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TORONTO, Nov. 4 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported net income of $6.6 million for the third quarter of 2009, down from $10.4 million a year earlier. Earnings per share for the quarter were $0.46 compared to $0.73 last year. Net income for the nine months ended September 30, 2009 was $18.6 million, down from $20.4 million a year earlier, while earnings per share in the same period were $1.30 compared to $1.44 in 2008.
Although general economic conditions remain weak, MCAN continued its strong 2009 performance in the third quarter. Despite historically low interest rates, the yield on our mortgage portfolio increased by 0.47% over the second quarter as a result of strong management of our asset mix and increased realization of discounts embedded in our mortgage portfolio. The decreases in the prime rate since 2008 also facilitated a 0.50% decrease in our average term deposit interest rate over the second quarter, which contributed to a significant increase in spreads over last quarter.
MCAN continued its participation in the Canada Mortgage Bonds ("CMB") program during the third quarter, which has led to significant incremental income in recent quarters.
The deterioration in the economy has also led to a significant increase in impaired mortgages and total mortgage arrears during 2009. Impaired mortgages increased from 3.47% at June 30th to 5.88% at September 30th, although total mortgage arrears decreased from $43 million to $35 million during the same period. While MCAN's arrears levels are much higher than last year, we have not experienced material losses for the year to date.
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 third quarter decreased from $12.5 million in 2008 to $8.0 million in 2009. The decrease in the quarter is primarily due to a one-time gain on the sale of mortgages in 2008, in addition to lower spread income in the current year.
During the quarter, we realized $1.2 million (included in mortgage interest income) relating to the partial recovery of purchase price discounts on several portfolios of discounted mortgages that we acquired in 2008, down from $1.6 million realized in the prior year. We also received $476,000 (included in fees) from MCAP Commercial LP ("MCLP") from a profit sharing arrangement relating to discounted mortgages acquired by MCLP, compared to $875,000 in 2008.
Mortgage interest income decreased from $9.7 million to $6.7 million as a result of a $60 million decrease in the average mortgage portfolio size and a 1.21% decrease in the average mortgage yield. The decrease in the yield is partly due to a lower yield on the acquired portfolios in the current year as a result of the aforementioned decrease in discount income from lower payout volumes. In addition, the prime rate has decreased from 4.75% at September 30, 2008 to 2.25% at September 30, 2009. This decrease has had a negative impact on mortgage interest income, as 49% of our mortgages at quarter end were floating rate mortgages.
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.
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 0.44% if interest owing but not accrued was not included in the yield calculation.
As at September 30, 2009, we held discounted mortgages with a net discount of $28 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 continue to be realized over the next few years.
Interest on loans and investments decreased from $1.3 million to $736,000 as a result of the aforementioned decrease in the prime rate and a smaller average portfolio.
Fees decreased from $1.6 million to $1.2 million, primarily due to the decrease in fees received from MCLP related to the profit sharing noted above.
Equity income from our ownership interest in MCLP was $707,000 during the quarter compared to $1.2 million in the prior year. MCLP's gains from sales of single family mortgages and realization of discounts decreased in the current year.
We recognized securitization income of $2.3 million during the quarter compared to $1.7 million in the prior year. Current quarter income consists of an up-front gain from securitization of $1.7 million (2008 - $813,000) and residual securitization income of $604,000 (2008 - $1.1 million), while the prior year included a write-down on the interest-only strips of $260,000. The increase in up-front gains from securitization is primarily due to an increase in our economic participation in the CMB program. Residual securitization income decreased as a result of negative fair value adjustments to CMB-related financial instruments of $747,000 (2008 - positive impact of $738,000). 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 refinancing and renewal gains and a larger CMB portfolio.
Term deposit interest and expenses decreased from $5.2 million in 2008 to $2.9 million in 2009 as a result of a 1.37% decrease in the average interest rate and a $93 million decrease in the average outstanding balance. Although new term deposit funding rates are low by historical standards, the decrease in the term deposit yield has not decreased to the extent of the prime rate. However, the yield has continued to decrease over the last two 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 $174,000 during the quarter compared to an increase of $736,000 for the same period of 2008. In the current year, we increased specific mortgage provisions by $573,000 as we increased an existing provision and recorded new provisions on two loans in our residential construction portfolio. The prior year included an $800,000 write-down of an investment. Write-offs were $58,000 during the quarter.
Impaired loans net of specific allowances were 5.88% ($21 million) at September 30, 2009, compared to 3.47% ($14 million) at June 30, 2009 and 0.89% ($4.3 million) at September 30, 2008. The increase is mostly due to the impairment of the aforementioned residential construction loans on which we recorded new specific allowances during the quarter. We continue to proactively monitor loan arrears and take prudent steps to collect overdue accounts.
Although impaired loans increased during the third quarter, total arrears decreased by $8 million from $43 million to $35 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 decreased from $2.1 million to $1.4 million, primarily due to incentives payable in 2008 with respect to the acquisition of mortgage portfolios.
Financial Position: As of September 30, 2009, total consolidated assets were $500 million, unchanged from June 30, 2009. The change in assets since June 30, 2009 consists of increases of $23 million in loans and investments and $26 million in cash and a decrease of $48 million in mortgages. Term deposit liabilities were $361 million at September 30, 2009, down $8 million from June 30, 2009. Total shareholders' equity of $121 million increased by $3.8 million from June 30, 2009. Activity for the quarter consisted of net income of $6.6 million, the issuance of $157,000 of new common shares and an increase to accumulated other comprehensive income of $1.0 million, partially offset by the third quarter dividend of $3.6 million and a charge to retained earnings of $384,000 relating to current and future income taxes.
Outlook: The 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 future acquisition opportunities may present themselves. We plan to retain investment capacity so that we can take advantage of these opportunities.
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. 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.
Arrears in our single family mortgage portfolio remain high due to job losses. Property values have stabilized in several markets 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.
While economic conditions remain weak, the Canadian economy appears to be stabilizing. This is evidenced by the fact that employment increased in both August and September. Should this job creation continue, then we would expect lower arrears in our mortgage portfolio.
Management does not believe that the continuing disruption in the financial markets has materially affected the capital or liquidity of the Company.
Dividend: The Board of Directors declared a fourth quarter dividend of $0.26 per share (increased from $0.25 per share) to be paid January 4, 2010 to shareholders of record as of December 15, 2009.
Further Information: Complete copies of the Company's 2009 Third 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 November 13, 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 statements.
SOURCE MCAN Mortgage Corporation
For further information: For further information: MCAN Mortgage Corporation, Website: www.mcanmortgage.com, e-mail: firstname.lastname@example.org, Blaine Welch, President and Chief Executive Officer, (416) 591-2726; Tammy Oldenburg, Vice President and Chief Financial Officer, (416) 847-3542