MCAN Mortgage Corporation reports fourth quarter earnings

Stock market symbol

TSX: MKP

TORONTO , Feb. 12 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported net income of $6.1 million for the fourth quarter of 2009, down from $9.9 million a year earlier. Earnings per share for the quarter were $0.43 compared to $0.70 last year. The decrease is primarily due to a one-time gain on the sale of mortgages in the prior year and a significant increase to an existing specific mortgage provision in the current year.

Net income for the year ended December 31, 2009 was $24.7 million , down from $30.3 million in 2008, while earnings per share were $1.73 compared to $2.14 in 2008.

Although general economic conditions have been weak over the course of the year, MCAN continued its strong 2009 performance in the fourth quarter. Despite historically low interest rates, the yield on our mortgage portfolio increased by 1.20% over the third quarter as a result of a significant increase in the realization of discounts embedded in our mortgage portfolio. In addition, substantial decreases in new term deposit funding rates facilitated a 0.73% decrease in our average term deposit interest rate over the third quarter. Both items contributed to a significant increase in spreads over last quarter.

MCAN continued its participation in the Canada Mortgage Bonds ("CMB") program during the fourth quarter, which has led to significant incremental income in recent quarters.

The general deterioration in the economy has led to a significant increase in impaired mortgages during 2009, however during the fourth quarter impaired mortgages decreased slightly and total mortgage arrears decreased by $4 million . While our impaired mortgages are much higher than last year, we did not experience material losses during 2009.

Although earnings per share have decreased from 2008, our results are strong by historical standards. However, 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 decreased from $11.5 million in 2008 to $8.1 million in 2009.

During the quarter, we realized $2.1 million (included in mortgage interest income) relating to the partial recovery of purchase price discounts on mortgages that we acquired in 2008, up from $1.3 million realized in the prior year. We also received $1.1 million (included in fees) from MCAP Commercial LP ("MCLP") from a profit sharing arrangement relating to discounted mortgages acquired by MCLP, compared to $820,000 in 2008.

Mortgage interest income decreased from $8.6 million to $7.4 million due to a $81 million decrease in the average mortgage portfolio, partially offset by a 0.63% increase in the average mortgage yield. The increase in the yield is primarily due to an increase in the yield on the mortgages in the acquired portfolio as a result of higher discount income.

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.

The prime rate decreased from 3.50% at December 31, 2008 to 2.25% at December 31, 2009 . This decrease has negatively impacted mortgage interest income, as 57% of our mortgages at quarter end were floating rate.

Interest owing but not accrued on impaired mortgages is included in the mortgage yield to accurately represent the underlying portfolio. The mortgage yield for the quarter would have decreased by 0.33% if interest owing but not accrued was not included in the yield calculation.

As at December 31, 2009 , we held discounted mortgages with a net discount of $22 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 2010 to 2032. 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 $1.1 million to $910,000 due to a lower average prime rate in 2009.

We recognized securitization income of $1.8 million during the quarter compared to $2.8 million in the prior year. Current quarter income consists of an up-front gain from securitization of $470,000 (2008 - $125,000 ) and residual securitization income of $1.3 million (2008 - $2.6 million ). Residual securitization income decreased in the current year as a result of negative fair value adjustments to CMB-related financial instruments of $207,000 (2008 - positive impact of $2.2 million ). 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 refinancing and renewal gains and a larger CMB portfolio.

Fees increased from $1.8 million to $1.9 million . Fees consist primarily of the amounts received from MCLP related to the profit sharing noted above, and also include construction loan commitment fees.

Equity income from our ownership in MCLP was $523,000 in the quarter compared to $788,000 in 2008.

Term deposit interest and expenses decreased to $2.5 million in 2009 from $4.9 million in 2008 as a result of a 1.87% decrease in the average interest rate and a $87 million decrease in the average outstanding balance. The average interest rate has continued to decrease over the last three quarters despite no changes in the prime rate, as the funding rate on new term deposits has been significantly lower than that of the majority of maturing term deposits.

Allowances for loan losses were increased by $1.4 million during the quarter compared to a decrease of $103,000 for the same period last year. In the current year, we increased a specific mortgage provision on a loan in our construction portfolio by $1.5 million compared to net specific provisions of $92,000 in the prior year. Write-offs for the quarter decreased to $16,000 from $48,000 in the prior year.

Impaired loans net of specific allowances were 5.81% ( $17 million ) at December 31, 2009 , compared to 5.88% ( $21 million ) at September 30, 2009 and 0.80% ( $3.4 million ) at December 31, 2008 . We continue to proactively monitor loan arrears and take prudent steps to collect overdue accounts. Total mortgages past due but not impaired decreased from $14 million at September 30, 2009 to $13 million at December 31, 2009 .

Total mortgage arrears decreased during the fourth quarter from $35 million to $31 million . The high arrears levels experienced in 2009 are primarily due to two significant residential construction loan arrears in Ontario and one in Alberta. 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 $1.6 million to $2.0 million .

Financial Position:

As of December 31, 2009 , total consolidated assets were $507 million , an increase of $7 million from September 30, 2009 . The increase in assets since September 30, 2009 consists of increases of $49 million in cash and $11 million in securitization investments, partially offset by decreases of $48 million in mortgages and $4 million in loans receivable and other investments. Term deposit liabilities were $361 million at December 31, 2009 , unchanged from September 30, 2009 . Total shareholders' equity of $123 million increased by $1.9 million from September 30, 2009 . Activity for the quarter consisted of net income of $6.1 million , partially offset by the fourth quarter dividend of $3.7 million , a charge of $264,000 to retained earnings relating to current and future income taxes and a decrease to accumulated other comprehensive income of $219,000 .

Outlook:

We continue to carry significant unutilized investment capacity. During the quarter, we began to fund new single family mortgages to employ some of this investment capacity. The market for new housing construction has started to improve, so we will also be cautiously growing our residential construction loan portfolio.

While interest rates are expected to remain low for the next few quarters, our average term deposit interest rate has continued to decrease as maturing deposits are replaced by new deposits at significantly lower rates. This decrease should contribute to improved spread income in 2010, compared to 2009.

Arrears in our single family mortgage portfolio remain high due to continued high unemployment levels. Property values have stabilized in most markets in which we invest on rising sales volume. We have not experienced material loan losses resulting from these arrears.

Arrears in our construction loan portfolio also remain high. 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 growth and job creation was evident during the quarter. As this trend continues, we expect an increase in our mortgage portfolio and lower mortgage arrears.

Management believes that the continuing disruption in the financial markets has not materially affected the capital or liquidity of the Company.

We are in discussions with staff of the Office of the Superintendent of Financial Institutions ("OSFI") in connection with a review being undertaken by OSFI. The review has focused on MCAN's relationship with both MCLP and MCAP Service Corporation ("MSC"), and whether either or both of those entities should be designated as related parties of MCAN within the Trust and Loan Companies Act (the "Trust Act"). MCAN is co-operating with OSFI staff in connection with this review.

MCLP and MSC are not currently related parties of MCAN, and MCAN has made oral and written submissions to OSFI as to why such entities should not be designated as related parties pursuant to the Superintendent's discretion under the Trust Act. At this stage, it is unclear what the results of the review will be. However, MCAN notes that if OSFI, in its discretion, decides to designate MCLP and/or MSC as related parties, any resulting restructuring that may be necessary could have at least a temporary negative impact on MCAN's operations and results.

Dividend:

The Board of Directors declared a first quarter dividend of $0.41 per share to be paid March 31, 2010 to shareholders of record as of March 15, 2010 . This dividend comprises the regular quarterly dividend of $0.26 and a $0.15 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 2009.

    
    Selected Quarterly Financial Data
    (Unaudited) (dollars in thousands, except for per share amounts)

    Year Ended December 31, 2009    Q1       Q2       Q3       Q4      Total
                                ---------------------------------------------

    Net investment income       $7,703   $6,875   $8,007   $8,056    $30,641
    Operating expenses           1,269    1,268    1,410    1,952      5,899
                                ---------------------------------------------
    Income before income taxes   6,434    5,607    6,597    6,104     24,742
    Provision for income taxes       -        -        -        -          -
                                ---------------------------------------------
    Net income                  $6,434   $5,607   $6,597   $6,104    $24,742
                                ---------------------------------------------

    Basic and diluted earnings
     per share                   $0.45    $0.39    $0.46    $0.43      $1.73
    Dividends per share
      Regular                    $0.68    $0.25    $0.25    $0.26      $1.44
      Capital gains                  -        -        -        -          -
                                ---------------------------------------------
      Total                     $ 0.68    $0.25    $0.25    $0.26      $1.44
                                ---------------------------------------------


    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       -        -        -         -         -
                                ---------------------------------------------
    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
                                ---------------------------------------------



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                         CONSOLIDATED BALANCE SHEETS
                     (Unaudited) (dollars in thousands)

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                                      December 31  September 30  December 31
    As at                                    2009          2009         2008
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    Assets
    Investments
      Cash and cash equivalents         $  89,843     $  41,269    $  58,071
      Mortgages                           295,415       343,458      393,010
      Securitization investments           73,590        62,360       39,743
      Loans receivable and other
       investments                         16,885        21,367       35,624
      Equity investment in MCAP
       Commercial LP                       17,905        17,723       18,300
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                                          493,638       486,177      544,748
      Derivative financial
       instruments                         11,490        12,748       23,541
      Other assets                          1,555         1,320        1,865
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                                        $ 506,683     $ 500,245    $ 570,154
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    Liabilities and Shareholders' Equity
    Liabilities
      Term deposits                     $ 360,744     $ 361,156    $ 426,663
      Securitization liabilities            5,048         5,005        7,095
      Accounts payable and accrued
       charges                             11,001         7,718       12,186
      Future taxes payable                  7,011         5,385        7,601
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                                          383,804       379,264      453,545
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    Shareholders' Equity
      Share capital                        98,490        98,490       97,493
      Contributed surplus                     510           510          510
      Retained earnings                    22,165        20,048       17,313
      Accumulated other comprehensive
       income                               1,714         1,933        1,293
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                                          122,879       120,981      116,609
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                                        $ 506,683     $ 500,245    $ 570,154
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                      CONSOLIDATED STATEMENTS OF INCOME
       (Unaudited) (dollars in thousands except for per share amounts)

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                                          Quarters Ended         Years Ended
                                             December 31         December 31
                                          2009      2008      2009      2008
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    Investment Income
      Mortgage interest               $  7,413  $  8,643  $ 27,420  $ 33,429
      Interest on loans and
       investments                         910     1,133     3,878     5,617
      Securitization income              1,801     2,765     7,558     7,761
      Fees                               1,893     1,783     8,024     5,051
      Equity income from MCAP
       Commercial LP                       523       788     1,456     3,025
      Interest on cash and cash
       equivalents                          34       183       234     1,109
      Gain on sale of mortgages              -     1,851         -     5,326
      Marketable securities                  -         -         -       (97)
    -------------------------------------------------------------------------
                                        12,574    17,146    48,570    61,221
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    Financial Expenses
      Term deposit interest and
       expenses                          2,525     4,901    13,133    20,684
      Mortgage expenses                    615       877     2,761     3,524
      Provision for (recovery of)
       losses                            1,378      (103)    2,035       931
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                                         4,518     5,675    17,929    25,139
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    -------------------------------------------------------------------------
    Net Investment Income                8,056    11,471    30,641    36,082
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    Operating Expenses
      Salaries and benefits                933       682     2,587     2,226
      General and administrative         1,019       869     3,312     3,508
    -------------------------------------------------------------------------
                                         1,952     1,551     5,899     5,734
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    Income Before Income Taxes           6,104     9,920    24,742    30,348
    Provision for income taxes               -         -         -         -
    -------------------------------------------------------------------------
    Net Income                        $  6,104  $  9,920  $ 24,742  $ 30,348
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    Basic and diluted earnings per
     share                            $   0.43  $   0.70  $   1.73  $   2.14
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    Dividends per share               $   0.26  $   0.25  $   1.44  $   0.96
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    Weighted average number of basic
     and diluted shares (000's)         14,321    14,224    14,294    14,192
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Further Information:

Complete copies of the Company's 2009 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, 2010 .

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 statements.

For further information: MCAN Mortgage Corporation, Website: www.mcanmortgage.com, e-mail: [email protected]; Blaine Welch, President and Chief Executive Officer, [phone]; Tammy Oldenburg, Vice President and Chief Financial Officer, [phone]