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TORONTO, May 14, 2012 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the first quarter of 2012 was $4.4 million, down from $7.1 million in 2011, although net investment income only decreased minimally. The decrease in net income was primarily due to a lower recovery of income taxes in the current quarter. Earnings per share were $0.26 compared to $0.49 during the same quarter in the prior year.
Estimated taxable income for the quarter was $6.1 million ($0.36 per share), up from $4.4 million ($0.30 per share) in the prior year. The key differences between estimated taxable income and pre-tax net income 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 ("MCLP") for accounting and tax purposes.
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.
During the first quarter, MCAN and another participant lender foreclosed on one of our impaired residential construction loans. Our proportionate interest in this property is now held as a financial investment. This investment is carried at fair market value, which was estimated to be $6.8 million as at March 31, 2012. The realization of the previously recorded individual allowance was recognized as a mortgage write-off upon foreclosure. This property has been put under contract, with the purchase of the initial phase expected to close in the second quarter. The subsequent phases are subject to an option to purchase by the same party under the same contract.
Net Investment Income: Net investment income was $3.4 million for the quarter, down slightly from $3.5 million during the same quarter in the prior year. Net investment income consisted of $5.6 million from corporate assets (2011 - $5.3 million) and a loss of $2.2 million from securitization assets (2011 - loss of $1.8 million). Income from securitization assets includes a $3.2 million negative fair market value adjustment to derivative financial instruments (negative $3.2 million in 2011).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $10.3 million in the current year from $7.6 million in the prior year as a result of a $221 million increase in the average mortgage portfolio from $442 million to $663 million, partially offset by a 1.20% decrease in the average mortgage yield from 7.01% in 2011 to 5.81% in 2012. The decrease in the corporate portfolio yield was partially due to a change in the composition of the corporate mortgage portfolio, as we have gradually rebalanced our corporate mortgage portfolio since mid-2011 towards lower-risk single family uninsured mortgages from construction loans. Mortgage interest income includes $120,000 of realized discount income (2011 - $519,000) from MCAN's acquired mortgage portfolios.
As at March 31, 2012, we held discounted mortgages with a net discount of $8.2 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 2012 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 interest in MCLP was $526,000 during the quarter compared to $807,000 in the prior year.
Marketable securities income increased to $515,000 in the current year from $156,000 in the prior year as a result of a significantly higher average portfolio balance. The current year included gains from sales of marketable securities of $283,000 and a $260,000 write-down of a security.
Term deposit interest and expenses increased to $4.0 million in the current year from $2.6 million in the prior year as a result of an $170 million increase in the average outstanding balance from $462 million in 2011 to $632 million in 2012 and an increase in the average term deposit interest rate to 2.43% in 2012 from 2.19% in 2011.
There was a provision for credit losses of $1.5 million in the quarter compared to $333,000 in the prior year, including a collective mortgage provision of $635,000 during the quarter compared to $360,000 in the prior year. Both years had significant mortgage growth, however current year growth was balanced between uninsured single family mortgages (which carry a lower provisioning rate) and construction and commercial loans (which carry a higher provisioning rate), while prior year growth consisted almost entirely of uninsured single family mortgages. Mortgage write-offs were $1.1 million during the quarter (including the aforementioned residential construction loan foreclosure) compared to $75,000 in the prior year.
During the quarter, we recorded a $900,000 increase to a provision relating to our pro-rata share of estimated losses pursuant to an indemnity on the underlying assets of a residential construction loan securitization program. The provision, which was $1.1 million as at March 31, 2012, relates to an impaired residential construction loan that we have indemnified. This amount represents our estimated loss at this date based on property values given current market conditions. There are no other impaired mortgages associated with the indemnification of this securitization program.
Net Investment Income - Securitization Assets
Mortgage interest income decreased to $4.0 million in the current year from $5.5 million in the prior year as a result of a $429 million decrease in the average mortgage portfolio over 2011. As the securitized mortgages repay, we reinvest the collected principal in certain permitted investments, which include financial investments and short-term investments.
Interest on financial investments increased to $1.5 million from $1.3 million in the prior year due to an increase in the average portfolio from 2011.
Other securitization income was $2.8 million in the quarter compared to $2.2 million in the prior year, consisting primarily of interest rate swap receipts of $1.7 million (2011 - $2.1 million). In addition, we earned $428,000 of income from the sale of mortgage-backed securities ("MBS") in the current year. We also recognized $706,000 of income related to refinancing and renewal gains.
Interest on financial liabilities from securitization was $7.5 million for the quarter, unchanged from the prior year.
The negative fair market value adjustment to derivative financial instruments of $3.2 million (2011 - $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.
Operating Expenses: Operating expenses were $2.1 million compared to $1.7 million during the same quarter in the prior year as a result of higher salaries and benefits from an increase in the number of employees and increased corporate expenses.
Income Taxes: There was a $3.1 million recovery of income taxes in the first quarter of 2012 compared to a recovery of $5.2 million in the prior year. In both years, we had a recovery of current taxes through the payment of the first quarter dividend and a recovery of deferred taxes as a result of negative fair market value adjustments to derivative financial instruments.
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.25% ($5.5 million) at March 31, 2012, down significantly from 0.67% ($14 million) at December 31, 2011 as a result of the aforementioned foreclosure of an impaired construction loan. Impaired corporate mortgages as a percentage of the corporate portfolio also decreased significantly to 0.75% at March 31, 2012 from 2.24% at December 31, 2011.
Total mortgage arrears of $66 million as at March 31, 2012 decreased from $76 million at December 31, 2011. Mortgage arrears consist of $40 million of insured securitized mortgages and $26 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 March 31, 2012, total consolidated assets were $3.94 billion, consisting of $810 million of corporate assets and $3.13 billion of securitization assets. Corporate assets increased by $56 million during the quarter, while securitization assets decreased by $6 million. Changes in corporate assets included increases of $22 million in residential construction loans, $19 million in commercial loans, $14 million in single family mortgages and $7 million in financial investments, partially offset by a decrease of $7 million in cash. Term deposit liabilities were $666 million at March 31, 2012, up $64 million from December 31, 2011. Total shareholders' equity of $154 million decreased by $4.2 million from December 31, 2011. Activity for the quarter included net income of $4.4 million, the issuance of $1.3 million of new common shares through the dividend reinvestment plan and the fourth quarter dividend of $10.1 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 2.0% for 2012 and 2.4% for 2013. The Canadian economy saw a slight decline in February, but still posted positive growth for the first quarter. We expect moderate growth to continue through 2012 in line with the growth experienced in the latter half of 2011.
Interest rates continue to remain low, as central banks maintain neutral monetary policy to enable economic growth. In light of global economic uncertainty and the instability of financial markets, we believe that Canadian interest rates will remain low, providing stable funding costs for the balance of the year.
As we move towards full investment of the balance sheet, our emphasis remains on optimizing asset returns while maintaining our underwriting and risk appetite. We continue to closely monitor market conditions and maintain good geographic and borrower diversification.
Dividend: The Board of Directors declared a second quarter dividend of $0.27 per share to be paid June 29, 2012 to shareholders of record as of June 15, 2012.
Subsequent Event: On April 30, 2012, MCLP, an entity in which we own a 22.8% equity interest, acquired the remaining 80% interest in MCAP Service Corporation ("MSC") that it did not own, bringing its ownership of MSC to 100%. To maintain our ownership interest in MCLP, we provided $14 million of additional equity capital to MCLP such that our ownership interest is now 23.8%.
Further Information: Complete copies of the Company's 2012 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 on May 14, 2012.
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; 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;
- relationships with our mortgage originators; 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.
For further information:
MCAN Mortgage Corporation
President and Chief Executive Officer
Vice President and Chief Financial Officer