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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 securitization.
Accounting Policy Change: On January 1, 2014, we changed our accounting policy with respect to income taxes. As a mortgage investment corporation ("MIC") under the Income Tax Act (Canada) (the "Tax Act"), we intend to pay sufficient dividends in current and future years to ensure that we are not subject to income tax. Accordingly, we elected to no longer record a provision for current or deferred income taxes within the MIC entity. This change in policy was applied retrospectively as at January 1, 2013. We believe that this change will eliminate the income tax volatility in our income statement, and it is consistent with the approach that other MICs in our industry take in accounting for taxes.
Net Investment Income - Corporate Assets: Mortgage interest income increased to $12.4 million in the current year from $10.6 million in the prior year, primarily due to a $108 million increase in the average mortgage portfolio from $733 million in 2013 to $841 million in 2014. In addition, our average mortgage yield increased from 5.67% to 6.04%. Excluding income from the higher-yielding mortgages acquired as part of the Xceed acquisition in the third quarter of 2013, our mortgage yield increased from 5.67% to 5.82%.
MCAP reported strong results for the quarter as a result of higher MBS volumes and profitability and higher assets under administration. Our share of net income was $2.1 million for quarter, up from $1.4 million in the prior year (noting that the prior year was at a higher 23.4% investment level compared to our current 14.8% level). MCAP's origination volume was $1.4 billion for the first quarter of 2014, and as at March 31, 2014 it had $40.9 billion of assets under administration.
Fees, consisting primarily of extension, renewal and letter of credit fees earned on our corporate mortgage portfolio, increased to $595,000 in the current year from $384,000 the prior year as a result of a larger average portfolio.
During the quarter, we earned a whole loan gain on sale of $331,000, which related to the sale of insured single family mortgages. We regularly sell mortgages to third-party aggregators for sale into the CMB program or for pooling as MBS on a whole-loan basis with premium proceeds received at the time of sale.
During the quarter, we incurred realized and unrealized loss on financial instruments of $319,000, representing gains or losses associated with the hedging of mortgage funding commitments to mitigate interest rate risk. To the extent that the related hedged mortgages are sold, offsetting gains or losses are recognized in the period that the mortgages are sold.
Term deposit interest and expenses increased to $5.0 million from $4.8 million in the prior year as a result of a $40 million increase in the average term deposit balance to $788 million in 2014 from $748 million in 2013. The average term deposit rate remained unchanged from the prior year at 2.49%.
Mortgage expenses, consisting primarily of mortgage servicing fees, increased to $954,000 from $690,000 in the prior year primarily due to an increase in the average mortgage portfolio.
We had $608,000 of recoveries of provisions for credit losses during the quarter compared to provisions for credit losses of $88,000 in the prior year. Current year activity consisted primarily of the reversal of a $550,000 individual allowance on an impaired loan as a result of its partial repayment. The prior year consisted primarily of individual provisions on uninsured single family mortgages. Write-offs were $57,000 (2.7 basis points) during the current quarter, down from $309,000 (16.9 basis points) in the prior year.
Other Income - Corporate Assets: In the quarter, we sold 250,000 class C units of our investment in MCAP resulting in a gain on sale of $711,000. This sale reduced our equity interest in MCAP from 15.7% to 14.8%.
Net Investment Income - Securitization Assets: Net investment income from securitization assets relates to MCAN's participation in the market MBS program and the CMB program. For further details on these programs, refer to the "Securitization Programs" section of the Management's Discussion and Analysis ("MD&A"). We expect net investment income from the market MBS program to increase as we securitize additional mortgages through this program. As existing CMB issuances continue to mature, we expect net investment income from CMB assets to decrease as the related mortgages and reinvestment assets are removed from our balance sheet.
The net investment loss from securitization assets was $219,000 in the first quarter of 2014 compared to a loss of $602,000 in the prior year, although it included a $464,000 negative fair market value adjustment on derivative financial instruments (2013 - $641,000). Current year activity consisted of income of $405,000 from the market MBS program and a loss of $624,000 from the CMB program.
Mortgage interest income of $2.6 million was unchanged from the prior year. The current year consisted of $1.6 million of income from the market MBS program and $1.0 million from the CMB program, while the prior year related entirely to the CMB program. In the current quarter, the market MBS portfolio average balance was $215 million and its average yield was 3.00%. The CMB program average portfolio balance decreased significantly from $886 million in 2013 to $210 million in 2014 as a result of CMB mortgage maturities throughout 2013, while the average CMB mortgage yield also decreased from 3.69% in 2013 to 3.61% in 2014.
As a result of a significant decrease in the average portfolios due to the maturity of CMB-related assets, interest on financial investments decreased to $205,000 in 2014 from $655,000 in 2013, and interest on short-term investments decreased to $289,000 in 2014 from $340,000 in 2013.
Other securitization income was $447,000 in 2014 compared to $872,000 in the prior year, consisting primarily of interest rate swap receipts. As part of the CMB program, we enter into "pay floating, receive fixed" interest rate swaps to hedge interest rate risk.
Interest on financial liabilities from securitization of $3.2 million decreased from $4.4 million in the prior year. The current year consisted of $1.1 million from the market MBS program and $2.1 million from the CMB program, while the prior year related entirely to the CMB program. In the current quarter, the market MBS liability average balance was $205 million and its average interest rate was 2.25%. The CMB program securitization liability average balance decreased significantly from $2.0 billion in 2013 to $809 million in 2014 as a result of CMB issuance maturities throughout 2013, while the average CMB securitization liability yield also decreased from 3.24% in 2013 to 2.87% in 2014.
The negative fair market value adjustment to derivative financial instruments of $464,000 (2013 - negative adjustment of $641,000) relates to the CMB interest rate swaps. The unrealized portion of this fair market value adjustment can be volatile as it is driven by changes in the forward interest rate curve. From an economic perspective, this adjustment is generally offset by changes in future expected income from securitized mortgages and principal reinvestment assets that have a floating interest rate. We regularly monitor our interest rate swap hedge position to minimize our exposure to interest rate risk.
Our existing financial liabilities from securitization mature as follows: 2014 - $476 million (CMB program), 2015 - $40 million (CMB program), 2018 - $166 million (market MBS program), and 2019 - $45 million (market MBS program).
Operating Expenses: Operating expenses were $3.4 million in the quarter, up from $1.9 million in 2013. Salaries and benefits increased from $969,000 to $1.7 million and general and administrative expenses increased from $950,000 to $1.6 million. The increase in operating expenses from the prior year was a result of an increase in the scale of operations as a result of the acquisition of Xceed, which was completed in the third quarter of 2013.
Income Taxes: Taxable income was $4.1 million ($0.20 per share) in the current quarter compared to $1.3 million ($0.07 per share) in the first quarter of 2013. During the quarter, we incurred $2.1 million of up-front origination costs on mortgages securitized through the market MBS program, which are expensed for tax purposes and amortized for accounting purposes. Excluding the impact of expensing these costs for tax purposes, taxable income for the first quarter of 2014 would have been $6.1 million ($0.30 per share).
As previously noted in the "Accounting Policy Change" section, on January 1, 2014, we changed our accounting policy with respect to accounting for income taxes and accordingly we elected to no longer record a provision for current and deferred taxes within the MIC entity.
All subsidiaries of MCAN that are taxable entities will continue to account for current and deferred income taxes. The change in accounting policy has been applied retrospectively as at January 1, 2013. The small deferred tax recovery in the current year and prior year was due to temporary differences in the subsidiaries.
Credit Quality: Impaired corporate mortgages were 0.53% ($7.3 million) as at March 31, 2014, up slightly from 0.51% ($7.4 million) as at December 31, 2013. As a percentage of total mortgages, impaired mortgages were 0.84% as at March 31, 2014, down slightly from 0.85% as at December 31, 2013.
Total mortgage arrears were $44 million at March 31, 2014, up from $38 million at December 31, 2013, consisting of $38 million of corporate mortgages and $6 million of insured securitized mortgages. Activity for the quarter included increases of $4 million in single family mortgages and $6 million in residential construction loans and a decrease of $5 million in securitized mortgages.
Financial Position: Total assets were $1.75 billion as at March 31, 2014, consisting of $1.0 billion of corporate assets and $745 million of securitization assets. Corporate assets decreased by $15 million during the quarter, which included the conversion of $46 million of corporate mortgages into market MBS, partially offset by increases of $22 million in other corporate mortgages, $5 million in cash and cash equivalents and $4 million in marketable securities.
As we securitize mortgages into the market MBS program, assets are effectively transferred from corporate mortgages to securitized mortgages on the balance sheet. The change contributes to changes in asset levels when mortgages purchased are securitized in the following quarter.
Securitization assets decreased by $329 million during the quarter, primarily due to the maturity of CMB-related assets of $371 million during the quarter. This decrease was partially offset by an increase of $46 million in securitization mortgages related to the market MBS program, reflecting new MBS issued during the quarter.
Term deposit liabilities were $798 million at March 31, 2014, up slightly from $790 million at December 31, 2013.
Total shareholders' equity of $218 million as at March 31, 2014 increased from $215 million (restated) as at December 31, 2013. Activity for the quarter included net income of $7.4 million, the issuance of new common shares of $1.2 million, the payment of the first quarter dividend of $5.7 million and an increase to accumulated other comprehensive income of $631,000.
Asset Capacity: As at March 31, 2014, our remaining asset capacity was $100 million, based on our target assets to capital ratio of 5.75.
Outlook: The spring market for residential sales started late this year due to the long cold winter. However, we have seen a steady increase in activity over the last couple of weeks which in turn has resulted in an increase in mortgage applications. As a result of this increase, we expect to see a significant recovery and catch up in activity in Q2 leading to a strong recovery in home construction and mortgage lending volumes.
We will continue to focus on the growth of our corporate assets in 2014. We expect growth within the corporate mortgage portfolio to remain in line with past years. Growth is expected in the insured and uninsured single family mortgage segments. With the re-launch of the Xceed brand this past fall, we expect to grow the origination of uninsured single family mortgages. The Canadian single family mortgage business experienced strong interest margin and net income levels in the first quarter contributing to improved profits. We expect this trend to continue in the second quarter of 2014.
We expect Canada's housing markets to remain balanced for 2014. Current demand and supply fundamentals appear positive for stability in price points and housing sales. Sources of economic growth in Canada are expected to improve as exports and business investment progressively strengthen. Furthermore, employment and disposable income growth are expected to increase modestly. These factors will help to sustain demand for new home construction. However, the expectation of a modest and gradual increase in mortgage rates, the relatively high number of units currently under construction and the slowdown in the growth of the pool of first-time homebuyers are all expected to temper the amount of housing starts. Putting everything together, the forecast range for housing starts varies from 176,000 to 199,800 units for 2014. Multiple Listing Service ("MLS") sales are expected to continue to rise along with improving economic conditions, however they are also expected to be restrained by a modest rise in mortgage rates. MLS housing sales are expected to be between 436,000 and 497,000 units in 2014. Sales are expected to rise at a pace similar to the growth in new listings, thus balanced market conditions are expected to prevail in most regions across Canada.
Our construction lending program has seen improvements in yield. We have focused our construction lending activities in western Canada, where GDP and job growth is expected to be strongest. We continue to see good opportunities in our residential construction and mezzanine lending activities, which enhance the overall return to our shareholders while maintaining portfolio diversification within our risk appetite.
We participated in the market MBS program in the first quarter of 2014 with a new issuance. We expect growth in the market MBS program in 2014, following our re-launch of the program in the fourth quarter of 2013. Mortgage volumes in our market MBS program are expected to grow from our partnership with MCAP and origination from the Xceed platform.
Asset quality remains good. Overall arrears remain low and the quality of mortgage applications remains strong. We continue to watch all markets carefully to ensure that the basic fundamentals in residential markets which drive demand and price inflation, such as population growth, immigration and job growth, are strong enough to support the activity and price levels in our underwriting.
Non-IFRS Measures: The following metrics are considered to be Non-IFRS measures and are defined in the "Non-IFRS Measures" section of the MD&A: Return on Average Shareholders' Equity, Taxable Income, Taxable Income Per Share, Estimated Taxable Income, Estimated Taxable Income Per Share, Average Interest Rate, Net Interest Income, Common Equity Tier 1, Tier 1 and Total Capital Ratios, Regulatory Assets to Capital Ratio; Risk Weighted Assets, Income Tax Assets, Income Tax Liabilities, Income Tax Capital and Limited Partner's At-Risk Amount ("LP ARA").
Changes to Board of Directors: Derek Norton, Chief Executive Officer of MCAP, will not be standing for re-election at MCAN's Annual General Meeting ("AGM") of Shareholders to be held later today, May 7, 2014. The Board would like to thank Mr. Norton for his long service and valuable contribution to MCAN. Scott Coates, Managing Director, Mortgage Investments of KingSett Capital, is nominated for election to the Board at the AGM. This move follows the joint announcement we made with KingSett Capital in March 2014 regarding the MCAN common shares (approximately 7% shareholding) acquired by the KingSett Canadian Real Estate Income Fund LP.
Further Information: Complete copies of the Company's 2014 First Quarter Report will be filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com and on the Company's website at www.mcanmortgage.com.
MCAN is a public company listed on the Toronto Stock Exchange ("TSX") under the symbol MKP and is a reporting issuer in all provinces and territories in Canada. MCAN also qualifies as a mortgage investment corporation ("MIC") under the Income Tax Act (Canada) (the "Tax Act").
The Company's primary objective is to generate a reliable stream of income by investing its corporate funds in a portfolio of mortgages (including single family residential, residential construction, non-residential construction and commercial loans), as well as other types of financial investments, loans and real estate investments. MCAN employs leverage by issuing term deposits eligible for Canada Deposit Insurance Corporation ("CDIC") deposit insurance up to a maximum of five times capital (on a non-consolidated tax basis) as permitted by the Tax Act. The term deposits are sourced through a network of independent financial agents. As a MIC, MCAN is entitled to deduct from income for tax purposes 100% of dividends, except for capital gains dividends, which are deducted at 50%. Such dividends are received by the shareholders as interest income and capital gains dividends, respectively.
MCAN's wholly-owned subsidiary, Xceed, focuses on the origination and sale to third party mortgage aggregators of residential first-charge mortgage products across Canada. As such, Xceed operates primarily in one industry segment through its sales team and mortgage brokers.
MCAN also participates in the market MBS program, the CMB program and other securitizations of insured mortgages.
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS
This press release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. The words "may," "believe," "will," "anticipate," "expect," "planned," "estimate," "project," "future," and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Such statements reflect management's current beliefs and are based on information currently available to management. The forward-looking statements in this press release include, among others, statements and assumptions with respect to:
- the current business environment and outlook;
- possible or assumed future results;
- ability to create shareholder value;
- business goals and strategy;
- the stability of home prices;
- effect of challenging conditions on us;
- factors affecting our competitive position within the housing markets;
- sufficiency of our access to capital resources; and
- the timing of the effect of interest rate changes on our cash flows.
Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the anticipated future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements include, but are not limited to:
- global market activity;
- worldwide demand for and related impact on commodity prices;
- changes in government and economic policy;
- changes in general economic, real estate and other conditions;
- changes in interest rates;
- mortgage rate and availability changes;
- adverse legislation or regulation;
- technology changes;
- confidence levels of consumers;
- ability to raise capital on favourable terms;
- our debt and leverage;
- competitive conditions in the homebuilding industry, including product and pricing pressures;
- ability to retain our executive officers and other employees;
- litigation risk;
- relationships with our mortgage originators;
- ability to realize anticipated benefits from the acquisition of Xceed; and
- additional risks and uncertainties, many of which are beyond our control, referred to in this press release and our other public filings with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports should be consulted.
SOURCE: MCAN Mortgage Corporation
MCAN Mortgage Corporation
President and Chief Executive Officer
Vice President and Chief Financial Officer