By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Despite an almost $100 million-strong non-performing mortgage portfolio, Finance Corporation of the Bahamas’ (FINCO) 2013 first half net income more than tripled on the back of reduced operating costs and loan loss provisions.

The BISX-listed mortgage specialist, which is 78 per cent majority-owned by Royal Bank of Canada (RBC), saw loan loss provisions for the six months to end-April 2013 drop by 73 per cent - from $10.563 million for the same period in 2012 to just $2.858 million this time around.

And the drop was even more pronounced for the 2013 second quarter, where loan loss provisions fell by 94 per cent to just $624,164 compared to $10.419 million the previous year.

However, Tanya McCartney, FINCO’s managing director, indicated the fall in provisioning was more due to a change in how it was estimated rather than any ‘bottoming out’ of the mortgage market’s non-performing loan hangover.

In written replies to Tribune Business questions, she said of the half-year results: “Our provision charges and expenses were lower than expected,

hence our overall results were better than what we had planned.

“The reduction is largely due to a change in provision estimate, which inflated the 2012 figure. The level of non-accrual loans remains a challenge, which affects provisions. However, we continue to work with clients experiencing financial challenges and, where there is an opportunity to restructure their mortgages, we do so.”

FINCO’s non-interest expenses dropped by 19.3 per cent year-over-year for the 2013 first half, hitting $4.826 million compared to $6.012 million in 2012.

Ms McCartney attributed the significant reduction to “a disciplined approach to cost management and looking for efficiencies within our business”.

The FINCO managing director also confirmed that FINCO’s non-performing loans, standing at 11.62 per cent of its $856.248 million mortgage portfolio during the second quarter, was some 4.7 percentage points better than industry average.

Although this percentage places FINCO’s total non-performing loans just shy of $100 million, at $99.496 million, Ms McCartney told Tribune Business: “Non-performing loans as a proportion of the total loan portfolio were at 11.62 per cent during the second quarter.

“This is consistent with previous years, and below the industry average of 16.32 per cent for mortgages.”

While top-line interest income remained flat through the second quarter and first half, FINCO’s net interest margin continued to benefit from the banking system’s surplus liquidity and low deposit rates.

Net interest income was up 14.6 per cent at $22.189 million, compared to $19.364 million, for the six months to-end April 2013. This led to a 12 per cent increase in total income at $24.167 million, up from $21.573 million the year before.

This, combined with the operating expense and loan loss provisioning reductions, resulted in FINCO’s half-year net income more than tripling from $4.997 million to $16.482 million - a 230 per cent increase.

And the three months to April 30, 2013, saw a more than $11.7 million positive swing on the bottom line, as FINCO reversed last year’s $2.196 million loss into a $9.536 million gain.

Despite FINCO’s mortgage loan book growing by less than $11 million, or just 1.3 per cent, during the first six months of its current financial year, Ms McCartney said credit demand remained “consistent”.

“We recently held a successful Home & Auto Expo with a mortgage seminar as an educational component of the exposition,” she added.

“We were pleased that a significant number of persons pre-qualified for mortgages. FINCO continues to experience modest growth in its mortgage portfolio.”

On the balance sheet side, FINCO’s liabilities to its Royal Bank affiliates almost doubled, increasing by 90.11 per cent to $53.502 million from $28.142 million the year before.

Ms McCartney told Tribune Business this was related to FINCO’s funding needs, explaining: “RBC carries surplus liquidity, and the increase in liabilities to affiliated companies seen on FINCO’s books is as a result of FINCO utilising an operating line with RBC to source funding for its mortgage growth.”

Cash on hand also rose 33.88 per cent to $50.308 million, aided by system liquidity. Net shareholder equity rose from $130.073 million at end-October 2012 to $142.556 million at April 30, a gain of more than $12 million.

Retained earnings rose by a similar number, but Ms McCartney said the Board’s March 21, 2013, decision to declare a $0.05 per share dividend did not mean quarterly capital returns to investors had become automatic once again.

Explaining that dividend payment decisions would be made quarterly, the FINCO managing director declined to specify what impact the new 3 per cent Business Licence fee would have on the mortgage lender’s business.

“The new taxes will increase our operating costs, and like every other company the bank will have to manage this as best it can,” Ms McCartney told Tribune Business.