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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 share.
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 securitization.
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" discussion below.
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 portfolio.
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 average portfolio.
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 mortgage aggregators.
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 year.
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 risk.
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 financial instruments.
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 quarter.
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 instruments.
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 underwriting policies.
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 Pitblado LLP.
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, 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 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;
- 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
For further information:
MCAN Mortgage Corporation
e-mail: [email protected]
President and Chief Executive Officer
Vice President and Chief Financial Officer