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TORONTO , Feb. 25, 2014 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the fourth quarter of 2013 increased to $11.0 million from $7.3 million in 2012, while earnings per share increased to $0.54 from $0.40 in the prior year. The increase was primarily due to higher mortgage interest income, whole loan gain on sale income and securitization income, and a gain on dilution of our equity investment in MCAP Commercial LP ("MCAP"). These increases were partially offset by lower equity income from MCAP, higher operating expenses and a higher provision for income taxes. Estimated taxable income (refer to the "Non-IFRS Measures" section of the 2013 Management's Discussion & Analysis of Operations ("MD&A") for a definition of these measures) for the quarter was $6.4 million ( $0.32 per share) compared to $1.4 million ( $0.06 per share) in the prior year. Return on equity for the quarter increased from 16.8% in 2012 to 21.2% in 2013.
Net income for the year ended December 31, 2013 was $30.2 million , up from $21.5 million in the prior year. In addition to the reasons noted above relating to quarterly income, we recorded a bargain purchase gain on the acquisition of Xceed Mortgage Corporation ("Xceed"). For the year to date, earnings per share were $1.54 , up from $1.22 in the prior year. Taxable income for the year was $15.3 million ( $0.78 per share), down from $20.5 million ( $1.17 per share) in the prior year. Return on equity increased from 13.0% in 2012 to 15.8% in 2013.
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 were $1.54 in 2013 compared to $1.22 in 2012. However, any taxable income recognized from MCAP, the Xceed bargain purchase gain or income earned by Xceed will be recognized on a deferred basis. As such, 2013 taxable income was $0.78 per share compared to $1.17 in the prior year. During 2013, we paid dividends of $1.15 per share.
Despite these timing differences, we expect to be able to manage the volatility in taxable income at the current dividend rate and earnings level. The Board of Directors has maintained the existing quarterly dividend level by declaring a dividend of $0.28 per share payable on March 31, 2014 to shareholders of record as at March 17, 2014 .
During the fourth quarter, we re-commenced our participation in the market mortgage-backed securities ("MBS") program, under which we sell MBS to a third party and may also elect to sell the net economics and cash flows from the underlying mortgages ("interest-only strips") to a third party in future periods. In the quarter, we sold $168 million of MBS to a third party but did not sell the interest-only strip and retained the residual economics, therefore maintaining the mortgages on our balance sheet.
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, market MBS program and reinvestment assets purchased with mortgage principal repayments and are funded by the cash received from the sale of the associated securities, classified as financial liabilities from securitization.
Net Investment Income - Corporate Assets: Net investment income from corporate assets was $10.9 million in the fourth quarter, up from $9.7 million in the prior year.
Mortgage interest income increased to $15.0 million in the current quarter from $10.0 million in 2012 due to an increase in the average mortgage portfolio from $728 million in 2012 to $898 million in 2013 and 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 6.73% in 2013 from 5.50% in 2012. Excluding mortgages acquired from Xceed, the yield increased from 5.50% to 5.99%. Given the short duration of the mortgages acquired from Xceed, we expect the corporate mortgage yield to return to historical levels by mid-2014.
Equity income from our investment in MCAP decreased to $303,000 in the current quarter from $4.3 million in 2012 as a result of lower MBS spreads earned by MCAP in the current quarter.
Fees increased to $923,000 in the current quarter from $677,000 in 2012 as a result of a higher average mortgage balance. Fees include extension, renewal and letter of credit fees earned on our corporate mortgage portfolio.
In the current quarter, we earned whole loan gain on sale income of $1.7 million , which includes a $1.3 million gain on the sale of the remaining balance of the acquired mortgage portfolio, on which we had recognized discount income in previous quarters. In addition, we earned $195,000 of gains from sales of insured mortgages to third party mortgage aggregators.
During the quarter, we incurred $341,000 of realized and unrealized losses on financial instruments, relating to the hedging of 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 quarter from $4.7 million in 2012 as a result of a $61 million increase in the average term deposit balance to $792 million in 2013 from $731 million in 2012. The average term deposit interest rate increased from 2.44% in 2012 to 2.46% in 2013.
Mortgage expenses, consisting primarily of mortgage servicing expenses, increased to $972,000 in the current quarter from $748,000 in 2012 as a result of a larger average mortgage portfolio.
There was a $420,000 provision for credit losses during the current quarter compared to $421,000 in 2012. Current quarter activity consisted primarily of a $371,000 increase in the collective allowance, while 2012 activity consisted of a collective provision of $310,000 and net individual provisions of $111,000 . Mortgage write-offs during the quarter were $138,000 compared to $83,000 in the prior year.
Other Income - Corporate Assets: Other income from corporate assets was $5.2 million in the current quarter compared to $nil in 2012. Please note that in previous quarters other income from corporate assets was not presented separately. In the first three quarters of 2013, the bargain purchase gain and transaction and restructuring expenses were presented in corporate net investment income and operating expenses, respectively, but for fiscal 2013 were reclassified to other income from corporate assets.
On November 30, 2013 , MCAP issued new class A and C units to another partner of MCAP at a cost of $11.72 per unit, raising $100 million of new unitholder equity. As a result of the issuance of the new units at a price in excess of the carrying value per unit, we recorded a $4.5 million gain on the dilution of the investment in MCAP. Subsequent to the issuance of the new class A and class C units, we sold 237,880 class A units to another partner of MCAP at a price of $11.72 unit, recognizing a gain on sale of $736,000 . The combination of the two transactions reduced our equity interest in MCAP from 23.4% to 15.7%.
Subsequent to quarter end, we sold 250,000 class C units to another partner of MCAP at a price of $11.72 per unit, reducing our equity interest from 15.7% to 14.8%.
Net Investment Income - Securitization Assets: Net income from securitization assets before fair market value adjustments was $590,000 in the quarter compared to $837,000 in 2012. Including fair market value adjustments on derivative financial instruments, net investment income from securitization assets was $78,000 in 2013 compared to a net loss of $1.3 million in 2012. Gross securitization revenues and expenses decreased significantly from 2012 due to a substantial decline in average securitization and liability balances, which was due to the maturity of $970 million of CMB-related assets and liabilities during 2013.
Securitized mortgage interest income decreased to $1.7 million in the current quarter from $3.0 million in 2012, primarily due to a $473 million decrease in the average mortgage portfolio from 2012. In addition, the average yield decreased from 3.72% in 2012 to 3.51% in 2013. As the mortgages securitized through the CMB program 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 $246,000 in the quarter from $819,000 in 2012 and interest on short-term investments decreased to $319,000 in 2013 from $478,000 in 2012, both as a result of the decrease in CMB-related assets noted above.
Other securitization income was $945,000 in the quarter compared to $2.5 million in 2012, consisting primarily of interest rate swap receipts in both years in addition to small refinancing and renewal gains. 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 $2.5 million in the current quarter from $5.9 million from the prior year, primarily due to a significantly lower average balance as a result of the decrease in CMB-related financial liabilities from securitization noted above. In addition, the average interest rate decreased to 2.82% in 2013 from 3.37% in 2012.
The negative fair market value adjustment to derivative financial instruments of $512,000 (2012 - $2.1 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 CMB-related securitization assets and liabilities will decrease significantly over the next two years. Our existing financial liabilities from securitization mature as follows: 2014 - $847 million (CMB program), 2015 - $41 million (CMB program), 2018 - $168 million (market MBS program).
Operating Expenses: Operating expenses were $3.8 million in the quarter, up from $2.5 million in 2012. Salaries and benefits increased from $1.0 million to $1.9 million as a result of an increase in the number of employees as a result of the acquisition of Xceed. General and administrative expenses increased from $1.5 million to $1.9 million due to the consolidation of Xceed's operations in the current year.
Income Taxes: During the current quarter, we incurred a provision for taxes of $1.5 million compared to a recovery of $1.4 million in 2012. The current quarter provision and 2012 recovery relate to the excess and deficiency of taxable income over the quarterly dividend paid, respectively.
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.51% ( $7.4 million ) at December 31, 2013 , up slightly from 0.46% ( $6.3 million ) at September 30, 2013. Impaired corporate mortgages as a percentage of the corporate portfolio also increased to 0.85% at December 31, 2013 from 0.76% at September 30, 2013 .
Mortgage arrears and impaired mortgages were $38 million at December 31, 2013 , down significantly from $58 million at September 30, 2013. Activity for the quarter includes decreases of $12 million in residential construction loans, $4 million in corporate single family mortgages and $5 million in securitized mortgages. Mortgage arrears consist of $27 million of corporate mortgages and $11 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 December 31, 2013 , total consolidated assets were $2.09 billion , consisting of $1.02 billion of corporate assets and $1.07 billion of securitization assets. Corporate assets decreased by $15 million during the quarter, which included an increase of $42 million in mortgages and a decrease of $60 million in cash and cash equivalents. Securitization assets decreased by $197 million , primarily due to the maturity of CMB-related assets of $220 million and a decrease of $145 relating to the maturity of IMPP-related assets. These decreases were partially offset by an increase of $169 million in securitization mortgages related to the market MBS program.
Term deposit liabilities were $790 million at December 31, 2013 , down from $814 million at September 30, 2013 .
Total shareholders' equity of $210 million as at December 31, 2013 increased from $203 million at September 30, 2013 . Activity for the quarter included net income of $11.0 million , the fourth quarter dividend of $5.7 million , the issuance of new common shares of $450,000 through the Executive Share Purchase Plan, and an increase in accumulated other comprehensive income of $1.7 million .
Asset Capacity: As at December 31, 2013 , our remaining asset capacity was $76 million , based on our target assets to capital ratio of 5.75.
Outlook: Canada's housing markets remain balanced and current demand and supply fundamentals appear positive for stability in price points and housing sales for the coming year. The reduction in housing demand as a result of regulatory changes has stabilized markets. Development approvals continue to be constrained in several Canadian markets, limiting the supply of single family housing and creating price inflation. Housing markets will benefit from low mortgage rates, stable employment, a stable supply of new and resale listings and reasonable housing affordability within our core lending markets.
We expanded our mortgage lending activities through captive and external origination in 2013. Xceed's origination platform allowed the Company to take advantage of attractive returns available in its single family lending markets in the fourth quarter. We expect to continue to capitalize upon these opportunities with enhanced returns in 2014.
Asset growth has been in line with expectations, however increased competition has resulted in some spread compression within our single family residential mortgage business. In Q4 2013 we successfully completed our first new MBS issuance through the market MBS program since Q3 2012. We expect to continue with new issuances throughout 2014. Our focus will be on single family originations for both our corporate balance sheet and market MBS securitization portfolios throughout 2014. We expect growth within the corporate mortgage portfolio to remain in line with past years at 15 to 20%.
Our corporate asset portfolio continues to generate an acceptable return on capital, which we expect to improve over the next twelve months as we grow the acquired origination and underwriting operations to scale and complete the implementation of further technology enhancements to improve efficiencies. 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.
Financial results for the second half of 2013 contained several one time items that contributed to net income. While we expect to see the benefits of the Xceed acquisition in future periods through the realization of mortgages acquired at discounts, mortgage renewals and increased single family origination, the magnitude of gains realized in 2013 may be difficult to repeat.
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.
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, Regulatory Assets to Capital Ratio; Risk Weighted Assets, Income Tax Assets, Income Tax Liabilities, Income Tax Capital and Limited Partner's At-Risk Amount.
Further Information: Complete copies of the Company's 2013 Annual 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 CMB program, the market MBS 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
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