MCAN Mortgage Corporation Reports Third Quarter Earnings and an Increase in
the Quarterly Dividend
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
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
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
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 throughoutthe 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
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
-- sufficiency of our access to capital resources; and
-- the timing of the effect of interest rate changes on our cash
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
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.
MCAN Mortgage Corporation
William Jandrisits President and Chief Executive Officer (416) 591-2726
Tammy Oldenburg Vice President and Chief Financial Officer (416) 847-3542
SOURCE: MCAN Mortgage Corporation
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-0- Nov/08/2012 21:00 GMT
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