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TORONTO, May 14, 2013 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the first quarter of 2013 was $4.5 million, up from $4.4 million in the prior year. Earnings per share were $0.24 compared to $0.26 during the same quarter in the prior year. The impact of expenses related to the proposed acquisition of Xceed Mortgage Corporation ("Xceed") reduced income by $722,000 ($0.04 per share) in the quarter. The increase in net income was primarily due to higher equity income from MCAP Commercial LP ("MCAP"), lower provisions for credit losses and increased securitization income, partially offset by a lower recovery of income taxes and transaction expenses incurred during the quarter.
Taxable income for the quarter decreased significantly in the current year to $1.3 million ($0.07 per share) from $6.1 million ($0.36 per share) in the prior year. Further details regarding current quarter taxable income are discussed below.
The key differences between taxable income and pre-tax net income for accounting purposes include differences between equity income from MCAP for accounting and tax purposes, the treatment of capital gains income and 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. As a mortgage investment corporation ("MIC"), we typically pay out all of our taxable income to shareholders through dividends.
We earned $1.4 million of equity income from our investment in MCAP during the quarter, primarily due to significant mortgage securitization by MCAP during that period, in addition to higher origination volumes and assets under administration. For tax purposes, equity income from MCAP related to mortgage securitizations is recognized in line with actual cash flows, such that a tax loss is incurred up front as program costs are paid while interest income is earned over the term of the mortgage portfolios. As a result of this difference we recognized negative taxable income from MCAP during the quarter, which contributed to the relatively low first quarter taxable income per share. We expect to earn future taxable income from our investment in MCAP given the timing differences between income for accounting and tax purposes.
On March 26, 2013, we announced our intention to acquire all of the issued and outstanding shares of Xceed for $1.75 per share, for a total consideration of approximately $53 million. Xceed is a specialized, single family insured and uninsured residential mortgage lender, focused primarily on the insured area of the mortgage market and, in recent years, has been focused on winding down its legacy securitization portfolio. The transaction is expected to be funded with a combination of cash and common shares of MCAN, and will be effected pursuant to a plan of arrangement under Section 182 of the Business Corporations Act (Ontario). The proposed transaction is expected to close on or before July 4, 2013, subject to receipt of Xceed shareholder, regulatory and other approvals and satisfaction of customary conditions precedent.
We separate our assets into the 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 securitization.
Net Investment Income: Net investment income was $6.6 million for the quarter, an increase of $3.2 million from $3.4 million during the same quarter in the prior year. Net investment income consisted of $7.2 million from corporate assets (2012 - $5.6 million) and negative $602,000 from securitization assets (2012 - negative $2.2 million). The increase was primarily due to higher equity income from MCAP, lower negative fair market value adjustments to derivative financial instruments and a lower provision for credit losses. Income from securitization assets includes a negative fair market value adjustment to derivative financial instruments of $641,000 (negative $3.2 million in 2012).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $10.6 million in the current year from $10.3 million in the prior year as a result of a $70 million increase in the average mortgage portfolio (from $663 million in 2012 to $733 million in 2013), partially offset by a decrease in the average mortgage yield from 5.81% in 2012 to 5.67% in 2013. The decrease in yield was primarily due to lower average yields in the uninsured single family and construction portfolios, partially offset by an increase in the commercial yield. Mortgage interest income includes $293,000 of realized discount income (2012 - $120,000) from MCAN's acquired mortgage portfolios.
As at March 31, 2013, we held discounted mortgages with a net discount of $5.3 million (December 31, 2012 - $5.9 million). We retain 50% of any recoveries of that amount, and we pay the remaining 50% to MCAP. The amount of the discount ultimately recovered is dependent on the value of the real estate securing the mortgage, as well as the financial capacity of the borrower. Additionally, these mortgages have maturity dates ranging from 2013 to 2032. The realization of the discount is based on management's expectations as to when cash will be received.
Equity income from our ownership in MCAP was $1.4 million, up from $526,000 in the prior year. The increase was primarily due to higher origination volumes, assets under administration and securitization volumes. In addition, MCAP's current year operations reflect the full consolidation of MCAP Service Corporation ("MSC"), whereas it had not yet acquired MSC in the first quarter of 2012.
Fees were $384,000 in the quarter, comparable to $340,000 in the prior year. Fees consist of mortgage fees of $373,000 (2012 - $265,000) and fee income from a profit sharing arrangement related to mortgage portfolios acquired by MCAP of $11,000 (2012 - $75,000). Mortgage fees include extension, renewal and letter of credit fees earned on our corporate mortgage portfolio.
Marketable securities income was $245,000 for the quarter compared to $515,000 in the prior year. The decrease was primarily due to a lower average portfolio balance. The prior year included gains from sales of securities of $283,000 and a $260,000 write down of a security.
There was a $59,000 loss on financial investments and other loans in the current year, primarily due to a $150,000 write-down of a financial investment during the quarter.
Term deposit interest and expenses increased to $4.8 million in the current year from $4.0 million in the prior year due to a $116 million increase in the average term deposit balance (from $632 million in 2012 to $748 million in 2013) and an increase in the average term deposit rate from 2.43% in 2012 to 2.49% in 2013.
Provisions for credit losses were $88,000 for the quarter compared to $1.5 million for the same period of the prior year. Current year activity consisted primarily of net individual mortgage provisions of $95,000 relating to uninsured single family mortgages, while collective provisions were minimal. The prior year included $635,000 of collective mortgage provisions and a $900,000 provision relating to an indemnity from a construction loan securitization program discussed below.
As at December 31, 2012, we had a $1.1 million allowance on our balance sheet included in other liabilities relating to our pro-rata share of estimated losses pursuant to an indemnity on the underlying assets of a residential construction loan securitization program, specifically an impaired residential construction loan. We participated in the securitization program (and associated indemnity) with another investor. During the first quarter of 2013, we purchased the other investor's interest in the underlying loans at a discount, including the impaired residential construction loan with which the allowance was associated. Upon the purchase of the loans for our corporate mortgage portfolio, we reversed the existing liability (as the indemnity was released at this time) and established an individual mortgage allowance for the same amount, which resulted in a net $nil impact to provisions for credit losses in the current year. In the first quarter of 2012, we increased the allowance from $200,000 to $1.1 million, which led to the $900,000 provision in the prior year.
Mortgage write-offs, consisting primarily of a residential construction loan, were $309,000 during the quarter compared to $1.1 million in the prior year.
Net Investment Income - Securitization Assets
Mortgage interest income decreased to $2.6 million in the current year from $3.9 million in the prior year as a result of a $549 million decrease in the average mortgage portfolio over 2013 and a decrease in the average yield from 4.08% in 2012 to 3.69% 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 $655,000 in the current year from $1.5 million in the prior year due to a decrease in the average portfolio.
Interest on short-term investments increased to $340,000 in the current year from $315,000 as a result of an increase in the average portfolio.
Other securitization income for the quarter decreased to $872,000 from $2.8 million in the prior year, consisting primarily of interest rate swap receipts of $872,000 (2012 - $1.7 million). The prior year also included $706,000 of refinancing and renewal gains and $428,000 from the sale of mortgage-backed securities ("MBS").
Interest on financial liabilities from securitization decreased to $4.4 million in the current year from $7.5 million in the prior year as a result of a significantly lower average balance as a result of the maturity of certain CMB issuances during 2012 and a decrease in the average interest rate to 3.24% in 2013 from 3.66% in 2012.
The negative fair market value adjustment to derivative financial instruments of $641,000 (2012 - negative $3.2 million) for the quarter 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 financial instruments.
Since we are not currently participating in new CMB issuances, our existing securitization assets and liabilities will decrease significantly over the next three years. The CMB securitization liabilities mature as follows: 2013 - $1.1 billion, 2014 - $871 million, 2015 - $44 million.
Operating Expenses: Operating expenses were $2.6 million compared to $2.1 million during the same quarter in the prior year. During the quarter, we incurred $722,000 of transaction expenses related to the proposed acquisition of Xceed. In addition, general and administration expenses decreased by $225,000 as a result of lower corporate expenses.
Income Taxes: There was a $1.7 million recovery of current income taxes in the first quarter of 2013 compared to a $1.2 million provision during 2012. The current year recovery was a result of significantly lower than usual taxable income. We had a deferred tax expense of $1.2 million in the current year as a result of the significant difference between equity income from MCAP for accounting and tax purposes, compared to a $1.9 million recovery during 2012.
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.44% ($6.9 million) at March 31, 2013, down from 0.51% ($8.6 million) at December 31, 2012. Impaired corporate mortgages as a percentage of the corporate mortgage portfolio decreased to 0.95% at March 31, 2013 from 1.17% at December 31, 2012.
Total mortgage arrears decreased to $51 million at March 31, 2013 from $63 million at December 31, 2012. Mortgage arrears consist of $26 million of corporate mortgages and $25 million of insured securitized mortgages. There were no other assets in arrears at quarter end. We continue to proactively monitor mortgage arrears and take prudent steps to collect overdue accounts.
Financial Position: As at March 31, 2013, total consolidated assets were $2.93 billion, consisting of $897 million of corporate assets and $2.04 billion of securitization assets. Corporate assets decreased by $54 million during the quarter, while securitization assets were unchanged. Corporate asset activity during the quarter included decreases of $32 million in cash and cash equivalents and $23 million in mortgages.
Term deposit liabilities were $729 million as at March 31, 2013, down $48 million from $777 million as at December 31, 2012.
Total shareholders' equity of $178 million was unchanged from December 31, 2012. Activity for the quarter included the issuance of new common shares of $1.1 million, net income of $4.5 million and the first quarter dividend of $5.8 million.
Asset Capacity: As at March 31, 2013, our remaining asset capacity was $48 million, based on our target assets to capital ratio of 5.75, which is measured on a tax basis.
Outlook: Residential housing markets in Canada continue to be stable while experiencing moderation in terms of sales volumes and pricing. We expect the housing market to remain stable for the next 12 months as interest rates remain flat and the Canadian economy continues to be supported by slower GDP and employment growth.
With new mortgage rules and regulatory changes in full effect, we expect to see a reduction in mortgage originations in Ontario, Eastern Canada and British Columbia. Western Canada will continue to see mortgage volumes grow. Market conditions should cause some downward pressure on price points, but no significant disruption to the overall housing market. We expect market conditions to improve credit spreads and overall loan profitability as funding costs remain stable in 2013.
In the first quarter of 2013, we have observed stable construction loan originations and improvements in volumes of residential mortgage origination at good spreads. In addition, we have observed more opportunities for short term bridge/mezzanine lending opportunities which should enhance MCAN's overall returns commencing in the second quarter of 2013.
Dividend: The Board of Directors declared a second quarter regular dividend of $0.28 per share to be paid June 28, 2013 to shareholders of record as of June 14, 2013.
Changes to Board of Directors: Robert Stuebing will not stand for re-election at MCAN's Annual and Special Meeting of Shareholders on May 14, 2013. The Board would like to thank Mr. Stuebing for his long service and valuable contribution to MCAN.
Further Information: Complete copies of the Company's 2013 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 by May 15, 2013.
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 also participates in 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 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;
- the timing of the effect of interest rate changes on our cash flows; and
- the completion of MCAN's proposed acquisition of Xceed.
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;
- litigation risk;
- relationships with our mortgage originators;
- 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; and
- the expected timing and completion of MCAN's proposed acquisition of Xceed is subject to Xceed shareholder approval, court and regulatory approvals, and other customary closing conditions; accordingly, there can be no certainty that the transaction will be completed or that anticipated benefits will be realized.
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