Stock market symbol
TSX: MKP
TORONTO, Aug. 13, 2014 /CNW/ - MCAN Mortgage
Corporation's ("MCAN", the "Company" or "we") net income for the
second quarter of 2014 was $6.1
million, a 36% increase from $4.5
million (on a restated basis for our change in income tax
accounting noted below) in 2013. Earnings per share were
$0.30, a 20% increase from
$0.25 (restated) in the prior year.
Return on average shareholders' equity was 11.01% for the
quarter, up from 9.91% (restated) in the second quarter of
2013.
The increase in net income was primarily due to higher mortgage
interest income and interest on financial investments and other
loans, a smaller loss on securitization assets and whole loan gains
on sale earned in the current year. These increases were
partially offset by higher term deposit interest and expenses and
lower income from our equity investment in MCAP Commercial LP
("MCAP") in the current year, in addition to higher operating
expenses as our scale of operations has increased since the
acquisition of Xceed Mortgage Corporation ("Xceed") in the third
quarter of 2013.
Year to date net income increased to $13.5 million from $8.6
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 $0.66, up from $0.46 in the prior year. Return on average
shareholders' equity was 12.24% for the year to date, up from 9.34%
in the prior year.
The Board of Directors (the "Board") declared a third quarter
regular dividend of $0.28 per share
to be paid September 30, 2014 to
shareholders of record as of September 16,
2014.
Corporate assets totalled $1.07
billion as at June 30, 2014,
an increase of $63 million from
March 31, 2014. The increase
consisted of a $44 million increase
in mortgages (primarily due to the acquisition of $41 million of mortgages for securitization
through the market mortgage-backed securities ("MBS") program) and
a $19 million increase in cash and
cash equivalents.
During the quarter, we executed a reorganization through a
transfer of our equity investment in MCAP to a wholly-owned
subsidiary. We estimate that this reorganization will create
$112 million of additional MIC asset
capacity and will generate a $23.6
million gain on sale in MCAN on a non-consolidated
basis. For tax purposes, we recognize a 50% capital gain,
which will have an estimated positive impact to taxable income of
$11.8 million ($0.57 per share). As part of the
reorganization, the estimated tax cost base of the investment was
increased from $22 million to
$46 million.
This reorganization and its related tax impact will be finalized
by December 31, 2014. Under
IFRS, the reorganization did not have a direct impact on the
consolidated financial statements of MCAN for accounting
purposes.
In the second quarter of 2014, our primary focus was on core
operations and origination activities. We continue to grow
the uninsured single family mortgage portfolio through the build
out of the Xceed origination platform. This initiative is expected
to grow our corporate assets and improve the asset mix to further
reduce our risk profile, while optimizing returns at the same
time. On the construction side of the business, we have been
managing operations near our target levels in terms of both
commitments and outstanding balances to remain within our risk
appetite for this asset category. As noted last quarter, the
spring market for housing was late in starting this year due to a
harsh winter. We have seen a steady increase in construction
funding activity, which resulted in an increase in this asset class
during the quarter. We expect the impact of these delayed fundings
to be minimal in the third quarter.
We were active in the MBS market during the quarter both on the
mortgage purchase and origination sides. During the quarter,
we securitized $147 million of single
family mortgages through the market MBS program.
Profitability levels on mortgages and MBS have continued to benefit
from attractive GOC rates. The strength of the market,
combined with the tightening of MBS spreads, has improved the
profitability of our market MBS activities. We expect to
continue our securitization activity in the market MBS program
throughout 2014. Additionally, in the Xceed origination
platform, we were active both in the insured and uninsured single
family mortgage market, building our presence within the broker
channel. Xceed has made good progress in the re-introduction of
mortgage products with origination levels meeting our focus levels
established over a year ago.
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.
Net Investment Income - Corporate Assets:
Mortgage interest income increased to $12.6
million in the current year from $10.1 million in the prior year. The
increase was primarily due to a $188
million increase in the average mortgage portfolio from
$708 million in 2013 to $896 million in 2014, partly offset by a decrease
in the average mortgage yield from 5.66% to 5.58%.
Equity income from our ownership in MCAP decreased from
$2.1 million to $1.5 million in the current year. We held a
23.4% equity interest in MCAP in the prior year compared to 14.8%
in the current year. MCAP's securitization volumes increased
in 2014, while the prior year had higher income from whole loan
sales. In addition, assets under administration and servicing
fees increased from the prior year. These increases were
partially offset by negative mark-to-market adjustments on
financial liabilities from securitization. MCAP's origination
volumes were $2.7 billion for the
second quarter of 2014, and as at May 31,
2014 MCAP had $42.3 billion of
assets under administration.
Fees, consisting primarily of extension, renewal and letter of
credit fees earned on our corporate mortgage portfolio, increased
to $493,000 in the current year from
$439,000 the prior year as a result
of a larger average portfolio.
Marketable securities income of $466,000 was comparable to prior year income of
$488,000. Lower gains from sale
in the current year were offset by a higher average portfolio
balance.
During the quarter, we earned a whole loan gain on sale of
$535,000, which related to the sale
of $28 million of insured single
family mortgages to a third party. We regularly sell
mortgages to third-party aggregators with premium proceeds received
at the time of sale.
During the quarter, we incurred realized and unrealized losses
on financial instruments of $320,000,
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 $5.2 million from $4.4
million in the prior year as a result of a $114 million increase in the average term deposit
balance from $701 million in 2013 to
$815 million in 2014 and an increase
in the average term deposit rate to 2.46% from 2.44% in the prior
year.
Mortgage expenses, consisting primarily of mortgage servicing
fees, increased to $993,000 from
$764,000 in the prior year primarily
due to an increase in the average mortgage portfolio.
We recorded $2,000 of provisions
for credit losses during the quarter, compared to $411,000 of recoveries of provisions for credit
losses in the prior year. The change from the prior year is
primarily due to the reversal of a $550,000 individual allowance on an impaired
mortgage in 2013. Current year activity includes amortization
of $69,000 in the quarter relating to
the reserve set up at the time of the acquisition of Xceed,
relating to Xceed's off balance sheet securitized mortgage
portfolio. This reserve is expected to be incurred over the
remaining duration of the portfolio. Net write-offs were
$40,000 (1.8 basis points) during the
current quarter compared to $3,000
(0.1 basis points) in the prior year.
Other Income - Corporate Assets: In the
second quarter of 2013, we incurred $406,000 of transaction and restructuring
expenses related to the acquisition of Xceed.
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
$110,000 in the second quarter of
2014 compared to a loss of $1.6
million in the prior year, net of a $365,000 negative fair market value adjustment on
derivative financial instruments (2013 - $1.7 million negative adjustment). Current
quarter activity consisted of income of $467,000 from the market MBS program and a loss
of $577,000 from the CMB program,
while prior year activity related entirely to the CMB program.
Mortgage interest income of $2.6
million was up 37% from $1.9
million in the prior year. The current quarter consisted of
$2.0 million of income from the
market MBS program and $637,000 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 $251 million and its
average yield was 2.80%. The CMB program average portfolio balance
decreased significantly from $773
million in 2013 to $186
million in 2014 as a result of CMB mortgage maturities
throughout 2013 and 2014, while the average CMB mortgage yield also
decreased from 3.77% in 2013 to 3.54% in 2014.
As a result of a significant decrease in the average portfolios
due to the maturity of CMB-related reinvestment assets, interest on
financial investments decreased to $167,000 in 2014 from $550,000 in 2013, and interest on short-term
investments decreased to $217,000 in
2014 from $409,000 in 2013.
Other securitization income was $351,000 in 2014 compared to $1.4 million 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, however interest rate swap
activity has decreased as CMB mortgages have continued to
mature.
Interest on financial liabilities from securitization of
$2.9 million decreased from
$4.1 million in the prior year. The
current year consisted of $1.4
million from the market MBS program and $1.5 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 $251 million and its average interest rate was
2.21%. The CMB program securitization liability average balance
decreased significantly from $1.7
billion in 2013 to $464
million in 2014 as a result of CMB issuance maturities
throughout 2013 and 2014, while the average CMB securitization
liability yield also decreased from 3.16% in 2013 to 3.05% in
2014.
The negative fair market value adjustment to derivative
financial instruments of $365,000
(2013 - negative adjustment of $1.7
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.
Our existing financial liabilities from securitization mature as
follows: 2014 - $253 million (CMB
program), 2015 - $40 million (CMB
program), 2018 - $164 million (market
MBS program), 2019 - $191 million
(market MBS program).
Operating Expenses: Operating expenses were
$3.2 million in the quarter, up from
$2.1 million in 2013. Salaries
and benefits increased from $1.0
million to $1.8 million and
general and administrative expenses increased from $1.0 million to $1.4
million. The increase in operating expenses from the
prior year was due to a significant 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: Estimated taxable income was
$13.7 million ($0.66 per share) in the current quarter compared
to $4.3 million ($0.23 per share) in the second quarter of
2013. The aforementioned tax reorganization of our investment
in MCAP contributed an estimated $11.8
million to taxable income through the gain earned on sale on
a non-consolidated basis. During the quarter, we incurred
$2.6 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.
Credit Quality: Impaired mortgages decreased
to $4.5 million at June 30, 2014 from $7.3
million as at March 31,
2014. The total impaired mortgage ratio was 0.30% as at
June 30, 2014, down significantly
from 0.53% March 31, 2014 while the
corporate impaired mortgage ratio also decreased to 0.47% as at
June 30, 2014 from 0.84% as at
March 31, 2014.
Corporate mortgage arrears were $26
million at June 30, 2014, down
from $38 million at March 31, 2014, consisting of decreases of
$5 million in single family
mortgages, $4 million in residential
construction mortgages and $3 million
in commercial mortgages. Securitized mortgage arrears were
$5 million as at June 30, 2014, down from $6 million as at March 31,
2014.
Financial Position: Total assets were
$1.74 billion as at June 30, 2014, consisting of $1.07 billion of corporate assets and
$669 million of securitization
assets. Corporate assets increased by $63 million during the quarter, consisting
primarily of increases of $44 million
in mortgages (primarily due to the acquisition of $41 million of mortgages for securitization
through the MBS program) and $19
million in cash and cash equivalents.
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 $76
million during the quarter, primarily due to the maturity of
CMB-related assets of $223 million
during the quarter. This decrease was partially offset by an
increase of $147 million in
securitization mortgages related to the market MBS program,
reflecting new MBS issued during the quarter.
Term deposit liabilities were $841
million at June 30, 2014, up
$43 million from $798 million at March 31,
2014.
Total shareholders' equity of $221
million as at June 30, 2014
increased from $218 million as at
March 31, 2014. Activity for
the quarter included net income of $6.1
million, the issuance of new common shares of $1.7 million, the payment of the second quarter
dividend of $5.8 million and an
increase to accumulated other comprehensive income of $317,000.
Asset Capacity: As at June 30, 2014, our remaining asset capacity was
$162 million, based on our target
assets to capital ratio of 5.75. The significant increase
from March 31, 2014 was primarily due
to the reorganization of our equity investment in MCAP noted above.
For further information, refer to the "Equity Investment in
MCAP" sub-section of the "Financial Position" section of MCAN's Q2
2014 MD&A.
Outlook: Real estate markets are expected to remain
balanced throughout 2014, supported by low interest rates and
steady job growth. We expect mortgage rates to remain
attractive to home buyers, and the evidence of price inflation to
support demand levels that are sufficient for stable housing
markets.
Our focus continues to be the growth of the uninsured single
family mortgage portfolio sourced from MCAP and more recently
through the successful integration of the Xceed origination
platform into our single family unit. This initiative is expected
to grow our corporate assets, improve asset mix to further reduce
our risk profile, while also optimizing returns. We intend to
place greater emphasis on building lower risk assets to support
lower risk, sustainable profits and enhanced risk adjusted
return.
We have continued our participation in the securitization market
with regular issuances through the market MBS program which
commenced in the fourth quarter of 2013. To June 30, 2014, we have issued $364 million of MBS, and we expect to continue
our participation in the program for the remainder of 2014.
To date, we have retained the residual economics of the MBS (the
"interest-only strips"). We expect to sell a portion of the MBS
interest-only strips in future periods.
We expect residential construction activity to moderate
nationally, with Western Canadian markets showing continued
strength based on strong GDP and job growth. We see opportunity for
continued growth in our core markets in Western Canada and Ontario. Interest
rates should remain at historic lows, though we may see a modest
increase in the latter half of 2015.
Recent CMHC changes have resulted in tighter underwriting
guidelines and lower origination volumes in some mortgage products.
We anticipate improved stability and modest growth in our core
markets to the end of 2014. Canadian real estate markets,
while at an elevated price level, are considered to be balanced and
we do not expect any significant housing price adjustments in the
near future.
The Basel III Liquidity Adequacy Requirements Guideline comes
into effect on January 1, 2015.
To prepare for the implementation date, we have started to assess
and, where necessary, change the composition of our liquid assets
to comply with the new guideline. A key modification to our
liquid asset position will likely be to increase our holdings of
NHA MBS securities, as these securities are considered to be "High
Quality Liquid Assets" under the guideline.
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.
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,
Limited Partner's At-Risk Amount ("LP ARA") and Impaired Mortgage
Ratios.
Further Information: Complete copies of the
Company's 2014 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.
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