (3,333) (13,802) 12,083 3,212 (285) — (5,091) 509 (1,726) (1,048) 722 (456) $ (4,444) $ 35,551 $ 45,720 $ 40,427 (3,033) (1,734) — (581) (1,726) 201 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 for year to date 2023 compared to year to date 2022 was primarily due to higher net corporate mortgage spread income and lower taxable loss recorded by MCAP. This was partially offset by higher insured multi family securitization origination costs in Q4 2023 that are deducted for tax upfront. As well, in the prior year we recorded a taxable capital gain on re-organization of our investment in MCAP. As a MIC, we pay out all of our taxable income to shareholders through dividends. Largely as a result of tax timing differences on insured multi family securitizations, we will not need to distribute a special dividend in the first quarter of 2024. - 37 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) FINANCIAL POSITION Assets Table 12: Assets (in thousands except %) December 31 September 30 2023 2023 Change December 31 2022 (%) Change (%) Corporate Assets $ Cash and cash equivalents Marketable securities Mortgages Non-marketable securities Equity investment in MCAP Commercial LP Deferred tax asset Derivative financial instruments Other assets 60,345 $ 50,320 2,414,855 109,943 111,367 336 198 8,965 2,756,329 50,473 46,081 2,337,717 111,590 110,222 1,872 247 8,534 2,666,736 20% $ 9% 3% (1%) 1% (82%) (20%) 5% 3% 78,210 53,743 1,939,494 97,228 106,168 1,095 — 7,182 2,283,120 Securitization Assets Cash held in trust Mortgages Other assets 30,909 1,929,948 21,901 1,982,758 4,739,087 $ 28,307 1,835,318 10,121 1,873,746 4,540,482 $ 9% 5% 116% 6% 4% $ 34,531 1,751,303 9,722 1,795,556 4,078,676 (23%) (6%) 25% 13% 5% (69%) n/a 25% 21% (10%) 10% 125% 10% 16% Our total corporate and securitized assets increased compared to September 30, 2023 and December 31, 2022 primarily due to origination volumes, including strong renewal activity in our residential mortgage portfolio, outpacing maturities. In selecting residential construction projects to finance, we focus more on the affordable segments of the housing market, such as first time and move up homebuyers. These segments are characterized by affordable price points, lower price volatility and steady sales volumes based on continued family formation and migration primarily in major urban markets and their surrounding areas in proximity to transit. We focus on a diverse portfolio of predominantly first mortgage positions with 65-75% LTVs in our normal segment of lending. At December 31, 2023, the average outstanding construction loan balance was $11 million (September 30, 2023 - $10 million; December 31, 2022 - $8 million) with a maximum individual loan commitment of $40 million (September 30, 2023 - $40 million; December 31, 2022 - $40 million). - 38 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Securitized Mortgages We are an NHA MBS issuer, which involves the securitization of insured mortgages to create MBS. Securitization assets consist of insured residential mortgages that have been securitized through our internal market MBS program and the CHT CMB program. For further information, refer to Note 11 to the consolidated financial statements. 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 our 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” section of this MD&A. We securitized $128 million in Q4 2023 (Q3 2023 - $144 million; Q4 2022 - $112 million) and $359 million year to date 2023 (year to date 2022 - $426 million) of insured residential mortgages through the market MBS program and CMB program. Overall, for the year to date, total insured residential origination volumes (including commitments sold) were lower in 2023 as a result of the higher interest rate environment, particularly for first time home buyers, who would be a significant portion of the borrowers of insured residential mortgages. We securitized $150 million in Q4 2023 (Q4 2022 - $nil) and $150 million year to date 2023 (year to date 2022 - $nil) of insured multi family mortgages through the CMB program. 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 $1 million in Q4 2023 (Q4 2022 - $nil) and $1 million year to date 2023 (year to date 2022 - $nil). 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, 2023, we held $125 million of retained MBS on our balance sheet (September 30, 2023 - $101 million; December 31, 2022 - $63 million), which is included in the insured residential mortgage portfolio in corporate mortgages. Table 13: Mortgage Summary (in thousands except %) Corporate portfolio Residential mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Multi family residential Other commercial December 31 September 30 2023 2023 Change December 31 2022 (%) Change (%) $ 276,685 $ 966,726 54,367 1,045,768 269,271 956,188 18,201 997,423 70,103 1,206 2,414,855 90,285 6,349 2,337,717 3% $ 1% 199% 5% 144,569 828,540 36,680 825,126 (22%) (81%) 3% 98,238 6,341 1,939,494 91% 17% 48% 27% (29%) (81%) 25% 10% 18% Securitized portfolio 1,929,948 1,835,318 5% 1,751,303 $ 4,344,803 $ 4,173,035 4% $ 3,690,797 - 39 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 14: Corporate Mortgage Portfolio Continuity for Year to Date 2023 (in thousands) Residential Mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Total Balance, beginning of the period $ 144,569 $ 828,540 $ Originations1 Payments and prepayments Maturities Securitizations Sale of commitments to MCAP Capitalization and amortization of fees 622,369 (10,960) (79,251) (376,902) (24,876) 1,736 768,195 (18,236) (612,970) — — 1,197 Balance, end of the period $ 276,685 $ 966,726 $ 36,680 $ 65,167 (47,301) — — — (179) 3,675 (37,231) 825,126 $ 104,579 $ 1,939,494 2,119,790 660,384 (558,272) (444,544) (692,221) (376,902) (24,876) 7,842 71,309 $ 2,414,855 — — — 4,802 — — — 286 54,367 $ 1,045,768 $ 1 includes originations, including insured residential mortgage commitments originated and sold to MCAP, renewals and transfers in from our securitization portfolio. Table 15: Corporate Mortgage Portfolio Continuity for Year to Date 2022 (in thousands) Residential Mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Total Balance, beginning of the period $ 196,595 $ 783,061 $ Originations1 Payments and prepayments Maturities Securitizations Sale of commitments and loans to MCAP Capitalization and amortization of fees 679,500 (9,497) (68,352) (425,696) 706,505 (22,569) (640,869) — (227,449) (532) — 2,412 Balance, end of the period $ 144,569 $ 828,540 $ 49,431 $ 15,982 (29,083) 684,298 $ 660,948 (520,927) — — — — 92,761 $ 1,806,146 2,100,615 37,680 (607,979) (25,903) (709,221) (425,696) — — — 350 36,680 $ (2,549) 3,356 (229,998) 5,627 825,126 $ 104,579 $ 1,939,494 — 41 1 includes originations, including insured residential mortgage commitments originated and sold to MCAP, renewals and transfers in from our securitization portfolio. 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 and relationships and we maintain a high quality of underwriting. We have also enhanced our internal sales and marketing capabilities, strengthened relationships and customer service with the broker community and increased underwriting capacity. We continue to focus on our construction and commercial portfolio growing it in selected markets, with our preferred borrowers and risk profile given they tend to provide higher yields compared to our residential mortgages. Figure 1: Total Corporate and Securitized Mortgage Portfolio (in thousands) - 40 - Net PrincipalSecuritizedCorporateDec 2021Mar 2022Jun 2022Sep 2022Dec 2022Mar 2023Jun 2023Sep 2023Dec 2023$1,000,000$1,250,000$1,500,000$1,750,000$2,000,000$2,250,000$2,500,000 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Figure 2: Corporate Mortgage Portfolio Composition by Product Type (in thousands) Construction loans Residential mortgages uninsured Residential mortgages insured Commercial loans multi family residential Commercial loans other Residential mortgages uninsured - completed inventory Dec 31, 2022 $825,126 (43%) $828,540 (43%) $144,569 (7%) $98,238 (5%) Mar 31, 2023 $856,165 (42%) $848,342 (42%) $187,218 (9%) $102,114 (5%) Jun 30, 2023 $956,569 (43%) $906,074 (41%) $244,600 (11%) $102,114 (5%) Sep 30, 2023 $997,423 (42%) $956,188 (41%) $269,271 (12%) Dec 31, 2023 $1,045,768 (44%) $966,726 (40%) $276,685 (11%) $90,285 (4%) $70,103 (3%) $6,341 (0%) $4,845 (0%) $5,267 (0%) $6,349 (0%) $1,206 (0%) $36,680 (2%) $38,060 (2%) $9,803 (0%) $18,201 (1%) $54,367 (2%) Note: Amounts in parentheses represent the percentage of the corporate portfolio represented by the individual product type. Table 16: Mortgage Portfolio Geographic Distribution Ontario British Columbia Alberta Atlantic Provinces Quebec Other December 31, 2023 September 30, 2023 December 31, 2022 Corporate Securitized Corporate Securitized Corporate Securitized 60.4 % 30.3 % 8.2 % 0.4 % 0.1 % 0.6 % 100.0 % 85.7 % 3.3 % 8.5 % 1.4 % 0.4 % 0.7 % 100.0 % 59.4 % 29.4 % 9.9 % 0.4 % 0.3 % 0.6 % 100.0 % 87.1 % 3.1 % 7.7 % 1.1 % 0.4 % 0.6 % 100.0 % 57.6 % 29.4 % 11.0 % 0.3 % 1.2 % 0.5 % 100.0 % 86.4 % 3.3 % 8.0 % 1.3 % 0.5 % 0.5 % 100.0 % - 41 - Net PrincipalConstruction loansResidential mortgagesuninsuredResidential mortgagesinsuredCommercial loansmulti family residentialCommercial loansotherResidential mortgagesuninsured -completedinventory$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000$800,000$900,000$1,000,0002023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Credit Quality Table 17: Arrears and Impaired Mortgages (in thousands except %) Impaired mortgages Corporate Residential mortgages - insured Residential mortgages - uninsured Construction loans Commercial loans - other Securitized Total impaired mortgages Impaired corporate mortgage ratio 1 Impaired total mortgage ratio 1 Mortgage arrears Corporate Residential mortgages - insured Residential mortgages - uninsured Residential mortgages - uninsured - completed inventory Construction loans Commercial loans - other Total corporate mortgage arrears Total securitized mortgage arrears Total mortgage arrears Staging analysis - corporate portfolio Stage 2 Residential mortgages - insured Residential mortgages - uninsured Residential mortgages - uninsured - completed inventory Construction loans Commercial loans - multi-family residential Commercial loans - other $ Stage 3 Residential mortgages - insured Residential mortgages - uninsured Construction loans Commercial loans - other 11,572 184,514 2,221 5,967 39,798 — 244,072 599 5,971 72,206 — 78,776 December 31 September 30 Change December 31 Change (%) 2022 2023 2023 (%) $ $ 599 5,971 72,206 — 78,776 343 79,119 3.26 % 1.82 % $ 813 39,770 — 72,206 — 112,789 4,661 $ 117,450 $ $ $ $ $ 483 3,931 31,787 4,855 41,056 310 41,366 24% $ 52% 127% (100%) 92% 11% 91% $ — 186 32,085 — 32,271 550 32,821 n/a 3,110% 125% n/a 144% (38%) 141% 1.76 % 1.50% 0.99 % 0.83% 1.66 % 1.60% 0.89 % 0.93% 849 35,246 2,218 42,345 4,855 85,513 4,438 89,951 9,808 186,623 2,218 32,388 39,821 — 270,858 483 3,931 31,787 4,855 41,056 (4%) $ 13% (100%) 71% (100%) 32% 5% 31% $ 511 14,177 2,577 32,085 5,080 54,430 3,439 57,869 18% $ (1%) —% (82%) —% n/a (10%) 5,157 132,934 2,577 7,341 27,406 5,080 180,495 59% 181% (100%) 125% (100%) 107% 36% 103% 124% 39% (14%) (19%) 45% (100%) 35% 24% 52% 127% (100%) 92% — 186 32,085 — 32,271 n/a 3,110% 125% n/a 144% Total stage 2 and 3 corporate mortgages $ 322,848 $ 311,914 4% $ 212,766 52% Allowance for credit losses Corporate Allowance on performing mortgages Allowance on impaired mortgages Securitized - allowance on performing mortgages Total allowance for credit losses $ $ 7,953 1,972 9,925 — 9,925 $ $ 6,752 1,220 7,972 — 7,972 18% $ 62% 24% n/a 24% $ 5,549 49 5,598 — 5,598 43% 3,924% 77% n/a 77% 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. - 42 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Figure 3: Arrears and Impaired Mortgage Ratios1 The majority of our residential mortgage 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. While greater than 30 days arrears have increased in our residential mortgages, it is still low compared to the size of our portfolio and low relative to industry norms. We believe that we have a quality residential mortgage loan portfolio. With respect to our construction and commercial loan portfolio, we have a strong track record with our default management processes and asset recovery programs as the need arises. The impaired corporate and total mortgage ratios, as presented above, reflects impaired (stage 3) mortgages under IFRS 9 as a percentage of the corporate or total mortgage portfolios, as applicable. At December 31, 2023, impaired mortgages are mainly five construction mortgages where we have initiated asset recovery programs. We expect to recover all past due interest and principal on these loans. Our realized loan losses on our construction portfolio have been negligible in the last 10 years. In the event of a protracted economic downturn due to the current inflationary and higher interest rate environment, or for any other reason, we would expect to observe an increase in overall mortgage default and arrears rates as realization periods on collateral become longer and borrowers adjust to the new economic conditions and potentially changing real estate values in such an event. An economic downturn could also result in an increase in our allowance for credit losses. MCAN utilizes a number of risk assessment and mitigation strategies to lessen the potential impact for loss on residential mortgages; however, traditional actions may not be available or effective. For further information regarding corporate mortgages by risk rating, refer to Note 7 to the consolidated financial statements. 1 Considered to be a non-GAAP and other financial measure. For further details, refer to the "Non-GAAP and Other Financial Measures" section of this MD&A. Non-GAAP and other financial measures and ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. - 43 - Impaired Corporate Mortgage RatioImpaired Total Mortgage RatioArrears Total Mortgage RatioDec 2021Mar 2022Jun 2022Sep 2022Dec 2022Mar 2023Jun 2023Sep 2023Dec 20230.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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 residential 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 residential uninsured and residential uninsured - completed inventory loans. The HELOC balances displayed below relate to insured residential mortgages that were acquired by MCAN previously. We do not originate HELOCs at this time. Table 18: Residential Mortgages by Province at December 31, 2023 (in thousands except %) Insured % Uninsured % HELOCs % Corporate Securitized Insured % Total % Ontario Alberta British Columbia Quebec Atlantic Provinces Other Total $ 202,183 52,071 8,516 2,090 6,405 5,346 $ 276,611 73.0 % $ 888,284 27,844 18.9 % 96,305 3.1 % 1,221 0.8 % 2,307 2.3 % 5,132 1.9 % 100.0 % $ 1,021,093 100.0 % $ 87.1 % $ 2.7 % 9.4 % 0.1 % 0.2 % 0.5 % 59 15 — — — — 74 79.7 % $ 1,655,249 20.3 % 164,398 62,971 7,298 26,521 13,511 85.7 % $ 2,745,775 244,328 167,792 10,609 35,233 23,989 100.0 % $ 1,929,948 100.0 % $ 3,227,726 8.5 % 3.3 % 0.4 % 1.4 % 0.7 % — % — % — % — % 85.1 % 7.6 % 5.2 % 0.3 % 1.1 % 0.7 % 100.0 % Table 19: Residential Mortgages by Province at December 31, 2022 (in thousands except %) Insured % Uninsured % HELOCs % Corporate Securitized Insured % Total % Ontario Alberta British Columbia Quebec Atlantic Provinces Other Total $ 96,828 34,926 4,762 3,239 3,793 923 $ 144,471 67.1 % $ 745,343 30,319 24.2 % 66,010 3.3 % 16,045 2.2 % 2,754 2.6 % 4,749 0.6 % 100.0 % $ 865,220 86.2 % $ 3.5 % 7.6 % 1.9 % 0.3 % 0.5 % 100.0 % $ 80 18 — — — — 98 81.6 % $ 1,514,305 18.4 % 139,420 57,828 7,896 22,817 9,037 86.4 % $ 2,356,556 204,683 128,600 27,180 29,364 14,709 100.0 % $ 1,751,303 100.0 % $ 2,761,092 8.0 % 3.3 % 0.5 % 1.3 % 0.5 % — % — % — % — % 85.3 % 7.4 % 4.7 % 1.0 % 1.1 % 0.5 % 100.0 % Table 20: Residential Mortgages by Amortization Period at December 31, 2023 (in thousands except %) Up to 20 Years >20 to 25 Years >25 to 30 Years >30 to 35 Years Total Corporate Securitized Total $ 182,403 $ 292,137 $ 450,377 $ 372,861 $ 1,297,778 14.1 % 22.4 % 34.7 % 28.8 % 100.0 % $ 585,539 $ 1,343,070 $ 1,339 $ 30.3 % 69.6 % 0.1 % — — % $ 1,929,948 100.0 % $ 767,942 $ 1,635,207 $ 451,716 $ 372,861 $ 3,227,726 23.8 % 50.6 % 14.0 % 11.6 % 100.0 % - 44 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 21: Residential Mortgages by Amortization Period at December 31, 2022 (in thousands except %) Up to 20 Years >20 to 25 Years >25 to 30 Years >30 to 35 Years Total Corporate Securitized Total $ 121,572 $ 171,941 $ 453,693 $ 262,583 $ 1,009,789 12.0 % 17.1 % 44.9 % 26.0 % 100.0 % $ 415,475 $ 1,260,250 $ 75,231 $ 347 $ 1,751,303 23.7 % 72.0 % 4.3 % — % 100.0 % $ 537,047 $ 1,432,191 $ 528,924 $ 262,930 $ 2,761,092 19.5 % 51.8 % 19.2 % 9.5 % 100.0 % Table 22: Average LTV Ratio for Uninsured Residential Mortgage Originations (in thousands except %) For the Periods Ended Ontario Alberta British Columbia Quebec Other Q4 Average LTV 2023 Q4 Average LTV 2022 Annual Average LTV 2023 Annual Average LTV 2022 $ 63,778 601 49,599 — — $ 113,978 67.4 % $ 46,350 310 61.2 % 2,088 68.5 % — — % — — % 67.8 % $ 48,748 69.2 % $ 335,693 58.2 % 7,651 61.4 % 73,912 — 150 68.8 % $ 417,406 — % — % 68.4 % $ 335,012 70.1 % 7,992 68.4 % 38,584 4,432 — % 417 22.2 % 68.4 % $ 386,437 68.0 % 69.6 % 69.7 % 52.8 % 67.1 % 68.1 % Table 23: Average LTV Ratios at Origination by Mortgage Portfolio Corporate portfolio Residential mortgages Insured Uninsured1 Uninsured - completed inventory Construction loans Residential Commercial loans Multi family residential Other commercial Securitized portfolio December 31 2023 December 31 2022 69.6 % 66.0 % 63.4 % 68.0 % 63.1 % 56.6 % 63.7 % 65.7 % 75.9 % 63.0 % 65.7 % 74.6 % 62.1 % 65.0 % 79.9 % 80.1 % 72.0 % 72.2 % 1 MCAN’s corporate uninsured residential mortgage portfolio (including completed inventory loans) is secured with a weighted average LTV at origination of 65.9% at December 31, 2023 (December 31, 2022 - 65.6%). Based on an industry index that incorporates current real estate values, the ratios would be 63.4% at December 31, 2023 (December 31, 2022 - 62.1%). Other Corporate Assets Cash and Cash Equivalents At December 31, 2023, our cash balance was $60 million (September 30, 2023 - $50 million; December 31, 2022 - $78 million). As part of liquidity management, we align our liquidity position to our liquidity and funding requirements. Cash and cash equivalents, which include cash balances with banks and overnight term deposits, provide liquidity to meet maturing term deposits and new mortgage funding commitments. We actively manage our cash and cash equivalents in the context of our prudent liquidity and cash management practices. See “Liquidity and Funding Risk” sub-section of this MD&A. - 45 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Marketable Securities Marketable securities, consisting of REITs, provide additional liquidity at yields in excess of cash and cash equivalents. We actively manage our portfolio, as appropriate. At December 31, 2023, the portfolio balance was $50 million (September 30, 2023 - $46 million; December 31, 2022 - $54 million). Year to date 2023, we had $3 million of unrealized fair value losses due to volatility in REIT stocks as a result of Bank of Canada interest rate increases resuming and uncertainty around future rate increases and recessionary pressures. We expect continued volatility in the REIT market given the economic uncertainty and interest rate environment. We are long term investors and continue to realize the benefits of solid cash flows and distributions from these investments. Non-Marketable Securities At December 31, 2023, our non-marketable securities balance was $110 million (September 30, 2023 - $112 million; December 31, 2022 - $97 million). The movement to our security balance from prior periods mainly relates to funding of capital advances and a $0.4 million unrealized loss comprised of (i) a $3.4 million unrealized loss mainly related to two underlying properties from general commercial real estate headwinds increasing capitalization rates as well as increased debt servicing costs that impact overall returns; and (ii) a $3.0 million unrealized gain related to construction and leasing completion and value-add activity on two underlying property investments. Our non-marketable securities are either held for long-term capital appreciation or distribution income and they tend to improve the diversification and risk and reward characteristics of our overall investment portfolio; however, the real estate development funds tend to have less predictable cash flows that are predicated on the completion of the development projects within the funds. We have $76 million in remaining capital advances for non-marketable securities expected to fund mainly over the next five years. Some of the real estate funds that we are invested in, have been slower to deploy committed capital then initially expected as finding the right opportunities in the current market environment takes more time. Our non-marketable securities consist of the following: KSHYF: We invest in the KSHYF representing a 5.9% equity interest at December 31, 2023 (September 30, 2023 - 5.9%; December 31, 2022 - 5.9%). At December 31, 2023, the carrying value of our investment was $55 million (September 30, 2023 - $55 million; December 31, 2022 - $53 million). The KSHYF invests in mortgages secured by real estate including mezzanine, subordinate and bridge mortgages. At December 31, 2023, our total remaining commitment to the KSHYF was $33 million, consisting of $4 million of capital advances for the KSHYF and $29 million to support credit facilities throughout the life of the KSHYF. KSSMF: We invest in KSSMF representing a 2.1% partnership interest at December 31, 2023 (September 30, 2023 - 2.1%; December 31, 2022 - 1.5%). At December 31, 2023, the carrying value of our investment was $16 million (September 30, 2023 - $16 million; December 31, 2022 - $9 million) with an additional $9 million remaining commitment. KSSMF invests in a diversified portfolio of mortgage loans secured by Canadian residential and commercial real estate. TAS LP 3 (“TAS 3”): We invest in TAS 3 representing a 9.7% partnership interest at December 31, 2023 (September 30, 2023 - 9.7%; December 31, 2022 - 9.7%). At December 31, 2023, the carrying value of our investment was $8 million (September 30, 2023 - $10 million; December 31, 2022 - $9 million) with a $3 million additional commitment finalized subsequent to year end. TAS 3 invests in, and develops, residential and mixed use properties with a focus on assets that drive environmental and social impacts. TAS LP 3 Co-Invest LP (“TAS Co”): We invest in TAS Co representing a 34.8% partnership interest at December 31, 2023 (September 30, 2023 - 34.8%; December 31, 2022 - 34.8%). At December 31, 2023, the carrying value of our investment was $4 million (September 30, 2023 - $6 million; December 31, 2022 - $4 million) with an additional $1 million remaining commitment. TAS Co has an approximately 17.5% to 24% interest in some of the same properties invested in by TAS 3 as noted above. Pearl Group Growth Fund LP (“Pearl”): We invest in Pearl representing a 6.9% partnership interest at December 31, 2023 (September 30, 2023 - 6.9%; December 31, 2022 - 6.9%). At December 31, 2023, the carrying value of our investment was $2 million (September 30, 2023 - $2 million; December 31, 2022 - $2 million) with an additional $1 million remaining commitment. Pearl executes a value-add strategy by acquiring, redeveloping, entitling, leasing and project managing commercial and multi- unit residential properties in the Greater Toronto area. Crown Realty V Limited Partnership (“Crown”): We invest in Crown representing a 7.7% partnership interest at December 31, 2023 (September 30, 2023 - 7.7%; December 31, 2022 - 7.7%). At December 31, 2023, the carrying value of our investment was $8 million (September 30, 2023 - $9 million; December 31, 2022 - $9 million) with an additional $10 million remaining commitment. Crown integrates environmental and social focused initiatives to acquire, lease, manage and reposition commercial real estate properties across Ontario. Harbour Equity JV Development Fund VI (“Harbour”): We invest in Harbour representing a 12.1% partnership interest at December 31, 2023 (September 30, 2023 - 12.1%; December 31, 2022 - 12.1%). At December 31, 2023, the carrying value of our investment was $3 million (September 30, 2023 - $3 million; December 31, 2022 - $2 million) with an additional $7 million remaining commitment. Harbour provides equity capital to real estate developers in joint ventures or co-ownership structures for ground up development of residential and mixed-use properties across Canada. - 46 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) TAS Impact Development LP 4 (“TAS 4”): We invest in TAS 4 representing a 14.8% partnership interest (September 30, 2023 - 14.8%; December 31, 2022 - 17.6%). At December 31, 2023, the carrying value of our investment was $2 million (September 30, 2023 - $2 million; December 31, 2022 - $2 million) with an additional $18 million remaining commitment. TAS 4 acquires urban residential, mixed-use development and repositioning properties with a focus on developing and repositioning assets that drive environmental and social impacts. Broccolini Limited Partnership No. 8 (“Broccolini”): We invest in Broccolini representing a 5.7% partnership interest at December 31, 2023 (September 30, 2023 - 5.7%; December 31, 2022 - 5.7%). At December 31, 2023, the carrying value of our investment was $5 million (September 30, 2023 - $2 million; December 31, 2022 - $2 million) with an additional $18 million remaining commitment. Broccolini manages real estate development funds primarily focused on ground up development of industrial, residential and mixed-use properties across Canada, with a focus on Ontario and Quebec. Fiera Real Estate Development Fund IV, LP (“Fiera”): We invest in Fiera representing a 6.5% partnership interest at December 31, 2023 (September 30, 2023 - 6.5%; December 31, 2022 - 7.1%). At December 31, 2023, the carrying value of our investment was $6 million (September 30, 2023 - $6 million; December 31, 2022 - $4 million) with an additional $9 million remaining commitment. Fiera focuses on development and re-development of multi-residential, industrial, office and retail properties, located in growing major Canadian urban markets. Securitization Notes: During 2019, we invested $18 million in Class A Securitization Notes. The final distribution date was March 15, 2023 and we received all scheduled principal and interest repayments over the life of the Securitization Notes. The issuer of the Securitization Notes was a wholly-owned subsidiary of MCAP. Equity Investment in MCAP We have a strategic investment in MCAP, which is Canada’s largest independent mortgage finance company serving many institutional investors and over 400,000 homeowners. We hold a 13.73% equity interest in MCAP (September 30, 2023 - 13.73%; December 31, 2022 - 13.65%), which represents 4.0 million units held by MCAN at December 31, 2023 (September 30, 2023 - 4.0 million; December 31, 2022 - 4.0 million) of the 29.1 million total outstanding MCAP partnership units (September 30, 2023 - 29.1 million; December 31, 2022 - 29.3 million). The investment had a net book value of $111 million at December 31, 2023 (September 30, 2023 - $110 million; December 31, 2022 - $106 million). The net book value is not indicative of the fair market value of our equity interest in MCAP. During Q4 2023, we received $3.3 million of unitholder distributions from MCAP (Q3 2023 - $3.9 million; Q4 2022 - $5.7 million). For year to date 2023, we have received $17.9 million of unitholder distributions from MCAP (year to date 2022 - $18.3 million). As we account for this investment using the equity method, the receipt of distributions reduces the carrying value of the investment in MCAP. Pursuant to 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. Any sale by MCAN of its units in MCAP pursuant to this majority partner right, could result in a taxable gain, which could be material. 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. - 47 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Liabilities and Shareholders’ Equity Table 24: Liabilities and Shareholders' Equity (in thousands except %) Corporate Liabilities Term deposits Loans payable Other liabilities Securitization Liabilities Financial liabilities from securitization Shareholders’ Equity Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Term Deposits December 31 September 30 2023 2023 Change December 31 2022 (%) Change (%) $ 2,200,102 $ 64,683 25,575 2,290,360 2,094,788 83,235 10,513 2,188,536 5% $ (22%) 143% 5% 1,819,830 6,532 22,616 1,848,978 1,916,883 1,916,883 4,207,243 1,824,258 1,824,258 4,012,794 5% 5% 5% 1,740,388 1,740,388 3,589,366 21% 890% 13% 24% 10% 10% 17% 406,528 510 124,708 98 531,844 4,739,087 $ 406,581 510 118,315 2,282 527,688 4,540,482 $ —% —% 5% (96%) 1% 4% $ 389,986 510 98,990 (176) 489,310 4,078,676 4% —% 26% (156%) 9% 16% Our primary source of funding for our corporate operations is the issuance of term deposits that are eligible for 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. Loans Payable We have a secured demand revolver facility from a Canadian Schedule I Chartered bank with a facility limit of $220 million. The facility is due and payable upon demand. Under the facility, there is a sublimit for issued letters of credit which are used for the purpose of supporting developer obligations to municipalities in conjunction with residential construction loans. We also have a $100 million senior secured mortgage warehouse facility with a Canadian Schedule I Chartered bank. The facility is used to fund insured residential mortgages prior to securitization activities. Financial Liabilities from Securitization Financial liabilities from securitization relate to our participation in the market MBS and CMB programs, 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 “Financial Position” section of this MD&A. Share Capital Share capital activity may reflect new common shares issued through the DRIP, Executive Share Purchase Plan, special stock dividend and other share offerings and their related costs, as applicable. For further information, refer to the “Description of Capital Structure” section of this MD&A and Note 18 to the consolidated financial statements. Retained Earnings Retained earnings activity for Q4 2023 consists of net income of $19.9 million (Q3 2023 - $18.5 million; Q4 2022 - $24.1 million) less dividends of $13.5 million (Q3 2023 - $13.3 million; Q4 2022 - $11.5 million). Retained earnings activity for year to date - 48 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 2023 consists of a net income of $77.5 million (year to date 2022 - $55.4 million) less dividends of $51.8 million (year to date 2022 - $73.8 million). Accumulated Other Comprehensive Income We may enter into Government of Canada bond forward contracts to hedge interest rate risk arising from the impact of (i) movements in interest rates between the time insured residential mortgages are funded and the time that these mortgages are securitized; and (ii) movements in interest rates between the time term deposit funding is forecasted to be required and the time that the actual funding occurs. Achieving hedge accounting allows us to reduce our net income volatility related to changes in interest rates. In Q4 2023, we had net realized fair value losses of $2.1 million (Q3 2023 - $0.6 million fair value gains; Q4 2022 - $0.2 million fair value losses), and in 2023, we had net realized fair value gains of $0.4 million (year to date 2022 - $0.2 million fair value losses) on our derivative transactions recognized in accumulated other comprehensive income. For further information, refer to the “Derivatives and Hedging” sub-section of this MD&A and Note 13 to the consolidated financial statements. 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. We calculate our income tax capital in accordance with the Tax Act. Table 25: Income Tax Capital (in thousands except ratios) Income tax assets Consolidated assets Adjustment for assets in subsidiaries Non-consolidated assets in MIC entity Add: corporate mortgage allowances Less: securitization assets 1 Adjustments to equity investments in MCAP and subsidiaries Other adjustments Income tax liabilities Consolidated liabilities Adjustment for liabilities in subsidiaries Non-consolidated liabilities in MIC entity Less: securitization liabilities 1 Income tax capital Income tax capital ratios Income tax assets to capital ratio Income tax liabilities to capital ratio December 31 2023 December 31 2022 $ 4,739,087 $ (27,520) 4,711,567 8,149 (1,953,086) (59,274) 5,501 $ 2,712,857 $ 4,078,676 29,833 4,108,509 5,545 (1,768,828) (41,090) 4,064 2,308,200 $ $ $ 4,207,243 $ (71,761) 4,135,482 (1,913,719) 2,221,763 $ 3,589,366 (11,537) 3,577,829 (1,738,216) 1,839,613 491,094 $ 468,587 5.52 4.52 4.93 3.93 1 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 in accordance with the Tax Act. - 49 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Regulatory Capital As a Loan Company under 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. 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, 2023, we were in compliance with our internal target minimum CET 1, Tier 1 and Total Capital to risk weighted asset and leverage ratios. Our total capital and leverage ratios have decreased due to OSFI’s new revised rules that incorporate Basel III reforms. We maintain prudent capital planning practices to ensure that we are adequately capitalized and continue to satisfy minimum standards and internal targets. - 50 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 26: Regulatory Capital 3 (in thousands except %) OSFI Regulatory Ratios Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Deduction from equity investment in MCAP 1 Eligible Stage 1 and Stage 2 mortgage allowances 3 Common Equity Tier 1 and Tier 1 Capital (A) Tier 2 Capital Total Capital (D) Total Exposure/Regulatory Assets Consolidated assets Less: deduction for equity investment in MCAP 1 Other adjustments 2 Total On-Balance Sheet Exposures Mortgages and non-marketable securities funding commitments Letters of credit Total Off-Balance Sheet Items December 31 2023 December 31 2022 $ $ $ $ $ $ 406,528 510 124,708 98 (58,183) — 473,661 7,953 481,614 4,739,087 (58,183) 1,900 4,682,804 286,655 24,318 310,973 389,986 510 98,990 (176) (57,201) 357 432,466 5,192 437,658 4,078,676 (57,201) 2,994 4,024,469 352,069 23,994 376,063 Total Exposure/Regulatory Assets (B) $ 4,993,777 $ 4,400,532 Leverage ratio (A / B) Risk-weighted assets (C) Regulatory Capital Ratios 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) 9.49 % 9.83 % $ 2,689,764 $ 2,206,580 17.61 % 17.61 % 17.91 % 19.60 % 19.60 % 19.83 % 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 mortgage allowances. 2 Certain items, such as negative cash balances, are excluded from total exposures but included in consolidated assets. 3 These measures have been calculated in accordance with OSFI’s Capital Adequacy Requirements and Leverage Requirements guidelines. Effective March 31, 2020, the total capital ratios in 2022 reflected 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 were included in CET 1 capital. The adjustment to CET 1 capital was 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, was subject to a scaling factor that decreased over time and was 25% in fiscal 2022. - 51 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 27: Regulatory Risk-Weighted Assets 1 (in thousands except %) December 31, 2023 December 31, 2022 Average Rate Risk- Weighted Assets Amounts Average Rate Risk- Weighted Assets Amounts 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 Derivative Financial Instruments $ 60,345 30,909 50,320 2,414,855 1,929,948 109,943 111,367 336 30,866 198 4,739,087 21 % $ 20 % 100 % 12,449 $ 6,182 50,320 67 % 1,626,403 104,989 188,885 132,961 336 30,867 — 2,153,392 5 % 172 % 119 % 100 % 100 % — % 78,210 34,531 53,743 1,939,494 1,751,303 97,228 106,168 1,095 16,904 — 4,078,676 21 % $ 20 % 100 % 16,241 6,906 53,743 66 % 1,279,396 96,599 174,338 48,967 1,095 16,904 — 1,694,189 6 % 179 % 46 % 100 % 100 % — % Off-Balance Sheet Items Letters of credit Commitments Derivative Financial Instruments Charge for operational risk 2 48,637 716,638 314,197 50 % 43 % — % 24,319 306,764 276 331,359 205,013 47,988 704,139 — 50 % 47 % — % 23,994 330,109 — 354,103 158,288 Risk-Weighted Assets $ 2,689,764 $ 2,206,580 1 This measure has been calculated in accordance with OSFI’s Capital Adequacy Requirements guidelines. 2 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. - 52 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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 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, which emphasizes accountability, and supports a common understanding among all key stakeholders of how the Company manages its risks. Figure 4: Roles and Accountabilities Risk Governance The Board oversees the design and implementation of our ERMF, while team members at all levels of the organization are accountable for managing day-to-day risks. The Board is supported by Board committees, senior management committees and an experienced senior management team. - 53 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) MCAN’s Risk Governance structure is illustrated in the following diagram: Figure 5: Risk Governance Structure Note: 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 pursuant to 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 top and emerging risks, regularly assessing the Company’s capacity to withstand potential adverse events and ensuring management allocates appropriate resources to risk management. The Audit Committee is accountable for the oversight of financial reporting and the information technology (“IT”) function, the adequacy and effectiveness of internal controls and the performance of the finance, internal audit and IT functions. 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. - 54 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) • • • • • • 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 RCC 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. ALCO serves as an important component of liquidity and interest rate risk management by providing strategic direction of these risk types. Capital Commitments Committee (“CCC”): 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. 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. - 55 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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; Satisfy MIC requirements while under chosen MIC status; Maintain balance in our 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; and Ensure financial and operational 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 team members. Within MCAN’s Three-Lines-of-Defence risk governance structure, all team members 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 team members are aware of how their behaviors may impact the organization. MCAN’s risk culture is further promoted through one of our core DRIVE values, “Risk managers are in all of us”, which is embedded as a core element of team member performance and compensation. Stress Testing Stress testing is a key risk management tool that supplements risk management practices by (i) providing an assessment of our effectiveness and capacity to withstand potential adverse events, including an increase in unemployment rates, rising interest rates, and a decline in real estate prices; and (ii) aiding in refining our risk limits and chosen strategies to mitigate the impact of potential adverse events. 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, liquidity 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. Liquidity and Funding Risk Liquidity risk is the risk that cash and liquid assets are insufficient to honour all cash outflow commitments (both on- and off- balance sheet) as they come due. Funding risk is the risk that available sources of liquidity and long term funding are insufficient to sustain business growth or mitigate funding gaps. - 56 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) On a daily basis, we monitor our liquidity position to ensure that the level of liquid assets held, together with our ability to raise new deposits and other funding sources, are sufficient to meet our commitments, deposit maturity obligations, and other financial obligations. On a monthly basis, we plan out our funding using a 12-month rolling forecast of expected business growth and balance sheet obligations. This provides us with a forward-looking perspective on the adequacy of our funding and liquidity channels. Stress testing is performed using multiple scenarios incorporating simultaneous impacts to the Company’s funding sources and uses. MCAN’s stress testing is designed to assess the viability of liquidity and funding channels, as well as contingency funding to remain within Board-approved liquidity risk limits. At December 31, 2023, the Company held sufficient funding and liquidity to meet all requirements under the stress test scenarios. The Board is accountable for the approval of the Liquidity Risk Management Framework (“LRMF”). The LRMF establishes a framework to maintain sufficient funding and liquidity, including holding a portfolio of high-quality liquid assets to meet commitments as they come due. The LRMF provides guidance for 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 and 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. 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 funding and liquidity risk profile, including funding strategies, performance against established liquidity risk limits, stress testing and contingency funding plan status. Results of the monitoring of liquidity risk are reported to the Board and any exceptions or breach of key limits are immediately reported by ALCO to the ERM&CC. At December 31, 2023, the Company was in full compliance with the LRMF, key liquidity risk limits and regulatory requirements. 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 secured demand 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 $220 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. We have a credit agreement with a Canadian Schedule I Chartered bank for a $100 million senior secured mortgage warehouse facility. The facility is used to fund insured residential mortgages prior to securitization activities. This facility provides improved funding in response to our continued growth. We have an agreement with MSLP, a wholly owned subsidiary of MCAP, whereby the Company can sell to MSLP insured residential mortgage commitments. This agreement provides liquidity and the opportunity to fund other core business activities in line with our strategy. The Company continues to enhance monitoring of its liquidity risk profile, its funding markets such as the term deposit and securitization markets and its liquidity risk position. OSFI’s Liquidity Adequacy Requirements 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, 2023, we were in compliance with the LCR and NCCF metrics. - 57 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Our sources and uses of liquidity are outlined in the table below. For information on our off-balance sheet commitments refer to the “Off-Balance Sheet Arrangements” section of this MD&A. Table 28: Liquidity Analysis At December 31, 2023 (in thousands) $ Sources of liquidity Cash and cash equivalents Marketable securities Mortgages - corporate Non-marketable securities Derivative Financial Instruments 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 > 5 Years Total 60,345 $ 50,320 470,526 — — 2,256 583,447 — $ — 1,082,561 — 32 — 1,082,593 — $ — 713,302 — 166 — 713,468 — $ — 126,237 — — — 126,237 — $ — 22,229 109,943 — — 132,172 60,345 50,320 2,414,855 109,943 198 2,256 2,637,917 282,818 64,683 22,180 369,681 803,926 — 657 804,583 790,132 — 1,956 792,088 323,226 — 782 324,008 — — — — 2,200,102 64,683 25,575 2,290,360 Net liquidity surplus (deficit) $ 213,766 $ 278,010 $ (78,620) $ (197,771) $ 132,172 $ 347,557 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 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. Capital Commitments Committee, 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 Risk and Compliance Committee, which is comprised of management, monitors and challenges credit risk exposures, monitors portfolio and underwriting quality and performance against credit risk limits on a monthly basis. The ERM&CC reviews all material risks affecting the Company on a quarterly basis, which includes the identification, assessment, and monitoring of material credit risks. We identify potential risks in our mortgage portfolio by way of regular review of market and portfolio metrics, which are a key component of quarterly market reports provided to the Board by management. Existing risks in our mortgage portfolio are identified by arrears reporting, portfolio diversification analysis, post funding monitoring and risk rating trends of the entire mortgage portfolio. The aforementioned reporting and analysis provide adequate monitoring of and control over our exposure to credit risk. We assign a credit score and risk rating for all mortgages at the time of underwriting based on the assessed credit quality of the borrower and the value of the underlying real estate. Risk ratings are reviewed annually at a minimum, and more frequently whenever there is an amendment, or a material change such as a default or impairment. As part of our credit risk management process, we monitor our loan portfolio for early indicators of potential 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. - 58 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Considering factors such as borrower equity, portfolio loan to value ratios and project liquidity, at December 31, 2023 and 2022 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. As a response to economic uncertainty, the Company has increased the frequency of monitoring and reporting of our credit risk profile, including enhanced arrears reporting and pipeline monitoring. Real estate prices have been, and may continue to be, impacted by inflationary pressures on the economy and higher interest rates, which may adversely impact the ability of borrowers to make timely payments on mortgages. 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 investments in non-marketable securities, where maximum credit exposure includes our total remaining commitments. 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. The uninsured single family LGD model segments the portfolio by loan to value ratios to differentiate LGDs at the borrower level as well. 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 is segmented by product type. EAD is forecasted 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, etc.), 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 - 59 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) rates where we have mismatched repricing and maturity dates may have an adverse effect on our financial condition and results of operations. The Interest Rate Risk Management Framework, which is reviewed and approved by the Board, provides guidance on MCAN’s interest rate risk measurement tools, including stress testing, roles and accountabilities, and monitoring and reporting requirements. Additionally, it establishes 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. 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 a duration-based framework to measure structural risk and 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 (i) movements in interest rates between the time residential mortgages are committed to borrowers and the time that the mortgage is funded; (ii) movements in interest rates between the time insured residential mortgages are funded and the time that these mortgages are securitized; (iii) movements in interest rates between the time term deposit funding is forecasted to be required and the time that the actual funding occurs; and (iv) movements in interest rates during the term of the fixed-rate term deposits and floating rate construction and commercial portfolios. To manage these risks, we may employ various hedging strategies. For further information, refer to “Derivatives and Hedging” sub-section of this MD&A and Note 13 to the consolidated financial statements. An immediate and sustained parallel 1% increase to market interest rates on interest-bearing financial instruments at December 31, 2023 would have an estimated positive effect of $5.0 million (September 30, 2023 - positive effect of $7.7 million; December 31, 2022 - positive effect of $8.3 million) to net income over the following twelve month period. An immediate and sustained parallel 1% decrease to market interest rates at December 31, 2023 would have an estimated adverse effect of $3.8 million (September 30, 2023 - adverse effect of $7.4 million; December 31, 2022 - adverse effect of $8.3 million) to net income over the following twelve month period. The following tables present the assets and liabilities of the Company by interest rate sensitivity at December 31, 2023 and December 31, 2022 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. Non-interest sensitive items include marketable securities, equity investment in MCAP and other assets and liabilities. Yield spread represents the difference between the weighted average interest rate of the assets and liabilities in a certain category. Table 29: Interest Rate Sensitivity at December 31, 2023 At December 31, 2023 (in thousands except %) Assets Corporate Securitization Liabilities Corporate Securitization Floating Rate Within 3 Months > 3 Months to 1 Year > 1 to 3 Years > 3 to 5 Years > 5 Years Non Interest Sensitive Total $ 1,265,585 126,874 1,392,459 $ 162,442 $ 433,336 $ 504,327 $ 101,094 $ 8,614 — 1,262,090 16,427 8,614 1,766,417 178,869 145,074 578,410 379,482 480,576 $ 280,931 $ 2,756,329 1,982,758 4,739,087 52,811 333,742 64,682 126,103 190,785 282,827 7,420 290,247 803,952 137,127 941,079 790,157 1,199,547 1,989,704 323,237 446,686 769,923 — — — 25,505 — 25,505 2,290,360 1,916,883 4,207,243 Shareholders’ Equity — — — — — — 531,844 531,844 GAP $ 1,201,674 $ (111,378) $ (362,669) $ (223,287) $ (289,347) $ 8,614 $ (223,607) $ — YIELD SPREAD 4.36 % 2.07 % 1.56 % 0.74 % (0.03) % 5.39 % - 60 - Assets Corporate Securitization Liabilities Corporate Securitization 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 30: Interest Rate Sensitivity at December 31, 2022 At December 31, 2022 (in thousands except %) Floating Rate Within 3 Months > 3 Months to 1 Year > 1 to 3 Years > 3 to 5 Years > 5 Years Non Interest Sensitive Total $ 1,047,280 $ 148,537 5,314 132,705 153,851 1,179,985 $ 520,269 51,191 571,460 $ 223,858 730,114 953,972 $ 76,963 831,979 908,942 $ 1,819 — 1,819 $ 264,394 $ 2,283,120 1,795,556 4,078,676 44,253 308,647 6,533 131,077 137,610 171,543 4,259 175,802 760,203 48,331 808,534 691,343 688,660 1,380,003 196,741 868,061 1,064,802 — — — — 22,615 — 22,615 1,848,978 1,740,388 3,589,366 489,310 489,310 Shareholders’ Equity — — — — — GAP $ 1,042,375 $ (21,951) $ (237,074) $ (426,031) $ (155,860) $ 1,819 $ (203,278) $ — YIELD SPREAD 4.97 % 1.34 % 1.49 % 0.79 % 0.04 % 4.87 % Market Risk Market risk is the exposure to adverse changes in the value of financial assets. Market risk includes price risk on marketable securities, execution risk, real estate values and commodity prices, among others. Any changes in these market risk factors may negatively affect the value of our financial assets, which may have an adverse effect on our financial condition and results of operations. We do not undertake trading activities as part of our regular operations, and therefore are not exposed to risks associated with activities such as market making, arbitrage or proprietary trading. Our marketable 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. Our non-marketable securities portfolios are focused on equity investments in Canadian real estate focused funds. The portfolio is susceptible to the overall outlook of the real estate market, execution risk from respective fund managers, and other market conditions, such as spreads, housing prices, land prices, construction costs and adverse changes in interest rates or capitalization rates. In 2024, we expect continued market volatility across our marketable securities, reflective of the uncertain macroeconomic environment and corresponding investor sentiment. Despite this potential volatility, our investment strategy is to invest in high quality REITs over the long term. 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. Third Party Risk Within operational risk, third party risk is the risk of third parties failing to provide goods and services or otherwise carrying out activities in accordance with their arrangements. This risk also considers similar risks as it relates to fourth and fifth parties. 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 and expose MCAN to negative outcomes. - 61 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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 contracts to determine if an arrangement is material and to assess the overall risk inherent in that contract. All outsourced contracts are subject to a risk management program, which includes detailed monitoring activities. If an outsourced contract is material, it is subjected to an enhanced risk management program. Technology and Cyber Security Risk Technology risk encompasses the risk of IT systems, tools, and practices being unable to support business and user needs. Cyber security risk is the risk of loss of confidentiality, integrity, or availability of information, data, or information (or control) systems as a result of actions taken by internal or external malicious actors. In particular, the cybersecurity threat landscape remains elevated globally, where threat actors are increasingly utilizing sophisticated tools and technologies to disrupt business operations. Any such system failure or material data loss, either accidental through misconfiguration or purposeful through threat actors, could generate disruption to business practices, create financial loss, and damage MCAN’s reputational risk profile. The IT Management Committee, which is comprised of executive management, is accountable for overseeing technology and cybersecurity risk management activities and reports cyber security, system performance, and technology change management risks to the Audit Committee. Likewise the Vice President, IT reports on the technology and cyber risk profile to the Audit Committee on a quarterly basis. We also leverage third parties to provide cyber security insurance, incremental technical expertise, infrastructure and security monitoring support, and periodic cyber security assessment assistance, such as vulnerability/penetration testing and broader risk assessments. These activities are complemented by crisis management plans, including a Cyber Security Incident Response Plan, Disaster Recovery Plan, and process-level Business Continuity Plans, all of which are supported by an executive Crisis Management Team. Strategically, MCAN continues to invest in its technology and data infrastructure to enhance operational processes, resiliency, cyber security, analytical capabilities, and digital-first customer offerings. Borrower Fraud Risk In the loan underwriting process, we rely on information provided by potential borrowers and other third parties, including mortgage brokers and insurers. We may also rely on the representations of potential borrowers and third parties as to the accuracy and completeness of that information. Our financial performance may be negatively impacted if this information is intentionally misleading or does not fairly represent the financial condition of the potential borrower. We frequently review and continuously 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, broker and insurer engagement, independent income verification procedures, and other quality control and quality assurance processes. MCAN controls and monitors for borrower misrepresentation and maintains awareness of industry reported instances of mortgage fraud. To date, document falsification has not had a material impact on MCAN or its financial position or performance. Nonetheless, MCAN acknowledges that the likelihood of borrower misrepresentation may increase as mortgage qualification requirements tighten. MCAN maintains a robust internal control environment to mitigate borrower fraud. 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. 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. - 62 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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. Legislative and Regulatory Change MCAN is impacted by federal, provincial and municipal decision-making bodies, each of which continue to evolve their expectations or legislation to address systemic risks, such as debt serviceability, housing supply, climate change, and key sub- categories of operational risk (e.g. technology and cyber risk, third party risk, resiliency, etc.). Legislative and regulatory changes have the potential to both positively and negatively impact operational capacity or financial performance. MCAN continues to remain abreast of the evolving regulatory and legislative landscape and maintains regular correspondence with regulators and industry partners. Strategic Risk Strategic risk is the risk of loss due to fluctuations in the external business environment, or failure to adjust strategies and business activities to adapt or respond appropriately. Strategic risk factors include the evolving business environment, an inability to proactively evolve business strategies or poor execution of strategic objectives. Strategic risk is managed by the CEO and Management. The Board approves the Company’s strategies at least annually and regularly reviews results and needed changes as applicable against those strategies. Strategies are aligned to be consistent with the RAF, regulatory and other internal requirements. Business and Economic Environment MCAN’s business is both directly and indirectly impacted by macroeconomic forces such as commodity prices, consumer confidence, geopolitical conflicts, and interest rate changes (see “Inflationary Pressures & Debt Serviceability” sub-section for additional detail on borrower impacts). Increased interest rates have negatively impacted the Canadian housing market, including sales activity and housing prices, and may similarly impact new housing starts by builders. Conversely, MCAN’s business is supported by strong underlying fundamentals associated with immigration and lack of housing supply, forecasted stabilizing interest rates, and legislative changes favourable to housing development in major markets. These fundamentals support the longer-term resiliency of the Canadian housing market. Nonetheless, with a potential recessionary environment in 2024, Management continues to monitor the increased uncertainty related to the housing market and the broader economy. Inflationary Pressures & Debt Serviceability The inflationary environment continues to be undesirable, driven by factors such as consumer demand, resilient employment and wage growth, supply chain pressures, and geopolitical risks. With high interest rates, Canadian households may continue to be challenged through 2024, particularly those subject to renewals of their mortgage. Additionally, construction budgets or sales strategies for construction projects, which are subject to inflationary pressures from increased material costs and rising rates, may need to be amended. Management actively manages, monitors, and stress tests its portfolio on a regular basis, and follows established practices of working collaboratively with borrowers across all segments. For additional details on how MCAN manages its interest rate risk, specifically, refer to the “Interest Rate Risk” section of this MD&A. 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. Competition Risk MCAN competes with other mortgage, construction, and commercial lenders. As prefaced in the “Business and Economic Environment” section of this MD&A, reduced volumes in housing sales and new housing starts may create an environment of increased competition for available new originations. MCAN remains focused on maintaining competitive rates while driving retention of its existing borrowers. - 63 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Furthermore, 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 therein are dependent on market competition. If 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 market presence. 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. MCAN’s RAF notes the satisfaction of MIC requirements as one of its core risk appetite statements. Reputational Risk Reputational risk is a risk of loss or adverse impacts resulting from damages to MCAN’s reputation. 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, team members, 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. ESG Risks ESG risks are the environmental, social and governance factors that may affect a company’s financial position or reputation. For MCAN, this includes (i) considering environmental stewardship in our decision-making; (ii) equity, diversity, and inclusion in our people; and (iii) behaviours aligned to our values that promote integrity in our workplace at all levels. Environmentally, MCAN minimizes both its direct and indirect emissions as a hybrid organization with a minimal physical geographic footprint. We further mitigate these risks by complying with all applicable environmental laws. We also consider in our decision-making, key social risk factors across demographic changes, housing affordability, and diversity, equity, and inclusion. MCAN is focused on lending on residential density developments in urban communities close to mass transit. Management also cultivates an inclusive and diverse team supported by a set of comprehensive policies and programs that promote ethical behaviours, team culture, career development, volunteerism, and community giving. MCAN maintains strong governance practices across all risk types through management and Board committees, that have a strong and diverse mix of expertise across the Three-Lines-of-Defence. Additionally, MCAN is committed to accurate and transparent disclosures and meeting all applicable regulatory expectations as they evolve. These are further supported by a mix of policies and procedures to maintain integrity and ethical practices across the entire organization. MCAN monitors broader ESG expectations across its stakeholder network and reviews its own ESG practices regularly. MCAN acknowledges that should ESG expectations evolve faster than MCAN’s ability to adapt, negative sentiment could emerge and impact the willingness of investors, customers, or strategic partners to participate in our products, services, or common share ownership. Other Risk Factors Climate-related Risks MCAN’s climate-related risks are physical risks (e.g. weather events, longer term climate shifts, etc.) associated with our new originations and underlying portfolio, and transition risks associated with evolving consumer, legislative, or regulatory sentiment as the market transitions to a low greenhouse gas emissions economy. To mitigate incremental climate physical risk impacts on our portfolio at origination, our underwriting practices restrict new lending on properties that are at higher risk of environmental harm (e.g. flood, forest fire, contamination, etc.). By extension, - 64 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) our current portfolio is regularly stress tested to analyze the potential impacts on assets in the geographic regions that are more prone to physical climate events, which assists our decision-making on geographic diversification and risk appetite. MCAN’s climate transition risk profile is subject to legislative or regulatory guidance, such as the recent OSFI Climate Risk Management expectations. Through 2024, MCAN will prioritize establishing its processes to support the disclosure of its direct emissions (scope 1 and 2) by the end of 2025, and indirect emissions (scope 3) by the end of 2026. Furthermore, as part of our existing business activities, we perform an environmental assessment during our construction underwriting and monitor approved projects to ensure they proceed as planned (e.g., site remediation, municipal environmental compliance, etc.). 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. 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, 2023, there were 35,431,938 common shares outstanding (December 31, 2022 - 35,431,938; December 31, 2022 - 34,305,704). At February 26, 2024, there were 35,695,267 common shares outstanding. We issued $14.5 million in 2023 (2022 - $7.4 million) in new common shares 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. The DRIP participation rate for the 2023 fourth quarter dividend was 30% (2023 third quarter - 30%; 2022 fourth quarter - 28%). In 2023, we renewed our (i) Base Shelf prospectus; and (ii) ATM Program established pursuant to a Prospectus Supplement to our Base Shelf prospectus allowing us to issue up to $30 million common shares to the public from time to time over a 2 year period at the market prices prevailing at the time of sale. The volume and timing of distributions under the ATM Program are determined at MCAN’s sole discretion. Year to date 2023, we sold 153,400 common shares at a weighted average price of $16.12 for gross proceeds of $2.5 million and net proceeds of $2.1 million including $0.1 million of commission paid to our agent and $0.3 million of other share issuance costs under the ATM Program. For additional information related to share capital, refer to Note 18 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 investments in non-marketable securities. 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. - 65 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Table 31: Contractual Commitments At December 31, 2023 (in thousands) Mortgage funding commitments Commitment - TAS Co Commitment - TAS 4 Commitment - Harbour Commitment - KSSMF Commitment - Pearl Commitment - Crown Commitment - Fiera Commitment - Broccolini Commitment - KSHYF Within 3 months > 3 Months to 1 Year > 1 to 3 Years > 3 to 5 Years > 5 Years $ 364,822 $ — — — — — 771 1,103 1,000 — $ 367,696 $ 204,905 $ 1,076 8,800 3,500 1,000 721 5,013 3,116 6,000 2,000 236,131 $ 42,303 $ — 4,400 2,500 7,800 — 4,380 1,899 7,600 1,850 72,732 $ — $ — 4,400 1,000 — — — 1,335 2,000 — 8,735 $ — $ — — — — — — 1,500 1,000 28,844 31,344 $ Total 612,030 1,076 17,600 7,000 8,800 721 10,164 8,953 17,600 32,694 716,638 We retain mortgage servicing obligations relating to securitized insured multi family mortgages where balance sheet derecognition has been achieved. At December 31, 2023, these derecognized securitized insured multi family mortgages totalled $218 million. 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 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 we are obligated to fund the letters of credit. For further information, refer to Note 24 to the consolidated financial statements. 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 generally 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 cash or 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. Regular cash dividends and special stock dividends per share over the past three years are shown in the table below: Table 32: Dividends Per Share For the Years Ended December 31 First quarter - regular cash Second quarter - regular cash Third quarter - regular cash Fourth quarter - regular cash Total regular cash dividends First quarter - special stock $ 2023 2022 0.36 $ 0.36 0.38 0.38 1.48 — 0.36 $ 0.36 0.36 0.36 1.44 0.97 Total regular cash and special stock dividends $ 1.48 $ 2.41 $ 2021 0.34 0.34 0.34 0.34 1.36 0.85 2.21 The Board declared a first quarter regular cash dividend of $0.39 per share (a 5.4% increase on an annualized basis from 2023) to be paid March 28, 2024 to shareholders of record on March 15, 2024. Largely as a result of tax timing differences on various investing strategies that we undertook in the second half of 2023, we will not need to distribute a special dividend in the first quarter of 2024. - 66 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) TRANSACTIONS WITH RELATED PARTIES Related party transactions for the years ended December 31, 2023 and December 31, 2022 and related party balances at December 31, 2023 and December 31, 2022 are discussed in Notes 9 and 23 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, 2023, we had 142 team members (September 30, 2023 - 136; December 31, 2022 - 128). Team members include full-time, part-time, contract and students, as applicable. 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 For non-marketable securities, fair value is determined using a variety of approaches including independent appraisals, recent transactions and incremental investments in the funds. We consider various factors in the determination of fair value including, but not limited to, recent appraisals, the status of underlying construction project and recent capital calls. Judgment is applied in the determination of the appropriate valuation approach, depending on the nature of the investment. On a quarterly basis, we review the fair value of the investments in conjunction with reports produced by the fund administrators, recent development activity and any other market-driven triggers. For all other 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 appropriate valuation techniques that may include discounted cash flow method, comparison to similar instruments for which market observable prices may exist and other relevant valuation models. The inputs 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. - 67 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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 credit judgment when such differences are material. Mortgage prepayment rates In calculating the rate at which borrowers prepay their mortgages, the Company makes estimates based on its historical experience. These assumptions impact the timing of revenue recognition and the amortization of mortgage premiums, as applicable, using the effective interest rate method. Impairment of financial assets As applicable, the Company reviews financial assets at each consolidated financial statement date to assess whether an impairment loss should be recorded. In particular, estimates by management are required in the calculation of the amount and timing of future cash flows associated with these assets when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the fair value of the asset. Critical Accounting Judgments Significant influence In determining whether it has significant influence over an entity, the Company makes certain judgments based on the applicable accounting standards. These judgments form the basis for the Company’s policies in accounting for its equity method investments. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure Controls and Procedures (“DC&P”) A disclosure committee (the “Disclosure Committee”), comprised of members of our senior management is responsible for establishing and maintaining adequate DC&P. As of December 31, 2023, 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 - 68 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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, 2023. Ernst & Young LLP, our Independent Registered Chartered Professional Accountants, have audited our consolidated financial statements for the year ended December 31, 2023. Changes in ICFR There were no changes in our ICFR that occurred during the period beginning on January 1, 2023 and ending on December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our control framework. On January 1, 2024, we implemented a new enterprise resource planning (“ERP”) system. This ERP implementation did not result in any significant changes in internal controls. We had appropriate testing on the new ERP system to ensure a proper transition as well as appropriate procedures to ensure internal controls over financial reporting were in place during and after the implementation. 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. NON-GAAP AND OTHER FINANCIAL MEASURES We prepare our consolidated financial statements in accordance with IFRS, which is current GAAP. We use a number of financial measures and ratios 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 other issuers using these measures. The non-GAAP and other financial measures used in this MD&A are defined as follows: Non-GAAP Financial Measures Net Corporate Mortgage Spread Income Non-GAAP financial measure that is an indicator of net interest profitability of income-earning corporate assets less cost of funding for our corporate mortgage portfolio. It is calculated as the difference between corporate mortgage interest and term deposit interest and expenses as reported on the consolidated statements of income. Calculations can also be found in Tables 1, 2, 4 and 5 of this MD&A. Table 35: Net Corporate Mortgage Spread Income (in thousands) At December 31 Q4 2023 Q4 2022 Change ($) Annual 2023 Annual 2022 Change ($) Mortgage interest - corporate assets Term deposit interest and expenses Net Corporate Mortgage Spread Income $ 47,406 $ 30,747 13,189 24,361 $ 165,997 $ 101,286 44,222 78,219 $ 23,045 $ 17,558 $ 5,487 $ 87,778 $ 57,064 $ 30,714 Securitized Mortgage Spread Income Non-GAAP financial measure that is an indicator of net interest profitability of income-earning securitized assets less cost of securitized liabilities for our securitized mortgage portfolio. It is calculated as the difference between securitized mortgage interest and interest on financial liabilities from securitization as reported on the consolidated statements of income. Calculations can also be found in Tables 7 and 8 of this MD&A. Table 36: Net Securitized Mortgage Spread Income (in thousands) At December 31 Q4 2023 Q4 2022 Change ($) Annual 2023 Annual 2022 Change ($) Mortgage interest - securitized assets Interest on financial liabilities from securitization Net Securitized Mortgage Spread Income $ 11,309 $ 9,597 1,712 $ $ 8,607 7,005 1,602 $ - 69 - $ 39,335 $ 31,411 24,101 7,310 $ 32,769 6,566 $ 110 $ (744) 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) Supplementary Financial Measures Average Rates Supplementary financial measures that are an indicator of interest profitability of income-earning assets or the cost of liabilities. It is calculated as income or expense as a percentage of average interest-earning assets or liabilities balance. This financial measure includes average interest rates for (i) mortgages - corporate portfolios; (ii) term deposit interest and expenses; (iii) mortgages - securitized portfolio; and (iv) financial liabilities from securitization. The average income-earning asset or liability balance that is incorporated into the average interest rate calculations is calculated on either a daily or monthly basis depending on the nature of the asset or liability. Spread of Corporate Mortgages over Term Deposit Interest and Expenses Supplementary financial measure that is an indicator of net interest profitability of income-earning corporate assets less cost of funding. The spread of corporate mortgages over term deposit interest and expenses is calculated by taking the total corporate mortgage interest as a percentage of the average corporate mortgage average portfolio balance less the average term deposit interest and expenses rate. Spread of Securitized Mortgages over Liabilities Supplementary financial measure that is an indicator of net interest profitability of income-earning securitized assets less cost of securitized liabilities. The spread of securitized mortgages over liabilities is calculated by taking the securitized mortgage portfolio average interest rate less the financial liabilities average interest rate. Return on Average Shareholders’ Equity Supplementary financial measure that measures profitability by presenting the annualized net income available (loss attributable) to shareholders as a percentage of the average capital deployed to earn the income (loss). It is calculated as net income (loss) divided by average shareholders’ equity. Average shareholders’ equity is calculated as a monthly average using all components of shareholders’ equity. Arrears and Impaired Mortgage Ratios Supplementary financial measures that represent the ratio of arrears and impaired mortgages to mortgage principal for both the corporate and total (corporate and securitized) portfolios. Distribution Yield Supplementary financial measure that is an indicator of profitability on marketable and non-marketable securities. It is calculated by dividing the distribution income as a percentage of the average balance. Book Value per Common Share Supplementary financial measure that is calculated as total shareholders’ equity divided by the number of common shares outstanding as of that date. Total Shareholder Return Supplementary financial measure that is defined as the total return of one share to a shareholder including stock appreciation and dividends. GLOSSARY CET 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 OSFI’s Capital Adequacy Requirements and Leverage Requirements guidelines. 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. - 70 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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. Don Coulter President and Chief Executive Officer Floriana Cipollone Senior Vice President and Chief Financial Officer Toronto, Canada February 26, 2024 - 71 - 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, 2023 and 2022, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of material accounting policy information. 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, 2023 and 2022, 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 2023 consolidated financial statements. As disclosed in Note 7 and Note 12 to the 2023 consolidated financial statements, MCAN recognized $9,925 thousand 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 included 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. 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 within the current environment. We independently recalculated the ECLs and reperformed the staging to validate that the model methodology and staging triggers were correctly applied. With the assistance of our credit risk modelling specialists, 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 regional differences in defaults. Furthermore, we assessed the adequacy of the presentation and disclosures of the ECLs in the notes to the consolidated financial statements. Non-Marketable Securities Key audit matter MCAN describes its significant accounting judgments and estimates in relation to non-marketable securities in Note 5 of the 2023 consolidated financial statements. As disclosed in Note 8 and Note 20 to the 2023 consolidated financial statements, MCAN recognized $38,495 thousand in fair value on its consolidated balance sheet for its portfolio of limited partnership real estate funds within the overall non-marketable securities portfolio (“the Funds”). The valuation process involves judgement in determining the appropriate valuation approach to be used, and in estimating the fair value. The fair value is determined using independent appraisals, recent transactions and considers incremental investments in the Funds. The Funds are considered level 3 investments and are not traded in active markets. Auditing the fair value of the Funds was complex, required the application of auditor judgment and involved the use of our Valuation Specialists, due to the judgement required to determine the fair value of the Funds. How our audit addressed the key audit matter We involved Valuations Specialists with specialized skills and knowledge to evaluate management’s estimate of fair value for a sample of Funds. We assessed the reasonableness of inputs and assumptions used in the appraisals of the underlying properties in the Funds. We also reviewed comparable transactions, where applicable and market data from our research of independent third-party sources to assess the fair value. We obtained confirmations from fund administrators for each of the Funds to confirm the proportionate share of MCAN’s investment in each Fund. We reviewed quarterly updates provided by each of the Funds to identify events or transactions that would impact fair value and assessed how management included in the determination of fair value if relevant. We also considered changes in market conditions and events affecting the Funds to assess the adjustments, or lack of adjustments, made by MCAN in arriving at the fair value of each Fund. Other Information Other information consists of the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. 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. 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 Andrea Feddema. Toronto, Canada February 26, 2024 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) At December 31 Assets Corporate Assets Cash and cash equivalents Marketable securities Mortgages Non-marketable securities Equity investment in MCAP Commercial LP Derivative financial instruments Deferred tax assets Other assets Securitization Assets Cash held in trust Mortgages Other assets Liabilities and Shareholders’ Equity Liabilities Corporate Liabilities Term deposits Demand loans payable Other liabilities Securitization Liabilities Financial liabilities from securitization Shareholders’ Equity Share capital Contributed surplus Retained earnings Accumulated other comprehensive income CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars) Note 2023 2022 6 7 8 9 13 15 10 12 12 14 24 16 17 18 $ $ $ $ 60,345 $ 50,320 2,414,855 109,943 111,367 198 336 8,965 2,756,329 30,909 1,929,948 21,901 1,982,758 4,739,087 $ 2,200,102 $ 64,683 25,575 2,290,360 1,916,883 1,916,883 4,207,243 406,528 510 124,708 98 531,844 4,739,087 $ 78,210 53,743 1,939,494 97,228 106,168 — 1,095 7,182 2,283,120 34,531 1,751,303 9,722 1,795,556 4,078,676 1,819,830 6,532 22,616 1,848,978 1,740,388 1,740,388 3,589,366 389,986 510 98,990 (176) 489,310 4,078,676 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: Don Coulter President and CEO Gordon Herridge Director, Chair of the Audit Committee - 76 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) CONSOLIDATED STATEMENTS OF INCOME (in thousands of Canadian dollars except for per share amounts) Years Ended December 31 Note 2023 2022 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 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 Recovery of credit losses Operating Expenses Salaries and benefits General and administrative Net Income Before Income Taxes Provision for (recovery of) income taxes Current Provision for (recovery of) income taxes Net Income Basic and diluted earnings per share Cash dividends per share Stock dividends per share Weighted average number of basic and diluted shares (000’s) $ 9 20 9 13 21 23 22 13 21 22 15 15 165,997 $ 22,010 8,772 3,625 2,417 4,061 (3,622) 1,048 204,308 101,286 26,603 8,050 3,568 2,713 1,533 (12,074) 1,726 133,405 78,219 7,490 6,458 100 4,494 96,761 107,547 39,335 2,234 41,569 32,769 4,548 — 37,317 4,252 22,815 10,757 33,572 44,222 6,337 3,895 210 (1,064) 53,600 79,805 31,411 667 32,078 24,101 4,084 (5) 28,180 3,898 19,607 9,030 28,637 78,227 55,066 (30) 759 729 77,498 $ 2.22 $ 1.48 $ — $ 34,873 (84) (204) (288) 55,354 1.77 1.44 0.97 31,262 $ $ $ $ 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. - 77 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands of Canadian dollars) Years Ended December 31 Net Income Other comprehensive income items that may be subsequently reclassified to income (loss): Cash Flow Hedges Net gains (losses) from changes in fair value of cash flow hedges Reclassification of net losses (gains) to net income Total Other Comprehensive Income Comprehensive Income Note 2023 2022 $ 77,498 $ 55,354 13 386 (112) 274 (178) 2 (176) $ 77,772 $ 55,178 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, net of share issuance costs Balance, end of year Contributed Surplus Retained Earnings Balance, beginning of year Net income Dividends declared Balance, end of year Accumulated Other Comprehensive Income Balance, beginning of year Other comprehensive income Balance, end of year Note 2023 2022 $ 18 389,986 $ 16,542 406,528 315,339 74,647 389,986 510 510 18 13 98,990 77,498 (51,780) 124,708 117,409 55,354 (73,773) 98,990 (176) 274 98 — (176) (176) Total Shareholders’ Equity $ 531,844 $ 489,310 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. - 78 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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: Provision for (recovery of) income 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 cash flow hedges net losses (gains) 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 Derivative Financial Instruments 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 Proceeds from issuance of common shares, net of share issuance costs Net change in demand loans Other loan payable to MCAP Securities Limited Partnership Repayment of premises lease liability Dividends paid Cash flows from (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 2023 2022 $ 77,498 $ 55,354 9 9 22 759 (22,010) (1,048) 4,494 3,622 (112) 9,132 640 210 (663,654) (13,125) 198 (13,900) 3,622 380,272 172,516 (30) 1,321 (59,595) (204) (26,603) (1,726) (1,069) 12,074 — 7,874 588 (3,132) (305,254) (32,273) — 1,178 18,617 158,838 143,564 — 441 28,267 9 17,859 (669) 17,190 18,347 (282) 18,065 2,085 58,151 — (369) (35,327) 24,540 (17,865) 78,210 60,345 $ 38,157 (50,808) (41,205) (356) (36,179) (90,391) (44,059) 122,269 78,210 $ $ 219,233 $ 136,304 73,829 9,574 125,366 12,397 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. - 79 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note Corporate Information ............................................................................................................................... 1. Basis of Preparation ................................................................................................................................... 2. Basis of Consolidation ................................................................................................................................ 3. Material Accounting Policy Information .................................................................................................... 4. Summary of Significant Accounting Judgments and Estimates ................................................................. 5. Marketable Securities ................................................................................................................................ 6. Mortgages - Corporate .............................................................................................................................. 7. Non-Marketable Securities ........................................................................................................................ 8. Equity Investment in MCAP Commercial LP .............................................................................................. 9. 10. Other Assets ............................................................................................................................................... Securitization Activities ............................................................................................................................. 11. 12. Mortgages - Securitized ............................................................................................................................. 13. Derivative Financial Instruments ............................................................................................................... Term Deposits ............................................................................................................................................ 14. Income Taxes ............................................................................................................................................. 15. 16. Other Liabilities .......................................................................................................................................... Financial Liabilities from Securitization ..................................................................................................... 17. Share Capital .............................................................................................................................................. 18. 19. Dividends ................................................................................................................................................... 20. Net Gain (Loss) on Securities ..................................................................................................................... 21. Mortgage Expenses ................................................................................................................................... Provision for (Recovery of) Credit Losses .................................................................................................. 22. Related Party Disclosures .......................................................................................................................... 23. Credit Facilities ........................................................................................................................................... 24. Capital Management ................................................................................................................................. 25. Financial Instruments ................................................................................................................................ 26. Commitments and Contingencies.............................................................................................................. 27. 81 81 81 82 88 89 90 98 99 100 100 101 103 104 105 105 106 106 107 107 107 107 108 109 110 111 114 - 80 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 1. Corporate Information MCAN Mortgage Corporation doing business as (“d/b/a”) MCAN Financial Group (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 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, MCAN Home Mortgage Corporation, is an originator of residential mortgage products across Canada. The consolidated financial statements were approved in accordance with a resolution of the Board of Directors (the “Board”) on February 26, 2024. 2. Basis of Preparation The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements have been prepared on a historical cost basis, except for 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. - 81 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 4. Material Accounting Policy Information The following are the material 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 - 82 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (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 residential 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. - 83 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (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 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: • • • • 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. 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 - 84 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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. Hedge Accounting The Company makes use of bond forwards and interest rate swaps to manage interest rate exposures. In order to manage particular risks, the Company applies hedge accounting for transactions which meet specified criteria. If derivative instruments do not meet all of the criteria for hedge accounting, the changes in fair value of such derivatives are recognized in non-interest income. In order to qualify for hedge accounting, a hedge relationship must be designated and formally documented in accordance with IFRS 9. The Company’s documentation, in accordance with these requirements, includes a specific risk management objective and strategy being applied, the specific cash flow or fair value being hedged and how hedge effectiveness is assessed. To qualify for hedge accounting, there must be a correlation between the changes in the cash flows or fair value between the hedged and hedging item. Hedge effectiveness is assessed at the inception of the hedging relationship and on an ongoing basis. Hedge ineffectiveness occurs when the changes in cash flows or fair value of the hedging item differ from the cash flows or fair value changes in the hedged risk in the hedged item. Cash Flow Hedges The Company’s cash flow hedges use bond forwards to hedge changes in future cash flows attributable to interest rate fluctuations arising in highly probable forecasted issuances of fixed-rate liabilities. The effective portion of the change in fair value of the bond forward is recognized in other comprehensive income (loss) (“OCI”) until the forecasted cash flows being hedged are recognized in income in future accounting periods. When the forecasted cash flows are recognized in income, the cash flow hedge reserve related to those cash flows is reclassified from OCI to income. Hedge ineffectiveness is recognized immediately in net gain (loss) on securities. If the hedging instrument expires, or is settled or sold, or if the hedge no longer meets the criteria for hedge accounting under IFRS 9, the hedge relationship is terminated. Any cumulative gain or loss recognized at the time remains in OCI until the forecasted transaction impacts the consolidated statements of income. When the forecasted transaction is no longer expected to occur, the cumulative gain or loss that was recognized in OCI is immediately recognized in non-interest income. Fair Value Hedges The Company’s fair value hedges use interest rate swaps to hedge changes in fair value of fixed-rate term deposits which are impacted by changes in market interest rates. The fair value of the interest rate swap and the change in fair value of the pool of term deposits are recorded as part of the change in their carrying value and in term deposit interest and expenses. If the hedging instrument expires, or is settled or sold, or if the hedge no longer meets the criteria for hedge accounting under IFRS 9, the hedge relationship is terminated. Any fair value adjustment on the pool of term deposits is amortized over their remaining term. If the term deposits are settled before their remaining term, the unamortized fair value adjustment is recognized immediately in net gain (loss) on securities. (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 non-marketable securities, fair value is determined using a variety of approaches including independent appraisals, recent transactions and incremental investments in the funds. The Company considers various factors in the determination of fair value including, but not limited to, recent appraisals, the status of underlying construction project and recent capital calls. Judgment is applied in the determination of the appropriate valuation approach, depending on the nature of the - 85 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) investment. On a quarterly basis, the Company reviews the fair value of the investments in conjunction with reports produced by the fund administrators, recent development activity and any other market-driven triggers. For all other 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 appropriate valuation techniques that may include discounted cash flow method, comparison to similar instruments for which market observable prices may exist and other relevant valuation models. The inputs 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. 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. 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. - 86 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) (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 declared. 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. 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. - 87 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) (8) Cash and cash equivalents Cash and cash equivalents (including cash held in trust) on the consolidated balance sheets comprise cash held at banks and short-term deposits with original maturity dates of less than 90 days. (9) Share-based compensation payment transactions The cost of cash-settled transactions is measured initially at fair value at the grant date. The obligations are 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 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, 2023, 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. - 88 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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 mathematical 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. • market approach - the inputs include the use of recently observable market transactions and appraisals. • cost approach - for new property developments, the inputs include the cost of the land and construction costs. 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 current inflationary and rising interest rate environment. Key judgments and estimates, including around probability weights to assign to each scenario and the impacts of government policy and stimulus measures, will be heavily influenced by the extent and severity of these events. 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. 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 2023 50,320 $ 50,320 $ 2022 53,743 53,743 $ $ For details of net gains and losses on marketable securities, refer to Note 20. - 89 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 7. Mortgages - Corporate (a) Summary At December 31, 2023 Corporate Portfolio: Residential mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Multi family residential Other commercial At December 31, 2022 Corporate Portfolio: Residential 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 $ 276,685 $ 969,256 54,714 1,052,572 — $ — $ — $ 885 336 5,210 1,267 11 — 378 — 1,594 — $ 276,685 966,726 54,367 1,045,768 2,530 347 6,804 70,345 1,208 $ 2,424,780 $ 201 2 6,634 $ 41 — 1,319 $ — — 1,972 $ 242 2 70,103 1,206 9,925 $ 2,414,855 Gross Principal Allowance Stage 1 Stage 2 Stage 3 Total Net Principal — $ — $ $ 144,569 $ 829,745 36,880 828,809 514 200 3,503 98,715 6,374 $ 1,945,092 $ 348 8 4,573 $ 642 — 180 129 25 976 $ — $ 49 — — — — 49 $ — $ 144,569 828,540 36,680 825,126 1,205 200 3,683 477 33 98,238 6,341 5,598 $ 1,939,494 Gross principal as presented in the tables above includes unamortized capitalized transaction costs and accrued interest. 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. - 90 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (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 residential 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 residential 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. - 91 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) At December 31 2023 2022 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Residential mortgages Insured Insured performing Monitored/Arrears Impaired/Default Uninsured Very low/Low Normal/Moderate High/Higher Monitored/Arrears Impaired/Default Uninsured - completed inventory High/Higher Monitored/Arrears Construction loans Normal/Moderate High/Higher Monitored/Arrears Impaired/Default Commercial loans Multi family residential Normal/Moderate High/Higher Other Normal/Moderate Monitored/Arrears $ 264,514 $ 11,358 $ — $ 275,872 $ 139,351 $ 4,707 $ — $ 144,058 — — 214 — — 599 214 599 61 — 450 — — — 511 — 264,514 11,572 599 276,685 139,412 5,157 — 144,569 328,323 399,425 48,493 — — 55,912 83,046 11,757 33,799 — 384,235 361,995 — 482,471 295,807 60,250 33,799 5,971 29,916 7,702 — 69,030 50,738 6,877 6,289 — — 431,025 — 346,545 — — 186 36,793 13,991 186 — 5,971 776,241 184,514 5,971 966,726 695,420 132,934 186 828,540 52,146 2,221 54,367 34,103 — 34,103 — 2,577 2,577 — — — 34,103 2,577 36,680 — — — — — — 52,146 — 52,146 — 2,221 2,221 — 967,595 — — — 5,886 — 967,595 779,814 — — — 5,886 — 779,814 — — 5,967 — — 72,206 5,967 72,206 — — 7,341 — — 32,085 7,341 32,085 967,595 5,967 72,206 1,045,768 785,700 7,341 32,085 825,126 — 30,305 30,305 — 39,798 39,798 1,206 — 1,206 — — — — — — — — — — 70,103 70,103 37,012 33,820 70,832 — 27,406 27,406 1,206 — 1,206 1,261 — 1,261 — 5,080 5,080 — — — — — — 37,012 61,226 98,238 1,261 5,080 6,341 $ 2,092,007 $ 244,072 $ 78,776 $ 2,414,855 $ 1,726,728 $ 180,495 $ 32,271 $ 1,939,494 - 92 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) (c) Mortgage allowances Years Ended December 31 2023 2022 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Residential mortgages Insured Allowance, beginning of year Total provision 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) $ — $ — $ — $ — $ — $ — $ — $ — — — — — — — — — — — — — — — — — $ 514 $ 642 $ 49 $ 1,205 $ 1,754 $ 364 $ 13 $ 2,131 (1,242) 341 — 657 676 (61) 371 1,242 (565) 2 56 — (110) 625 — 225 (2) 350 — (94) 479 — 1 — 1,063 676 (265) 1,475 327 (891) (76) (1,037) 707 (270) (1,240) (327) 918 — (179) — (134) 278 — (27) 76 (15) — (13) 21 — — — (1,231) 707 (417) (941) Write-off (recovery) Allowance, end of year — 885 — 1,267 (150) 378 (150) 2,530 — 514 — 642 15 49 15 1,205 Uninsured - completed inventory Allowance, beginning of year Transfer to stage 1 3 Transfer to stage 2 3 Net remeasurement of allowance 1 Originations 4 Mortgages derecognized or repaid 2 Total provision (recovery) $ 200 $ — $ — $ 200 $ 337 $ 8 $ — $ 345 (63) 32 104 172 (109) 136 63 (45) (7) — — 11 — 13 (13) — — — — — 84 172 (109) 147 49 (34) (146) — (6) (137) (49) 34 15 — (8) (8) — — — — — — — — — (131) — (14) (145) 200 Allowance, end of year 336 11 — 347 200 — Construction loans Allowance, beginning of year $ 3,503 $ 180 $ — $ 3,683 $ 3,599 $ 216 $ — $ 3,815 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) (1,902) 1,873 — 1,948 685 (897) 1,707 1,902 (1,996) — 89 — (175) (180) — 122 — 1,472 — — 1,594 — (1) — 3,509 685 (1,072) 3,121 1,848 (2,074) (117) 381 616 (750) (96) (1,848) 2,074 — (233) — (29) (36) — — 117 (117) — — — — — — 31 616 (779) (132) Allowance, end of year 5,210 — 1,594 6,804 3,503 180 — 3,683 - 93 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) Years Ended December 31 2023 2022 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Commercial loans Multi family residential Allowance, beginning of year $ 348 $ 129 $ — $ 477 $ 150 $ 115 $ — $ 265 Transfer to stage 1 3 Net remeasurement of allowance 1 Originations 4 Mortgages derecognized or repaid 2 Total provision (recovery) (12) (18) — (117) (147) 12 (100) — — (88) Allowance, end of year 201 41 — — — — — — — (118) — (117) (235) — 130 83 (15) 198 — 14 — — 14 242 348 129 — — — — — — — 144 83 (15) 212 477 Other Allowance, beginning of year Transfer to stage 1 3 Transfer to stage 2 3 Transfer to stage 3 3 Net remeasurement of allowance 1 Mortgages derecognized or repaid 2 Total provision (recovery) $ 8 $ 25 $ — $ 33 $ 7 $ 84 $ — $ 91 — — — (6) — (6) — (25) 225 — (225) (25) — 25 (225) 200 — — — — — — 194 (225) (31) 2 54 (41) — — (12) 1 8 (54) 41 — (46) — (59) 25 — — — — — — — — — — (46) (12) (58) 33 Allowance, end of year 2 — Total Allowance, beginning of year $ 4,573 $ 976 $ 49 $ 5,598 $ 5,847 $ 787 $ 13 $ 6,647 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) (3,219) 3,219 2,246 (2,631) — 2,685 1,533 227 38 — — 385 (227) 2,009 — — — — 4,732 1,533 2,278 (2,278) (3,040) 3,067 — — (27) 193 — — — (429) (132) (1,233) — — 1,406 (193) (672) 1,406 (1,184) (510) (94) (1,788) (1,053) (171) (13) (1,237) 2,061 343 2,073 4,477 (1,274) 189 21 (1,064) Write-off (recovery) Allowance, end of year — — (150) (150) — — 15 15 $ 6,634 $ 1,319 $ 1,972 $ 9,925 $ 4,573 $ 976 $ 49 $ 5,598 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. ECLs are calculated through three probability-weighted forward-looking scenarios: base, favourable, and unfavourable. ECLs are 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. - 94 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (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, 2023 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, 2022 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 1 The numbers represent the average values over the quoted period. (1.90%) (3.10%) (1.33%) 0.96% 6.45% 4.14% 3.94% 4.00% 2.26% 6.46% 6.23% 4.95% 6.83% 1.96% 5.95% 5.18% 4.82% 4.95% 2.39% 6.36% (3.85) % (4.12) % (3.93) % (0.04) % 6.95% 3.89% 3.89% 3.95% 2.14 % 6.55% 6.61% 5.29% 7.11% 5.79% 6.36% 5.04% 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 (7.28%) (8.93%) (8.70%) 0.08% 5.94% 3.97% 3.74% 3.70% 1.64% 6.53% (0.49%) (0.51%) (0.50%) 1.08% 5.44% 4.48% 4.67% 4.58% 1.76% 6.44% (9.16) % (9.51) % (9.34) % (1.55) % 6.94% 3.24% 3.37% 3.30% 1.51% 6.72% 6.53% 5.36% 7.03% 5.86% 6.28% 5.11% 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 judgements and estimates at the reporting date. The current inflationary and higher interest rate environment has increased the level of uncertainty with respect to management’s judgements and estimates including the probability weights assigned to each scenario, the impacts of monetary policy on macroeconomic indicators and the mortgage portfolio. Since December 31, 2023, forecasts around these uncertainties have continued to evolve. Any new forward-looking information subsequent to December 31, 2023, 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. The base scenario represents management’s best estimate using all available economic forecasts in light of the current inflationary and higher interest rate environment. It assumes the unemployment rate will increase marginally. Gross domestic product is expected to increase slightly in the short term and increase going forward. Housing prices are expected to decrease before increasing in the mid to long term. The favourable scenario assumes a significant increase in housing prices, lower unemployment in the short term, and faster increases to gross domestic product compared to the base scenario. The unfavourable scenario represents the possibility of a recession resulting in an increase to the unemployment rate and decreases in housing prices and gross domestic product in the short term followed by a recovery in the mid to long term. 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 ECL for corporate mortgages at December 31, 2023 would be approximately $9,243 (December 31, 2022 - $4,829) compared to the reported ECL for corporate mortgages of $9,925 (December 31, 2022 - $5,598). 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 ECL for corporate mortgages at December 31, 2023 would be approximately $10,947 (December 31, 2022 - $8,504) compared to the reported ECL for corporate mortgages of $9,925 (December 31, 2022 - $5,598). - 95 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) (d) Mortgage arrears Mortgages past due but not impaired are as follows: At December 31, 2023 1 to 30 days 31 to 60 days 61 to 90 days Total Residential mortgages Insured Uninsured At December 31, 2022 Residential mortgages Insured Uninsured Uninsured - completed inventory Commercial loans $ $ $ $ 214 $ 17,203 17,417 $ — $ 10,190 10,190 $ — $ 6,406 6,406 $ 1 to 30 days 31 to 60 days 61 to 90 days 60 $ 11,454 2,577 5,080 19,171 $ 234 $ 1,825 — — 2,059 $ 217 $ 712 — — 929 $ 214 33,799 34,013 Total 511 13,991 2,577 5,080 22,159 Impaired mortgages (net of individual allowances) are as follows: At December 31, 2023 Ontario Alberta British Columbia Atlantic Provinces Other At December 31, 2022 Alberta British Columbia Residential Mortgages Insured Uninsured Construction loans Total $ — $ 5,384 $ 14,315 $ 19,699 311 — 137 151 138 449 — — — 449 57,891 58,340 — — 137 151 $ 599 $ 5,971 $ 72,206 $ 78,776 Residential Mortgages Construction Loans Uninsured Total $ $ 186 $ — $ 186 — 32,085 32,085 186 $ 32,085 $ 32,271 At December 31, 2023, the total appraised value of the collateral related to the impaired construction loans was $252,570. - 96 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) (e) Geographic analysis At December 31, 2023 Ontario Alberta British Columbia Quebec Atlantic Provinces Other At December 31, 2022 Ontario Alberta British Columbia Quebec Atlantic Provinces Other (f) Other information Residential Mortgages Construction Loans Commercial Loans 1,090,528 $ 79,928 104,821 3,311 8,711 10,479 1,297,778 $ 301,776 $ 116,888 627,104 — — — 1,045,768 $ 66,337 $ — — — — 4,972 71,309 $ Residential Mortgages Construction Loans Commercial Loans 842,251 $ 65,263 70,772 19,284 6,547 5,672 1,009,789 $ 183,088 $ 142,151 499,887 — — — 825,126 $ 90,377 $ 5,109 — 4,113 — 4,980 104,579 $ $ $ $ $ Total 1,458,641 196,816 731,925 3,311 8,711 15,451 2,414,855 Total 1,115,716 212,523 570,659 23,397 6,547 10,652 1,939,494 60.4 % 8.2 % 30.3 % 0.1 % 0.4 % 0.6 % 100.0 % 57.6 % 11.0 % 29.4 % 1.2 % 0.3 % 0.5 % 100.0 % Outstanding commitments for future fundings of mortgages are as follows: At December 31 Residential mortgages Insured Uninsured Uninsured - completed inventory Construction loans Commercial loans Other 2023 2022 $ $ 76,904 $ 25,332 2,432 507,159 203 612,030 $ 32,270 19,804 129 542,609 — 594,812 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, 2023 was $2,416,197 (December 31, 2022 - $1,939,615). Fair values are calculated on a discounted cash flow basis using the prevailing market rates for similar mortgages. At December 31, 2023, insured residential mortgages included $125,350 (December 31, 2022 - $63,229) 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. - 97 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 8. Non-Marketable Securities At December 31 KingSett High Yield Fund Securitization Notes TAS LP 3 KingSett Senior Mortgage Fund LP TAS LP 3 Co-Invest LP Crown Realty V Limited Partnership Pearl Group Growth Fund LP TAS Impact Development LP 4 Broccolini Limited Partnership No. 8 Fiera Real Estate Development Fund IV, LP Harbour Equity JV Development Fund VI 2023 54,548 $ — 8,291 16,307 4,284 8,413 2,094 2,400 4,534 6,072 3,000 109,943 $ $ $ 2022 52,642 1,022 8,714 9,462 3,750 8,962 1,745 2,400 2,400 3,806 2,325 97,228 KingSett High Yield Fund (“KSHYF”): The Company holds an investment in the KSHYF representing a 5.9% equity interest (December 31, 2022 - 5.9%). The KSHYF invests in mortgages secured by real estate including mezzanine, subordinate and bridge mortgages. As mortgage advances are made by the KSHYF, the Company advances its proportionate share. The KSHYF pays a base distribution of 9% per annum, and distributes any additional income earned on a quarterly basis. At December 31, 2023, the Company’s total remaining commitment to the KSHYF was $32,694 (December 31, 2022 - $34,694), consisting of $3,850 available for capital advances for the KSHYF (December 31, 2022 - $5,850) and $28,844 that supports credit facilities throughout the life of the KSHYF (December 31, 2022 - $28,844). Securitization Notes: The Company invested $18,000 in Class A Securitization Notes. The issuer of the Securitization Notes was a wholly-owned subsidiary of MCAP. The final distribution date was March 15, 2023. During 2023, the Company received $1,022 (December 31, 2022 - $5,427) in principal repayment and recorded $8 (December 31, 2022 - $307) of interest income at the contractual rate of the Securitization Notes in net investment income from non-marketable securities on the consolidated statements of income. TAS LP 3 (“TAS 3”): The Company holds an investment in TAS 3 representing a 9.7% partnership interest (December 31, 2022 - 9.7%). At December 31, 2023, the Company had no remaining commitment. The Company advances its proportionate share as TAS 3 invests in, and develops, residential and mixed use properties with a focus on assets that drive environmental and social impacts. KingSett Senior Mortgage Fund LP (“KSSMF”): The Company holds an investment in KSSMF representing a 2.1% partnership interest (December 31, 2022 - 1.5%). At December 31, 2023, the Company’s total remaining commitment is $8,800. The Company advances its proportionate share as KSSMF invests in a diversified portfolio of mortgage loans secured by Canadian residential and commercial real estate. TAS LP 3 Co-Invest LP (“TAS Co”): The Company holds an investment in TAS Co, in which it has a 34.8% partnership interest (December 31, 2022 - 34.8%). At December 31, 2023, the Company’s total remaining commitment is $1,076. The Company advances its proportionate share as TAS Co invests and it invests in some of the same properties as TAS 3 noted above. Pearl Group Growth Fund LP (“Pearl”): The Company holds an investment in Pearl, in which it has a 6.9% partnership interest (December 31, 2022 - 6.9%). At December 31, 2023, the Company’s total remaining commitment is $721. The Company advances its proportionate share as Pearl executes a value-add strategy by acquiring, redeveloping, entitling, leasing and project managing commercial and multi-unit residential properties in the Greater Toronto area. Crown Realty V Limited Partnership (“Crown”): The Company holds an investment in Crown representing a 7.7% partnership interest (December 31, 2022 - 7.7%). At December 31, 2023, the Company’s total remaining commitment is $10,164. The Company advances its proportionate share as Crown integrates environmental and social focused initiatives to acquire, lease, manage and reposition commercial real estate properties across Ontario. TAS Impact Development LP 4 (“TAS 4”): The Company holds an investment in TAS 4 representing a 14.8% partnership interest (December 31, 2022 - 17.6%). At December 31, 2023, the Company’s total remaining commitment is $17,600. The Company advances its proportionate share as TAS 4 acquires urban residential, mixed-use development and repositioning properties with a focus on developing and repositioning assets that drive environmental and social impacts. Broccolini Limited Partnership No. 8 (“Broccolini”): The Company holds an investment in Broccolini representing a 5.7% partnership interest (December 31, 2022 - 5.7%). At December 31, 2023, the Company’s total remaining commitment is - 98 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) $17,600. The Company advances its proportionate share as Broccolini invests in ground up development of industrial, residential and mixed-use properties across Canada, with a focus on Ontario and Quebec. Harbour Equity JV Development Fund VI (“Harbour”): The Company holds an investment in Harbour representing a 12.1% partnership interest (December 31, 2022 - 12.1%). At December 31, 2023, the Company’s total remaining commitment is $7,000. The Company advances its proportionate share as Harbour provides equity capital to real estate developers in joint ventures or co-ownership structures for ground up development of residential and mixed-use properties across Canada. Fiera Real Estate Development Fund IV, LP (“Fiera”): The Company holds an investment in Fiera representing an 6.5% partnership interest (December 31, 2022 - 7.1%). At December 31, 2023, the Company’s total remaining commitment is $8,953. The Company advances its proportionate share as Fiera develops and re-develops multi-residential, industrial, office and retail properties, located in growing major Canadian urban markets. For details of net gains and losses on non-marketable securities, refer to Note 20. 9. Equity Investment in MCAP Commercial LP At December 31, 2023, the Company held a 13.73% equity interest in MCAP (December 31, 2022 - 13.65%), representing 4.0 million units held by MCAN (December 31, 2022 - 4.0 million) of the 29.1 million total outstanding MCAP partnership units (December 31, 2022 - 29.3 million). The Company recognizes equity income from MCAP on a one-month lag such that equity income from MCAP is based on MCAP’s net income for the years ended November 30 adjusted for the impacts of significant transactions or events up to the date of our financial statements. 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 2023 2022 $ $ 106,168 $ 22,010 1,048 (17,859) 111,367 $ 96,186 26,603 1,726 (18,347) 106,168 2023 2022 $ 62,259,444 $ 50,903,680 50,117,275 786,405 61,453,571 805,873 2023 2022 $ 1,056,940 $ 160,149 1,020,951 192,677 During 2023, MCAP issued new class B units at a price in excess of the carrying value per unit, resulting in a dilution gain of $1,048 (2022 - $1,726). - 99 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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 2023 2022 $ $ 837 $ 472 1,147 1,093 2,256 1,628 1,211 321 8,965 $ 373 601 1,453 1,212 2,276 782 50 435 7,182 During the year ended December 31, 2023, the Company recognized $306 (2022 - $306) of depreciation expense and recorded no additions 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. The capital assets and intangible assets continuity is as follows: Furniture & Fixtures Computer Hardware Leasehold Improvements Capital Asset Total Intangible Assets $ 835 $ — 835 — 835 828 3 831 2 833 2,099 $ 114 2,213 10 2,223 1,950 79 2,029 78 2,107 2,003 $ 0 2,003 — 2,003 1,531 59 1,590 59 1,649 4,937 $ 114 5,051 10 5,061 4,309 141 4,450 139 4,589 $ 4 2 $ 184 116 $ 413 354 $ 601 472 $ 6,109 168 6,277 659 6,936 5,763 141 5,904 195 6,099 373 837 Cost At January 1, 2022 Additions At December 31, 2022 Additions At December 31, 2023 Amortization At January 1, 2022 Amortization for the year At December 31, 2022 Amortization for the year At December 31, 2023 Net Book Value At December 31, 2022 At December 31, 2023 11. Securitization Activities The Company is an NHA MBS issuer, which involves the securitization of insured mortgages to create and sell MBS through Canada Mortgage and Housing Corporation (“CMHC”) market MBS and Canada Mortgage Bonds (“CMB”) programs. 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. 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 - 100 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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. During 2023, MCAN securitized $359,419 insured residential mortgages through the market MBS and CMB programs (2022 - $426,217). During 2023, MCAN securitized $150,265 of insured multi family mortgages (2022 - $nil). With respect to the insured multi family securitization, at the time of securitization the Company derecognized the mortgages from its consolidated balance sheet and recorded an upfront gain of $518 (2022 - $nil). 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 shaded sections of 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 residential mortgage CMB program sale transactions, MCAN continues to recognize the securitized mortgages (Note 12) and financial liabilities from securitization (Note 17) on its consolidated balance sheet. 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: 2025 2026 2028 2029 2030 2034 Total At December 31, 2023 $ 14,585 $ 8,161 $ 82,377 $ 12,993 $ 32,208 $ 67,807 $ 218,131 12. Mortgages - Securitized (a) Summary At December 31, 2023 At December 31, 2022 (b) Mortgages by risk rating Gross Principal Allowance Total Net Principal $ 1,929,948 $ $ 1,751,303 $ — $ 1,929,948 — $ 1,751,303 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 residential 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. - 101 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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. At December 31 2023 2022 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Insured Performing Monitored/Arrears Impaired/Default $ 1,826,912 $ 98,375 $ — — 4,318 — $ 1,826,912 $ 102,693 $ (c) Mortgage allowances — $ 1,925,287 $ 1,654,140 $ 93,724 $ — 343 343 $ 1,929,948 $ 1,654,943 $ 95,810 $ 2,086 — 4,318 343 803 — — $ 1,747,864 2,889 — 550 550 550 $ 1,751,303 The allowance for credit losses on the securitized portfolio at December 31, 2023 was $nil (December 31, 2022 - $nil). The provision for credit losses recorded during 2023 was $nil (2022 - recovery of credit losses of $5). (d) Mortgage arrears Securitized mortgages past due but not impaired are as follows: At December 31, 2023 At December 31, 2022 $ $ 3,904 $ 1,641 $ 414 $ 1,248 $ — $ — $ 1 to 30 days 31 to 60 days 61 to 90 days Impaired securitized mortgages are as follows: Total 4,318 2,889 2022 447 — 103 550 2023 — $ 343 — 343 $ $ $ 2023 2022 $ $ 1,655,249 164,398 62,971 7,298 26,521 13,511 1,929,948 85.7 % $ 8.5 % 3.3 % 0.4 % 1.4 % 0.7 % 100.0 % $ 1,514,305 139,420 57,828 7,896 22,817 9,037 1,751,303 86.4 % 8.0 % 3.3 % 0.5 % 1.3 % 0.5 % 100.0 % At December 31 Ontario Alberta Atlantic Provinces (e) Geographic analysis At December 31 Ontario Alberta British Columbia Quebec Atlantic Provinces Other (f) Other information Capitalized transaction costs are included in mortgages and are amortized using the EIM. At December 31, 2023, the unamortized capitalized transaction cost balance was $11,563 (December 31, 2022 - $11,268). The fair value of the securitized mortgage portfolio at December 31, 2023 was $1,891,654 (December 31, 2022 - $1,675,759). Other assets of $21,901 at December 31, 2023 (December 31, 2022 - $9,722) includes interest-only strips of $12,500 (December 31, 2022 - $1,325) from the Company’s CMB insured multi family securitizations. - 102 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 13. Derivative Financial Instruments Cash Flow Hedging Relationships The Company may enter into Government of Canada bond forward contracts to hedge interest rate risk arising from the impact of (i) movements in interest rates between the time insured residential mortgages are funded and the time that these mortgages are securitized; and (ii) movements in interest rates between the time term deposit funding is forecasted to be required and the time that the actual funding occurs. Realized gains or losses on these derivatives are reclassified from other comprehensive income (“OCI”) to interest on financial liabilities from securitization and term deposit interest and expenses on the consolidated statements of income over the expected life of the underlying hedged item. At December 31, 2023, the Company had $nil of derivative financial instruments outstanding relating to cash flow hedges (December 31, 2022 - $nil). The following table provides a reconciliation of OCI related to cash flow hedges: Years Ended December 31 2023 2022 Liabilities - Interest Rate Risk Accumulated OCI at the beginning of the year OCI Accumulated OCI at the End of the Period OCI on designated hedges $ $ $ (176) $ 274 98 $ 274 $ — (176) (176) (176) The following table presents the total effects of cash flow hedges on the consolidated statements of income and the consolidated statements of comprehensive income: Years Ended December 31 Liabilities - Interest Rate Risk Change in value of hedged item for ineffectiveness measurement Change in value of hedging item for ineffectiveness measurement Hedge Ineffectiveness Hedging gains recognized in other comprehensive income Amount reclassified from accumulated other comprehensive income to net income Effect on OCI 2023 2022 (386) $ 386 — 386 (112) 274 $ 178 (178) — (178) 2 (176) $ $ Fair Value Hedging Relationships The Company may enter into interest rate swaps to hedge interest rate risk arising from fair value changes in our fixed-rate term deposits due to movements in interest rates. Hedges are structured such that the fair value movements of the hedge instruments offset, within a reasonable range, the changes in fair value of the pool of term deposits due to interest rate fluctuations. The terms of our fair value hedges are generally less than 2 years. The derivative instruments are settled at the time of maturity of the pool of term deposits. The Company applies fair value hedge accounting to these derivative transactions with the intention to recognize the effective matching of the fair value gain or loss on the derivative transactions with the fair value gain or loss on the pool of term deposits, within a reasonable range. Any unmatched fair value is recorded in term deposit interest and expenses as hedge ineffectiveness. At December 31, 2023, the Company had $198 of derivative financial instruments outstanding relating to fair value hedges (December 31, 2022 - $nil). - 103 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) The following table presents the effects of fair value hedges on the consolidated balance sheets and the consolidated statements of income: Years Ended December 31 Liabilities - Interest Rate Risk Change in value of hedged item for ineffectiveness measurement Change in value of hedging item for ineffectiveness measurement Hedge Ineffectiveness Carrying amounts for hedged items Accumulated amounts of fair value hedge adjustments on hedged items 2023 2022 $ $ $ 72 $ (198) (126) 317,000 $ 72 $ — — — — — The following table presents outstanding derivative financial instruments designated in qualifying hedging relationships: At December 31, 2023 Interest Rate Risk - Fair Value Hedges Average Rate on Interest Rate Swaps1 Notional Amount Derivative Asset Derivative Liability Net Fair Market Value $ 112,000 Within 1 year 1 to 5 years 202,000 Total Derivatives in Qualifying Hedging Relationships $ 314,000 4.63 % $ 4.27 % 4.53 % $ 33 $ 165 $ 198 $ — $ — — $ 33 165 198 1Average rate on interest rate swaps represents the weighted average received fixed rate The notional amount is not recorded as an asset or liability as it represents the face amount of the contract to which the rate or price is applied in order to calculate the amount of cash exchanged. Notional amounts do not represent the potential gain or loss associated with market risk and are not indicative of the credit risk associated with the derivatives. Derivative-Related Risks The potential for derivatives to increase or decrease in value as a result of changes in relevant factors, such as interest rate changes is referred to as market risk. Credit risk on derivatives, also known as counterparty credit risk, is the risk of a financial loss occurring as a result of the failure of a counterparty to meet its obligation to the Company. The risks are actively monitored and managed by the Company. 14. Term Deposits At December 31 Maturity Date Within 3 Months > 3 Months to 1 Year > 1 to 3 Years > 3 to 5 Years 2023 2022 $ $ 282,817 $ 803,927 790,132 323,226 2,200,102 $ 171,543 760,203 691,343 196,741 1,819,830 The estimated fair value of term deposits at December 31, 2023 was $2,213,220 (December 31, 2022 - $1,792,257) and is determined by discounting the contractual cash flows using market interest rates currently offered for deposits of similar remaining maturities. - 104 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 15. 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 2023 2022 78,227 $ 55,066 0 % 0 % — 729 729 $ $ — (288) (288) $ $ $ 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) 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 2023 2022 (30) $ (84) 591 168 759 729 $ (239) 35 (204) (288) 2023 2022 196 $ 140 336 $ 786 309 1,095 $ $ $ $ At December 31, 2023, deferred tax assets and liabilities were assessed for each entity and are presented as deferred tax assets of $336 (December 31, 2022 - $1,095) and deferred tax liabilities of $nil (December 31, 2022 - $nil) 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. At December 31, 2023, the Company has loss carry forward amounts in the non-consolidated MIC entity of $4,574 (December 31, 2022 - $2,804), the benefit of which has not been recorded in deferred tax assets. This balance only includes assessed fiscal years. The tax loss carry forward amounts expire beginning in 2036. 16. Other Liabilities At December 31 Accounts payable and accrued charges Premises lease liability Dividends payable 2023 10,411 $ 1,700 13,464 25,575 $ 2022 9,078 2,070 11,468 22,616 $ $ - 105 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) During 2023, the Company recognized $66 (2022 - $80) of interest expense and $436 (2022 - $436) of payments relating to the premises lease liability. The maturity of the premises lease liability is as follows: At December 31 Within 1 year > 1 to 5 years Total premises lease liability 17. Financial Liabilities from Securitization Total financial liabilities from securitization mature as follows: At December 31 2023 2024 2025 2026 2027 2028 18. Share Capital At December 31 Balance, January 1 Issued Dividend reinvestment plan At-the-market equity program Rights offerings Stock dividend Executive Share Purchase Plan Balance, December 31 $ $ 2023 397 1,303 1,700 2023 2022 — $ 144,546 471,305 728,243 345,650 227,139 1,916,883 $ 52,590 167,671 520,989 635,435 363,703 — 1,740,388 $ $ 2023 Number of Shares Share Capital 2022 Number of Shares Share Capital 34,305,704 $ 389,986 29,620,939 $ 315,339 972,834 153,400 — — — 35,431,938 $ 14,458 2,084 — — — 406,528 458,781 236,600 2,450,407 1,522,308 16,669 34,305,704 $ 7,376 4,116 34,112 28,750 293 389,986 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%. In 2023, the Company renewed its (i) Base Shelf prospectus; and (ii) at-the-market equity program (“ATM Program”) established pursuant to a Prospectus Supplement to its Base Shelf prospectus allowing the Company to issue up to $30,000 common shares to the public from time to time over a 2 year period at the market prices prevailing at the time of sale. The volume and timing of distributions under the ATM Program are determined at MCAN’s sole discretion. The Company began issuing shares under the ATM Program in 2022. During 2023, the Company sold 153,400 common shares at a weighted average price of $16.12 for gross proceeds of $2,474 and net proceeds of $2,084 including $50 of agent commission paid and $340 of other share issuance costs under the ATM Program. During 2022, the Company sold 236,600 common shares at a weighted average price of $17.88 for gross proceeds of $4,231 and net proceeds of $4,116 including $85 of agent commission paid and $30 of other share issuance costs under the ATM Program. On February 22, 2022, the Board declared a special stock dividend of $0.97 per share paid on March 31, 2022 to shareholders of record as of March 15, 2022. The Company issued $28,750 in common shares out of treasury to shareholders (with fractional shares paid in cash) at the weighted average trading price for the five days preceding the record date of $18.9326. On November 17, 2022, the Company announced a rights offering that closed on December 22, 2022. The Company issued common shares out of treasury to shareholders at a price of $14.00 per common share. Total proceeds net of share issuance costs of $193 was $34,112. - 106 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) For details on the Executive Share Purchase Plan, refer to Note 23. The Company had no potentially dilutive instruments at December 31, 2023 or December 31, 2022. 19. Dividends On February 26, 2024, the Board declared a quarterly regular cash dividend of $0.39 per share to be paid on March 28, 2024 to shareholders of record as of March 15, 2024. 20. Net Gain (Loss) on Securities Years Ended December 31 Net realized gain (loss) on marketable securities Net unrealized gain (loss) on marketable securities Net unrealized gain (loss) on non-marketable securities 2023 2022 $ $ — $ (3,212) (410) (3,622) $ (1,786) (10,297) 9 (12,074) For the year ended December 31, 2023, the Company recorded a $410 net unrealized loss on non-marketable securities comprised of (i) a $3,427 unrealized loss mainly related to underlying properties from general commercial real estate headwinds increasing capitalization rates as well as increased debt servicing costs that impact overall returns; and (ii) a $3,017 unrealized gain related to construction and leasing completion and value-add activity on certain underlying property investments. Unrealized gains or losses on marketable securities fluctuate with share prices of the underlying securities. 21. Mortgage Expenses Corporate assets Years Ended December 31 Mortgage servicing expense Letter of credit expense Other mortgage expenses 2023 2022 $ $ 5,930 $ 752 808 7,490 $ 4,877 748 712 6,337 Letter of credit expense relates to outstanding letters of credit under the Company’s credit facility, discussed in Note 24. Securitization assets At December 31, 2023, mortgage expenses associated with securitization assets of $4,548 (2022 - $4,084) consist primarily of mortgage servicing expenses. 22. 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 Provision for (recovery of) credit losses - 107 - Note 2023 2022 $ 7 7 7 2,061 $ 343 2,073 4,477 17 4,494 (1,274) 189 21 (1,064) — (1,064) 12 $ — — $ (5) (5) 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 23. Related Party Disclosures Transactions with MCAP In 2023, the Company entered into related party transactions with MCAP as follows: • • • • Purchase of mortgage origination and administration services of $7,054 (2022 - $6,176) Purchase of uninsured residential mortgages of $16,750 (2022 - $8,331) Purchase of construction loans of $nil (2022 - $154,962) and sale of construction loans at par of $nil (2022 - $155,799) with no gain or loss on sale. The Company has an agreement with MCAP Securities Limited Partnership, a wholly owned subsidiary of MCAP, whereby the Company can sell to MCAP Securities Limited Partnership insured residential mortgage commitments. The Company sold commitments of $24,877 (2022 - $227,949) under this agreement and received revenue of $193 (2022 - $2,535) recorded in interest on cash and other income on the consolidated statements of income. 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 benefits (salaries, benefits and director fees) Share-based payments (RSU, PSU) Executive Share Purchase Plan 2023 6,822 $ 464 7,286 $ 2022 5,903 974 6,877 $ $ 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. The granting of awards under the Share Purchase Plan may only be done before a black-out period begins or after the sixth day following the end of a black-out period. At December 31, 2023, $1,852 of loans were outstanding under the Share Purchase Plan (December 31, 2022 - $2,276). During 2023, the Company advanced new loans under the Share Purchase Plan of $nil (2022 - $415). The loans under the Share Purchase Plan bore interest at 8.20% at December 31, 2023 (December 31, 2022 - 7.45%) 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 $2,405 at December 31, 2023 (December 31, 2022 - $2,617). In 2023, MCAN recognized $161 of interest income (2022 - $105) on the Share Purchase Plan loans. Employee Share Ownership Plan The Company has an Employee Share Ownership Plan whereby team members can elect to purchase common shares of the Company up to 6% of their annual earnings. The Company matches 50% of each team member’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 $215 for 2023 (2022 - $199). Share Unit Plans 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 - 108 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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. During 2023 and 2022, there were no DSU Plan units outstanding. 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. During 2023, the Company paid the RSU Participants $761 (2022 - $634) upon vesting of 45,776 RSU Plan units (2022 - 32,697 units). 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 0-200% 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. During 2023, the Company paid the PSU Participants $303 (2022 - $696) upon vesting of 26,954 PSU Plan units (2022 - 31,322). At December 31, 2023 and 2022, the Company recorded a liability on all outstanding units as it expected to payout on these units. Activity related to the RSU Plan and PSU Plan is as follows: At December 31 Units outstanding, beginning of year New units granted Units issued as dividends Units vested Units forfeited Units outstanding, end of year Compensation expense for the year Outstanding liability, end of year 24. Credit Facilities 2023 RSU 2022 PSU RSU PSU 104,994 100,340 102,440 49,858 11,017 55,693 12,519 32,808 12,792 86,280 41,799 11,676 (45,776) (26,954) (32,697) (31,322) (722) (722) (10,349) (8,093) 119,371 140,876 104,994 100,340 $ $ 767 $ 954 $ 957 $ 1,542 $ 524 $ 940 $ 313 883 The Company has a secured demand revolver facility from a Canadian Schedule I Chartered bank bearing interest at prime plus 0.25% (December 31, 2022 - prime plus 0.25%), with a facility limit of $220,000 (December 31, 2022 - $220,000). The facility is due and payable upon demand. At December 31, 2023, the outstanding loan principal payable was $nil (December 31, 2022 - $nil). - 109 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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, 2023, there were letters of credit in the amount of $48,637 issued (December 31, 2022 - $47,988) and additional letters of credit in the amount of $25,722 committed but not issued (December 31, 2022 - $25,965). 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, 2023, the outstanding facility balance was $nil (December 31, 2022 - $nil). The Company has a demand loan credit agreement with a Canadian Schedule I Chartered bank for a $100,000 senior secured mortgage warehouse facility (December 31, 2022 - $100,000) at either prime plus 0.05% or bankers’ acceptance rate plus 1.05%. The facility is used to fund insured residential mortgages prior to securitization activities. At December 31, 2023, the outstanding loan principal payable was $64,280 (December 31, 2022 - $6,370). 25. 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. Through the Company’s risk management and corporate governance framework, assessments of current and projected asset growth, economic conditions, housing market activity, the interest rate environment and changes to credit quality are made to determine appropriate levels of capital. The Company expects 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. 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. OSFI expects all federally regulated financial institutions to meet the minimum capital to risk-weighted asset ratios of 7% common equity tier 1 capital, 8.5% tier 1 capital and 10.5% total capital. 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. - 110 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) At December 31 Regulatory ratios (OSFI) Share capital Contributed surplus Retained earnings Accumulated other comprehensive income 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 Letters of credit Less: conversion to credit equivalent amount Off-balance sheet items $ $ $ 2023 2022 406,528 $ 510 124,708 98 (58,183) — 473,661 7,953 481,614 $ 4,739,087 $ (58,183) 1,900 4,682,804 716,638 (429,983) 48,637 (24,319) 310,973 389,986 510 98,990 (176) (57,201) 357 432,466 5,192 437,658 4,078,676 (57,201) 2,994 4,024,469 704,139 (352,070) 47,988 (23,994) 376,063 Total exposures/Regulatory assets (B) $ 4,993,777 $ 4,400,532 Leverage ratio (A / B) 9.49 % 9.83 % 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 was 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, was subject to a scaling factor that decreased over time and was 25% in fiscal 2022. 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. Other Capital Management Activity In conjunction with the annual strategic planning and budgeting process, the Company completes an Internal Capital Adequacy Assessment Process (“ICAAP”) in order to ensure that it has sufficient capital to support its business plan and risk appetite. The ICAAP assesses the capital necessary to support the various inherent risks that the Company faces, including liquidity and funding, credit, interest rate, market, operational, regulatory compliance, strategic and reputational risks. The Company’s business plan is also stress-tested under various adverse scenarios to determine the impact on 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 its internal forecasts for capital adequacy on a quarterly basis, and the results of such testing are reported to the Board. 26. 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 loans payable. - 111 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) 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, 2023 and 2022. 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, 2023 Level 1 Level 2 Level 3 Total — $ 198 — — — — — — — — — — 198 $ — $ — 54,548 8,291 16,307 4,284 8,413 2,094 2,400 4,534 6,072 3,000 109,943 $ 50,320 $ 198 54,548 8,291 16,307 4,284 8,413 2,094 2,400 4,534 6,072 3,000 160,461 $ Carrying Value 50,320 198 54,548 8,291 16,307 4,284 8,413 2,094 2,400 4,534 6,072 3,000 160,461 — $ 60,345 $ 60,345 — $ 2,414,855 — 2,256 — 30,909 — — 1,929,948 — $ 4,310,107 $ 4,401,361 $ 4,438,313 2,416,197 2,256 — 1,891,654 2,416,197 2,256 30,909 1,891,654 — $ 2,213,220 $ 2,213,220 $ 2,200,102 64,683 — 25,575 — — 1,916,883 — $ 4,158,328 $ 4,158,328 $ 4,207,243 64,683 25,575 1,854,850 64,683 25,575 1,854,850 Assets measured at FVPL Marketable securities Derivative financial instruments - assets 10 Non-marketable securities - KSHYF 1 Non-marketable securities - TAS 3 9 Non-marketable securities - KSSMF 1 Non-marketable securities - TAS Co 9 Non-marketable securities - Crown 8 Non-marketable securities - Pearl 9 Non-marketable securities - TAS 4 8 Non-marketable securities - Broccolini 8 Non-marketable securities - Fiera 8 Non-marketable securities - Harbour 8 Assets measured at amortized cost for which fair values are disclosed Cash and cash equivalents Mortgages - corporate 3 Other assets - other loans 4 Securitization program cash held in trust Mortgages - securitized 3 Liabilities measured at amortized cost for which fair values are disclosed Term deposits 6 Demand loans payable 5 Other liabilities - corporate 5 Financial liabilities from securitization 7 $ $ $ $ $ $ 50,320 $ — — — — — — — — — — — 50,320 $ 60,345 $ — — 30,909 — 91,254 $ — $ — — — — $ - 112 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) At December 31, 2022 Level 1 Level 2 Level 3 Total $ Assets measured at FVPL Marketable securities Non-marketable securities - KSHYF 1 Non-marketable securities - Securitization Notes 2 Non-marketable securities - TAS 3 9 Non-marketable securities - KSSMF 1 Non-marketable securities - TAS Co 9 Non-marketable securities - Crown 8 Non-marketable securities - Pearl 9 Non-marketable securities - TAS 4 8 Non-marketable securities - Broccolini 8 Non-marketable securities - Fiera 8 Non-marketable securities - Harbour 8 Assets measured at amortized cost for which fair values are disclosed Cash and cash equivalents Mortgages - corporate 3 Other assets - other loans 4 Securitization program cash held in trust Mortgages - securitized 3 Liabilities measured at amortized cost for which fair values are disclosed Term deposits 6 Demand loan payable 6 Other liabilities - corporate 5 Financial liabilities from securitization 7 53,743 $ — — — — — — — — — — — 53,743 $ 78,210 $ — — 34,531 — $ $ $ 112,741 $ $ $ — $ — — — — $ — $ — — — — — — — — — — — — $ — $ 52,642 1,022 8,714 9,462 3,750 8,962 1,745 2,400 2,400 3,806 2,325 97,228 $ 53,743 $ 52,642 1,022 8,714 9,462 3,750 8,962 1,745 2,400 2,400 3,806 2,325 150,971 $ Carrying Value 53,743 52,642 1,022 8,714 9,462 3,750 8,962 1,745 2,400 2,400 3,806 2,325 150,971 — $ 78,210 $ 78,210 — $ 1,939,494 — 2,276 — 34,531 — 1,751,303 — — $ 3,617,650 $ 3,730,391 $ 3,805,814 1,939,615 2,276 — 1,675,759 1,939,615 2,276 34,531 1,675,759 — $ 1,792,257 $ 1,792,257 $ 1,819,830 6,532 — 22,616 — — 1,740,388 — $ 3,463,097 $ 3,463,097 $ 3,589,366 6,532 22,616 1,641,692 6,532 22,616 1,641,692 1 Fair value is based on the redemption value. 2 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. 3 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 insured adjustable rate residential 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. 4 Fair value is assumed to be the carrying value as underlying loans are variable rate. 5 The carrying value of the asset/liability approximates fair value. 6 As term deposits are non-transferable by the deposit holders, there is no observable market. As such, the fair value of the term deposits is determined by discounting expected future cash flows of the deposits at current offered rates for deposits with similar terms. 7 Fair value of financial liabilities from securitization is determined using current market rates for CMB and MBS. 8 Fair value based on recent transaction price. 9 Fair value based on the net asset value of the underlying partnerships. 10 Fair value based on swaps curves adjusted for credit risks. The following table shows the continuity of Level 3 financial assets measured at FVPL: At December 31 Balance, beginning of year Advances / Purchases Repayments / Dispositions Changes in fair value, recognized in net income Balance, end of year 2023 2022 $ 97,228 $ 14,670 (1,545) (410) $ 109,943 $ 64,946 40,382 (8,109) 9 97,228 - 113 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) (Dollar amounts in thousands except for per share amounts) Risk management 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. For the nature of these risks and how they are managed, please refer to the shaded sections of 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. 27. Commitments and Contingencies For the nature of the Company’s commitments and contingencies, please refer to the shaded sections of the “Off-Balance Sheet Arrangements” section of the MD&A. The shaded section of the MD&A relating to off-balance sheet arrangements forms an integral part of these consolidated financial statements. - 114 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) EXECUTIVE OFFICERS Donald Coulter President and Chief Executive Officer Floriana Cipollone Senior Vice President and Chief Financial Officer Avish Buck Senior Vice President and Chief Operating Officer Carl Brown Senior Vice President, Investments & Corporate Development Aaron Corr Vice President and Chief Risk Officer Michelle Liotta Vice President, Human Resources Mike Jensen Vice President and Chief Compliance Officer (Chief Anti Money Laundering & Privacy Officer) Sylvia Pinto Vice President, Corporate Secretary & Governance Officer Paul Gill Vice President, Information Technology Nazeera Khan Vice President and Chief Audit Officer Alysha Rahim Vice President, Finance Peter Ryan Vice President, Controller Justin Silva Vice President, Treasurer DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS Bonnie Agostinho Chief Information Officer, Canadian Tire Financial Services Member of Audit Committee Member of Enterprise Risk Management and Compliance Committee Director since May 2022 Brian Chu Founding Partner, Bogart Robertson & Chu LLP Chair of Conduct Review, Corporate Governance and Human Resources Committee Member of Enterprise Risk Management and Compliance Committee Director since May 2021 John Coke Corporate Director, MCAN Member of Audit Committee Member of Enterprise Risk Management and Compliance Committee Director since May 2021 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 Member of Audit Committee Chair of Enterprise Risk Management and Compliance Committee Director since May 2020 Gordon Herridge Corporate Director, MCAN Chair of Audit Committee Member of Conduct Review, Corporate Governance and Human Resources Committee Director since May 2018 Gaelen Morphet President, Morphet Family Wealth Advisors Inc. Member of Conduct Review, Corporate Governance and Human Resources Committee Member of Enterprise Risk Management and Compliance Committee Director since January 2018 Derek Sutherland Chair of the Board, MCAN President, Canadazil Capital Inc. Director since May 2017 Donald Coulter President and Chief Executive Officer Director since December 2023 - 115 - 2023 ANNUAL REPORT | MCAN MORTGAGE CORPORATION (d/b/a MCAN FINANCIAL GROUP) 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@mcanfinancial.com Term Deposits Tel: 1-800-387-9096 (toll free) Fax: 1-877-821-0710 termdeposits@mcanfinancial.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.mcanfinancial.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@mcanfinancial.com. Dividend Reinvestment Plan (“DRIP”) For further information regarding MCAN’s Dividend Reinvestment Plan, please visit: www.mcanfinancial.com. 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 https://www-us.computershare.com/Investor/#DirectStock. 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 2023 Annual Report is available for viewing/printing on our website at www.mcanfinancial.com, and also on SEDAR+ at www.sedarplus.ca. To request a printed copy, please contact Ms. Sylvia Pinto, Corporate Secretary & Governance Officer, or e-mail mcanexecutive@mcanfinancial.com. - 116 - 

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