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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
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
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
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%
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
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
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
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
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
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
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
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,
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
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
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;
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;
relationships with our mortgage originators;
ability to realize anticipated benefits from the acquisition of Xceed;
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
For further information:
MCAN Mortgage Corporation
President and Chief Executive Officer
Vice President and Chief Financial Officer