Stock market symbol
TORONTO, Nov. 11, 2011 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the
"Company" or "we") net income for the third quarter of 2011 was $7.6
million, down from $10.7 million in the prior year. Earnings per share
were $0.45 compared to $0.74 during the same quarter in the prior year.
The decrease from the prior year is primarily due to substantially
lower fee income and equity income from MCAP Commercial LP ("MCLP"),
and the reversal of a significant construction loan individual
allowance in the prior year. Estimated taxable income for the quarter
was $4.5 million, or $0.27 per share. The prior year was exceptionally
high at $9.4 million, or $0.66 per share.
We issued 2.3 million common shares in April, raising net proceeds of
approximately $31 million. This share issuance created $178 million of
additional asset capacity for MCAN. We intend to deploy this capacity
in a timely manner so as to avoid significant dilution, however we
experienced slower than anticipated asset growth in the third quarter,
leaving us with $177 million of asset capacity at September 30th. In
light of current market concerns, we have moderated the risk profile of
our assets at this point in time. We continue to focus on investing in
mortgages with sound borrower equity, reasonable market acceptance
through pre-sales on construction loans and acceptable risk-adjusted
returns. The majority of our growth for the year to date has arisen
from the acquisition of seasoned single family residential mortgage
portfolios with good payment histories and healthy borrower equity that
were underwritten at market values from two years ago.
The consolidated financial statements for the quarter ended September
30, 2011 are the third quarter that we have prepared in accordance with
International Financial Reporting Standards ("IFRS"). For periods up
to and including the year ended December 31, 2010, we prepared our
consolidated financial statements in accordance with Canadian Generally
Accepted Accounting Principles ("CGAAP").
The most significant changes to our financial statements are as follows:
We have recognized $3.1 billion of new assets and $3.1 billion of new
liabilities, primarily due to the on-balance sheet treatment of
mortgages securitized through the Canada Mortgage Bonds ("CMB")
program. As the securitization issuances mature, the securitization
liability and related assets (securitized mortgages and principal
reinvestment assets) will be removed from the balance sheet. Since we
are not currently participating in new CMB issuances, we expect that
the Company's securitization assets and liabilities will decrease
significantly over the next three years. The CMB securitization
liabilities mature as follows: 2012 - $1.1 billion, 2013 - $1.1
billion, 2014 - $879 million, 2015 - $47 million.
We now recognize ongoing CMB program mortgage interest income, principal
reinvestment income and securitization liability interest expense on
the accrual basis. We reversed up-front gains from securitization
previously recognized under CGAAP through opening retained earnings on
transition to IFRS.
Fair market value changes in the CMB interest rate swaps are no longer
generally offset by fair market value changes in CMB interest-only
strips, as the interest-only strips do not exist under IFRS due to the
reversal of up-front gains from securitization previously recognized
under CGAAP. The lack of an offset has led to increased volatility to
net income under IFRS despite the fact that, from an economic
perspective, interest rate risk remains largely mitigated through the
interest rate swaps.
We now recognize current and deferred taxes through the statement of
income, which has led to increased volatility to net income. Under
CGAAP, we charged current and deferred taxes directly to retained
MCAN paid its regular $0.27 per share dividend in the third quarter.
The Company separates its assets into its corporate and securitized
portfolios for reporting purposes. Corporate assets represent the
Company's 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 $11.4 million for the quarter, a decrease of
$3.0 million from $14.4 million during the same quarter in the prior
year. Net investment income consisted of $5.4 million from corporate
assets (2010 - $8.2 million) and $6.0 million from securitized assets
(2010 - $6.1 million). The decrease is primarily due to substantially
lower fee income and equity income from MCLP, and the reversal of a
significant construction loan individual allowance in the prior year.
Income from securitized assets includes a $4.9 million positive fair
market value adjustment to derivative financial instruments (positive
$4.3 million in 2010).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $8.2 million in the current year
from $6.8 million in the prior year as a result of a $140 million
increase in the average mortgage portfolio from $377 million to $517
million, partially offset by a 0.85% decrease in the average mortgage
yield from 7.32% in 2010 to 6.47% in 2011. Mortgage interest income
includes $341,000 (2010 - $702,000) of discount income on MCAN's
acquired mortgage portfolios, which caused the majority of the decrease
in the mortgage yield over the prior year.
As at September 30, 2011, we held discounted mortgages with a net
discount of $10 million. We retain 50% of any recoveries of that
amount, and we pay the remaining 50% to MCLP. 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 2011 to 2032. The realization of the discount is dependent on if
and when cash is received.
Interest on financial investments and other loans decreased from
$396,000 to $102,000, primarily due to a significantly lower average
portfolio balance in the current year.
Equity income from our ownership interest in MCLP was $360,000 during
the quarter compared to $1.2 million in the prior year as a result of
lower mortgage gains and fee income.
Fees were $333,000 in the quarter, down from $1.3 million in the prior
year. Fees consist of fee income from a profit sharing arrangement
relating to mortgage portfolios acquired by MCLP of $82,000 (2010 -
$883,000) and other mortgage fees of $251,000 ($2010 - $438,000).
Prior year fee income from profit sharing was extremely high by
historical standards, while other mortgage fees can be volatile and
difficult to predict.
Marketable securities income was $427,000 for the quarter compared to
$nil in the prior year, as we did not acquire any marketable securities
until late 2010.
Term deposit interest and expenses increased to $3.3 million in the
current year from $1.8 million in the prior year, primarily due to a
$176 million increase in the average outstanding balance from $334
million in 2010 to $510 million in 2011 and an increase in the average
term deposit interest rate to 2.45% in 2011 from 2.08% in 2010.
Provisions for credit losses were $80,000 for the quarter compared to a
recovery of $1.0 million for the same period of the prior year. The
prior year recovery included the full recovery of a $2 million
construction loan individual allowance upon payout with no principal
loss. There was a collective mortgage recovery of $12,000 during the
quarter compared to a provision of $418,000 in the prior year, which
relates to an increase in mortgages that attract an allowance during
the prior year compared to the current year. In addition, we increased
individual mortgage allowances by $95,000 in the quarter compared to a
net increase of $445,000 in the prior year, not including the
aforementioned $2 million individual allowance reversal. The remaining
composition of both years includes financial investments and other
loans provision activity. Mortgage write-offs were $59,000 during the
quarter compared to $28,000 during the same quarter in the prior year.
Net Investment Income - Securitized Assets
Mortgage interest income decreased to $5.0 million in the current year
from $6.1 million in the prior year as a result of a $384 million
decrease in the average mortgage portfolio over 2010. As the
securitized mortgages repay, we reinvest the collected principal in
certain permitted investments, which include financial investments and
Interest on financial investments increased to $1.5 million from $1.0
million in the prior year due to an increase in the average portfolio
Other securitization income was $2.0 million in the quarter compared to
$2.2 million in the prior year, consisting primarily of interest rate
swap receipts of $1.9 million (2010 - $2.0 million).
Interest on financial liabilities from securitization was $7.5 million
for the quarter, up from $7.4 million in the prior year due to a slight
increase in the average interest rate.
The positive fair market value adjustment to derivative financial
instruments of $4.9 million (2010 - $4.3 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
Operating Expenses: Operating expenses were $1.6 million compared to $1.5 million during the
same quarter in the prior year.
Income Taxes: There was a $2.2 million provision for income taxes in the third quarter
of 2011, consistent with the prior year. In both years, we incurred a
deferred tax expense as a result of the significant positive fair
market value adjustments to derivative financial instruments.
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual
allowances) were 0.65% ($14 million) at September 30, 2011, compared to
0.67% ($15 million) at June 30, 2011. Impaired corporate mortgages as
a percentage of the corporate portfolio increased marginally to 2.51%
at September 30, 2011 from 2.46% at June 30, 2011.
Total mortgage arrears of $80 million as at September 30, 2011 decreased
from $87 million at June 30, 2011. Mortgage arrears are comprised of
$52 million of insured securitized mortgages and $28 million of
corporate mortgages, relating to uninsured single family and
residential construction 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 of September 30, 2011, total consolidated assets were $3.8 billion, an increase of $9 million from June 30, 2011. Corporate assets
increased by $17 million during the quarter, while securitized assets
decreased by $9 million. Changes in corporate assets included
increases of $31 million in single family mortgages and $11 million in
commercial loans, partially offset by decreases of $23 million in
residential construction loans and $4 million in cash. Term deposit
liabilities were $521 million at September 30, 2011, up $7 million from
June 30, 2011. Total shareholders' equity of $156 million increased by
$3.2 million from June 30, 2011. Activity for the quarter consisted of
net income of $7.6 million and the issuance of $226,000 of new common
shares through the dividend reinvestment plan, partially offset by the
third quarter dividend of $4.5 million.
Outlook: The Canadian economy has continued to expand, although domestic demand
has been somewhat slower than initially anticipated by economists. The
economy is projected to expand with GDP growth of 2.1% and 1.9% for
2011 and 2012, respectively. The Canadian economy saw improved growth
in the third quarter of 2011, as temporary factors that depressed
growth in the second quarter unwound. However, we expect slower growth
to continue through 2012.
We continue to prudently grow our mortgage portfolio. Average term
deposit rates are expected to remain flat as central banks maintain
neutral monetary policy to enable economic growth. We expect asset
growth and the resulting increase in net investment income to be offset
to an extent by lower discount income from our acquired mortgage
We continue to focus on investing in mortgages with sound borrower
equity, reasonable market acceptance through pre-sales on construction
loans and acceptable risk-adjusted returns. In light of global
economic uncertainty and the instability of financial markets, we will
be closely monitoring market conditions in the geographic markets in
which we invest. We have moderated the risk profile of our assets at
this point in time. Our mortgage portfolio is currently in a sound
position with a low level of impaired mortgages. In addition, we have
good geographic and borrower diversification. We will continue to
expand the Canadian markets in which we invest, maintain prudent
lending practices and look for quality assets with compelling risk
Dividend: The Board of Directors declared a fourth quarter dividend of $0.27 per
share to be paid January 3, 2012 to shareholders of record as of
December 2, 2011.
Changes to Board of Directors: David MacIntosh retired from the Board of Directors effective November
11, 2011 after 11 years of service. The Board would like to thank Mr.
MacIntosh for his long service and valuable contribution to MCAN.
Karen Weaver, CPA, ICD.D was appointed to the Board of Directors
effective November 11, 2011. Ms. Weaver currently serves as the
Executive Vice President and Chief Financial Officer of First Capital
Further Information: Complete copies of the Company's 2011 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 14, 2011.
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 also participates in the CMB program, and other securitizations of
This report may contain forward-looking statements, including statements
regarding the business and anticipated financial performance of the
Company. These forward looking statements can generally be identified
as such because of the context of the statements and often include
words such as the Company "believes", "anticipates", "expects",
"plans", "estimates" or words of a similar nature. These statements
are based on current expectations, and are subject to a number of risks
and uncertainties that may cause actual results to differ materially
from those contemplated by the forward-looking statements. Some of the
factors that could cause such differences include legislative or
regulatory developments, competition, technology change, global market
activity, interest rates, changes in government and economic policy and
general economic conditions in geographic areas where the Company
operates. Reference is made to the risk factors disclosed in the
Company's 2011 Annual Information Form, which are incorporated herein
by reference. These and other factors should be considered carefully
and undue reliance should not be placed on the Company's
forward-looking statements. Subject to applicable securities law
requirements, we do not undertake to update any forward-looking
SOURCE MCAN Mortgage Corporation
For further information:
MCAN Mortgage Corporation
President and Chief Executive Officer
Vice President and Chief Financial Officer