MKP MCAN Mortgage Corporation

Stock market symbol
TSX: MKP

TORONTO, Aug. 12, 2015 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported second quarter 2015 earnings today.  Q2 2015 highlights are as follows:

• Second quarter net income of $11.9 million ($0.56 per share) increased 96% from $6.1 million ($0.30 per share) in the prior year. Return on average shareholders' equity increased from 11.01% to 20.16%. Earnings per share were up $0.26 from last year, $0.35 from the prior quarter and are up $0.11 year to date.
  
  
• The increase was due to higher equity income from MCAP Commercial LP ("MCAP") and securitization income from the market mortgage-backed securities ("MBS") program, and discount income earned from a construction loan.
  
  
• We sold $172 million of new MBS through the market MBS program. Income from the market MBS program increased from significant growth in the portfolio.
  
  
• The Board of Directors (the "Board") declared a 2015 third quarter dividend of $0.28 per share to be paid on September 30, 2015.

Q2 2015 Operating Results

Net income for the second quarter of 2015 was $11.9 million, up 96% from $6.1 million in 2014.  Earnings per share were $0.56, up from $0.30 in the prior year.  Return on average shareholders' equity was 20.16% for the quarter, up from 11.01% in the prior year.

The increase in net income from the second quarter of 2014 and the first quarter of 2015 was primarily due to significantly higher equity income from MCAP in the current quarter, higher securitization income from a significant increase in our participation in the market MBS program and discount income earned on the payout of a previously impaired construction loan.  Additionally, the first quarter of 2015 had a significant loss on realized and unrealized financial instruments.

Year to date net income increased to $16.2 million from $13.5 million in the prior year, primarily due to increases in equity income from MCAP, corporate mortgage interest income and income from the market MBS program. These increases were partially offset by a higher realized and unrealized loss on financial instruments.  For the year to date, earnings per share totalled $0.77, up from $0.66 per share in the prior year. Return on average shareholders' equity was 13.99% for the year to date, up from 12.24% in the prior year.

Corporate assets totalled $1.08 billion at June 30, 2015, up from $1.06 billion at March 31, 2015.  Activity for the quarter included increases of $32 million in cash and cash equivalents and $4 million in our equity investment in MCAP and a decrease of $25 million in mortgages.  Our corporate mortgage portfolio decreased from $882 million at March 31, 2015 to $857 million at June 30, 2015, which included decreases of $40 million in construction loans and $11 million in completed inventory loans and increases of $11 million in commercial loans, $9 million in insured single family mortgages and $5 million in uninsured single family mortgages.  The decrease in the construction loan portfolio is a result of the measured approach that we have taken to new loan originations and the geographic rebalancing of the portfolio given the current economic uncertainty in Canada (especially Western Canada), in addition to us experiencing a steady volume of loan repayments. 

Net Investment Income - Corporate Assets:  Net investment income from corporate assets was $13.7 million in the current quarter, up from $10.0 million in the prior year.

Mortgage interest income

Mortgage interest income increased to $13.6 million from $12.7 million in the prior year.  The average mortgage portfolio balance decreased from $904 million in the prior year to $884 million in the current quarter and the average mortgage portfolio yield decreased from 5.55% in the prior year to 5.34% in the current quarter.  Despite the decreases in the average yield and portfolio balance, mortgage interest income increased as a result of $1.1 million of discount income earned from the payout of a previously impaired construction loan and $529,000 of deferred interest earned on a commercial loan, both of which are excluded from the average mortgage portfolio yield as they are non-recurring items. 

The spread of our corporate mortgage yield over the term deposit yield is slightly down from 3.09% to 2.96% in the current year due to slightly lower rates.  Uninsured mortgage rates and overall interest rates have declined throughout the first half of 2015. 

The uninsured single family mortgage portfolio increased as a result of higher volumes from our internal Xceed origination platform, which has grown since early 2014.  The decrease in the construction loan portfolio is a result of the measured approach that we have taken to new loan originations and the geographic rebalancing of the portfolio given the current economic uncertainty in Canada, in addition to us experiencing a steady volume of loan repayments.  The average uninsured completed inventory portfolio has decreased as a result of a tight supply of available product in the market.

Equity income from MCAP

Equity income from our investment in MCAP increased from $1.5 million in the prior year to $4.9 million in the current quarter.  In the current quarter, MCAP earned significant gains from the sales of mortgages and higher securitization income and origination fees.  MCAP's origination volumes were $3.5 billion in the second quarter of 2015.  MCAP had $50.4 billion of assets under administration as at June 30, 2015.  Our share of equity income from MCAP has been historically volatile, and the current quarter may not be indicative of future results.

Realized and unrealized losses on financial instruments

The realized and unrealized loss on financial instruments was $21,000 in the current quarter compared to $320,000 in the prior year. These losses relate to the hedging of mortgage funding commitments to mitigate interest rate risk.  We enter into forward starting interest rate swaps with a financial institution as part of this hedge.  If the hedged mortgage is securitized through the market MBS program, the offsetting economic gain (loss) is realized over the term of the mortgage through higher (lower) spread income.  If the hedged mortgages are sold to third parties on a whole loan basis, offsetting gains or losses are recognized in the period that the mortgages are sold. 

During the current quarter, 5-year Government of Canada bond rates increased by 0.07% compared to a decrease of 0.22% in the prior year.

Other net investment income

Fees consisting primarily of extension, renewal and letter of credit fees earned on our corporate mortgage portfolio, increased to $533,000 in the current quarter from $504,000 in the prior year.

Marketable securities income decreased to $424,000 in the current quarter from $465,000 in the prior year as a result of a lower average portfolio balance in the current quarter. 

Whole loan gain on sale income was $130,000 in the current quarter, down from $535,000 in the prior year.  We regularly sell mortgages to third-party aggregators on a whole-loan basis with mortgage premiums received at the time of sale.  In the current quarter, we used the majority of our insured single family originations for the market MBS program and therefore whole loan sales volumes were relatively low.

Term deposit interest and expenses decreased to $5.1 million in the current quarter from $5.2 million in the prior year.  The decrease was due to a decrease in the average term deposit rate from 2.46% in the prior year to 2.38% in the current quarter, partially offset by the impact of a $12 million increase in the average term deposit balance from $815 million in the prior year to $827 million in the current quarter.

Mortgage expenses, consisting primarily of mortgage servicing fees, decreased to $905,000 in the current quarter from $993,000 in the prior year. 

We recorded $38,000 of recoveries of credit losses during the quarter compared to $2,000 of provisions in the prior year.  Collective provisions were lower as a result of the decrease in the corporate mortgage portfolio in the current quarter, while individual provisions were higher as a result of the impairment of a residential construction loan that has experienced cost overruns.  Net write-offs increased to $114,000 (5.2 basis points) in the current quarter from $40,000 (1.8 basis points) in the prior year.

Net Investment Income - Securitization Assets:  Net investment income from securitization assets was $1.1 million in the current quarter compared to a loss of $189,000 in the prior year.  Net investment income from securitization assets relates to MCAN's participation in the market MBS program and the Canada Mortgage Bonds ("CMB") program. Our participation in the CMB program ceased as of June 15, 2015.  For further details on these programs, refer to the "Securitization Programs" section of the Management's Discussion and Analysis ("MD&A"). Net investment income from the market MBS program has increased in recent quarters as we have continued to securitize insured single family mortgages through this program. 

Market MBS Program

Net investment income from the market MBS program was $1,134,000 in the current quarter, up from $426,000 in the prior year.  Mortgage interest income was $6.1 million, up from $1.9 million in the prior year.  The average portfolio balance increased from $251 million to $896 million, while the average yield decreased from 2.80% to 2.75%.  Interest on financial liabilities from securitization was $4.6 million in the current quarter, up from $1.4 million in the prior year.  The market MBS liability average balance increased from $251 million to $899 million while the average interest rate decreased from 2.21% to 2.07%. 

CMB Program

Our participation in the CMB program ceased as of June 15, 2015 with the maturity of the final CMB bond liability.  We incurred a net loss of $76,000 from the CMB program in the current quarter compared to a loss of $617,000 in the prior year. 

Operating Expenses:  Operating expenses were $3.1 million in the current quarter, down from $3.2 million in the prior year.  Salaries and benefits increased by $58,000, while general and administrative expenses decreased by $144,000.  The decrease in operating expenses is a result of a prior year capital tax refund received in the current quarter.

Income Taxes:  In the current quarter we had a recovery of deferred taxes of $183,000 compared to a provision of $385,000 in the prior year.  The deferred tax recovery relates to tax losses recognized at the subsidiary level.  The prior year provision relates to the partial application of loss carry forwards as a result of taxable income earned at the subsidiary level.

Taxable income was $5.1 million ($0.24 per share) in the current quarter compared to $12.5 million ($0.61 per share) in the prior year, which included $11.8 million of taxable income from the reorganization of our investment in MCAP.  In the current quarter, we incurred $3.7 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, compared to $2.6 million in the prior year. 

Credit Quality:  Impaired mortgages were $5.7 million at June 30, 2015, down from $8.0 million at March 31, 2015.  The total impaired mortgage ratio was 0.27% at June 30, 2015, down from 0.45% at March 31, 2015 while the corporate impaired mortgage ratio also decreased to 0.58% at June 30, 2015 from 0.90% at March 31, 2015. 

Corporate mortgage arrears were $29 million at June 30, 2015, down from $32 million at March 31, 2015.  Securitized mortgage arrears were $12 million at June 30, 2015, up from $10 million at March 31, 2015.  Despite the economic volatility and uncertainty relating to oil prices and any potential impact across Canada, our total mortgage arrears have not increased significantly during 2015 and our impaired mortgage ratios have decreased.  We continue to diligently monitor mortgage arrears given current economic conditions.

Financial Position:  Total assets were $2.10 billion as at June 30, 2015, consisting of $1.08 billion of corporate assets and $1.02 billion of securitization assets.  Corporate assets increased by $16 million in the current quarter, which included increases of $32 million in cash and cash equivalents and $4 in our equity investment in MCAP and a decrease of $25 million in mortgages.  Our corporate mortgage portfolio decreased from $882 million at March 31, 2015 to $857 million at June 30, 2015, which included a decrease of $40 million in our residential construction loan portfolio. 

Securitization assets increased by $123 million during the quarter, primarily due to the $172 million of new mortgages securitized through the market MBS program in the current quarter.  This increase was partially offset by the maturity of $28 million of CMB-related assets upon the maturity of our final CMB program bond liability.  As a result of the increase in securitized mortgages during the quarter, insured single family mortgages represented over 50% of total assets as at June 30, 2015.

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.

Term deposit liabilities were $854 million at June 30, 2015, up from $847 million at March 31, 2015.

Financial liabilities from securitization were $1.0 billion at June 30, 2015, up from $881 million at March 31, 2015.  The final CMB program bond liability matured during the quarter, ending our participation in the CMB program.  The balance increased by $121 million in the current quarter, consisting of $172 million of new liabilities issued through the market MBS program, the maturity of the $28 million CMB bond liability and a $23 million repayment of existing market MBS liabilities. 

Total shareholders' equity was $238 million at June 30, 2015, up from $231 million as at March 31, 2015. Activity for the quarter included net income of $11.9 million, the issuance of $1.9 million of new common shares through the dividend reinvestment plan, the payment of the second quarter dividend of $5.9 million and a decrease to accumulated other comprehensive income of $1.1 million.

Dividend:  The Board declared a third quarter regular dividend of $0.28 per share to be paid September 30, 2015 to shareholders of record as of September 15, 2015.

Asset Capacity:  As at June 30, 2015, our remaining income tax asset capacity, based on our target income tax assets to capital ratio of 5.75, was $103 million.

Outlook:  Canadian real estate markets have remained balanced throughout the first half of 2015, however we continue to observe some declines in housing markets in Alberta as the province adjusts to the instability in oil prices and the employment concerns for the province.  We expect Canadian housing markets to remain in a balanced state, but we are monitoring inventory levels as they are currently at historical lows as consumers, developers and builders adjust sales activity due to current economic conditions.  Housing and financial markets are expected to encounter moderation and potential instability over the next few quarters as Canada adjusts to lower sale volumes and inventory levels and financial markets adjust to the volatility within bond markets as a result of the recent rate cut by the Bank of Canada and indications that further monetary policy changes are possible should economic conditions warrant such measures.

The recent rate cut by the Bank of Canada will likely soften the impact on the housing market as lower rates are integrated into markets, facilitate increased consumer spending and stabilize economic growth. The key concerns are low economic growth and that any increase in unemployment rates will have a spillover effect to consumer confidence. In the first half of 2015, housing markets have benefited from the low interest rate environment, relatively stable unemployment rates and restricted supply in our core markets. Recent volatility in the stock market and the global price of oil could have a negative influence on the economy for the latter half of 2015.  Although mortgage rates will remain low, volatility within the long term bond market will impact mortgage spreads and continued pricing discipline will be necessary. The uncertainty in housing markets and low mortgage rates should temper price appreciation, but economic uncertainty will require continued diligence on underwriting standards and closer monitoring of our mortgage portfolio performance.

Our growth strategy remains focused on our insured and uninsured single family mortgage portfolio sourced through our direct origination platform of Xceed. Although we did not meet our 10% annual corporate asset growth target of $52 million in the first half of the year, we continue to observe origination growth in these asset classes and expect originations to remain steady through Q3 with some moderation in volumes in Q4 as the mortgage market adjusts to changes in the housing market.  We expect the origination and portfolio growth over the remainder of 2015 will allow us to grow our corporate assets, further diversify and re-balance our mortgage portfolio while optimizing returns and lowering our risk profile.

We participated in the MBS securitization market with regular issuances throughout the second quarter of 2015, however we expect volumes to moderate in the latter half of 2015 as the mortgage market adjusts to the current state of the housing market. In the second quarter, we issued $172 million of new MBS and since re-entering the MBS market, we have issued $1.1 billion of MBS and will continue our issuances in the near term.  To date, we have retained the residual economics of the MBS (the "interest-only strip"). We regularly review the economics of this retention strategy and will assess the impact of future sales of a portion of the MBS interest-only strips going forward to facilitate portfolio growth.

We expect construction activity to moderate nationally, with British Columbia and Ontario benefiting from the continued decline in the Canadian dollar and increased export gains on provincial GDP growth. The recent rate cut announcement by the Bank of Canada and slow growth projections for the Canadian economy will result in continued close monitoring of our construction portfolio. Our portfolio remains well balanced with seasoned projects with strong presales and seasoned builders and developers. We expect interest rates to remain at historic lows throughout 2015.

Subsequent Event: Subsequent to quarter end, we closed a rights offering (the "Offering") to common shareholders that raised proceeds of approximately $15.1 million through the issuance of 1,406,084 common shares, creating approximately $87 million of additional income tax asset capacity.  Of the new Common Shares issued, 1,197,595 were subscribed for under the initial subscription privilege and 208,489 (out of total additional subscription requests of 1,468,786) were subscribed for under the additional subscription privilege.  The incremental capital will be used to fund further growth of our mortgage origination opportunities, primarily in our single family residential product lines.

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, Average Interest Rate, Net Interest Income, Impaired Mortgage Ratios, Mortgage Arrears, Common Equity Tier 1, Tier 1 and Total Capital Ratios, Total Exposures, Regulatory Assets, Leverage Ratio, Assets to Capital Multiple; Risk Weighted Asset Ratios, Tier 1, Tier 2, Tier 3 and Total Liquid Assets and Liquidity Ratios, Income Tax Assets, Income Tax Liabilities, Income Tax Capital, Income Tax Assets to Capital Ratio, Income Tax Asset Capacity, Market Capitalization, Book Value per Common Share and Limited Partner's At-Risk Amount.

Further Information:  Complete copies of the Company's 2015 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 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 NHA MBS program.

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.

The material factors or assumptions that were identified and applied by us in drawing conclusions or making forecasts or projections set out in the forward-looking statements include, but are not limited to:

• the Company's ability to successfully implement and realize on its business goals and strategy;
• factors and assumptions regarding interest rates;
• housing sales and residential mortgage borrowing activities;
• the effect of competition;
• government regulation of the Company's business;
• computer failure or security breaches;
• future capital and funding requirements;
• the value of mortgage originations;
• the expected margin between interest earned on mortgage portfolios and interest paid on deposits;
• the relative continued health of real estate markets;
• acceptance of the Company's products in the marketplace;
• availability of key personnel;
• the Company's operating cost structure; and
• the current tax regime.

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;
• changes in MBS spreads and swap rates;
• MBS and mortgage prepayment rates;
• mortgage rate and availability changes;
• adverse legislation or regulation;
• availability of MBS issuer allocation;
• technology changes;
• confidence levels of consumers;
• ability to raise capital and term deposits 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