TORONTO, Nov. 8, 2012 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the third quarter of 2012 decreased to $3.5 million from $7.6 million in 2011, although estimated taxable income for the quarter was $4.8 million ($0.27 per share) compared to $4.5 million ($0.27 per share) in the prior year. The decrease in net income was primarily due to a significant negative fair market value adjustment to derivative financial instruments in the current quarter, partially offset by a recovery of income taxes. Earnings per share were $0.19 for the quarter compared to $0.45 in the prior year.
For the year to date, net income was $14.2 million, down from $21.9 million in the prior year as a result of the reasons noted above for the quarter. However, estimated taxable income for the year to date was $19.1 million ($1.11 per share) compared to $14.4 million ($0.91 per share) in the prior year. For the year to date, earnings per share were $0.82 compared to $1.38 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 to shareholders through dividends.
During the quarter, the Company successfully completed a fully subscribed rights offering that raised net proceeds of $20 million with 1,699,157 new common shares issued. This resulted in additional asset capacity of $115 million based on our target assets to capital ratio of 5.75, which is measured on a tax basis. As at September 30, 2012, we had remaining asset capacity of $95 million.
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 $4.5 million for the quarter, down from $11.4 million during the same quarter of the prior year. Net investment income consisted of $5.9 million from corporate assets (2011 - $5.4 million) and a loss of $1.4 million from securitization assets (2011 - income of $6.0 million). The loss from securitization assets includes a $1.9 million negative fair market value adjustment to derivative financial instruments (positive $4.9 million in 2011).
Net Investment Income - Corporate Assets
Mortgage interest income increased to $10.6 million in the current year from $8.2 million in the prior year as a result of a $168 million increase in the average mortgage portfolio from $517 million to $685 million, partially offset by a 0.62% decrease in the average mortgage yield from 6.47% in 2011 to 5.85% in 2012 that was primarily due to lower average yields in the uninsured single family and construction portfolios. The construction loan 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. The decrease in the uninsured single family mortgage yield was a result of the maturity in the current year of certain high-yielding mortgages that contributed to the high 2011 yield. Mortgage interest income includes $527,000 of realized discount income from MCAN's acquired mortgage portfolios (2011 - $341,000).
As at September 30, 2012, we held discounted mortgages with a net discount of $6.0 million. We retain 50% of any recoveries of that amount, and we pay the remaining 50% to MCAP. 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 (for certain fixed rate mortgages) to 2032 (for certain floating rate mortgages). The recognition of discount income is based on management's expectations as to when cash will be received.
Equity income from our ownership in MCAP was $331,000 in the quarter, comparable to $360,000 in the prior year. During the quarter, MCAP securitized approximately $900 million of mortgages. The associated interest income will be earned over the term of these mortgages.
Fees were $339,000 in the quarter, up from $333,000 in the prior year. Fees consist of other mortgage fees of $337,000 (2011 - $251,000) and fee income from a profit sharing arrangement relating to mortgage portfolios acquired by MCAP of $2,000 (2011 - $82,000).
Marketable securities income decreased to $40,000 in the current year from $427,000 in the prior year primarily due to a lower average portfolio and a loss of $255,000 on sales and early redemption of bonds during the quarter.
Interest on financial investments and other loans was $333,000 in the current year compared to $102,000 in the prior year as a result of a significantly larger average portfolio.
Term deposit interest and expenses increased to $4.6 million in the current year from $3.3 million in the prior year as a result of a $165 million increase in the average outstanding term deposit balance from $510 million in 2011 to $675 million in 2012, partially offset by a slight decrease in the average term deposit rate to 2.44% in 2012 from 2.45% in 2011.
There was a provision for credit losses of $592,000 in the quarter compared to $80,000 in the prior year, which included net individual mortgage provisions of $445,000 (2011 - $95,000) and collective mortgage provisions of $150,000 (2011 - recovery of $12,000). Although there was a small net decrease in the mortgage portfolio during the third quarter of 2012, the increase in construction loans, which attract a higher provisioning rate than uninsured single family mortgages, led to a net collective provision during the quarter. Corporate mortgage growth in the third quarter of 2011 consisted almost entirely of insured single family mortgages, which do not attract a collective allowance. Mortgage write-offs were $72,000 during the quarter compared to $59,000 in the prior year.
Net Investment Income - Securitization Assets
Mortgage interest income decreased to $3.5 million in the current year from $5.0 million in the prior year as a result of a $573 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 $1.1 million from $1.5 million in the prior year due to a decrease in the average yield and a smaller average portfolio balance.
Other securitization income was $1.8 million in the quarter compared to $2.0 million in the prior year, consisting primarily of interest rate swap receipts of $1.6 million (2011 - $1.9 million). In addition, we earned $340,000 of income from the sale of mortgage-backed securities ("MBS") in the current year (2011 - $nil).
Interest on financial liabilities from securitization decreased to $6.2 million in the current year from $7.5 million in the prior year as a result of a lower average liability balance in the current year. The decrease was a result of the maturity of two CMB issuances during the second quarter of 2012.
The negative fair market value adjustment to derivative financial instruments of $1.9 million (2011 - positive $4.9 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 $2.0 million compared to $1.6 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 recovery of $1.0 million of income taxes in the third quarter of 2012 compared to a provision of $2.2 million in the prior year. Activity in both years related primarily to deferred taxes as a result of fair market value adjustments during the quarter.
Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.36% ($6.5 million) at September 30, 2012, up from 0.35% ($6.6 million) at June 30, 2012. Impaired corporate mortgages as a percentage of the corporate portfolio decreased to 0.91% at September 30, 2012 from 0.92% at June 30, 2012.
Total mortgage arrears were $71 million at September 30, 2012, up from $66 million at June 30, 2012. Mortgage arrears consist of $30 million of insured securitized mortgages and $41 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 September 30, 2012, total consolidated assets were $3.61 billion, consisting of $909 million of corporate assets and $2.70 billion of securitization assets. Corporate assets increased by $17 million during the quarter, while securitization assets decreased by $10 million.
Corporate asset activity included an increase of $22 million in cash and an $8 million decrease in mortgages.
Term deposit liabilities were $710 million at September 30, 2012, up from $704 million at June 30, 2012.
Total shareholders' equity of $176 million increased by $20 million from June 30, 2012. Activity for the quarter included net income of $3.5 million, new common shares of $20 million issued through the rights offering, $513,000 of new common shares issued through the dividend reinvestment plan and the third quarter dividend of $5.0 million.
Asset Capacity: As at September 30, 2012, our remaining asset capacity was $95 million, based on our target assets to capital ratio of 5.75.
Outlook: While economic conditions in Canada remain stable, the global economy continues to be a concern for central banks and financial markets around the world. Consequently, the Canadian economy is showing signs of weakening and job growth appears to be slowing. The inventory of unsold homes has risen in most markets over the last quarter. We expect housing markets to slow throughout the remainder of 2012 and into 2013 as a result of weakening GDP and job growth. The current low interest rate environment continues to support affordability for home buyers. MCAN believes that Canada should avoid a significant housing market correction, however we see the possibility of a slowdown of 10% to 15% in housing sales.
Regulatory changes to underwriting standards appear to have impacted the number of eligible home buyers in addition to the amount that home purchasers are able to borrow under the government-backed mortgage insurance program. We believe that the regulatory changes have resulted in some downward pressure on price points in our core markets and expect this to continue throughout 2013. We have observed the cancellation of construction projects within our core markets as developers concentrate on managing inventory and focus on sales activity within their existing projects. We expect the impact of these new regulations to become more pronounced into the spring of 2013.
We continue to monitor the impacts of changes to the mortgage markets and will adjust our investment strategy accordingly. We have concentrated our origination efforts on the entry level/affordable segment within our core markets in an effort to minimize the potential impacts of any weakness in home values. We have historically been active in uninsured single family mortgage markets and expect this segment to improve its risk adjusted returns with the recently announced regulatory changes. With prudent underwriting, we continue to regard residential mortgages as a solid investment asset class.
Dividend: The Board of Directors declared a fourth quarter dividend of $0.28 per share (increased from $0.27 per share) to be paid January 2, 2013 to shareholders of record as of December 17, 2012.
Further Information: Complete copies of the Company's 2012 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 by November 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