Stock market symbol TSX: MKP
TORONTO, Aug. 6 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company"
or "we") reported net income of $5.6 million for the second quarter of 2009,
up from $4.9 million a year earlier. Earnings per share for the quarter were
$0.39 compared to $0.35 last year. Net income for the six months ended June
30, 2009 was $12.0 million, up from $10.0 million a year earlier, while
earnings per share in the same period were $0.84 compared to $0.71 in 2008.
Economic conditions are largely unchanged since our previous quarterly
report. 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 48% 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 has led to significant incremental income in the past twelve
months. Although earnings per share have been strong in recent quarters, 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 second quarter
increased from $6.1 million in 2008 to $6.9 million in 2009.
During the quarter, we realized $629,000 (included in mortgage interest
income) relating to the partial recovery of purchase price discounts on
several portfolios of discounted mortgages that we acquired in the second half
of 2008. We also received $1.6 million (included in fees) from MCLP from a
profit sharing arrangement relating to discounted mortgages acquired by MCLP.
Mortgage interest income decreased from $7.5 million to $6.6 million as a
result of a $44 million decrease in the average mortgage portfolio size,
although this was partly offset by a 0.13% increase in the average mortgage
The prime rate was 2.25% as at June 30, 2009 compared to 4.75% as at June
30, 2008. Although this decrease has had a negative impact on mortgage
interest income as 48% of our mortgages at quarter end were floating rate
mortgages, it has been offset by the higher effective yields on the mortgages
in the acquired portfolios.
The mortgages in the acquired portfolios have higher effective yields
than those in our regular portfolio, as they have been acquired at a discount
to their par values. 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.
As at June 30, 2009, we held discounted mortgages with a net discount of
$31 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 $1.2 million to $989,000
as a result of the aforementioned decrease in the prime rate and a smaller
Fees increased from $871,000 to $2.6 million, primarily due to the amount
received from MCLP related to the profit sharing noted above.
Equity income from our ownership interest in MCLP was $77,000 during the
quarter compared to $707,000 in the prior year. The results were lower in the
current year as they included losses in construction and commercial operations
and mark to market adjustments, which were partially offset by strong single
family and leasing results.
We recognized securitization income of $1.2 million during the quarter
compared to $1.3 million in the prior year. Current quarter income consists of
the net of an up-front gain from securitization of $2.4 million, residual
securitization income of $57,000 and a write-down on the interest-only strips
of $1.2 million. Up-front gains from securitization increased over 2008 as a
result of significantly wider interest rate spreads between mortgages and
government bonds in the current year. Residual securitization income decreased
from the prior year, as fair value adjustments to CMB-related financial
instruments had a negative impact to income of $2.5 million (2008 - negative
impact of $247,000). Forward interest rates have been volatile since early
2008, which can lead to unanticipated income variances in either direction.
The negative impact of fair value adjustments in the current year has been
partly offset by a significant increase in interest rate swap receipts and
At quarter end, we recorded a net write-down of $1.2 million on our
outstanding interest-only strips. On an overall basis, our CMB issuances have
had significantly higher than anticipated principal repayment levels as a
result of higher mortgage refinancing and payout volumes in the current
environment of low mortgage interest rates. This has decreased expected future
cash flows as the assets in which we reinvest principal collections generally
yield less than the securitized mortgages.
Term deposit interest and expenses decreased from $5.2 million in 2008 to
$3.6 million in 2009 due to a 1.13% decrease in the average interest rate and
a $39 million decrease in the average outstanding balance. The decreases in
the interest rate on new term deposits have not kept pace with the declines in
the prime rate.
Allowances for loan losses were increased by $183,000 during the quarter
compared to a decrease of $299,000 for the same period last year. Write-offs
were $28,000 during the quarter. Impaired loans net of specific allowances
were 3.47% ($14 million) at June 30, 2009, compared to 1.42% ($6.2 million) at
March 31, 2009 and 0.93% ($4.2 million) at June 30, 2008. The increase is
mostly due to the impairment of a residential construction loan on which we
recorded a specific allowance of $600,000 during the quarter. We continue to
proactively monitor loan arrears and take prudent steps to collect overdue
Total mortgages past due but not impaired decreased from $29 million at
March 31, 2009 to $28 million at June 30, 2009, however total arrears
increased by $8 million during the second quarter from $35 million to $43
million. The increase in total arrears is primarily due to additional
residential construction loan arrears in Ontario. Our current arrears levels
are a reflection of the general deterioration in the Canadian economy over the
past year. There were no other assets in arrears at quarter end.
Operating Expenses: Operating expenses increased from $1.2 million to
$1.3 million, mainly due to higher salaries and benefits as a result of an
increase in the number of employees.
Financial Position: As of June 30, 2009, total consolidated assets were
$500 million, a decrease of $44 million from March 31, 2009. The decrease in
assets since March 31, 2009 consists of decreases of $16 million in mortgages,
$16 million in cash and $12 million in other assets. Term deposit liabilities
were $369 million at June 30, 2009, down $43 million from March 31, 2009.
Total shareholders' equity of $117 million increased by $2.8 million from
March 31, 2009. Activity for the quarter consisted of net income of $5.6
million, the issuance of $149,000 of new common shares and an increase to
accumulated other comprehensive income of $1.1 million, partially offset by
the second quarter dividend of $3.6 million and a charge to retained earnings
of $426,000 relating to current and future income taxes.
Outlook: The continuing disruption in the financial markets has afforded
us with opportunities to acquire mortgages on a profitable basis. While these
transactions are opportunistic and cannot be planned, we expect that the
disruption in the financial 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
The decreases in the prime rate from 2008 and early 2009 will continue to
have an adverse effect on net investment income over the next few 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 order to minimize this compression. For new and
existing floating rate mortgages, we are establishing minimum rates whenever
possible, to protect our spread income. Higher profitability from the CMB
program and the acquired portfolios has more than offset the reduction in
Arrears in our single family mortgage portfolio are continuing to rise
due to job losses. Property values have declined over the past year but appear
to be stabilizing in several markets on rising sales volume. We have not
experienced material loan losses resulting from these arrears.
Arrears in our construction loan portfolio have also risen. The large
size of these loans causes them to skew our arrears statistics. The nature of
these loans also usually results in a more protracted resolution period.
Economic conditions remain weak, with most economists forecasting that
conditions will improve sometime during the second half of this year.
Management does not believe that the continuing disruption in the
financial markets has materially affected the capital or liquidity of the
Dividend: The Board of Directors declared a third quarter dividend of
$0.25 per share to be paid September 30, 2009 to shareholders of record as of
September 15, 2009.
Further Information: Complete copies of the Company's 2009 Second 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 August 14, 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 2009 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
For further information:
For further information: MCAN Mortgage Corporation, Website:
www.mcanmortgage.com, e-mail: email@example.com; Blaine Welch,
President and Chief Executive Officer, (416) 591-2726; Tammy Oldenburg, Vice
President and Chief Financial Officer, (416) 847-3542