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TORONTO, Aug. 13 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported net income of $5.6 million for the second quarter of 2010, unchanged from the prior year. Earnings per share were $0.40 compared to $0.39 in the prior year. Current year results included improved spread income and discount income from our acquired mortgage portfolios, however this was largely offset by lower fee income.
The overall yield on our mortgage portfolio increased to 7.62% during the second quarter of 2010 from 6.94% in 2009. The average term deposit interest rate decreased to 1.76% from 3.42% in the second quarter of 2009.
We had a $75,000 upfront gain from the securitization of insured single family mortgages through the Canada Mortgage Bonds ("CMB") program during the quarter, and continued to earn significant residual securitization income from the CMB program.
Total mortgage arrears of $36 million as at June 30, 2010 decreased from $43 million at June 30, 2009, although impaired mortgages as a percentage of total mortgages increased to 4.04% from 3.47% during the same period. While MCAN's arrears levels remain high by historical standards, we have not realized material losses since the onset of the recent recession.
MCAN paid a $0.26 per share dividend in the second quarter, consistent with its regular quarterly dividend. Over the past twelve months, the cumulative MCAN shareholder return as measured on the Toronto Stock Exchange (assuming reinvestment of all dividends) has been 24%.
Net Investment Income:
Net investment income was $7.1 million for the quarter, an increase of $239,000 from $6.9 million in the prior year.
During the quarter, we realized $1.2 million (included in mortgage interest income) relating to the partial recovery of purchase price discounts on MCAN's acquired portfolios, compared to $629,000 in the prior year. We also received $614,000 (included in fees) from MCAP Commercial LP ("MCLP") from a profit sharing arrangement relating to the discounted mortgages acquired by MCLP, compared to $1.6 million in 2009. The volume of discount recoveries from the portfolios of both companies can be volatile and difficult to predict.
Mortgage interest income decreased from $6.6 million to $6.4 million primarily due to a $30 million decrease in the average mortgage portfolio, partially offset by the 0.68% increase in the average mortgage yield as noted above. The increase in the overall portfolio yield was largely driven by the aforementioned increase in discount income from MCAN's acquired mortgage portfolios.
The mortgages in the acquired portfolios have higher effective yields than those in our regular portfolio, as they were 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.
Interest owing but not accrued on impaired mortgages is included in the mortgage yield calculation to accurately represent the underlying portfolio. The mortgage yield for the quarter would be lower by 0.34% if interest owing but not accrued was excluded in the yield calculation.
Interest on loans and investments decreased from $989,000 to $925,000 as a result of a higher average portfolio balance in the prior year, partially offset by a one-time interest payout received in the current year.
As at June 30, 2010, we held discounted mortgages with a net discount of $18 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.
We recognized securitization income of $1.3 million compared to $1.2 million in the prior year. Our upfront gain from securitization decreased significantly over the prior year from $2.4 million to $75,000, as there was a substantial decrease in the volume of mortgages securitized in the current year. Current quarter income includes residual securitization income of $1.2 million (2009 - $57,000). Residual securitization income increased over the prior year as a result of higher refinancing and renewal gains, a larger CMB portfolio and a decrease in negative fair value changes from CMB interest-only strips and interest rate swaps. The second quarter of 2009 also included a write-down of interest-only strips of $1.2 million as a result of higher than anticipated mortgage principal repayment levels.
Fee income decreased from $2.6 million to $1.4 million, primarily due to the $1.0 million decrease noted above in fees received from MCLP related to profit sharing on its discounted mortgage portfolios.
We had an equity loss from our ownership interest in MCLP of $125,000 during the quarter compared to equity income of $77,000 in the prior year.
Term deposit interest and expenses decreased from $3.6 million to $1.7 million as a result of a 1.66% decrease in the average term deposit rate and a $67 million decrease in the average outstanding balance from the prior year. The average term deposit rate has continued to decrease over the last twelve months, as the funding rate on new term deposits has been significantly lower than that of the maturing term deposits despite minimal increases in the prime rate.
Allowances for loan losses were increased by $308,000 during the quarter compared to an increase of $183,000 for the same period of the prior year. We increased general mortgage provisions by $195,000 in the current year compared to a reduction of $402,000 in the prior year. In addition, we increased specific mortgage provisions by $62,000 in the current year compared to an increase of $604,000 in the prior year. During the quarter, we recorded a $100,000 provision relating to our pro-rata share of expected losses pursuant to an indemnity on the underlying assets of a residential securitization program. The remaining composition of both years consists of a net recovery of loan and investment provisions. There were no mortgage write-offs during the quarter, compared to $28,000 in the prior year.
Specific provision activity for the quarter consists of an increase of $62,000 relating to uninsured single family mortgages. During the second quarter, we maintained the existing specific provisions on our residential construction loan portfolio of $2.7 million. These specific provisions consist of MCAN's 20% participation in a multi-phased land development loan that has experienced slow sales and cost increases and a land loan that has been delayed by municipal negotiations. Given the timeline for repayment and market price point fluctuations, specific provisions have been established for anticipated losses. Subsequent to the end of the quarter, an agreement of purchase and sale was entered into related to the property underlying the aforementioned land loan. We expect the sale of the property to close on or about August 18th. As at June 30th, we had recorded a $2 million specific provision on this loan. If the sale closes as set out in the agreement of purchase and sale, we will not experience any loss of principal and will reverse the existing specific provision of $2 million. Prior year specific provision activity consisted of one impaired residential construction loan.
Impaired mortgages as a percentage of total mortgages (net of specific allowances) were 4.04% ($16 million) at June 30, 2010, compared to 4.79% ($16 million) at March 31, 2010 and 3.47% ($14 million) at June 30, 2009.
Total mortgage arrears of $36 million as at June 30, 2010 decreased from $43 million at June 30, 2009, although they were up from $24 million at March 31, 2010, attributable to several large residential construction loans. Our arrears level is a reflection of high unemployment levels from 2009. 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.
Operating expenses were $1.5 million compared to $1.3 million in the prior year.
As of June 30, 2010, total consolidated assets were $483 million, an increase of $32 million from March 31, 2010. The change in assets since March 31, 2010 relates primarily to increases of $6 million in cash and $67 million in mortgages, partially offset by a decrease of $44 million in securitization investments. Term deposit liabilities were $338 million at June 30, 2010, up $26 million from March 31, 2010. Total shareholders' equity of $123 million was unchanged from March 31, 2010. Activity for the quarter consisted of net income of $5.6 million and the issuance of $184,000 of new common shares, offset by a charge of $1.6 million to retained earnings relating to current and future taxes, a decrease to accumulated other comprehensive income of $532,000 and the second quarter dividend of $3.7 million.
During 2010 we have continued to carry significant unutilized investment capacity, a continuation from 2009. Although our mortgage portfolios have increased during 2010, they have not met our growth targets due to increased competition in our core markets. However, we plan to continue to grow the mortgage portfolio throughout the balance of the year to employ some of this investment capacity. The market for new housing construction has improved, and we have experienced growth in fundings and commitments for both our residential construction loan and our uninsured single family portfolios.
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 continue to contribute to improved spread income in 2010, compared to 2009. The lower level of the average deposit interest rates achieved throughout 2010 will be dependent on the timing and magnitude of increases to the prime rate throughout the balance of 2010 as increases in the current market rate structure will diminish the benefit on replacing maturing deposits.
Arrears in our single family mortgage portfolio remain high compared to historical levels due to the continuing impact of higher unemployment levels from 2009. 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 last quarter of 2009 and has continued through the first half of 2010. As this trend continues, we expect an increase in our mortgage portfolio and lower mortgage arrears.
In previous quarters we advised that we were 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 in accordance with the Trust and Loan Companies Act.
Based on submissions made by MCAN we have been advised that OSFI does not consider either MCLP or MSC to be a related party to MCAN in the current circumstances.
The Board of Directors declared a third quarter dividend of $0.26 per share to be paid September 30, 2010 to shareholders of record as of September 15, 2010.
Complete copies of the Company's 2010 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 on August 13, 2010.
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 objective is to generate a reliable stream of income by investing its funds in a portfolio of mortgages (including single family residential, residential construction, non-residential construction and commercial loans), as well as other types of loans and investments, real estate and securitization 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 50% of capital gains dividends and 100% of other dividends paid. Such dividends are received by the shareholders as capital gains dividends and interest income, respectively.
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 2010 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.
SOURCE MCAN Mortgage Corporation
For further information: For further information: MCAN Mortgage Corporation, Website: www.mcanmortgage.com, e-mail: firstname.lastname@example.org; William Jandrisits, President and Chief Executive Officer, (416) 591-2726; Tammy Oldenburg, Vice President and Chief Financial Officer, (416) 847-3542