MCAN Mortgage Corporation reports second quarter earnings

Stock market symbol
TSX: MKP

TORONTO, Aug. 13, 2013 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the second quarter of 2013 decreased to $5.0 million from $6.3 million in 2012. Estimated taxable income (refer to "Non-IFRS Measures" section of the Second Quarter 2013 Management's Discussion & Analysis of Operations ("MD&A") for a definition of these measures) for the quarter was $4.3 million ($0.23 per share) compared to $8.2 million ($0.48 per share) in the prior year.  The decrease in net income was primarily due to lower income from securitization assets, marketable securities income and interest earned on financial investments and loans, and transaction expenses incurred in the current year, partially offset by lower provisions for credit losses and a recovery of income taxes. Earnings per share were $0.27 for the quarter compared to $0.37 in the prior year.

Year to date net income decreased to $9.5 million from $10.7 million in the prior year as a result of the reasons noted above for the quarter.  Estimated taxable income for the year to date was $5.6 million ($0.30 per share) compared to $14.3 million ($0.84 per share) in the prior year. For the year to date, earnings per share were $0.51 compared to $0.63 in the prior year.

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 Commercial LP ("MCAP") for accounting and tax purposes.  As a mortgage investment corporation ("MIC"), we typically pay out all of our taxable income (refer to "Non-IFRS Measures" section of the MD&A for a definition of these measures) to shareholders through dividends.

As discussed in the 2013 first quarter press release, taxable income from MCAP continues to be significantly lower than income for accounting purposes.  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 minimal taxable income from MCAP during the quarter and have recognized a tax loss of $1.5 million for the year to date.  The timing differences associated with income from MCAP for accounting and tax purposes are expected to reverse over future periods.

MCAN's estimated taxable income per share of $0.30 for the year to date has been $0.26 per share lower than the regular dividends of $0.56 per share paid over the six month period.  Although our core corporate operations have been performing to expectations, this deficiency has resulted primarily from the tax loss incurred from our equity investment in MCAP.  In the second half of 2013, any earnings from our investment in Xceed Mortgage Corporation ("Xceed") are expected to be sheltered by tax losses available in Xceed.  We expect both investments to ultimately be accretive to taxable income, however the impact of timing differences on taxable income may impact dividends paid in upcoming quarters.  We are currently assessing strategies to manage these timing differences and their impacts on dividends paid to shareholders.

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 $7.0 million for the quarter, down from $9.0 million during the same quarter of the prior year.  Net investment income consisted of $8.6 million from corporate assets (2012 - $10.0 million) and a loss of $1.6 million from securitization assets (2012 - loss of $1.0 million).  The loss from securitization assets includes a $1.7 million negative fair market value adjustment to derivative financial instruments (negative $1.5 million in 2012).

Net Investment Income - Corporate Assets

Mortgage interest income decreased to $10.1 million in the current year from $10.5 million in the prior year as a result of a decrease in the average mortgage yield to 5.66% in 2013 from 6.10% in 2012, partially offset by an increase in the average mortgage portfolio (from $687 million in 2012 to $708 million in 2013).  The decrease in yield was primarily due to lower average yields in the single family and construction portfolios, partially offset by an increase in the commercial portfolio yield.  Mortgage interest income includes $86,000 of realized discount income from MCAN's acquired mortgage portfolios compared to $562,000 in 2012.

Equity income from our ownership in MCAP was $2.1 million, an increase from $1.8 million in the prior year. The increase was primarily due to higher assets under administration and higher origination and securitization volume by MCAP.  During the second quarter of 2012, MCAP acquired the remaining 80% of MCAP Service Corporation that it did not previously own, and acquired the residential mortgage operations and certain related assets of ResMor Trust Company. A full quarter of consolidated operations in 2013 also led to the increase in equity income over the prior year.

Fees were $439,000 during the quarter, down from $880,000 in the prior year.  Fees consist primarily of extension, renewal and letter of credit fees earned on our corporate mortgage portfolio.

Marketable securities income decreased to $488,000 from $1.1 million in the prior year, primarily due to $259,000 of gains from sales of marketable securities in 2013 compared to $759,000 in 2012. In addition, the average portfolio balance in 2013 was lower than 2012.

Interest on financial investments and other loans decreased from $753,000 in the prior year to $61,000 in the current year, primarily due to a $493,000 income distribution from a commercial real estate investment in the prior year and a lower average balance in 2013 compared to 2012.

Term deposit interest and expenses increased to $4.4 million in the current year from $4.3 million in the prior year as a result of a $28 million increase in the average term deposit balance to $701 million in 2013 from $673 million in 2012 and an increase in the average term deposit rate to 2.44% from 2.43%.

There was a $411,000 recovery of credit losses during the quarter compared to $50,000 of provisions in the prior year.  Current year activity consisted primarily of a $550,000 reduction to an individual allowance on a completed inventory loan, in addition to collective mortgage provisions of $138,000.  Collective and individual mortgage provision activity in the prior year was minimal.  Mortgage write-offs during the quarter were $3,000 compared to $104,000 in the prior year.

Net Investment Income - Securitization Assets

Net investment income from securitized assets before fair market value adjustments was $44,000 in 2013 compared to $457,000 in the prior year.  Including fair market value adjustments on derivative financial instruments, net investment income on securitized assets was negative $1.6 million in 2013 compared to negative $1.0 million in the prior year.

Mortgage interest income decreased to $1.9 million in the current year from $3.8 million in the prior year, primarily due to a $496 million decrease in the average mortgage portfolio from 2012.  In addition, the average yield decreased from 4.02% in 2012 to 3.77% 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 $550,000 in 2013 from $1.3 million in 2012 as a result of a decrease in the average portfolio.

Interest on short-term investments increased to $409,000 from $372,000 in the prior year as a result of an increase in the average portfolio.

Other securitization income was $1.4 million in 2013 compared to $2.3 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 $4.1 million in the current year from $7.3 million from the prior year, primarily due to a significantly lower average balance as a result of the maturity of certain CMB issuances throughout 2013 and in the latter half of 2012. In addition, the average interest rate decreased to 3.16% in 2013 from 3.65% in 2012.

The negative fair market value adjustment to derivative financial instruments of $1.7 million (2012 - $1.5 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 - $532 million, 2014 - $870 million, 2015 - $43 million.

Operating Expenses:  Operating expenses were $2.5 million compared to $2.4 million during the prior year. During the quarter, we incurred $406,000 of transaction expenses relating to the acquisition of Xceed (discussed below under "Subsequent Event").

Income Taxes:  There was a recovery of $480,000 of income taxes in the second quarter of 2013 compared to a provision of $323,000 in the prior year.  Current tax expense was higher in the prior year, in line with higher taxable income.

Credit Quality:  Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.52% ($7.6 million) at June 30, 2013, up from 0.44% ($6.9 million) at March 31, 2013.  Impaired corporate mortgages as a percentage of the corporate portfolio increased to 1.04% at June 30, 2013 from 0.95% at March 31, 2013.

Total mortgage arrears were $50 million at June 30, 2013, a slight decrease from $51 million at March 31, 2013. Mortgage arrears consist of $21 million of insured securitized mortgages and $29 million of corporate mortgages, relating primarily to insured and uninsured single family loans.  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 June 30, 2013, total consolidated assets were $2.36 billion, consisting of $897 million of corporate assets and $1.46 billion of securitization assets.  Corporate assets were unchanged during the quarter, which included a $20 million increase in mortgages and a $19 million decrease in cash and cash equivalents.  Securitization assets decreased by $571 million, which included decreases of $322 million in short term investments, $127 million in mortgages and $120 million in financial investments.

Term deposit liabilities were $728 million at June 30, 2013, down slightly from $729 million at March 31, 2013.

Total shareholders' equity of $177 million decreased slightly from $178 million at March 31, 2013. Activity for the quarter included the issuance of new common shares of $561,000 through the Dividend Reinvestment Plan, net income of $5.0 million, the second quarter dividend of $5.3 million and a decrease in the available for sale reserve of $838,000.

Asset Capacity:  As at June 30, 2013, our remaining asset capacity was $35 million, based on our target assets to capital ratio of 5.75.

Subsequent Event:  On July 4, 2013, we completed our 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.

Outlook:  Continuing from the prior quarter, residential housing markets in Canada continue to be stable while experiencing moderation in terms of sales volumes and pricing.

Market conditions should continue to cause some downward pressure on price points, but no significant disruption to the overall housing market.

In the first half of 2013, we have observed stable construction loan originations and improvements in volumes of residential mortgage origination at good spreads.  We continue to see good opportunities in residential construction, particularly in Western Canada where we have strategically targeted growth.

While the lending market continued to remain competitive following the spring market, lending spreads for single family mortgages widened in June.

We expect that the addition of Xceed's mortgage origination and lending capability will provide opportunity for the Company to originate assets in the broker channel resulting in a new revenue source.  With this new lending capability we anticipate Xceed's renewal volume and origination volume to contribute to revenue immediately in the third quarter.

Dividend:  The Board of Directors declared a third quarter dividend of $0.28 per share to be paid September 30, 2013 to shareholders of record as of September 16, 2013.

Further Information:  Complete copies of the Company's 2013 Second 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 August 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 and Income Tax Capital.

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 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

MCAN Mortgage Corporation

Website: www.mcanmortgage.com

e-mail: [email protected]

William Jandrisits
President and Chief Executive Officer
[phone]

Tammy Oldenburg
Vice President and Chief Financial Officer
[phone]