Stock market symbol
TSX: MKP
TORONTO, Nov. 13, 2013 /CNW/ - MCAN Mortgage Corporation's
("MCAN", the "Company" or "we") net income for the third quarter of
2013 increased to $9.7 million from
$3.5 million in 2012, while earnings
per share increased significantly to $0.49 from $0.19 in
the prior year. Estimated taxable income (refer to the "Non-IFRS
Measures" section of the Third Quarter 2013 Management's Discussion
& Analysis of Operations ("MD&A") for a definition of these
measures) for the quarter was $3.4
million ($0.16 per share)
compared to $4.8 million
($0.27 per share) in the prior
year. The increase in net income was primarily due
to higher mortgage interest income and equity income from MCAP
Commercial LP ("MCAP"), in addition to a bargain purchase gain
recorded on the acquisition of Xceed Mortgage Corporation ("Xceed")
and significantly higher yields earned on the mortgages acquired
from Xceed. These increases were partially offset by higher
operating expenses incurred as part of the acquisition of
Xceed.
Year to date net income increased to
$19.2 million from $14.2 million in the prior year, primarily due to
the same reasons noted above for the increase in quarterly
income. For the year to date, earnings per share were
$1.00, up from $0.82 in the prior year. Estimated taxable
income for the year to date was $8.9
million ($0.46 per share)
compared to $19.1 million
($1.11 per share) in the prior
year.
On July 4, 2013,
we completed the acquisition of Xceed. The acquisition
resulted in an increase of $21.5
million to share capital and in purchasing Xceed at a
discount to its fair value, we recorded a bargain purchase gain of
$2.1 million. In addition, we
acquired the renewal rights to $683
million of insured single family mortgages previously
originated and sold by Xceed to third parties. For further
details, refer to the "Acquisition of Xceed" discussion below.
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 and Xceed for accounting and tax purposes.
As a mortgage investment corporation ("MIC"), we typically pay out
all of our taxable income (refer to the "Non-IFRS Measures" section
of the MD&A for a definition of these measures) to shareholders
through dividends.
As noted above, earnings per share have been
$1.00 for the year to date compared
to $0.82 in the prior year.
However, income recognized from MCAP as well as the Xceed bargain
purchase gain and income earned by Xceed are only included in
taxable income when the amounts are distributed to MCAN
directly. As such, estimated taxable income year to date was
$0.46 per share compared to
$1.11 for the same period in the
prior year. Year to date, we have paid dividends of
$0.87 per share.
We reported last quarter that the timing
differences in taxable income may impact dividends in the upcoming
quarters. Each quarter and year, we attempt to balance the
importance of maintaining a tax efficient corporate structure
together with the goal of maintaining consistent and ongoing
distributions. With the taxable income timing differences
related to MCAP previously noted and the additional income created
in 2013 related to the Xceed acquisition, we have focused an
extensive amount of time assessing our dividend policy. We
expect to be able to manage the volatility in taxable income at the
current dividend rate and earnings level.
Consequently, for the fourth quarter, the Board
of Directors has maintained the existing quarterly dividend level
by declaring a dividend of $0.28 per
share payable on January 2, 2014 to
shareholders of record as at December 16,
2013.
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 $13.3 million
for the quarter, up significantly from $4.5
million in the prior year. Net investment income
consisted of $14.3 million from
corporate assets (2012 - $5.9
million) and a loss of $917,000 from securitization assets (2012 - loss
of $1.4 million). The loss from
securitization assets for the quarter includes a $385,000 negative fair market value adjustment to
derivative financial instruments (negative $1.9 million in 2012).
Net Investment Income - Corporate
Assets
Mortgage interest income increased to
$14.8 million in the current year
from $10.6 million in the prior year,
primarily due to the impact of the higher effective interest rates
on the mortgages acquired as part of the acquisition of
Xceed. These higher-yielding mortgages were primarily
responsible for the increase in the average mortgage yield to 7.32%
in 2013 from 5.85% in 2012. Excluding mortgages acquired from
Xceed, the yield increased from 5.85% to 5.97%. Given the
short duration of the mortgages acquired from Xceed, we expect the
corporate mortgage yield to return to historical levels by
mid-2014. In addition, the average mortgage portfolio
increased from $685 million in 2012
to $796 million in 2013.
Mortgage interest income also includes $427,000 of realized discount income from MCAN's
acquired mortgage portfolios compared to $527,000 in 2012.
Equity income from our investment in MCAP
increased to $2.7 million in the
current year from $331,000 in the
prior year as a result of higher assets under administration,
higher origination and securitization volumes and the reversal of a
significant provision.
During the quarter, we recognized a bargain
purchase gain of $2.1 million as part
of the acquisition of Xceed, representing the excess of the fair
value of the net assets acquired over the consideration paid.
For additional information, refer to the "Acquisition of Xceed"
discussion below.
Fees were $601,000
during the quarter, up from $339,000
in the prior year as a result of higher mortgage fees, which
include extension, renewal and letter of credit fees earned on our
corporate mortgage portfolio.
Marketable securities income increased to
$306,000 from $40,000 in the prior year, primarily due to
losses on sale of $255,000 in the
prior year compared to minimal gains in the current year.
We incurred a loss on financial investments and
other loans of $101,000 in the
current year, primarily due to a write-off related to a financial
investment. In the prior year, interest on financial
investments and other loans was $333,000 as a result of a larger average
portfolio.
We earned $86,000
from whole loan gains on sale during the quarter, as we sold
$7.3 million of insured mortgages
through Xceed to third party mortgage aggregators.
During the third quarter, we incurred
$217,000 of realized and unrealized
losses on financial instruments, relating to the hedging of Xceed's
mortgage funding commitments to mitigate interest rate risk.
To the extent that the related mortgages are sold, offsetting gains
or losses are recognized in the period that the mortgages are
sold.
Term deposit interest and expenses increased to
$5.1 million in the current year from
$4.6 million in the prior year as a
result of a $93 million increase in
the average term deposit balance to $768
million in 2013 from $675
million in 2012. The average term deposit interest
rate remained unchanged from the prior year at 2.44%.
Mortgage expenses, consisting primarily of
mortgage servicing expenses, increased to $864,000 in the current year from $718,000 in the prior year as a result of a
larger average portfolio.
There was a $272,000 provision for credit losses during the
quarter compared to $592,000 in the
prior year. Current year activity consisted primarily of a
$339,000 increase in the collective
allowance, while the prior year consisted primarily of individual
residential construction loan provisions of $450,000. Mortgage write-offs during the
quarter were $215,000 compared to
$72,000 in the prior year.
Net Investment Income - Securitization
Assets
The net loss from securitization assets before
fair market value adjustments was $532,000 in 2013 compared to net income of
$458,000 in the prior year.
Including fair market value adjustments on derivative financial
instruments, the net investment loss on securitization assets was
$917,000 in 2013 compared to a loss
of $1.4 million in the prior
year.
Mortgage interest income decreased to
$1.2 million in the current year from
$3.4 million in the prior year,
primarily due to a $477 million
decrease in the average mortgage portfolio from 2012. In
addition, the average yield decreased from 4.22% in 2012 to 3.65%
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
$355,000 from $1.1 million in the prior year and interest on
short-term investments decreased to $318,000 from $382,000 in the prior year, both as a result of a
decrease in the average portfolio.
Other securitization income was $575,000 in 2013 compared to $1.9 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 $3.0
million in the current year from $6.2
million from the prior year, primarily due to a
significantly lower average balance as a result of the maturity of
$1.4 billion of CMB-related financial
liabilities from securitization since the third quarter of 2012. In
addition, the average interest rate decreased to 2.97% in 2013 from
3.49% in 2012.
The negative fair market value adjustment to
derivative financial instruments of $385,000 (2012 - $1.9
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 - $352 million, 2014 -
$859 million, 2015 - $42 million.
Operating Expenses: Operating
expenses were $4.4 million compared
to $2.0 million during the prior
year. During the quarter, we incurred $874,000 of transaction and restructuring
expenses relating to the acquisition of Xceed (discussed below
under "Acquisition of Xceed"). Salaries and benefits increased to
$2.1 million in the current year from
$995,000 in the prior year due to an
increase in the number of employees as a result of the acquisition
of Xceed and severance costs of $514,000 incurred during the quarter.
General and administrative expenses increased from $1.0 million to $1.4
million as a result of the consolidation of Xceed's
operations in the quarter.
Income Taxes: There was a recovery
of $721,000 of income taxes in the
third quarter of 2013 compared to a recovery of $1.0 million in the prior year. The current
year recovery relates to the excess of the third quarter dividend
over taxable income, while the prior year recovery relates to
negative fair market value adjustments to derivative financial
instruments.
Credit Quality: Impaired mortgages
as a percentage of total mortgages (net of individual allowances)
were 0.46% ($6.3 million) at
September 30, 2013, down from 0.52%
($7.6 million) at June 30, 2013. Impaired corporate mortgages
as a percentage of the corporate portfolio also decreased to 0.76%
at September 30, 2013 from 1.04% at
June 30, 2013.
Total mortgage arrears were $58 million at September
30, 2013, an increase from $50
million at June 30,
2013. Activity for the quarter includes an increase of
$14 million in residential
construction loans and a decrease of $6
million in securitized mortgage arrears. Mortgage
arrears consist of $43 million of
corporate mortgages and $15 million
of insured securitized mortgages. 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 September 30, 2013, total consolidated assets
were $2.30 billion, consisting of
$1.03 billion of corporate assets and
$1.27 billion of securitization
assets. Corporate assets increased by $136 million during the quarter, which included
increases of $82 million in mortgages
and $52 million in cash and cash
equivalents. The increase is partly due to the acquisition of
Xceed, in which we acquired $46
million of corporate mortgages. Securitization assets
decreased by $194 million, primarily
due to the maturity of CMB-related financial liabilities from
securitization of $180 million and
the removal of the associated assets from the balance sheet.
Term deposit liabilities were $814 million at September
30, 2013, up from $728 million
at June 30, 2013.
Total shareholders' equity of $203 million increased from $177 million at June 30,
2013. Activity for the quarter included the issuance of new
common shares of $21.5 million
related to the Xceed acquisition and $576,000 through the Dividend Reinvestment Plan,
net income of $9.7 million, the third
quarter dividend of $5.7 million and
a decrease in the available for sale reserve of $225,000.
Asset Capacity: As at September 30, 2013, our remaining asset capacity
was $48 million, based on our target
assets to capital ratio of 5.75.
Acquisition of Xceed: On
July 4, 2013, we completed the
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.
For further information, refer to the "Acquisition of Xceed"
section of the MD&A.
Outlook: We continue to expand our
mortgage lending activities with the closing of the acquisition of
Xceed on July 4, 2013 and have been
able to take advantage of the attractive returns available in its
lending activities. Asset growth has been in line with
expectations, however increased competition has resulted in single
family residential mortgage originations being lower than
anticipated.
With the acquisition of Xceed, MCAN successfully
launched the origination of uninsured residential mortgages to the
independent mortgage broker market early in the fourth quarter,
which will enhance our ability to source new originations and add
to the growth of our single family mortgage balances in the fourth
quarter and into 2014.
Our corporate asset portfolio generates an
acceptable return on capital, which we expect to improve over the
next twelve months as we implement underwriting and technology
enhancements to improve efficiencies. We continue to focus on
our residential construction and mezzanine lending opportunities to
optimize the overall return to our shareholders while maintaining
portfolio diversification within our risk appetite.
Canada's
housing markets remain balanced and current demand and supply
fundamentals appear positive for stability in price points and
housing sales for the next year. The tightening of
underwriting requirements and additional regulatory changes has
reduced housing demand and development approvals continue to be
constrained by capacity issues within the approval
authorities. We expect housing markets to continue to benefit
from low interest rates, stable employment, sufficient supply of
new and resale listings and reasonable housing affordability within
our core lending markets. We continue to observe strong
demand for traditional mortgages as major lending institutions
adjust their underwriting policies.
We expect growth within the corporate mortgage
portfolio to remain in line with past experience. We continue
to observe improving returns from our corporate mortgage portfolio
through increased interest income and net margin, and will be
focusing on securitization activities for the remainder of 2013 and
into 2014.
We will continue to maintain relatively high
levels of liquidity to support our lending activities and
depositors. We continue to actively solicit new sources of
deposits to diversify our network of deposits. As we
approach full investment, the portfolio will be adjusted to
optimize overall returns on a risk adjusted basis. The Board of
Directors and management are confident that increased core earnings
and asset growth can be generated for the remainder of 2013 and
into 2014.
Dividend: The Board of Directors
declared a fourth quarter dividend of $0.28 per share to be paid January 2, 2014 to shareholders of record as at
December 16, 2013.
Changes to Board of Directors:
David Broadhurst and Jean Pinard retired from the Board of Directors
effective September 26, 2013 after 16
and 8 years of service, respectively. The Board would like to thank
Mr. Broadhurst and Mr. Pinard for their long service and valuable
contribution to MCAN. Verna
Cuthbert and W. Terrence
Wright were appointed to the Board of Directors effective
September 26, 2013. Ms.
Cuthbert currently serves as a senior commercial lawyer and counsel
with Fasken Martineau DuMoulin LLP, while Mr. Wright currently
serves as counsel with Pitblado LLP.
Further Information: Complete
copies of the Company's 2013 Third 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 November 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, Income Tax Capital and Limited Partner's At-Risk
Amount.
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's wholly-owned subsidiary, Xceed,
focuses on the origination and sale to third party mortgage
aggregators of residential first-charge mortgage products across
Canada. As such, Xceed
operates primarily in one industry segment through its sales team
and mortgage brokers.
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