Stock market symbol
TSX: MKP
TORONTO, Aug. 13, 2013 /CNW/ - MCAN Mortgage Corporation's
("MCAN", the "Company" or "we") net income for the second quarter
of 2013 decreased to $5.0 million
from $6.3 million in 2012. Estimated
taxable income (refer to "Non-IFRS Measures" section of the Second
Quarter 2013 Management's Discussion & Analysis of Operations
("MD&A") for a definition of these measures) for the quarter
was $4.3 million ($0.23 per share) compared to $8.2 million ($0.48
per share) in the prior year. The decrease in net income was
primarily due to lower income from securitization assets,
marketable securities income and interest earned on financial
investments and loans, and transaction expenses incurred in the
current year, partially offset by lower provisions for credit
losses and a recovery of income taxes. Earnings per share were
$0.27 for the quarter compared to
$0.37 in the prior year.
Year to date net income decreased to
$9.5 million from $10.7 million in the prior year as a result of
the reasons noted above for the quarter. Estimated taxable
income for the year to date was $5.6
million ($0.30 per share)
compared to $14.3 million
($0.84 per share) in the prior year.
For the year to date, earnings per share were $0.51 compared to $0.63 in the prior year.
The key differences between estimated taxable
income and pre-tax net income for accounting purposes include 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, the
treatment of capital gains income, and differences between equity
income from MCAP Commercial LP ("MCAP") for accounting and tax
purposes. As a mortgage investment corporation ("MIC"), we
typically pay out all of our taxable income (refer to "Non-IFRS
Measures" section of the MD&A for a definition of these
measures) to shareholders through dividends.
As discussed in the 2013 first quarter press
release, taxable income from MCAP continues to be significantly
lower than income for accounting purposes. 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 minimal taxable income
from MCAP during the quarter and have recognized a tax loss of
$1.5 million for the year to
date. The timing differences associated with income from MCAP
for accounting and tax purposes are expected to reverse over future
periods.
MCAN's estimated taxable income per share of
$0.30 for the year to date has been
$0.26 per share lower than the
regular dividends of $0.56 per share
paid over the six month period. Although our core corporate
operations have been performing to expectations, this deficiency
has resulted primarily from the tax loss incurred from our equity
investment in MCAP. In the second half of 2013, any earnings
from our investment in Xceed Mortgage Corporation ("Xceed") are
expected to be sheltered by tax losses available in Xceed. We
expect both investments to ultimately be accretive to taxable
income, however the impact of timing differences on taxable income
may impact dividends paid in upcoming quarters. We are
currently assessing strategies to manage these timing differences
and their impacts on dividends paid to shareholders.
We separate our assets into 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 $7.0 million
for the quarter, down from $9.0
million during the same quarter of the prior year. Net
investment income consisted of $8.6
million from corporate assets (2012 - $10.0 million) and a loss of $1.6 million from securitization assets (2012 -
loss of $1.0 million). The loss
from securitization assets includes a $1.7
million negative fair market value adjustment to derivative
financial instruments (negative $1.5
million in 2012).
Net Investment Income - Corporate
Assets
Mortgage interest income decreased to
$10.1 million in the current year
from $10.5 million in the prior year
as a result of a decrease in the average mortgage yield to 5.66% in
2013 from 6.10% in 2012, partially offset by an increase in the
average mortgage portfolio (from $687
million in 2012 to $708
million in 2013). The decrease in yield was primarily
due to lower average yields in the single family and construction
portfolios, partially offset by an increase in the commercial
portfolio yield. Mortgage interest income includes
$86,000 of realized discount income
from MCAN's acquired mortgage portfolios compared to $562,000 in 2012.
Equity income from our ownership in MCAP was
$2.1 million, an increase from
$1.8 million in the prior year. The
increase was primarily due to higher assets under administration
and higher origination and securitization volume by MCAP.
During the second quarter of 2012, MCAP acquired the remaining 80%
of MCAP Service Corporation that it did not previously own, and
acquired the residential mortgage operations and certain related
assets of ResMor Trust Company. A full quarter of consolidated
operations in 2013 also led to the increase in equity income over
the prior year.
Fees were $439,000
during the quarter, down from $880,000 in the prior year. Fees consist
primarily of extension, renewal and letter of credit fees earned on
our corporate mortgage portfolio.
Marketable securities income decreased to
$488,000 from $1.1 million in the prior year, primarily due to
$259,000 of gains from sales of
marketable securities in 2013 compared to $759,000 in 2012. In addition, the average
portfolio balance in 2013 was lower than 2012.
Interest on financial investments and other
loans decreased from $753,000 in the
prior year to $61,000 in the current
year, primarily due to a $493,000
income distribution from a commercial real estate investment in the
prior year and a lower average balance in 2013 compared to
2012.
Term deposit interest and expenses increased to
$4.4 million in the current year from
$4.3 million in the prior year as a
result of a $28 million increase in
the average term deposit balance to $701
million in 2013 from $673
million in 2012 and an increase in the average term deposit
rate to 2.44% from 2.43%.
There was a $411,000 recovery of credit losses during the
quarter compared to $50,000 of
provisions in the prior year. Current year activity consisted
primarily of a $550,000 reduction to
an individual allowance on a completed inventory loan, in addition
to collective mortgage provisions of $138,000. Collective and individual
mortgage provision activity in the prior year was minimal.
Mortgage write-offs during the quarter were $3,000 compared to $104,000 in the prior year.
Net Investment Income - Securitization
Assets
Net investment income from securitized assets
before fair market value adjustments was $44,000 in 2013 compared to $457,000 in the prior year. Including fair
market value adjustments on derivative financial instruments, net
investment income on securitized assets was negative $1.6 million in 2013 compared to negative
$1.0 million in the prior year.
Mortgage interest income decreased to
$1.9 million in the current year from
$3.8 million in the prior year,
primarily due to a $496 million
decrease in the average mortgage portfolio from 2012. In
addition, the average yield decreased from 4.02% in 2012 to 3.77%
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
$550,000 in 2013 from $1.3 million in 2012 as a result of a decrease in
the average portfolio.
Interest on short-term investments increased to
$409,000 from $372,000 in the prior year as a result of an
increase in the average portfolio.
Other securitization income was $1.4 million in 2013 compared to $2.3 million in the prior year, consisting
primarily of interest rate swap receipts in both years. As part of
the CMB program, we enter into "pay floating, receive fixed"
interest rate swaps to hedge interest rate risk.
Interest on financial liabilities from
securitization decreased to $4.1
million in the current year from $7.3
million from the prior year, primarily due to a
significantly lower average balance as a result of the maturity of
certain CMB issuances throughout 2013 and in the latter half of
2012. In addition, the average interest rate decreased to 3.16% in
2013 from 3.65% in 2012.
The negative fair market value adjustment to
derivative financial instruments of $1.7
million (2012 - $1.5 million)
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 two years. Our
existing financial liabilities from securitization mature as
follows: 2013 - $532 million, 2014 -
$870 million, 2015 - $43 million.
Operating Expenses:
Operating expenses were $2.5 million
compared to $2.4 million during the
prior year. During the quarter, we incurred $406,000 of transaction expenses relating to the
acquisition of Xceed (discussed below under "Subsequent
Event").
Income Taxes: There was a
recovery of $480,000 of income taxes
in the second quarter of 2013 compared to a provision of
$323,000 in the prior year.
Current tax expense was higher in the prior year, in line with
higher taxable income.
Credit Quality: Impaired
mortgages as a percentage of total mortgages (net of individual
allowances) were 0.52% ($7.6 million)
at June 30, 2013, up from 0.44%
($6.9 million) at March 31, 2013. Impaired corporate
mortgages as a percentage of the corporate portfolio increased to
1.04% at June 30, 2013 from 0.95% at
March 31, 2013.
Total mortgage arrears were $50 million at June 30,
2013, a slight decrease from $51
million at March 31, 2013.
Mortgage arrears consist of $21
million of insured securitized mortgages and $29 million of corporate mortgages, relating
primarily to insured and uninsured single family loans. There
were no other assets in arrears at quarter end. We continue
to proactively monitor loan arrears and take prudent steps to
collect overdue accounts.
Financial Position: As at
June 30, 2013, total consolidated
assets were $2.36 billion, consisting
of $897 million of corporate assets
and $1.46 billion of securitization
assets. Corporate assets were unchanged during the quarter,
which included a $20 million increase
in mortgages and a $19 million
decrease in cash and cash equivalents. Securitization assets
decreased by $571 million, which
included decreases of $322 million in
short term investments, $127 million
in mortgages and $120 million in
financial investments.
Term deposit liabilities were $728 million at June 30,
2013, down slightly from $729
million at March 31, 2013.
Total shareholders' equity of $177 million decreased slightly from $178 million at March 31,
2013. Activity for the quarter included the issuance of new
common shares of $561,000 through the
Dividend Reinvestment Plan, net income of $5.0 million, the second quarter dividend of
$5.3 million and a decrease in the
available for sale reserve of $838,000.
Asset Capacity: As at
June 30, 2013, our remaining asset
capacity was $35 million, based on
our target assets to capital ratio of 5.75.
Subsequent Event: On July 4, 2013, we completed our acquisition of all
of the issued and outstanding shares of Xceed for a total
consideration of $51.8 million,
consisting of cash consideration of $30.3
million and 1,531,903 MCAN common shares (valued at
$14.05 per share, for a total of
$21.5 million). As of this
date, Xceed became a wholly-owned subsidiary of MCAN.
Outlook: Continuing from the
prior quarter, residential housing markets in Canada continue to be stable while
experiencing moderation in terms of sales volumes and pricing.
Market conditions should continue to cause some
downward pressure on price points, but no significant disruption to
the overall housing market.
In the first half of 2013, we have observed
stable construction loan originations and improvements in volumes
of residential mortgage origination at good spreads. We
continue to see good opportunities in residential construction,
particularly in Western Canada
where we have strategically targeted growth.
While the lending market continued to remain
competitive following the spring market, lending spreads for single
family mortgages widened in June.
We expect that the addition of Xceed's mortgage
origination and lending capability will provide opportunity for the
Company to originate assets in the broker channel resulting in a
new revenue source. With this new lending capability we
anticipate Xceed's renewal volume and origination volume to
contribute to revenue immediately in the third quarter.
Dividend: The Board of
Directors declared a third quarter dividend of $0.28 per share to be paid September 30, 2013 to shareholders of record as
of September 16, 2013.
Further Information:
Complete copies of the Company's 2013 Second 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 on August 13,
2013.
Non-IFRS Measures: The following
metrics are considered to be Non-IFRS measures and are defined in
the "Non-IFRS Measures" section of the MD&A: Return on Average
Shareholders' Equity, Taxable Income, Estimated Taxable Income,
Estimated Taxable Income per share, Average Interest Rate, Net
Interest Income, Common Equity Tier 1, Tier 1 and Total Capital
Ratios, Risk Weighted Assets, Income Tax Assets, Income Tax
Liabilities and Income Tax Capital.
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 and assumptions with respect
to:
- the current business environment and outlook;
- possible or assumed future results;
- ability to create shareholder value;
- business goals and strategy;
- the stability of home prices;
- effect of challenging conditions on us;
- factors affecting our competitive position within the housing
markets;
- sufficiency of our access to capital resources; and
- the timing of the effect of interest rate changes on our cash
flows.
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;
- ability to realize anticipated benefits from the acquisition of
Xceed; and
- 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.
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