Stock market symbol
TSX: MKP
TORONTO, Nov. 6, 2014 /CNW/ - MCAN Mortgage Corporation's
("MCAN", the "Company" or "we") net income for the third quarter of
2014 was $4.9 million, down from
$9.3 million (on a restated basis for
our change in income tax accounting noted below) in 2013.
Earnings per share were $0.23, down
from $0.46 (restated) in the prior
year. Return on average shareholders' equity was 8.74% for
the quarter, down from 18.40% (restated) in the third quarter of
2013.
Net income in the third quarter of 2013 was significantly higher
than the current year due to the non-recurring benefits from our
acquisition of Xceed Mortgage Corporation ("Xceed") completed on
July 4, 2013. These
non-recurring items included the bargain purchase gain, partially
offset by transaction related expenses, and income from a
higher-yielding mortgage portfolio purchased at a discount to its
net book value, which was realized primarily during fiscal
2013. In terms of recurring items, equity income from MCAP
Commercial LP ("MCAP") decreased significantly from the prior year,
however securitization income increased as a result of growth in
the market mortgage-backed securities ("MBS") program.
Quarterly net income decreased by $1.2
million from the prior quarter ended June 30, 2014. The decrease is primarily
due to a $650,000 decrease in equity
income from MCAP and a $676,000
non-recurring income distribution from a commercial real estate
investment received in the second quarter. In addition,
operating expenses increased in the third quarter as a result of
certain non-recurring expenses.
Year to date net income increased to $18.3 million from $17.8
million in the prior year, primarily due to increases in
mortgage interest income, income from the market MBS program and
whole loan gains on sale. These increases were primarily
offset by lower equity income from MCAP, higher operating expenses
and the non-recurring items noted above. For the year to
date, earnings per share totalled $0.89, down from $0.92 per share in the prior year. Return
on average shareholders' equity was 11.10% for the year to date,
down from 12.56% in the prior year.
The Board of Directors (the "Board") declared a fourth quarter
regular dividend of $0.28 per share
to be paid January 2, 2015 to
shareholders of record as of December 15,
2014.
Corporate assets totalled $1.05
billion as at September 30,
2014, a decrease of $14
million from June 30,
2014. Activity for the quarter included decreases of
$8 million in mortgages, $4 million in marketable securities and
$3 million in cash and cash
equivalents.
During the quarter, we continued to focus on the growth of core
operations and origination activities. We continue to grow
the origination of single family mortgages through the build out of
the Xceed origination platform. This resulted in the growth of the
uninsured single family mortgage portfolio in corporate assets.
This growth has kept MCAN active in both the insured and uninsured
single family mortgage market, building our presence in the broker
channel. Xceed's mortgage origination levels have continued to
surpass management's expectations. On the construction side of
the business, the size of our portfolio decreased slightly in the
quarter as we experienced run off as projects were completed. We
saw increased competition for construction loans in the single
family market as the major banks attempted to reduce their exposure
to condominium construction. We have been managing the construction
portfolio in terms of both commitments and outstanding balances to
remain within our risk appetite for this asset category.
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 decreased to $12.9
million in the current year from $14.8 million in the prior year. The decrease was
primarily due to the impact of the higher effective interest rates
earned in the prior year on the mortgages acquired as part of the
acquisition of Xceed, partially offset by an increase in the
average mortgage portfolio from $796
million in 2013 to $909
million in 2014. The reduction in higher-yielding mortgages
was the primary factor in the average mortgage yield decrease from
7.32% in 2013 to 5.54% in 2014. Given the short duration of the
acquired mortgages, the average corporate mortgage yield has now
returned to market levels.
Excluding the mortgages acquired from Xceed, the average yield
decreased from 5.97% to 5.54%. The balance of the decrease in
the corporate yield from the prior year was due to a lower yield on
our construction loan portfolio as a result of lower commitment
fees earned from a decrease in its balance during the
quarter. This decrease was offset by an increase in mortgage
fee income as certain mortgages renew or are extended.
Equity income from our ownership in MCAP decreased to
$835,000 in the current year from
$2.7 million in the prior year,
primarily due to a significant decrease in origination fee income
in the current year. MCAP securitized a larger portion of its
funded mortgages in the current year and therefore did not
recognize any associated up-front origination fee income as the
mortgages remained on its balance sheet. In addition, our
equity interest in MCAP decreased from 23.4% in the prior year
compared to 14.8% in the current year. MCAP's origination volumes
were $3.7 billion for the third
quarter of 2014, and as at August 31,
2014, MCAP had $44.2 billion
of assets under administration.
Fees consisting primarily of extension, renewal and letter of
credit fees earned on our corporate mortgage portfolio, increased
to $744,000 in the current year from
$601,000 in the prior year as a
result of a larger average portfolio.
Marketable securities income increased to $558,000 in the current year from $306,000 in the prior year as a result of
$131,000 of gains from sale and a
higher average yield in the current year.
Whole loan gains on sale increased to $175,000 in the current year from $86,000 in the prior year, relating to the sale
of $10 million of insured single
family mortgages during the quarter. We regularly sell
mortgages to third-party aggregators on a whole-loan basis with
premium proceeds received at the time of sale.
The realized and unrealized loss on financial instruments
decreased to $119,000 in the current
year from $217,000 in the prior year.
These losses relate to the hedging of mortgage funding commitments
to mitigate interest rate risk.
Term deposit interest and expenses increased to $5.3 million in the current year from
$4.9 million in the prior year as a
result of a $54 million increase in
the average term deposit balance from $768
million in 2013 to $822
million in 2014. The average term deposit rate
increased from 2.44% in 2013 to 2.45% in 2014.
Mortgage expenses, consisting primarily of mortgage servicing
fees, increased to $945,000 in the
current year from $864,000 in the
prior year primarily due to the increase in the average mortgage
portfolio.
Interest on loans payable increased to $327,000 in the current year from $264,000 in the prior year as a result of an
increase in the volume of borrowings to facilitate the warehousing
of mortgages prior to their sale as whole loans or through the
market MBS program.
We recorded $73,000 of recoveries
of credit losses during the quarter compared to $272,000 of provisions for credit losses in the
prior year. The change from the prior year is primarily due
to a decrease in the collective allowance, as the corporate
mortgage portfolio decreased by $8
million in the quarter compared to an $82 million increase in the prior year. Net
write-offs were $4,000 (0.2 basis
points) during the current quarter compared to $215,000 (10.8 basis points) in the prior
year.
Other Income - Corporate Assets: In the
third quarter of 2013, 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. In
addition, we incurred $874,000 of
transaction and restructuring expenses.
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
$165,000 in the third quarter of 2014
compared to a loss of $917,000 in the
prior year, net of a $414,000
negative fair market value adjustment on derivative financial
instruments (2013 - $385,000 negative
adjustment). Current quarter activity consisted of income of
$409,000 from the market MBS program
and a loss of $574,000 from the CMB
program while prior year activity related entirely to the CMB
program.
Mortgage interest income of $3.0
million was up 150% from $1.2
million in the prior year. The current quarter
consisted of $2.8 million of income
from the market MBS program and $248,000 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 $421 million and its average yield was 2.64%.
The CMB program average portfolio balance decreased
significantly from $618 million in
2013 to $62 million in 2014 as a
result of CMB mortgage maturities throughout 2013 and 2014, while
the average CMB mortgage yield also decreased from 3.65% in 2013 to
3.29% 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 $48,000 in 2014 from $355,000 in 2013, and interest on short-term
investments decreased to $239,000 in
2014 from $318,000 in 2013.
Other securitization income was $414,000 in 2014 compared to $575,000 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, however interest rate swap activity has
decreased as CMB assets have continued to mature.
Interest on financial liabilities from securitization increased
to $3.3 million in 2014 from
$3.0 million in 2013. The current
year consisted of $2.3 million from
the market MBS program and $929,000
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 $417 million and
its average interest rate was 2.24%. The CMB program
securitization liability average balance has decreased
significantly since the prior year as a result of CMB issuance
maturities throughout 2013 and 2014, while the average CMB
securitization liability yield increased slightly from 2.97% in
2013 to 2.98% in 2014.
The negative fair market value adjustment to derivative
financial instruments of $414,000
(2013 - negative adjustment of $385,000) 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 - $59 million (CMB
program), 2015 - $39 million (CMB
program), 2018 - $162 million (market
MBS program) and 2019 - $384 million
(market MBS program).
Operating Expenses: Operating expenses were
$3.6 million in the quarter, up from
$3.5 million in 2013. Salaries
and benefits decreased from $2.1
million to $1.8 million and
general and administrative expenses increased from $1.4 million to $1.8
million. The decrease in salaries and benefits for the
quarter relates primarily to $514,000
of non-recurring severance costs incurred in the third quarter of
2013. The increase in general and administrative expenses is
primarily due to a non-recurring expense incurred in the current
year.
Income Taxes: Estimated taxable income was
$1.6 million ($0.08 per share) in the current quarter compared
to $3.4 million ($0.16 per share) in the third quarter of 2013.
During the quarter, we incurred $3.4
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 $4.1 million as at September 30, 2014 from $4.5 million as at June
30, 2014. The total impaired mortgage ratio was 0.25%
as at September 30, 2014, down from
0.30% as at June 30, 2014 while the
corporate impaired mortgage ratio also decreased to 0.43% as at
September 30, 2014 from 0.47% as at
June 30, 2014.
Corporate mortgage arrears and impaired mortgages were
$28 million as at September 30, 2014, up from $26 million as at June 30,
2014. The increase related to our residential
construction loan portfolio. Securitized mortgage arrears
were $7 million as at September 30, 2014, up from $5 million as at June 30,
2014.
Financial Position: Total assets were
$1.72 billion as at September 30, 2014, consisting of $1.05 billion of corporate assets and
$667 million of securitization
assets.
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 $2
million during the quarter. Activity for the quarter
included an increase of $192 million
in mortgages related to the market MBS program, offset by the
maturity of CMB-related assets of $193
million.
Term deposit liabilities were $827
million at September 30, 2014,
down $14 million from $841 million at June 30,
2014.
Financial liabilities from securitization were $644 million at September
30, 2014, down $4 million from
$648 million at June 30, 2014. Activity for the quarter
included $197 million of new
liabilities related to the market MBS program, the maturity of
$193 million of liabilities related
to the CMB program and $8 million of
market MBS and CMB program liability repayments.
Total shareholders' equity of $221
million as at September 30,
2014 was unchanged from June 30,
2014. Activity for the quarter included net income of
$4.9 million, the issuance of new
common shares of $1.8 million, the
payment of the third quarter dividend of $5.8 million and a decrease to accumulated other
comprehensive income of $892,000.
Asset Capacity: As at September 30, 2014, our remaining asset capacity,
based on our target assets to capital ratio, was $166 million.
Outlook: Canadian real estate markets have remained
balanced this year and are expected to remain in a balanced state
given that inventory levels appear to be falling as developers and
builders adjust to sales activities. The housing market
continues to benefit from the low interest rate environment and
stable job growth; however recent volatility in the stock market
and the global price of oil could have a temporary negative
influence on the market for the fourth quarter. We expect low
mortgage rates and modest price appreciation to support housing
demand and therefore maintain market stability.
Our strategic growth strategy remains focused on our insured and
uninsured single family mortgage portfolio sourced by MCAP and
through our direct origination platform of Xceed. We continue
to observe growth in this asset class and originations have
strengthened over 2014 which has allowed us to grow our corporate
assets, further diversify and re-balance our mortgage portfolio
while optimizing returns and maintaining a lower risk
profile. Over the medium term, our target corporate asset
growth rate is 10% per year.
We continued our participation in the MBS securitization market
with regular issuances throughout the third quarter of 2014. To
September 30, 2014, we have issued
$561 million of MBS to the market and
plan to continue our participation in this program. To date,
we have retained the residual economics of the MBS (the
"interest-only strip") on our balance sheet. We retain the
ability to sell a portion of the interest-only strips in future
periods to continue portfolio growth. As we approach 2015, we
expect the negative impact of the CMB program on net income to end
as remaining issuances mature, while we expect to earn further
income from the market MBS program.
We expect construction activity to moderate nationally, with
Western markets showing continued strength. The recent
decline in global oil prices may impact home prices and
construction activity in Western
Canada in future quarters. The lower Canadian dollar should
benefit British Columbia and
Ontario as exports of manufactured
goods and resources continue to support global growth. We
expect interest rates to remain at historic lows throughout
2015.
The Basel III Liquidity Adequacy Requirements Guidelines come
into effect on January 1, 2015. To
continue our preparation for the implementation of these new
guidelines, we have started to assess and change the composition of
our liquid assets to comply. A key modification to our liquid asset
position will likely be an increase in our holdings of High Quality
Liquid assets such as NHA MBS securities.
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 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.
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 in the MIC entity) 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