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TORONTO, Aug. 9, 2012 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the second quarter of 2012 was $6.3 million, down from $7.2 million in 2011. The decrease in net income was primarily due to a lower fair market value adjustment for derivative financial instruments and lower income from securitization assets in the current quarter, partially offset by a 62% increase in net investment income from corporate assets. For the year to date, net income was $10.7 million, down from $14.3 million in the prior year.
Earnings per share were $0.37 in the current year compared to $0.44 in the prior year. For the year to date, earnings per share were $0.63 in the current year compared to $0.93 in the prior year.
Estimated taxable income for the quarter was $8.2 million ($0.48 per share) compared to $5.5 million ($0.34 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. For the year to date, estimated taxable income was $14 million ($0.84 per share) compared to $9.9 million ($0.64 per share) in the prior year.
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 $9.0 million for the quarter, down from $9.7 million during the same quarter of the prior year. Net investment income consisted of $10.0 million from corporate assets (2011 - $6.2 million) and a loss of $1.0 million from securitization assets (2011 - income of $3.6 million). Income from securitization assets includes a $1.5 million negative fair market value adjustment to derivative financial instruments (positive $1.7 million in 2011).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $10.5 million in the current year from $8.0 million in the prior year as a result of a $184 million increase in the average mortgage portfolio from $503 million to $687 million, partially offset by a decrease in the average mortgage yield from 6.54% in 2011 to 6.10% in 2012 that was primarily due to a decrease in the average yield of the construction loan portfolio. This portfolio is primarily floating rate, however, certain loans carry a minimum interest rate. The proportion of minimum rate loans has declined from 2011, leading to the decrease in yield. Mortgage interest income includes $562,000 of realized discount income (2011 - $516,000) from MCAN's acquired mortgage portfolios.
As at June 30, 2012, we held discounted mortgages with a net discount of $7.0 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 recognition of discount income is based on management's expectations as to when cash will be received.
Equity income from our ownership interest in MCLP was $1.8 million during the quarter compared to $578,000 in the prior year. The increase was primarily due to gains earned from the sales of mortgages in the current year.
Fees were $880,000 in the quarter, up from $366,000 in the prior year. Fees consist of other mortgage fees of $874,000 (2011 - $236,000) and fee income from a profit sharing arrangement relating to mortgage portfolios acquired by MCLP of $6,000 (2011 - $130,000). We earned a $600,000 one-time mortgage fee during the current quarter.
Marketable securities income increased to $1.1 million in the current year from $299,000 in the prior year primarily due to $759,000 of gains from sales of marketable securities in the current year.
Interest on financial investments and other loans was $753,000 in the current year compared to $1.0 million in the prior year. The prior year included an $876,000 gain on the sale of a financial investment, while the current year included a $493,000 income distribution from a commercial real estate investment.
Term deposit interest and expenses increased to $4.3 million in the current year from $3.1 million in the prior year as a result of an $164 million increase in the average outstanding term deposit balance from $509 million in 2011 to $673 million in 2012 and an increase in the average term deposit interest rate to 2.43% in 2012 from 2.36% in 2011.
There was a provision for credit losses of $50,000 in the quarter compared to $257,000 in the prior year, which included a collective mortgage provision of $28,000 (2011 - $336,000) and net individual mortgage provisions of $25,000 (2011 - recovery of $76,000). Although corporate mortgage growth was slightly higher in the second quarter of 2012 compared to 2011, the collective provision was significantly lower in 2012. Current year growth included a significant insured single family mortgage component (which does not attract a collective allowance), while prior year growth consisted almost entirely of construction loans and uninsured single family mortgages, both of which attract a collective allowance. Mortgage write-offs were $104,000 during the quarter compared to $138,000 in the prior year.
Net Investment Income - Securitization Assets
Mortgage interest income decreased to $3.8 million in the current year from $5.5 million in the prior year as a result of a $499 million decrease in the average mortgage portfolio from 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 decreased to $1.3 million from $1.4 million in the prior year due to a decrease in the average portfolio yield.
Other securitization income was $2.3 million in the quarter compared to $2.2 million in the prior year, consisting primarily of interest rate swap receipts of $2.2 million (2011 - $2.2 million). In addition, we earned $210,000 of income from the sale of mortgage-backed securities ("MBS") in the current year (2011 - $nil).
Interest on financial liabilities from securitization decreased to $7.3 million in the current year from $7.4 million in the prior year as a result of a lower average liability balance in the current year. The liability balance decrease was a result of the maturity of two CMB issuances during the second quarter.
The negative fair market value adjustment to derivative financial instruments of $1.5 million (2011 - positive $1.7 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 $2.4 million compared to $1.8 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 provision of $323,000 for income taxes in the second quarter of 2012 compared to a provision of $733,000 in the prior year. There was a decrease in deferred taxes as a result of the negative fair market value adjustment, which was partially offset by an increase in current taxes as a result of higher taxable income in the current year.
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.35% ($6.6 million) at June 30, 2012, up from 0.25% ($5.5 million) at March 31, 2012. Impaired corporate mortgages as a percentage of the corporate portfolio also increased to 0.92% at June 30, 2012 from 0.75% at March 31, 2012.
Total mortgage arrears were $66 million at June 30, 2012, unchanged from March 31, 2012. Mortgage arrears consist of $34 million of insured securitized mortgages and $32 million of corporate mortgages, relating 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, 2012, total consolidated assets were $3.60 billion, consisting of $892 million of corporate assets and $2.71 billion of securitization assets. Corporate assets increased by $82 million during the quarter, while securitization assets decreased by $426 million due to the maturity of two CMB issuances near quarter end.
Corporate asset activity included increases of $34 million in cash, $30 million in mortgages, $16 million in our equity investment in MCLP and $7 million in financial investments, and a decrease of $7 million in marketable securities.
Term deposit liabilities were $704 million at June 30, 2012, up from $666 million at March 31, 2012.
Total shareholders' equity of $156 million increased by $2.0 million from March 31, 2012. Activity for the quarter included net income of $6.3 million, the issuance of $424,000 of new common shares through the dividend reinvestment plan and the second quarter dividend of $4.6 million.
Two CMB issuances totalling $423 million matured during the quarter and were repaid in full. These were our first CMB issuance maturities to date.
Asset Capacity: As at June 30, 2012, our remaining asset capacity was $36 million. The closing of the rights offering in the third quarter (see "Subsequent Event" discussion below) will create up to $115 million of additional asset capacity.
Outlook: While economic conditions in Canada continue to be stable, the global economy has once again turned more negative as concerns over European credit have found their way into financial markets. The impact to Canada was felt in falling bond yields as flight to quality and risk off strategies took over markets.
Canadian housing markets remained balanced in the quarter, with some signs of slowing volumes at higher price points in the market. The low interest rate environment continued to support affordability and housing sales. Originations on the most affordable segment of the housing market continued to grow.
Recent federal government announcements of significant changes to mortgage insurance and underwriting standards are expected to have material impacts on Canadian housing markets in quarters to follow. First, the Canada Mortgage and Housing Corporation ("CMHC") announced a decision to curtail its portfolio insurance activities. Secondly, the Office of the Superintendent Financial Institutions ("OSFI") issued Guideline B-20, Residential Mortgage Underwriting Practices and Procedures, which will alter the lending practices of Canada's regulated financial institutions. The impact will be a reduction in the amount that home purchasers are able to borrow under the government-backed mortgage insurance program.
There were four changes implemented by CMHC as at July 9, 2012, as follows:
- A reduction of the maximum amortization period to 25 years
- Lowering refinance loan to value ratios
- Fixing a ceiling for gross debt service ratios
- Limiting insurance to those homes purchased for less than $1 million
The impact of the above changes is expected to take effect on mortgage markets in the third and fourth quarters of 2012, with a more pronounced impact in the spring market of 2013. We expect insured mortgage origination to be negatively affected.
We continue to monitor the impacts of these changes on mortgage markets and will adjust our strategy accordingly. As we have traditionally not been a significant participant in the insured single family mortgage segment we expect the impact to be minor. We have concentrated our origination efforts on the entry level/affordable segment within our core markets in an effort to minimize the impact of any price adjustments. We have historically been active in the uninsured single family mortgage market and expect this segment to grow with the recently announced regulatory changes. We continue to regard residential mortgages as a solid investment asset class.
Dividend: The Board of Directors declared a third quarter dividend of $0.27 per share to be paid September 28, 2012 to shareholders of record as of September 14, 2012.
Subsequent Event: On July 10, 2012, we announced a rights offering (the "Offering") to common shareholders of record as at July 24, 2012, closing on August 22, 2012. The offering will raise maximum proceeds of $20 million through the issuance of up to 1,699,157 common shares, creating up to $115 million of additional asset capacity. We have decided to increase our capital in light of our $14 million incremental investment in MCLP that was completed on April 30, 2012. Our investment in MCLP as a percentage of regulatory capital will be consistent with historical levels after the closing of the Offering. The incremental capital will also be used to increase our mortgage lending operations.
Further Information: Complete copies of the Company's 2012 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 by August 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;
- litigation risk;
- 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.
SOURCE: MCAN Mortgage Corporation
For further information:
MCAN Mortgage Corporation
President and Chief Executive Officer
Vice President and Chief Financial Officer