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TORONTO, Feb. 16, 2012 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the fourth quarter of 2011 was $5.2 million, up from $2.0 million in the prior year. Earnings per share were $0.30 compared to $0.13 during the same quarter in the prior year. The increase from the prior year is a result of significant increases in equity income from MCAP Commercial LP ("MCLP") and fair market adjustments to derivative financial instruments, partially offset by an increase in provisions for credit losses due to mortgage growth and lower income from securitization assets. Taxable income for the quarter was $8.5 million ($0.51 per share), up from $6.5 million ($0.45 per share) in the prior year.
Net income for the year ended December 31, 2011 was $27.1 million, up from $26.7 million in 2010, while earnings per share were $1.68 compared to $1.85 in 2010. Taxable income for 2011 was $22.9 million ($1.42 per share), compared to $25.7 million ($1.79 per share) in 2010. Return on equity for the year was 18.5% compared to 22.0% in 2010.
The Board of Directors declared a first quarter dividend of $0.60 per share to be paid March 30, 2012 to shareholders of record as of March 15, 2012, consisting of the regular dividend of $0.27 per share and an extra dividend of $0.33 per share. The dividend is comprised of a $0.55 taxable dividend and a $0.05 capital gains dividend. Under the Income Tax Act (Canada), the Company can deduct dividends paid up to 90 days following year-end against the previous year's taxable income. The extra dividend declared is necessary to offset taxable income in 2011. MCAN paid its regular $0.27 per share during the fourth quarter.
In November 2011, the Company amended its dividend reinvestment plan such that it is now based on the weighted average trading price for the 5 days preceding such issue less a discount of 2%. Previously, the pricing for the dividend reinvestment plan was based on the weighted average trading price for the preceding 20 days. The January 3, 2012 dividend was the first dividend for which the new basis was applicable.
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 continue to deploy this capacity in a timely manner so as to avoid dilution. We experienced solid asset growth of $97 million in the fourth quarter and continue to have a strong pipeline of transactions that are scheduled to fund throughout 2012. Our focus is on investing in mortgages with sound borrower equity, reasonable market acceptance through pre-sales and acceptable risk-adjusted returns.
Our maximum permitted asset level is driven by a multiple of shareholders' equity as measured on a tax basis. Our remaining asset capacity as at December 31st was $132 million, although our capital base at this date included a significant amount of taxable income not yet distributed to shareholders. Due to the magnitude of the aforementioned 2012 first quarter dividend, our remaining asset capacity will decrease significantly on March 30, 2012 as a result of the related decrease to shareholders' equity. We have incorporated this anticipated decrease in asset capacity into our first quarter growth plans as we approach the full investment of the balance sheet.
We separate our assets into the 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, an increase of $2.6 million from $4.4 million during the same quarter in the prior year. Net investment income consisted of $8.8 million from corporate assets (2010 - $7.9 million) and negative $1.8 million from securitization assets (2010 - negative $3.6 million). The increase was primarily due to higher equity income from MCLP. Income from securitization assets includes a negative fair market value adjustment to derivative financial instruments of $3.2 million (negative $5.9 million in 2010).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $8.8 million in the current year from $7.9 million in the prior year as a result of a $171 million increase in the average mortgage portfolio from $410 million to $581 million, partially offset by a 1.26% decrease in the average mortgage yield from 7.47% in 2010 to 6.21% in 2011. Mortgage interest income includes $600,000 (2010 - $1.2 million) 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 December 31, 2011, we held discounted mortgages with a net discount of $9.1 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.
Interest on financial investments and other loans decreased from $309,000 to $81,000, primarily due to a significantly lower average portfolio balance in the current year.
Equity income from our ownership interest in MCLP increased to $3.3 million in the current year from $1.6 million in the prior year, primarily due to gains from the sale of mortgages.
On November 30, 2011, MCLP entered into an agreement to acquire the residential mortgage operations and certain related assets of ResMor Trust Company. The transaction is expected to be completed in the first quarter of 2012, subject to certain regulatory approvals and other customary closing conditions. If such transaction is successfully completed and MCLP realizes an increase in income, the Company may in turn realize an increase in equity income given our ownership interest in MCLP.
Fees were $689,000 in the quarter, down from $908,000 in the prior year. Fees consist of fee income from a profit sharing arrangement relating to mortgage portfolios acquired by MCLP of $86,000 (2010 - $541,000) and other mortgage fees of $603,000 (2010 - $367,000). 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 $399,000 for the quarter compared to $31,000 in the prior year as a result of a significantly higher average balance in the current year.
Term deposit interest and expenses increased to $3.4 million in the current year from $2.1 million in the prior year, primarily due to a $166 million increase in the average outstanding balance from $381 million in 2010 to $547 million in 2011 and an increase in the average term deposit interest rate to 2.42% in 2011 from 2.13% in 2010.
Provisions for credit losses were $388,000 for the quarter compared to a recovery of $72,000 for the same period of the prior year. Current year activity included collective mortgage provisions of $463,000 and the net reversal of $80,000 of individual provisions, while the prior year consisted primarily of the recovery of loan and investment collective provisions. Mortgage write-offs were $2,000 during the quarter compared to $6,000 in the prior year.
Net Investment Income - Securitization Assets
Mortgage interest income decreased to $4.7 million in the current year from $5.9 million in the prior year as a result of a $411 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 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 2010.
Other securitization income for the quarter was unchanged at $2.6 million, consisting primarily of interest rate swap receipts of $2.3 million (2010 - $2.6 million).
Interest on financial liabilities from securitization was $7.4 million for the quarter, down slightly from $7.5 million in the prior year.
The negative fair market value adjustment to derivative financial instruments of $3.2 million (2010 - negative $5.9 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 $1.8 million compared to $1.9 million during the same quarter in the prior year.
Income Taxes: There was a minimal provision for income taxes in the fourth quarter of 2011 compared to a provision of $469,000 in 2010.
Credit Quality: Impaired corporate mortgages as a percentage of the corporate mortgage portfolio (net of individual allowances) decreased to 2.24% ($14 million) at December 31, 2011 from 2.51% ($14 million) at September 30, 2011. Impaired mortgages as a percentage of total mortgages were 0.67% at December 31, 2011, compared to 0.65% at September 30, 2011.
Total mortgage arrears of $76 million as at December 31, 2011 decreased from $80 million at September 30, 2011. Mortgage arrears are comprised of $4 million of insured securitized mortgages and $72 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 December 31, 2011, total consolidated assets were $3.89 billion, an increase of $89 million from September 30, 2011. Corporate assets increased by $97 million during the quarter, while securitization assets decreased by $7.5 million. Changes in corporate assets included increases of $52 million in single family mortgages, $24 million in construction loans and $24 million in commercial loans, partially offset by a decrease of $10 million in cash. Term deposit liabilities were $602 million at December 31, 2011, up $81 million from September 30, 2011. Total shareholders' equity of $158 million increased by $2.3 million from September 30, 2011. Activity for the quarter consisted of net income of $5.2 million and a $1.6 million increase to the available for sale reserve, partially offset by the fourth quarter dividend of $4.6 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 2.8% 2013. The Canadian economy saw a moderation in growth in the fourth quarter of 2011, as a result of the European debt crisis and a slow down in the labour market. We expect moderate growth to continue through 2012 in line with the growth experienced in the latter half of 2011.
New term deposit funding 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 coming year.
As we move towards full investment of the balance sheet, our emphasis remains on investing in mortgages with sound borrower equity, reasonable market acceptance through pre-sales on construction loans and acceptable risk-adjusted returns. We are closely monitoring market conditions in the geographic markets in which we invest to mitigate balance sheet risk. Our mortgage portfolio is currently well positioned with a low level of impaired mortgages. In addition, we have good geographic and borrower diversification. We remain focused on expanding the Canadian markets in which we invest, maintaining prudent lending practices and investing in quality assets.
International Financial Reporting Standards:
The consolidated financial statements for the year ended December 31, 2011 are the first annual statements that we have prepared in accordance with International Financial Reporting Standards ("IFRS"). For years 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 - $47 million.
- We now recognize ongoing CMB program mortgage interest income, principal reinvestment income and securitization liability interest expense on the accrual basis. We reversed up-front gains from securitization previously recognized under CGAAP through opening retained earnings on transition to IFRS.
- Fair market value changes in the CMB interest rate swaps are no longer generally offset by fair market value changes in CMB interest-only strips, as the interest-only strips do not exist under IFRS due to the reversal of up-front gains from securitization previously recognized under CGAAP. The lack of an offset has led to increased volatility to net income under IFRS despite the fact that, from an economic perspective, interest rate risk remains largely mitigated through the interest rate swaps.
- We now recognize current and deferred taxes through the statement of income, which has led to increased volatility to net income. Under CGAAP, we charged current and deferred taxes directly to retained earnings.
Selected Quarterly Financial Data
(Unaudited) (dollars in thousands, except for per share amounts)
|Year Ended December 31, 2011||Q1||Q2||Q3||Q4||Total|
|Net investment income - corporate assets||$||5,308||$||6,165||$||5,420||$||8,757||$||25,650|
| Net investment income - securitized assets
before fair market value adjustment
|Fair market value adjustment||(3,238)||1,722||4,934||(3,190)||228|
|Net investment income - securitized assets||(1,769)||3,566||6,020||(1,759)||6,058|
|Net investment income||3,539||9,731||11,440||6,998||31,708|
|Income before income taxes||1,867||7,938||9,814||5,229||24,848|
|Provision for (recovery of) income taxes||(5,222)||733||2,228||6||(2,255)|
|Basic and diluted earnings per share||$||0.49||$||0.44||$||0.45||$||0.30||$||1.68|
|Dividends per share|
|Year Ended December 31, 2010||Q1||Q2||Q3||Q4||Total|
|Net investment income - corporate assets||$||5,037||$||6,174||$||8,229||$||7,940||$||27,380|
| Net investment income - securitized assets
before fair market value adjustment
|Fair market value adjustment||(1,462)||4,702||4,298||(5,909)||1,629|
|Net investment income - securitized assets||(259)||8,387||6,143||(3,587)||10,684|
|Net investment income||4,778||14,561||14,372||4,353||38,064|
|Income before income taxes||3,470||13,154||12,913||2,427||31,964|
|Provision for (recovery of) income taxes||(656)||3,294||2,199||469||5,306|
|Basic and diluted earnings per share||$||0.29||$||0.69||$||0.74||$||0.13||$||1.85|
|Dividends per share|
| CONSOLIDATED BALANCE SHEETS
(Unaudited) (dollars in thousands)
|As at|| December 31
| September 30
| December 31
|Cash and cash equivalents||$||51,309||$||60,977||$||85,309|
|Equity investment in MCAP Commercial LP||15,480||12,218||11,530|
|Derivative financial instruments||13,348||16,538||13,120|
|Liabilities and Shareholders' Equity|
|Current tax liabilities||3,321||1,783||5,728|
|Deferred tax liabilities||5,436||6,743||5,311|
|Financial liabilities from securitization||3,111,357||3,111,744||3,119,601|
|Available for sale reserve||1,647||3||(32)|
| CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (dollars in thousands except for per share amounts)
| Quarters Ended
| Years Ended
|Net Investment Income - Corporate Assets|
|Interest on financial investments and other loans||81||309||1,342||2,507|
|Equity income from MCAP Commercial LP||3,262||1,625||5,007||3,302|
|Interest on cash and cash equivalents||115||105||592||230|
|Term deposit interest and expenses||3,424||2,134||12,293||7,619|
|Provision for (recovery of) credit losses||388||(72)||1,058||(692)|
|Net Investment Income - Securitized Assets|
|Interest on financial investments||1,504||1,319||5,714||3,203|
|Interest on short-term investments||233||114||814||334|
|Other securitization income||2,593||2,616||9,001||10,239|
|Interest on financial liabilities from securitization||7,448||7,454||29,844||29,473|
|Net investment income before fair market value adjustment||1,431||2,322||5,830||9,055|
|Fair market value adjustment - derivative financial instruments||(3,190)||(5,909)||228||1,629|
|Net Investment Income||6,998||4,353||31,708||38,064|
|Salaries and benefits||882||1,038||3,234||2,711|
|General and administrative||887||888||3,626||3,389|
|Income Before Income Taxes||5,229||2,427||24,848||31,964|
|Provision for (recovery of) income taxes|
|Basic and diluted earnings per share||$||0.30||$||0.13||$||1.68||$||1.85|
|Dividends per share||$||0.27||$||0.26||$||1.81||$||1.19|
| Weighted average number of basic and diluted
This press release 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 statements.
Complete copies of the Company's 2011 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 by March 30, 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.
For further information:
MCAN Mortgage Corporation
e-mail: [email protected]
President and Chief Executive Officer
Vice President and Chief Financial Officer