Stock market symbol
TORONTO, Nov. 13, 2013 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the
"Company" or "we") net income for the third quarter of 2013 increased
to $9.7 million from $3.5 million in 2012, while earnings per share
increased significantly to $0.49 from $0.19 in the prior year.
Estimated taxable income (refer to the "Non-IFRS Measures" section of
the Third Quarter 2013 Management's Discussion & Analysis of Operations
("MD&A") for a definition of these measures) for the quarter was $3.4
million ($0.16 per share) compared to $4.8 million ($0.27 per share) in
the prior year. The increase in net income was primarily due to higher
mortgage interest income and equity income from MCAP Commercial LP
("MCAP"), in addition to a bargain purchase gain recorded on the
acquisition of Xceed Mortgage Corporation ("Xceed") and significantly
higher yields earned on the mortgages acquired from Xceed. These
increases were partially offset by higher operating expenses incurred
as part of the acquisition of Xceed.
Year to date net income increased to $19.2 million from $14.2 million in
the prior year, primarily due to the same reasons noted above for the
increase in quarterly income. For the year to date, earnings per share
were $1.00, up from $0.82 in the prior year. Estimated taxable income
for the year to date was $8.9 million ($0.46 per share) compared to
$19.1 million ($1.11 per share) in the prior year.
On July 4, 2013, we completed the acquisition of Xceed. The acquisition
resulted in an increase of $21.5 million to share capital and in
purchasing Xceed at a discount to its fair value, we recorded a bargain
purchase gain of $2.1 million. In addition, we acquired the renewal
rights to $683 million of insured single family mortgages previously
originated and sold by Xceed to third parties. For further details,
refer to the "Acquisition of Xceed" discussion below.
The key differences between estimated taxable income and pre-tax net
income for accounting purposes include the non-deductibility of fair
market value adjustments, collective provisions for credit losses and
the amortization of upfront Canada Mortgage Bonds ("CMB") program costs
for tax purposes, the treatment of capital gains income, and
differences between equity income from MCAP and Xceed for accounting
and tax purposes. As a mortgage investment corporation ("MIC"), we
typically pay out all of our taxable income (refer to the "Non-IFRS
Measures" section of the MD&A for a definition of these measures) to
shareholders through dividends.
As noted above, earnings per share have been $1.00 for the year to date
compared to $0.82 in the prior year. However, income recognized from
MCAP as well as the Xceed bargain purchase gain and income earned by
Xceed are only included in taxable income when the amounts are
distributed to MCAN directly. As such, estimated taxable income year
to date was $0.46 per share compared to $1.11 for the same period in
the prior year. Year to date, we have paid dividends of $0.87 per
We reported last quarter that the timing differences in taxable income
may impact dividends in the upcoming quarters. Each quarter and year,
we attempt to balance the importance of maintaining a tax efficient
corporate structure together with the goal of maintaining consistent
and ongoing distributions. With the taxable income timing differences
related to MCAP previously noted and the additional income created in
2013 related to the Xceed acquisition, we have focused an extensive
amount of time assessing our dividend policy. We expect to be able to
manage the volatility in taxable income at the current dividend rate
and earnings level.
Consequently, for the fourth quarter, the Board of Directors has
maintained the existing quarterly dividend level by declaring a
dividend of $0.28 per share payable on January 2, 2014 to shareholders
of record as at December 16, 2013.
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 CMB program and reinvestment assets purchased with mortgage
principal repayments and are funded by financial liabilities from
Net Investment Income: Net investment income was $13.3 million for the quarter, up
significantly from $4.5 million in the prior year. Net investment
income consisted of $14.3 million from corporate assets (2012 - $5.9
million) and a loss of $917,000 from securitization assets (2012 - loss
of $1.4 million). The loss from securitization assets for the quarter
includes a $385,000 negative fair market value adjustment to derivative
financial instruments (negative $1.9 million in 2012).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $14.8 million in the current year
from $10.6 million in the prior year, primarily due to the impact of
the higher effective interest rates on the mortgages acquired as part
of the acquisition of Xceed. These higher-yielding mortgages were
primarily responsible for the increase in the average mortgage yield to
7.32% in 2013 from 5.85% in 2012. Excluding mortgages acquired from
Xceed, the yield increased from 5.85% to 5.97%. Given the short
duration of the mortgages acquired from Xceed, we expect the corporate
mortgage yield to return to historical levels by mid-2014. In
addition, the average mortgage portfolio increased from $685 million in
2012 to $796 million in 2013. Mortgage interest income also includes
$427,000 of realized discount income from MCAN's acquired mortgage
portfolios compared to $527,000 in 2012.
Equity income from our investment in MCAP increased to $2.7 million in
the current year from $331,000 in the prior year as a result of higher
assets under administration, higher origination and securitization
volumes and the reversal of a significant provision.
During the quarter, 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.
For additional information, refer to the "Acquisition of Xceed"
Fees were $601,000 during the quarter, up from $339,000 in the prior
year as a result of higher mortgage fees, which include extension,
renewal and letter of credit fees earned on our corporate mortgage
Marketable securities income increased to $306,000 from $40,000 in the
prior year, primarily due to losses on sale of $255,000 in the prior
year compared to minimal gains in the current year.
We incurred a loss on financial investments and other loans of $101,000
in the current year, primarily due to a write-off related to a
financial investment. In the prior year, interest on financial
investments and other loans was $333,000 as a result of a larger
We earned $86,000 from whole loan gains on sale during the quarter, as
we sold $7.3 million of insured mortgages through Xceed to third party
During the third quarter, we incurred $217,000 of realized and
unrealized losses on financial instruments, relating to the hedging of
Xceed's mortgage funding commitments to mitigate interest rate risk.
To the extent that the related mortgages are sold, offsetting gains or
losses are recognized in the period that the mortgages are sold.
Term deposit interest and expenses increased to $5.1 million in the
current year from $4.6 million in the prior year as a result of a $93
million increase in the average term deposit balance to $768 million in
2013 from $675 million in 2012. The average term deposit interest rate
remained unchanged from the prior year at 2.44%.
Mortgage expenses, consisting primarily of mortgage servicing expenses,
increased to $864,000 in the current year from $718,000 in the prior
year as a result of a larger average portfolio.
There was a $272,000 provision for credit losses during the quarter
compared to $592,000 in the prior year. Current year activity
consisted primarily of a $339,000 increase in the collective allowance,
while the prior year consisted primarily of individual residential
construction loan provisions of $450,000. Mortgage write-offs during
the quarter were $215,000 compared to $72,000 in the prior year.
Net Investment Income - Securitization Assets
The net loss from securitization assets before fair market value
adjustments was $532,000 in 2013 compared to net income of $458,000 in
the prior year. Including fair market value adjustments on derivative
financial instruments, the net investment loss on securitization assets
was $917,000 in 2013 compared to a loss of $1.4 million in the prior
Mortgage interest income decreased to $1.2 million in the current year
from $3.4 million in the prior year, primarily due to a $477 million
decrease in the average mortgage portfolio from 2012. In addition, the
average yield decreased from 4.22% in 2012 to 3.65% in 2013. As the
securitized mortgages repay, we reinvest the collected principal in
certain permitted investments (which include financial investments and
short-term investments) until the maturity of the CMB issuance.
Interest on financial investments decreased to $355,000 from $1.1
million in the prior year and interest on short-term investments
decreased to $318,000 from $382,000 in the prior year, both as a result
of a decrease in the average portfolio.
Other securitization income was $575,000 in 2013 compared to $1.9
million in the prior year, consisting primarily of interest rate swap
receipts in both years. As part of the CMB program, we enter into "pay
floating, receive fixed" interest rate swaps to hedge interest rate
Interest on financial liabilities from securitization decreased to $3.0
million in the current year from $6.2 million from the prior year,
primarily due to a significantly lower average balance as a result of
the maturity of $1.4 billion of CMB-related financial liabilities from
securitization since the third quarter of 2012. In addition, the
average interest rate decreased to 2.97% in 2013 from 3.49% in 2012.
The negative fair market value adjustment to derivative financial
instruments of $385,000 (2012 - $1.9 million) relates to the CMB
interest rate swaps. The unrealized portion of this fair market value
adjustment can be volatile as it is driven by changes in the forward
interest rate curve. From an economic perspective, this adjustment is
generally offset by changes in future expected income from securitized
mortgages and principal reinvestment assets that have a floating
interest rate. We regularly monitor our interest rate swap hedge
position to minimize our exposure to interest rate risk. From an
accounting perspective, changes in future expected income from these
floating rate assets are not reflected in the consolidated statement of
income, which can cause significant volatility to net income since
there is no offset to the fair market value adjustment to derivative
Since we are not currently participating in new CMB issuances, our
existing securitization assets and liabilities will decrease
significantly over the next two years. Our existing financial
liabilities from securitization mature as follows: 2013 - $352 million,
2014 - $859 million, 2015 - $42 million.
Operating Expenses: Operating expenses were $4.4 million compared to $2.0 million during the
prior year. During the quarter, we incurred $874,000 of transaction and
restructuring expenses relating to the acquisition of Xceed (discussed
below under "Acquisition of Xceed"). Salaries and benefits increased to
$2.1 million in the current year from $995,000 in the prior year due to
an increase in the number of employees as a result of the acquisition
of Xceed and severance costs of $514,000 incurred during the quarter.
General and administrative expenses increased from $1.0 million to $1.4
million as a result of the consolidation of Xceed's operations in the
Income Taxes: There was a recovery of $721,000 of income taxes in the third quarter of
2013 compared to a recovery of $1.0 million in the prior year. The
current year recovery relates to the excess of the third quarter
dividend over taxable income, while the prior year recovery relates to
negative fair market value adjustments to derivative financial
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual
allowances) were 0.46% ($6.3 million) at September 30, 2013, down from
0.52% ($7.6 million) at June 30, 2013. Impaired corporate mortgages as
a percentage of the corporate portfolio also decreased to 0.76% at
September 30, 2013 from 1.04% at June 30, 2013.
Total mortgage arrears were $58 million at September 30, 2013, an
increase from $50 million at June 30, 2013. Activity for the quarter
includes an increase of $14 million in residential construction loans
and a decrease of $6 million in securitized mortgage arrears. Mortgage
arrears consist of $43 million of corporate mortgages and $15 million
of insured securitized mortgages. There were no other assets in
arrears at quarter end. We continue to proactively monitor loan
arrears and take prudent steps to collect overdue accounts.
Financial Position: As at September 30, 2013, total consolidated assets were $2.30 billion,
consisting of $1.03 billion of corporate assets and $1.27 billion of
securitization assets. Corporate assets increased by $136 million
during the quarter, which included increases of $82 million in
mortgages and $52 million in cash and cash equivalents. The increase
is partly due to the acquisition of Xceed, in which we acquired $46
million of corporate mortgages. Securitization assets decreased by
$194 million, primarily due to the maturity of CMB-related financial
liabilities from securitization of $180 million and the removal of the
associated assets from the balance sheet.
Term deposit liabilities were $814 million at September 30, 2013, up
from $728 million at June 30, 2013.
Total shareholders' equity of $203 million increased from $177 million
at June 30, 2013. Activity for the quarter included the issuance of new
common shares of $21.5 million related to the Xceed acquisition and
$576,000 through the Dividend Reinvestment Plan, net income of $9.7
million, the third quarter dividend of $5.7 million and a decrease in
the available for sale reserve of $225,000.
Asset Capacity: As at September 30, 2013, our remaining asset capacity was $48 million,
based on our target assets to capital ratio of 5.75.
Acquisition of Xceed: On July 4, 2013, we completed the acquisition of all of the issued and
outstanding shares of Xceed for a total consideration of $51.8 million,
consisting of cash consideration of $30.3 million and 1,531,903 MCAN
common shares (valued at $14.05 per share, for a total of $21.5
million). As of this date, Xceed became a wholly-owned subsidiary of
MCAN. For further information, refer to the "Acquisition of Xceed"
section of the MD&A.
Outlook: We continue to expand our mortgage lending activities with the
closing of the acquisition of Xceed on July 4, 2013 and have been able
to take advantage of the attractive returns available in its lending
activities. Asset growth has been in line with expectations, however
increased competition has resulted in single family residential
mortgage originations being lower than anticipated.
With the acquisition of Xceed, MCAN successfully launched the
origination of uninsured residential mortgages to the independent
mortgage broker market early in the fourth quarter, which will enhance
our ability to source new originations and add to the growth of our
single family mortgage balances in the fourth quarter and into 2014.
Our corporate asset portfolio generates an acceptable return on capital,
which we expect to improve over the next twelve months as we implement
underwriting and technology enhancements to improve efficiencies. We
continue to focus on our residential construction and mezzanine lending
opportunities to optimize the overall return to our shareholders while
maintaining portfolio diversification within our risk appetite.
Canada's housing markets remain balanced and current demand and supply
fundamentals appear positive for stability in price points and housing
sales for the next year. The tightening of underwriting requirements
and additional regulatory changes has reduced housing demand and
development approvals continue to be constrained by capacity issues
within the approval authorities. We expect housing markets to continue
to benefit from low interest rates, stable employment, sufficient
supply of new and resale listings and reasonable housing affordability
within our core lending markets. We continue to observe strong demand
for traditional mortgages as major lending institutions adjust their
We expect growth within the corporate mortgage portfolio to remain in
line with past experience. We continue to observe improving returns
from our corporate mortgage portfolio through increased interest income
and net margin, and will be focusing on securitization activities for
the remainder of 2013 and into 2014.
We will continue to maintain relatively high levels of liquidity to
support our lending activities and depositors. We continue to actively
solicit new sources of deposits to diversify our network of deposits.
As we approach full investment, the portfolio will be adjusted to
optimize overall returns on a risk adjusted basis. The Board of
Directors and management are confident that increased core earnings and
asset growth can be generated for the remainder of 2013 and into 2014.
Dividend: The Board of Directors declared a fourth quarter dividend of $0.28 per
share to be paid January 2, 2014 to shareholders of record as at
December 16, 2013.
Changes to Board of Directors: David Broadhurst and Jean Pinard retired from the Board of Directors
effective September 26, 2013 after 16 and 8 years of service,
respectively. The Board would like to thank Mr. Broadhurst and Mr.
Pinard for their long service and valuable contribution to MCAN. Verna
Cuthbert and W. Terrence Wright were appointed to the Board of
Directors effective September 26, 2013. Ms. Cuthbert currently serves
as a senior commercial lawyer and counsel with Fasken Martineau
DuMoulin LLP, while Mr. Wright currently serves as counsel with
Further Information: Complete copies of the Company's 2013 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 on November 13, 2013.
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, Estimated Taxable Income,
Estimated Taxable Income Per Share, Average Interest Rate, Net Interest
Income, Common Equity Tier 1, Tier 1 and Total Capital Ratios, Risk
Weighted Assets, Income Tax Assets, Income Tax Liabilities, Income Tax
Capital and Limited Partner's At-Risk Amount.
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 CMB program, and other securitizations of
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;
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