Stock market symbol
TSX: MKP
TORONTO,
Feb. 25, 2014 /CNW/ - MCAN Mortgage
Corporation's ("MCAN", the "Company" or "we") net income for the
fourth quarter of 2013 increased to $11.0
million from $7.3 million in
2012, while earnings per share increased to $0.54 from $0.40 in
the prior year. The increase was primarily due to higher
mortgage interest income, whole loan gain on sale income and
securitization income, and a gain on dilution of our equity
investment in MCAP Commercial LP ("MCAP"). These increases
were partially offset by lower equity income from MCAP, higher
operating expenses and a higher provision for income taxes.
Estimated taxable income (refer to the "Non-IFRS Measures" section
of the 2013 Management's Discussion & Analysis of Operations
("MD&A") for a definition of these measures) for the quarter
was $6.4 million ($0.32 per share) compared to $1.4 million ($0.06
per share) in the prior year. Return on equity for the
quarter increased from 16.8% in 2012 to 21.2% in 2013.
Net income for the year ended December 31, 2013 was $30.2 million, up from $21.5 million in the prior year. In addition to
the reasons noted above relating to quarterly income, we recorded a
bargain purchase gain on the acquisition of Xceed Mortgage
Corporation ("Xceed"). For the year to date, earnings per
share were $1.54, up from
$1.22 in the prior year.
Taxable income for the year was $15.3
million ($0.78 per share),
down from $20.5 million ($1.17 per share) in the prior year. Return
on equity increased from 13.0% in 2012 to 15.8% in 2013.
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 were
$1.54 in 2013 compared to
$1.22 in 2012. However, any
taxable income recognized from MCAP, the Xceed bargain purchase
gain or income earned by Xceed will be recognized on a deferred
basis. As such, 2013 taxable income was $0.78 per share compared to $1.17 in the prior year. During 2013, we
paid dividends of $1.15 per
share.
Despite these timing differences, we expect to
be able to manage the volatility in taxable income at the current
dividend rate and earnings level. The Board of Directors has
maintained the existing quarterly dividend level by declaring a
dividend of $0.28 per share payable
on March 31, 2014 to shareholders of
record as at March 17, 2014.
During the fourth quarter, we re-commenced our
participation in the market mortgage-backed securities ("MBS")
program, under which we sell MBS to a third party and may also
elect to sell the net economics and cash flows from the underlying
mortgages ("interest-only strips") to a third party in future
periods. In the quarter, we sold $168
million of MBS to a third party but did not sell the
interest-only strip and retained the residual economics, therefore
maintaining the mortgages on our balance sheet.
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,
market MBS program and reinvestment assets purchased with mortgage
principal repayments and are funded by the cash received from the
sale of the associated securities, classified as financial
liabilities from securitization.
Net Investment Income - Corporate
Assets: Net investment income from corporate assets was
$10.9 million in the fourth quarter,
up from $9.7 million in the prior
year.
Mortgage interest income increased to
$15.0 million in the current quarter
from $10.0 million in 2012 due to an
increase in the average mortgage portfolio from $728 million in 2012 to $898 million in 2013 and 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 6.73% in 2013 from 5.50% in 2012. Excluding
mortgages acquired from Xceed, the yield increased from 5.50% to
5.99%. Given the short duration of the mortgages acquired
from Xceed, we expect the corporate mortgage yield to return to
historical levels by mid-2014.
Equity income from our investment in MCAP
decreased to $303,000 in the current
quarter from $4.3 million in 2012 as
a result of lower MBS spreads earned by MCAP in the current
quarter.
Fees increased to $923,000 in the current quarter from $677,000 in 2012 as a result of a higher average
mortgage balance. Fees include extension, renewal and letter
of credit fees earned on our corporate mortgage portfolio.
In the current quarter, we earned whole loan
gain on sale income of $1.7 million,
which includes a $1.3 million gain on
the sale of the remaining balance of the acquired mortgage
portfolio, on which we had recognized discount income in previous
quarters. In addition, we earned $195,000 of gains from sales of insured mortgages
to third party mortgage aggregators.
During the quarter, we incurred $341,000 of realized and unrealized losses on
financial instruments, relating to the hedging of 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 quarter
from $4.7 million in 2012 as a result
of a $61 million increase in the
average term deposit balance to $792
million in 2013 from $731
million in 2012. The average term deposit interest
rate increased from 2.44% in 2012 to 2.46% in 2013.
Mortgage expenses, consisting primarily of
mortgage servicing expenses, increased to $972,000 in the current quarter from $748,000 in 2012 as a result of a larger average
mortgage portfolio.
There was a $420,000 provision for credit losses during the
current quarter compared to $421,000
in 2012. Current quarter activity consisted primarily of a
$371,000 increase in the collective
allowance, while 2012 activity consisted of a collective provision
of $310,000 and net individual
provisions of $111,000.
Mortgage write-offs during the quarter were $138,000 compared to $83,000 in the prior year.
Other Income - Corporate Assets:
Other income from corporate assets was $5.2
million in the current quarter compared to $nil in
2012. Please note that in previous quarters other income from
corporate assets was not presented separately. In the first
three quarters of 2013, the bargain purchase gain and transaction
and restructuring expenses were presented in corporate net
investment income and operating expenses, respectively, but for
fiscal 2013 were reclassified to other income from corporate
assets.
On November 30,
2013, MCAP issued new class A and C units to another partner
of MCAP at a cost of $11.72 per unit,
raising $100 million of new
unitholder equity. As a result of the issuance of the new
units at a price in excess of the carrying value per unit, we
recorded a $4.5 million gain on the
dilution of the investment in MCAP. Subsequent to the
issuance of the new class A and class C units, we sold 237,880
class A units to another partner of MCAP at a price of $11.72 unit, recognizing a gain on sale of
$736,000. The combination of
the two transactions reduced our equity interest in MCAP from 23.4%
to 15.7%.
Subsequent to quarter end, we sold 250,000 class
C units to another partner of MCAP at a price of $11.72 per unit, reducing our equity interest
from 15.7% to 14.8%.
Net Investment Income - Securitization
Assets: Net income from securitization assets before fair
market value adjustments was $590,000
in the quarter compared to $837,000
in 2012. Including fair market value adjustments on
derivative financial instruments, net investment income from
securitization assets was $78,000 in
2013 compared to a net loss of $1.3
million in 2012. Gross securitization revenues and
expenses decreased significantly from 2012 due to a substantial
decline in average securitization and liability balances, which was
due to the maturity of $970 million
of CMB-related assets and liabilities during 2013.
Securitized mortgage interest income decreased
to $1.7 million in the current
quarter from $3.0 million in 2012,
primarily due to a $473 million
decrease in the average mortgage portfolio from 2012. In
addition, the average yield decreased from 3.72% in 2012 to 3.51%
in 2013. As the mortgages securitized through the CMB program
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
$246,000 in the quarter from
$819,000 in 2012 and interest on
short-term investments decreased to $319,000 in 2013 from $478,000 in 2012, both as a result of the
decrease in CMB-related assets noted above.
Other securitization income was $945,000 in the quarter compared to $2.5 million in 2012, consisting primarily of
interest rate swap receipts in both years in addition to small
refinancing and renewal gains. 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 $2.5
million in the current quarter from $5.9 million from the prior year, primarily due
to a significantly lower average balance as a result of the
decrease in CMB-related financial liabilities from securitization
noted above. In addition, the average interest rate decreased to
2.82% in 2013 from 3.37% in 2012.
The negative fair market value adjustment to
derivative financial instruments of $512,000 (2012 - $2.1
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 CMB-related securitization assets and
liabilities will decrease significantly over the next two
years. Our existing financial liabilities from securitization
mature as follows: 2014 - $847
million (CMB program), 2015 - $41
million (CMB program), 2018 - $168
million (market MBS program).
Operating Expenses: Operating
expenses were $3.8 million in the
quarter, up from $2.5 million in
2012. Salaries and benefits increased from $1.0 million to $1.9
million as a result of an increase in the number of
employees as a result of the acquisition of Xceed. General
and administrative expenses increased from $1.5 million to $1.9
million due to the consolidation of Xceed's operations in
the current year.
Income Taxes: During the current
quarter, we incurred a provision for taxes of $1.5 million compared to a recovery of
$1.4 million in 2012. The
current quarter provision and 2012 recovery relate to the excess
and deficiency of taxable income over the quarterly dividend paid,
respectively.
Credit Quality: Impaired mortgages
as a percentage of total mortgages (net of individual allowances)
were 0.51% ($7.4 million) at
December 31, 2013, up slightly from
0.46% ($6.3 million) at September 30, 2013. Impaired corporate
mortgages as a percentage of the corporate portfolio also increased
to 0.85% at December 31, 2013 from
0.76% at September 30, 2013.
Mortgage arrears and impaired mortgages were
$38 million at December 31, 2013, down significantly from
$58 million at September 30, 2013. Activity for the
quarter includes decreases of $12
million in residential construction loans, $4 million in corporate single family mortgages
and $5 million in securitized
mortgages. Mortgage arrears consist of $27 million of corporate mortgages and
$11 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 December 31, 2013, total consolidated assets were
$2.09 billion, consisting of
$1.02 billion of corporate assets and
$1.07 billion of securitization
assets. Corporate assets decreased by $15 million during the quarter, which included an
increase of $42 million in mortgages
and a decrease of $60 million in cash
and cash equivalents. Securitization assets decreased by
$197 million, primarily due to the
maturity of CMB-related assets of $220
million and a decrease of $145
relating to the maturity of IMPP-related assets. These
decreases were partially offset by an increase of $169 million in securitization mortgages related
to the market MBS program.
Term deposit liabilities were $790 million at December
31, 2013, down from $814
million at September 30,
2013.
Total shareholders' equity of $210 million as at December 31, 2013 increased from $203 million at September
30, 2013. Activity for the quarter included net income of
$11.0 million, the fourth quarter
dividend of $5.7 million, the
issuance of new common shares of $450,000 through the Executive Share Purchase
Plan, and an increase in accumulated other comprehensive income of
$1.7 million.
Asset Capacity: As at December 31, 2013, our remaining asset capacity
was $76 million, based on our target
assets to capital ratio of 5.75.
Outlook: Canada's housing markets remain balanced and
current demand and supply fundamentals appear positive for
stability in price points and housing sales for the coming
year. The reduction in housing demand as a result of
regulatory changes has stabilized markets. Development approvals
continue to be constrained in several Canadian markets, limiting
the supply of single family housing and creating price inflation.
Housing markets will benefit from low mortgage rates, stable
employment, a stable supply of new and resale listings and
reasonable housing affordability within our core lending
markets.
We expanded our mortgage lending activities
through captive and external origination in 2013. Xceed's
origination platform allowed the Company to take advantage of
attractive returns available in its single family lending markets
in the fourth quarter. We expect to continue to capitalize
upon these opportunities with enhanced returns in 2014.
Asset growth has been in line with expectations,
however increased competition has resulted in some spread
compression within our single family residential mortgage business.
In Q4 2013 we successfully completed our first new MBS
issuance through the market MBS program since Q3 2012. We expect to
continue with new issuances throughout 2014. Our focus will
be on single family originations for both our corporate balance
sheet and market MBS securitization portfolios throughout
2014. We expect growth within the corporate mortgage
portfolio to remain in line with past years at 15 to 20%.
Our corporate asset portfolio continues to
generate an acceptable return on capital, which we expect to
improve over the next twelve months as we grow the acquired
origination and underwriting operations to scale and complete the
implementation of further technology enhancements to improve
efficiencies. We continue to see good opportunities in our
residential construction and mezzanine lending activities which
enhance the overall return to our shareholders, while maintaining
portfolio diversification within our risk appetite.
Financial results for the second half of 2013
contained several one time items that contributed to net income.
While we expect to see the benefits of the Xceed acquisition in
future periods through the realization of mortgages acquired at
discounts, mortgage renewals and increased single family
origination, the magnitude of gains realized in 2013 may be
difficult to repeat.
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.
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, Regulatory Assets to Capital Ratio; Risk Weighted Assets,
Income Tax Assets, Income Tax Liabilities, Income Tax Capital and
Limited Partner's At-Risk Amount.
Further Information: Complete
copies of the Company's 2013 Annual 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.
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,
the market MBS 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 and other
employees;
- 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