Stock market symbol
TSX: MKP
TORONTO,
May 14, 2013 /CNW/ - MCAN
Mortgage Corporation's ("MCAN", the "Company" or "we") net income
for the first quarter of 2013 was $4.5
million, up from $4.4 million
in the prior year. Earnings per share were $0.24 compared to $0.26 during the same quarter in the prior
year. The impact of expenses related to the proposed
acquisition of Xceed Mortgage Corporation ("Xceed") reduced income
by $722,000 ($0.04 per share) in the quarter. The
increase in net income was primarily due to higher equity income
from MCAP Commercial LP ("MCAP"), lower provisions for credit
losses and increased securitization income, partially offset by a
lower recovery of income taxes and transaction expenses incurred
during the quarter.
Taxable income for the quarter decreased
significantly in the current year to $1.3
million ($0.07 per share) from
$6.1 million ($0.36 per share) in the prior year. Further
details regarding current quarter taxable income are discussed
below.
The key differences between taxable income and
pre-tax net income for accounting purposes include differences
between equity income from MCAP for accounting and tax purposes,
the treatment of capital gains income and the non-deductibility of
fair market value adjustments, collective provisions for credit
losses and the amortization of upfront Canada Mortgage Bonds ("CMB") program costs
for tax purposes. As a mortgage investment corporation
("MIC"), we typically pay out all of our taxable income to
shareholders through dividends.
We earned $1.4
million of equity income from our investment in MCAP during
the quarter, primarily due to significant mortgage securitization
by MCAP during that period, in addition to higher origination
volumes and assets under administration. For tax purposes,
equity income from MCAP related to mortgage securitizations is
recognized in line with actual cash flows, such that a tax loss is
incurred up front as program costs are paid while interest income
is earned over the term of the mortgage portfolios. As a
result of this difference we recognized negative taxable income
from MCAP during the quarter, which contributed to the relatively
low first quarter taxable income per share. We expect to earn
future taxable income from our investment in MCAP given the timing
differences between income for accounting and tax purposes.
On March 26, 2013,
we announced our intention to acquire all of the issued and
outstanding shares of Xceed for $1.75
per share, for a total consideration of approximately $53 million. Xceed is a specialized, single
family insured and uninsured residential mortgage lender, focused
primarily on the insured area of the mortgage market and, in recent
years, has been focused on winding down its legacy securitization
portfolio. The transaction is expected to be funded with a
combination of cash and common shares of MCAN, and will be effected
pursuant to a plan of arrangement under Section 182 of the
Business Corporations Act (Ontario). The proposed transaction is
expected to close on or before July 4,
2013, subject to receipt of Xceed shareholder, regulatory
and other approvals and satisfaction of customary conditions
precedent.
We separate our assets into the corporate and
securitization portfolios for reporting purposes. Corporate
assets represent our core strategic investments, and are funded by
term deposits and share capital. Securitization assets
consist primarily of mortgages securitized through the CMB program
and reinvestment assets purchased with mortgage principal
repayments and are funded by financial liabilities from
securitization.
Net Investment Income: Net
investment income was $6.6 million
for the quarter, an increase of $3.2
million from $3.4 million
during the same quarter in the prior year. Net investment
income consisted of $7.2 million from
corporate assets (2012 - $5.6
million) and negative $602,000
from securitization assets (2012 - negative $2.2 million). The increase was primarily
due to higher equity income from MCAP, lower negative fair market
value adjustments to derivative financial instruments and a lower
provision for credit losses. Income from securitization
assets includes a negative fair market value adjustment to
derivative financial instruments of $641,000 (negative $3.2
million in 2012).
Net Investment Income - Corporate
Assets
Mortgage interest income increased to
$10.6 million in the current year
from $10.3 million in the prior year
as a result of a $70 million increase
in the average mortgage portfolio (from $663
million in 2012 to $733
million in 2013), partially offset by a decrease in the
average mortgage yield from 5.81% in 2012 to 5.67% in 2013. The
decrease in yield was primarily due to lower average yields in the
uninsured single family and construction portfolios, partially
offset by an increase in the commercial yield. Mortgage interest
income includes $293,000 of realized
discount income (2012 - $120,000)
from MCAN's acquired mortgage portfolios.
As at March 31,
2013, we held discounted mortgages with a net discount of
$5.3 million (December 31, 2012 - $5.9
million). We retain 50% of any recoveries of that
amount, and we pay the remaining 50% to MCAP. The amount of
the discount ultimately recovered is dependent on the value of the
real estate securing the mortgage, as well as the financial
capacity of the borrower. Additionally, these mortgages have
maturity dates ranging from 2013 to 2032. The realization of
the discount is based on management's expectations as to when cash
will be received.
Equity income from our ownership in MCAP was
$1.4 million, up from $526,000 in the prior year. The increase was
primarily due to higher origination volumes, assets under
administration and securitization volumes. In addition, MCAP's
current year operations reflect the full consolidation of MCAP
Service Corporation ("MSC"), whereas it had not yet acquired MSC in
the first quarter of 2012.
Fees were $384,000
in the quarter, comparable to $340,000 in the prior year. Fees consist of
mortgage fees of $373,000 (2012 -
$265,000) and fee income from a
profit sharing arrangement related to mortgage portfolios acquired
by MCAP of $11,000 (2012 -
$75,000). Mortgage fees include
extension, renewal and letter of credit fees earned on our
corporate mortgage portfolio.
Marketable securities income was $245,000 for the quarter compared to $515,000 in the prior year. The decrease was
primarily due to a lower average portfolio balance. The prior year
included gains from sales of securities of $283,000 and a $260,000 write down of a security.
There was a $59,000 loss on financial investments and other
loans in the current year, primarily due to a $150,000 write-down of a financial investment
during the quarter.
Term deposit interest and expenses increased to
$4.8 million in the current year from
$4.0 million in the prior year due to
a $116 million increase in the
average term deposit balance (from $632
million in 2012 to $748
million in 2013) and an increase in the average term deposit
rate from 2.43% in 2012 to 2.49% in 2013.
Provisions for credit losses were $88,000 for the quarter compared to $1.5 million for the same period of the prior
year. Current year activity consisted primarily of net
individual mortgage provisions of $95,000 relating to uninsured single family
mortgages, while collective provisions were minimal. The
prior year included $635,000 of
collective mortgage provisions and a $900,000 provision relating to an indemnity from
a construction loan securitization program discussed below.
As at December 31,
2012, we had a $1.1 million
allowance on our balance sheet included in other liabilities
relating to our pro-rata share of estimated losses pursuant to an
indemnity on the underlying assets of a residential construction
loan securitization program, specifically an impaired residential
construction loan. We participated in the securitization
program (and associated indemnity) with another investor. During
the first quarter of 2013, we purchased the other investor's
interest in the underlying loans at a discount, including the
impaired residential construction loan with which the allowance was
associated. Upon the purchase of the loans for our corporate
mortgage portfolio, we reversed the existing liability (as the
indemnity was released at this time) and established an individual
mortgage allowance for the same amount, which resulted in a net
$nil impact to provisions for credit losses in the current
year. In the first quarter of 2012, we increased the
allowance from $200,000 to
$1.1 million, which led to the
$900,000 provision in the prior
year.
Mortgage write-offs, consisting primarily of a
residential construction loan, were $309,000 during the quarter compared to
$1.1 million in the prior year.
Net Investment Income - Securitization
Assets
Mortgage interest income decreased to
$2.6 million in the current year from
$3.9 million in the prior year as a
result of a $549 million decrease in
the average mortgage portfolio over 2013 and a decrease in the
average yield from 4.08% in 2012 to 3.69% in 2013. As the
securitized mortgages repay, we reinvest the collected principal in
certain permitted investments (which include financial investments
and short-term investments) until the maturity of the CMB
issuance.
Interest on financial investments decreased to
$655,000 in the current year from
$1.5 million in the prior year due to
a decrease in the average portfolio.
Interest on short-term investments increased to
$340,000 in the current year from
$315,000 as a result of an increase
in the average portfolio.
Other securitization income for the quarter
decreased to $872,000 from
$2.8 million in the prior year,
consisting primarily of interest rate swap receipts of $872,000 (2012 - $1.7
million). The prior year also included $706,000 of refinancing and renewal gains and
$428,000 from the sale of
mortgage-backed securities ("MBS").
Interest on financial liabilities from
securitization decreased to $4.4
million in the current year from $7.5
million in the prior year as a result of a significantly
lower average balance as a result of the maturity of certain CMB
issuances during 2012 and a decrease in the average interest rate
to 3.24% in 2013 from 3.66% in 2012.
The negative fair market value adjustment to
derivative financial instruments of $641,000 (2012 - negative $3.2 million) for the quarter relates to the CMB
interest rate swaps. The unrealized portion of this fair
market value adjustment can be volatile as it is driven by changes
in the forward interest rate curve. From an economic
perspective, this adjustment is generally offset by changes in
future expected income from securitized mortgages and principal
reinvestment assets that have a floating interest rate. We
regularly monitor our interest rate swap hedge position to minimize
our exposure to interest rate risk. From an accounting
perspective, changes in future expected income from these floating
rate assets are not reflected in the consolidated statement of
income, which can cause significant volatility to net income since
there is no offset to the fair market value adjustment to
derivative financial instruments.
Since we are not currently participating in new
CMB issuances, our existing securitization assets and liabilities
will decrease significantly over the next three years. The
CMB securitization liabilities mature as follows: 2013 -
$1.1 billion, 2014 - $871 million, 2015 - $44
million.
Operating Expenses: Operating
expenses were $2.6 million compared
to $2.1 million during the same
quarter in the prior year. During the quarter, we incurred
$722,000 of transaction expenses
related to the proposed acquisition of Xceed. In addition, general
and administration expenses decreased by $225,000 as a result of lower corporate
expenses.
Income Taxes: There was a
$1.7 million recovery of current
income taxes in the first quarter of 2013 compared to a
$1.2 million provision during
2012. The current year recovery was a result of significantly
lower than usual taxable income. We had a deferred tax
expense of $1.2 million in the
current year as a result of the significant difference between
equity income from MCAP for accounting and tax purposes, compared
to a $1.9 million recovery during
2012.
Credit Quality: Impaired mortgages
as a percentage of total mortgages (net of individual allowances)
were 0.44% ($6.9 million) at
March 31, 2013, down from 0.51%
($8.6 million) at December 31, 2012. Impaired
corporate mortgages as a percentage of the corporate mortgage
portfolio decreased to 0.95% at March 31,
2013 from 1.17% at December 31,
2012.
Total mortgage arrears decreased to $51 million at March 31,
2013 from $63 million at
December 31, 2012. Mortgage
arrears consist of $26 million of
corporate mortgages and $25 million
of insured securitized mortgages. There were no other assets
in arrears at quarter end. We continue to proactively monitor
mortgage arrears and take prudent steps to collect overdue
accounts.
Financial Position: As at March 31, 2013, total consolidated assets were
$2.93 billion, consisting of
$897 million of corporate assets and
$2.04 billion of securitization
assets. Corporate assets decreased by $54 million during the quarter, while
securitization assets were unchanged. Corporate asset
activity during the quarter included decreases of $32 million in cash and cash equivalents and
$23 million in mortgages.
Term deposit liabilities were $729 million as at March
31, 2013, down $48 million
from $777 million as at December 31, 2012.
Total shareholders' equity of $178 million was unchanged from December 31, 2012. Activity for the quarter
included the issuance of new common shares of $1.1 million, net income of $4.5 million and the first quarter dividend of
$5.8 million.
Asset Capacity: As at March 31, 2013, our remaining asset capacity was
$48 million, based on our target
assets to capital ratio of 5.75, which is measured on a tax
basis.
Outlook: Residential housing markets in
Canada continue to be stable while
experiencing moderation in terms of sales volumes and
pricing. We expect the housing market to remain stable for
the next 12 months as interest rates remain flat and the Canadian
economy continues to be supported by slower GDP and employment
growth.
With new mortgage rules and regulatory changes
in full effect, we expect to see a reduction in mortgage
originations in Ontario,
Eastern Canada and British Columbia. Western Canada will continue to see mortgage
volumes grow. Market conditions should cause some downward
pressure on price points, but no significant disruption to the
overall housing market. We expect market conditions to
improve credit spreads and overall loan profitability as funding
costs remain stable in 2013.
In the first quarter of 2013, we have observed
stable construction loan originations and improvements in volumes
of residential mortgage origination at good spreads. In addition,
we have observed more opportunities for short term bridge/mezzanine
lending opportunities which should enhance MCAN's overall returns
commencing in the second quarter of 2013.
Dividend: The Board of Directors
declared a second quarter regular dividend of $0.28 per share to be paid June 28, 2013 to shareholders of record as of
June 14, 2013.
Changes to Board of Directors:
Robert Stuebing will not stand for
re-election at MCAN's Annual and Special Meeting of Shareholders on
May 14, 2013. The Board would
like to thank Mr. Stuebing for his long service and valuable
contribution to MCAN.
Further Information: Complete
copies of the Company's 2013 First Quarter Report will be filed on
the System for Electronic Document Analysis and Retrieval ("SEDAR")
at www.sedar.com and on the Company's website at
www.mcanmortgage.com by May 15,
2013.
MCAN is a public company listed on the Toronto Stock Exchange
("TSX") under the symbol MKP and is a reporting issuer in all
provinces and territories in Canada. MCAN also qualifies as a
mortgage investment corporation ("MIC") under the Income Tax Act
(Canada) (the "Tax Act").
The Company's primary objective is to
generate a reliable stream of income by investing its corporate
funds in a portfolio of mortgages (including single family
residential, residential construction, non-residential construction
and commercial loans), as well as other types of financial
investments, loans and real estate investments. MCAN employs
leverage by issuing term deposits eligible for Canada Deposit
Insurance Corporation ("CDIC") deposit insurance up to a maximum of
five times capital (on a non-consolidated tax basis) as permitted
by the Tax Act. The term deposits are sourced through a
network of independent financial agents. As a MIC, MCAN is entitled
to deduct from income for tax purposes 100% of dividends, except
for capital gains dividends, which are deducted at 50%. Such
dividends are received by the shareholders as interest income and
capital gains dividends, respectively.
MCAN also participates in the CMB program,
and other securitizations of insured mortgages.
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND
STATEMENTS
This press release contains "forward-looking
statements" within the meaning of applicable Canadian securities
laws. The words "may," "believe," "will," "anticipate,"
"expect," "planned," "estimate," "project," "future," and other
expressions that are predictions of or indicate future events and
trends and that do not relate to historical matters identify
forward-looking statements. Such statements reflect management's
current beliefs and are based on information currently available to
management. The forward-looking statements in this press release
include, among others, statements with respect to:
- the current business environment and outlook;
- possible or assumed future results;
- ability to create shareholder value;
- business goals and strategy;
- the stability of home prices;
- effect of challenging conditions on us;
- factors affecting our competitive position within the housing
markets;
- sufficiency of our access to capital resources;
- the timing of the effect of interest rate changes on our cash
flows; and
- the completion of MCAN's proposed acquisition of Xceed.
Reliance should not be placed on forward-looking
statements because they involve known and unknown risks,
uncertainties and other factors, which may cause the actual results
to differ materially from the anticipated future results expressed
or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those set forth in
the forward-looking statements include, but are not limited to:
- global market activity;
- worldwide demand for and related impact on commodity
prices;
- changes in government and economic policy;
- changes in general economic, real estate and other
conditions;
- changes in interest rates;
- mortgage rate and availability changes;
- adverse legislation or regulation;
- technology changes;
- confidence levels of consumers;
- ability to raise capital on favourable terms;
- our debt and leverage;
- competitive conditions in the homebuilding industry, including
product and pricing pressures;
- ability to retain our executive officers;
- litigation risk;
- relationships with our mortgage originators;
- additional risks and uncertainties, many of which are beyond
our control, referred to in this press release and our other public
filings with the applicable Canadian regulatory authorities;
and
- the expected timing and completion of MCAN's proposed
acquisition of Xceed is subject to Xceed shareholder approval,
court and regulatory approvals, and other customary closing
conditions; accordingly, there can be no certainty that the
transaction will be completed or that anticipated benefits will be
realized.
Subject to applicable securities law requirements, we undertake
no obligation to publicly update any forward-looking statements
whether as a result of new information, future events or
otherwise. However, any further disclosures made on related
subjects in subsequent reports should be consulted.
SOURCE MCAN Mortgage Corporation