MCAN Mortgage Corporation reports fourth quarter earnings



    
    Stock market symbol
    TSX: MKP
    

    TORONTO, Feb. 13 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company"
or "we") reported net income of $9.9 million for the fourth quarter of 2008,
up from $3.2 million a year earlier. Earnings per share for the quarter were
$0.70 compared to $0.23 last year. Net income for the year ended December 31,
2008 was $30.3 million, up from $14.8 million in 2007, while earnings per
share were $2.14 compared to $1.12 in 2007.
    The current turmoil in the general economy, and specifically in the
financial and real estate markets, has impacted MCAN both positively and
negatively. In our core spread business, decreases in the prime rate that have
not been matched by corresponding decreases in the cost of our term deposits
have compressed the spread on our mortgage portfolio, of which over 50% is
floating rate (prime-based). However, the changing interest rate environment
has had a positive impact on our participation in the Canada Mortgage Bonds
("CMB") program. Also, the market turmoil has created opportunities for us, in
conjunction with MCAP Commercial LP ("MCLP"), to acquire portfolios from other
lenders at favourable pricing, and the aggressive management of these
portfolios resulted in significant incremental income in the quarter. While
fourth quarter results were significantly higher than historical results, it
must be cautioned that the primary contributing activities are significantly
more volatile than our core activities.

    Net Investment Income: Net investment income for the fourth quarter
increased from $4.3 million in 2007 to $11.5 million in 2008.

    During the quarter, we realized $1.3 million (included in mortgage
interest income) relating to the partial recovery of purchase price discounts
on mortgages that we acquired. A further $838,000 (included in fees) was
earned under a profit sharing arrangement with MCLP, also relating to the
partial recovery of purchase price discounts on mortgages that MCLP acquired.
    Mortgage interest income increased from $8.0 million to $8.6 million due
to a $12 million increase in the average mortgage portfolio and a 0.56%
increase in the average mortgage yield. The increase in yield despite
decreases in the prime rate was a result of higher effective yields on the
mortgages in the acquired portfolios. The portion of the discount that we
expect to recover is amortized into income over the remaining term of the
respective mortgages. Upon the payout of a mortgage, the remaining unamortized
discount is recognized as income. In the fourth quarter, payout volumes were
significantly higher than anticipated.
    The prime rate decreased by 2.5% for the twelve months ended December 31,
2008. This decrease has negatively impacted mortgage interest income, as
approximately 56% of our mortgages at quarter end were floating rate. However,
this negative impact has been more than offset by the higher effective yields
on the mortgages in the acquired portfolios.
    As at December 31, 2008, we held discounted mortgages with a net discount
of $33 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 two years for the fixed rate mortgages to 23 years
for the floating rate mortgages. As such, it is difficult to accurately
estimate the timing and quantum of the discount ultimately recovered. However,
we do expect that material amounts will be realized over the next few years.
    Interest on loans and investments decreased from $1.4 million to $1.1
million due to a lower average prime rate in 2008.
    Fees increased from $995,000 to $1.8 million, primarily due to the amount
received from MCLP related to the profit sharing noted above.
    Equity income from our ownership in MCLP was $788,000 in the quarter
compared to a loss of $817,000 in 2007. The current year income is due to
significant gains from mortgage sales. In 2007, MCLP took write-downs on
certain of its securitization programs.
    We recognized securitization income of $2.8 million during the quarter
relating to the securitization of insured mortgages through the CMB program
compared to $511,000 in the prior year. In 2008, residual securitization
income, which includes the yield on the interest-only strips and CMB
liabilities, penalty income and fair value changes in certain CMB assets and
liabilities, increased significantly, although $1.9 million of this income
related to fair value changes.
    During the quarter, we earned $1.9 million from sales of mortgages from
the acquired portfolios.
    Term deposit interest and expenses decreased to $4.9 million in 2008 from
$5.5 million in 2007. The effect of a 0.64% decrease in the average interest
rate exceeded that of a $2 million increase in the average outstanding
balance. The interest rate on new term deposits is relatively high as deposit
rate decreases have not kept pace with the declines in the prime rate over the
past twelve months.
    Allowances for loan losses were decreased by $103,000 during the quarter
compared to a decrease of $286,000 for the same period last year. During the
quarter, we recorded specific allowances of $92,000. Write-offs were $48,000
during the quarter. Impaired loans net of specific allowances were 0.80% ($3.3
million), compared to 0.89% ($4.3 million) at September 30, 2008 and 0.58%
($2.3 million) at December 31, 2007. We continue to proactively monitor loan
arrears and take prudent steps to collect overdue accounts. Total mortgages
past due but not impaired increased from $25 million at September 30, 2008 to
$31 million at December 31, 2008. The increase is consistent with the general
deterioration in the Canadian economy.

    Operating Expenses: Operating expenses increased from $1.1 million to
$1.6 million due to an increase in compensation relating to the acquired
portfolios.

    Financial Position: As of December 31, 2008, total consolidated assets
were $570 million, a decrease of $18 million from September 30, 2008. The
decrease in assets since September 30, 2008 consists of decreases of $67
million in mortgages and $3 million in loans and investments, partially offset
by increases of $37 million in cash and $17 million in other assets. Term
deposit liabilities were $427 million at December 31, 2008, down $39 million
from September 30, 2008. Total shareholders' equity of $117 million increased
by $8 million from September 30, 2008. Activity for the quarter consisted of
net income of $9.9 million and an increase to accumulated other comprehensive
income of $2.8 million, partially offset by the fourth quarter dividend of
$3.6 million and a charge of $1.3 million to retained earnings relating to
current and future income taxes.

    Outlook: The continuing disruption in debt markets has afforded us with
opportunities to acquire mortgages on a profitable basis. While these
transactions are opportunistic and cannot necessarily be planned, we expect
that the disruption in debt markets will not materially improve for several
months, and as such, future acquisition opportunities may present themselves.
We plan to retain investment capacity so that we can take advantage of these
opportunities.

    Decreases in the prime rate during 2008 and early 2009 are expected to
have an adverse effect on net investment income over the next several
quarters. New term deposit funding rates have not decreased to this extent,
which will continue to compress spread income in the near term. With the
exception of the floating rate mortgages purchased as part of the portfolio
acquisitions, we have increased our fixed rate mortgage portfolio and
decreased our floating rate mortgage portfolio in 2008 in order to minimize
this compression. We are generally targeting fixed rate mortgages, rather than
floating rate mortgages. Higher profitability from the CMB program and the
acquired portfolios has more than offset the reduction in spread income.
    Slower economic activity has moderated housing market activity, compared
to last year, and we expect this to continue for the balance of the year.
Arrears on single family mortgages have risen due to job losses, and we also
expect this to continue throughout the balance of the year. While property
values have declined over the past year, the magnitude has been moderate in
most markets and further declines are not expected to be severe.
    The disruption in debt markets has not yet resolved itself and this could
be several months away. This disruption has not affected the capital or
liquidity of the Company.

    Dividend: The Board of Directors declared a first quarter dividend of
$0.68 per share to be paid March 31, 2009 to shareholders of record as of
March 16, 2009. This dividend comprises the regular quarterly dividend of
$0.25 and a $0.43 extra 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
fully offset taxable income in 2008.

    
    Selected Quarterly Financial Data (Unaudited)
    (In thousands of dollars, except per share amounts)

    Year Ended December 31, 2008      Q1       Q2       Q3       Q4    Total
                                 --------------------------------------------
    Net investment income         $6,064   $6,062  $12,485  $11,471  $36,082
    Operating expenses               922    1,173    2,088    1,551    5,734
                                 --------------------------------------------
    Income before income taxes     5,142    4,889   10,397    9,920   30,348
    Provision for income taxes and
     large corporations taxes          -        -        -        -        -
                                 --------------------------------------------
    Net income                    $5,142   $4,889  $10,397   $9,920  $30,348
                                 --------------------------------------------
    Basic and diluted earnings
     per share                     $0.36    $0.35    $0.73    $0.70    $2.14
    Dividends per share
      Regular                      $0.12    $0.23    $0.25    $0.25    $0.85
      Capital gains                 0.11        -        -        -     0.11
                                 --------------------------------------------
      Total                        $0.23    $0.23    $0.25    $0.25    $0.96
                                 --------------------------------------------


    Year Ended December 31, 2007      Q1       Q2       Q3       Q4    Total
                                 --------------------------------------------
    Net investment income         $5,444   $5,140   $4,083   $4,259  $18,926
    Operating expenses             1,075      955    1,000    1,079    4,109
                                 --------------------------------------------
    Income before income taxes     4,369    4,185    3,083    3,180   14,817
    Provision for (recovery of)
     income taxes and large
     corporations taxes              (24)      (2)       -        -      (26)
                                 --------------------------------------------
    Net income                    $4,393   $4,187   $3,083   $3,180  $14,843
                                 --------------------------------------------
    Basic and diluted earnings
     per share                     $0.35    $0.33    $0.21    $0.23    $1.12
    Dividends per share
      Regular                      $0.19    $0.23    $0.23    $0.23    $0.88
      Capital gains                 0.12        -        -        -     0.12
                                 --------------------------------------------
      Total                        $0.31    $0.23    $0.23    $0.23    $1.00
                                 --------------------------------------------


    -------------------------------------------------------------------------
                         CONSOLIDATED BALANCE SHEETS
                     (Unaudited) (dollars in thousands)
    -------------------------------------------------------------------------
                                      December 31  September 30  December 31
    As at                                    2008          2008         2007
    -------------------------------------------------------------------------
    Assets
    Investments
      Cash and cash equivalents         $  58,071     $  20,764    $  53,804
      Mortgages                           393,010       460,428      412,685
      Loans and investments                75,367        78,778       71,286
      Equity investment in MCAP
       Commercial LP                       18,300        19,331       17,095
      Marketable securities                     -             -          156
    -------------------------------------------------------------------------
                                          544,748       579,301      555,026

      Other assets                         25,406         8,491        2,399
    -------------------------------------------------------------------------
                                        $ 570,154     $ 587,792    $ 557,425
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity
    Liabilities
      Term deposits                     $ 426,663     $ 466,018    $ 445,368
      Securitization liabilities            7,095             -            -
      Accounts payable and accrued
       charges                             12,186         9,432        8,089
      Future taxes payable                  7,601         3,585          961
    -------------------------------------------------------------------------
                                          453,545       479,035      454,418
    -------------------------------------------------------------------------

    Shareholders' Equity
      Share capital                        97,493        97,493       96,370
      Contributed surplus                     510           510          510
      Retained earnings                    17,313        12,286        6,654
      Accumulated other comprehensive
       income (loss)                        1,293        (1,532)        (527)
    -------------------------------------------------------------------------
                                          116,609       108,757      103,007
    -------------------------------------------------------------------------
                                        $ 570,154     $ 587,792    $ 557,425
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                      CONSOLIDATED STATEMENTS OF INCOME
       (Unaudited) (dollars in thousands except for per share amounts)
    -------------------------------------------------------------------------
                                          Quarters Ended         Years Ended
                                             December 31         December 31
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Investment Income
      Mortgage interest                $ 8,643   $ 7,984  $ 33,429  $ 28,669
      Interest on loans and investments  1,133     1,372     5,617     5,728
      Interest on cash and cash
       equivalents                         183       542     1,109     1,299
      Fees                               1,783       995     5,051     3,384
      Equity income from MCAP
       Commercial LP                       788      (817)    3,025       890
      Securitization income              2,765       511     7,761     1,190
      Gain on sale of mortgages          1,851         2     5,326        22
      Marketable securities                  -         5       (97)      956
    -------------------------------------------------------------------------
                                        17,146    10,594    61,221    42,138
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial Expenses
      Term deposit interest and
       expenses                          4,901     5,543    20,684    18,996
      Mortgage expenses                    877     1,078     3,524     3,699
    Provision for (recovery of) losses    (103)     (286)      931       517
    -------------------------------------------------------------------------
                                         5,675     6,335    25,139    23,212
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net Investment Income               11,471     4,259    36,082    18,926
    -------------------------------------------------------------------------

    Operating Expenses
      Salaries and benefits                682       511     2,226     1,878
      General and administrative           869       568     3,508     2,231
    -------------------------------------------------------------------------
                                         1,551     1,079     5,734     4,109
    -------------------------------------------------------------------------

    Income Before Income Taxes           9,920     3,180    30,348    14,817
      Provision for (recovery of)
       income taxes and large
       corporations taxes                    -         -         -       (26)
    -------------------------------------------------------------------------
    Net Income                         $ 9,920   $ 3,180  $ 30,348  $ 14,843
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Basic and diluted earnings
     per share                          $ 0.70    $ 0.23    $ 2.14    $ 1.12
    -------------------------------------------------------------------------
    Dividends per share                 $ 0.25    $ 0.23    $ 0.96    $ 1.00
    -------------------------------------------------------------------------
    Weighted average number of basic
     and diluted shares (000's)         14,224    14,098    14,192    13,306
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Further Information: Complete copies of the Company's 2008 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 31, 2009.

    This report 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 2008 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.





For further information:

For further information: MCAN Mortgage Corporation, Website:
www.mcanmortgage.com, e-mail: mcanexecutive@mcanmortgage.com; Blaine Welch,
President and Chief Executive Officer, (416) 591-2726; Tammy Oldenburg, Vice
President and Chief Financial Officer, (416) 847-3542


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