Stock market symbol
TSX: MKP
TORONTO, May 7, 2014 /CNW/ - MCAN Mortgage Corporation's
("MCAN", the "Company" or "we") net income for the first quarter of
2014 was $7.4 million, an 83%
increase from $4.0 million (on a
restated basis for our change in income tax accounting noted below)
in 2013. Earnings per share were $0.36, a 71% increase from $0.21 (restated) in the prior year. Return on
average shareholders' equity was 13.52% for the quarter compared to
8.77% (restated) in the first quarter of 2013.
The increase in net income was primarily due
to higher mortgage interest income, higher income from our
equity investment in MCAP Commercial LP ("MCAP"), recoveries of
provisions for credit losses and the gain from the partial sale of
our investment in MCAP. These increases were partially offset
by higher operating expenses, as our scale of operations has
increased since the acquisition of Xceed Mortgage Corporation
("Xceed") in the third quarter of 2013.
The Board of Directors (the "Board") declared a
second quarter regular dividend of $0.28 per share to be paid June 30, 2014 to shareholders of record as of
June 16, 2014.
Corporate assets totalled $1.0 billion as at March
31, 2014, comparable to the balance as at December 31, 2013. Excluding the conversion
of $46 million of corporate mortgages
into market mortgage-backed securities ("MBS"), corporate assets
increased by $31 million.
Our primary focus this quarter was on core
operations and origination activities. On the construction
side of the business, we have been managing operations at target
levels in terms of both commitments and outstanding balances.
The spring market, with the unusually harsh winter of 2013/2014,
has also caused an estimated delay of six weeks in the funding of
certain construction projects. These projects are anticipated
to fund later into the second quarter, thereby ensuring we will
have a solid level of fundings through 2014.
The single family business, which started slowly
given the winter effect noted above, has been very active through
the spring market both on the mortgage purchase and origination
sides. During the first quarter, we securitized $46 million of single family mortgages through
the market MBS program. We expect to continue our
securitization activity in the market MBS program throughout
2014. Additionally, on the Xceed origination side of our
business, we were active both in the insured and uninsured single
family mortgage market, building our presence within the broker
channel. We have been actively working with various mortgage
brokers to partner with them in the new combined Xceed/MCAN brand
and product offering.
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 market MBS
program, Canada Mortgage Bonds ("CMB") program and reinvestment
assets purchased with mortgage principal repayments. These assets
are funded by the cash received from the sale of the associated
securities and are classified as financial liabilities from
securitization.
Accounting Policy Change: On
January 1, 2014, we changed our
accounting policy with respect to income taxes. As a mortgage
investment corporation ("MIC") under the Income Tax Act
(Canada) (the "Tax Act"), we
intend to pay sufficient dividends in current and future years to
ensure that we are not subject to income tax. Accordingly, we
elected to no longer record a provision for current or deferred
income taxes within the MIC entity. This change in policy was
applied retrospectively as at January 1,
2013. We believe that this change will eliminate the
income tax volatility in our income statement, and it is consistent
with the approach that other MICs in our industry take in
accounting for taxes.
Net Investment Income - Corporate
Assets: Mortgage interest income increased to
$12.4 million in the current year
from $10.6 million in the prior year,
primarily due to a $108 million
increase in the average mortgage portfolio from $733 million in 2013 to $841 million in 2014. In addition, our
average mortgage yield increased from 5.67% to 6.04%.
Excluding income from the higher-yielding mortgages acquired as
part of the Xceed acquisition in the third quarter of 2013, our
mortgage yield increased from 5.67% to 5.82%.
MCAP reported strong results for the quarter as
a result of higher MBS volumes and profitability and higher assets
under administration. Our share of net income was
$2.1 million for quarter, up from
$1.4 million in the prior year
(noting that the prior year was at a higher 23.4% investment level
compared to our current 14.8% level). MCAP's origination
volume was $1.4 billion for the first
quarter of 2014, and as at March 31,
2014 it had $40.9 billion of
assets under administration.
Fees, consisting primarily of extension, renewal
and letter of credit fees earned on our corporate mortgage
portfolio, increased to $595,000 in
the current year from $384,000 the
prior year as a result of a larger average portfolio.
During the quarter, we earned a whole loan gain
on sale of $331,000, which related to
the sale of insured single family mortgages. We regularly
sell mortgages to third-party aggregators for sale into the CMB
program or for pooling as MBS on a whole-loan basis with premium
proceeds received at the time of sale.
During the quarter, we incurred realized and
unrealized loss on financial instruments of $319,000, representing gains or losses associated
with the hedging of mortgage funding commitments to mitigate
interest rate risk. To the extent that the related hedged
mortgages are sold, offsetting gains or losses are recognized in
the period that the mortgages are sold.
Term deposit interest and expenses increased to
$5.0 million from $4.8 million in the prior year as a result of a
$40 million increase in the average
term deposit balance to $788 million
in 2014 from $748 million in
2013. The average term deposit rate remained unchanged from
the prior year at 2.49%.
Mortgage expenses, consisting primarily of
mortgage servicing fees, increased to $954,000 from $690,000 in the prior year primarily due to an
increase in the average mortgage portfolio.
We had $608,000 of
recoveries of provisions for credit losses during the quarter
compared to provisions for credit losses of $88,000 in the prior year. Current year
activity consisted primarily of the reversal of a $550,000 individual allowance on an impaired loan
as a result of its partial repayment. The prior year
consisted primarily of individual provisions on uninsured single
family mortgages. Write-offs were $57,000 (2.7 basis points) during the current
quarter, down from $309,000 (16.9
basis points) in the prior year.
Other Income - Corporate Assets: In the
quarter, we sold 250,000 class C units of our investment in MCAP
resulting in a gain on sale of $711,000. This sale reduced our equity
interest in MCAP from 15.7% to 14.8%.
Net Investment Income - Securitization
Assets: Net investment income from securitization assets
relates to MCAN's participation in the market MBS program and the
CMB program. For further details on these programs, refer to the
"Securitization Programs" section of the Management's Discussion
and Analysis ("MD&A"). We expect net investment income from the
market MBS program to increase as we securitize additional
mortgages through this program. As existing CMB issuances continue
to mature, we expect net investment income from CMB assets to
decrease as the related mortgages and reinvestment assets are
removed from our balance sheet.
The net investment loss from securitization
assets was $219,000 in the first
quarter of 2014 compared to a loss of $602,000 in the prior year, although it included
a $464,000 negative fair market value
adjustment on derivative financial instruments (2013 - $641,000). Current year activity consisted of
income of $405,000 from the market
MBS program and a loss of $624,000
from the CMB program.
Mortgage interest income of $2.6 million was unchanged from the prior year.
The current year consisted of $1.6
million of income from the market MBS program and
$1.0 million from the CMB program,
while the prior year related entirely to the CMB program. In the
current quarter, the market MBS portfolio average balance was
$215 million and its average yield
was 3.00%. The CMB program average portfolio balance decreased
significantly from $886 million in
2013 to $210 million in 2014 as a
result of CMB mortgage maturities throughout 2013, while the
average CMB mortgage yield also decreased from 3.69% in 2013 to
3.61% in 2014.
As a result of a significant decrease in the
average portfolios due to the maturity of CMB-related assets,
interest on financial investments decreased to $205,000 in 2014 from $655,000 in 2013, and interest on short-term
investments decreased to $289,000 in
2014 from $340,000 in 2013.
Other securitization income was $447,000 in 2014 compared to $872,000 in the prior year, consisting primarily
of interest rate swap receipts. 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 of $3.2 million
decreased from $4.4 million in the
prior year. The current year consisted of $1.1 million from the market MBS program and
$2.1 million from the CMB program,
while the prior year related entirely to the CMB program. In the
current quarter, the market MBS liability average balance was
$205 million and its average interest
rate was 2.25%. The CMB program securitization liability average
balance decreased significantly from $2.0
billion in 2013 to $809
million in 2014 as a result of CMB issuance maturities
throughout 2013, while the average CMB securitization liability
yield also decreased from 3.24% in 2013 to 2.87% in 2014.
The negative fair market value adjustment to
derivative financial instruments of $464,000 (2013 - negative adjustment of
$641,000) 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.
Our existing financial liabilities from
securitization mature as follows: 2014 - $476 million (CMB program), 2015 - $40 million (CMB program), 2018 - $166 million (market MBS program), and 2019 -
$45 million (market MBS program).
Operating Expenses: Operating
expenses were $3.4 million in the
quarter, up from $1.9 million in
2013. Salaries and benefits increased from $969,000 to $1.7
million and general and administrative expenses increased
from $950,000 to $1.6 million. The increase in operating
expenses from the prior year was a result of an increase in the
scale of operations as a result of the acquisition of Xceed, which
was completed in the third quarter of 2013.
Income Taxes: Taxable income was
$4.1 million ($0.20 per share) in the current quarter compared
to $1.3 million ($0.07 per share) in the first quarter of 2013.
During the quarter, we incurred $2.1
million of up-front origination costs on mortgages
securitized through the market MBS program, which are expensed for
tax purposes and amortized for accounting purposes. Excluding the
impact of expensing these costs for tax purposes, taxable income
for the first quarter of 2014 would have been $6.1 million ($0.30
per share).
As previously noted in the "Accounting Policy
Change" section, on January 1, 2014,
we changed our accounting policy with respect to accounting for
income taxes and accordingly we elected to no longer record a
provision for current and deferred taxes within the MIC entity.
All subsidiaries of MCAN that are taxable
entities will continue to account for current and deferred income
taxes. The change in accounting policy has been applied
retrospectively as at January 1,
2013. The small deferred tax recovery in the current
year and prior year was due to temporary differences in the
subsidiaries.
Credit Quality: Impaired corporate
mortgages were 0.53% ($7.3 million)
as at March 31, 2014, up slightly
from 0.51% ($7.4 million) as at
December 31, 2013. As a
percentage of total mortgages, impaired mortgages were 0.84% as at
March 31, 2014, down slightly from
0.85% as at December 31, 2013.
Total mortgage arrears were $44 million at March 31,
2014, up from $38 million at
December 31, 2013, consisting of
$38 million of corporate mortgages
and $6 million of insured securitized
mortgages. Activity for the quarter included increases of
$4 million in single family mortgages
and $6 million in residential
construction loans and a decrease of $5
million in securitized mortgages.
Financial Position: Total assets were
$1.75 billion as at March 31, 2014, consisting of $1.0 billion of corporate assets and $745 million of securitization assets. Corporate
assets decreased by $15 million
during the quarter, which included the conversion of $46 million of corporate mortgages into market
MBS, partially offset by increases of $22
million in other corporate mortgages, $5 million in cash and cash equivalents and
$4 million in marketable
securities.
As we securitize mortgages into the market MBS
program, assets are effectively transferred from corporate
mortgages to securitized mortgages on the balance sheet. The
change contributes to changes in asset levels when mortgages
purchased are securitized in the following quarter.
Securitization assets decreased by $329 million during the quarter, primarily due to
the maturity of CMB-related assets of $371
million during the quarter. This decrease was partially
offset by an increase of $46 million
in securitization mortgages related to the market MBS program,
reflecting new MBS issued during the quarter.
Term deposit liabilities were $798 million at March 31,
2014, up slightly from $790
million at December 31,
2013.
Total shareholders' equity of $218 million as at March
31, 2014 increased from $215
million (restated) as at December 31,
2013. Activity for the quarter included net income of
$7.4 million, the issuance of new
common shares of $1.2 million, the
payment of the first quarter dividend of $5.7 million and an increase to accumulated other
comprehensive income of $631,000.
Asset Capacity: As at March 31, 2014, our remaining asset capacity was
$100 million, based on our target
assets to capital ratio of 5.75.
Outlook: The spring market for
residential sales started late this year due to the long cold
winter. However, we have seen a steady increase in activity over
the last couple of weeks which in turn has resulted in an increase
in mortgage applications. As a result of this increase, we expect
to see a significant recovery and catch up in activity in Q2
leading to a strong recovery in home construction and mortgage
lending volumes.
We will continue to focus on the growth of our
corporate assets in 2014. We expect growth within the corporate
mortgage portfolio to remain in line with past years. Growth is
expected in the insured and uninsured single family mortgage
segments. With the re-launch of the Xceed brand this past
fall, we expect to grow the origination of uninsured single family
mortgages. The Canadian single family mortgage business experienced
strong interest margin and net income levels in the first quarter
contributing to improved profits. We expect this trend to continue
in the second quarter of 2014.
We expect Canada's housing markets to remain balanced
for 2014. Current demand and supply fundamentals appear positive
for stability in price points and housing sales. Sources of
economic growth in Canada are
expected to improve as exports and business investment
progressively strengthen. Furthermore, employment and disposable
income growth are expected to increase modestly. These factors will
help to sustain demand for new home construction. However, the
expectation of a modest and gradual increase in mortgage rates, the
relatively high number of units currently under construction and
the slowdown in the growth of the pool of first-time homebuyers are
all expected to temper the amount of housing starts. Putting
everything together, the forecast range for housing starts varies
from 176,000 to 199,800 units for 2014. Multiple Listing Service
("MLS") sales are expected to continue to rise along with improving
economic conditions, however they are also expected to be
restrained by a modest rise in mortgage rates. MLS housing sales
are expected to be between 436,000 and 497,000 units in 2014. Sales
are expected to rise at a pace similar to the growth in new
listings, thus balanced market conditions are expected to prevail
in most regions across Canada.
Our construction lending program has seen
improvements in yield. We have focused our construction lending
activities in western Canada,
where GDP and job growth is expected to be strongest. 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.
We participated in the market MBS program in the
first quarter of 2014 with a new issuance. We expect growth in the
market MBS program in 2014, following our re-launch of the program
in the fourth quarter of 2013. Mortgage volumes in our market MBS
program are expected to grow from our partnership with MCAP and
origination from the Xceed platform.
Asset quality remains good. Overall arrears
remain low and the quality of mortgage applications remains strong.
We continue to watch all markets carefully to ensure that the basic
fundamentals in residential markets which drive demand and price
inflation, such as population growth, immigration and job growth,
are strong enough to support the activity and price levels in our
underwriting.
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, Taxable Income Per Share,
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 ("LP ARA").
Changes to Board of Directors:
Derek Norton, Chief Executive
Officer of MCAP, will not be standing for re-election at MCAN's
Annual General Meeting ("AGM") of Shareholders to be held later
today, May 7, 2014. The Board
would like to thank Mr. Norton for his long service and valuable
contribution to MCAN. Scott
Coates, Managing Director, Mortgage Investments of KingSett
Capital, is nominated for election to the Board at the AGM.
This move follows the joint announcement we made with KingSett
Capital in March 2014 regarding the
MCAN common shares (approximately 7% shareholding) acquired by the
KingSett Canadian Real Estate Income Fund LP.
Further Information: Complete
copies of the Company's 2014 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.
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 market MBS
program, 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 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