MCAN Mortgage Corporation reports first quarter earnings

Tue. May 12, 2009; Posted: 03:06 PM

MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported net income of $6.4 million for the first quarter of 2009, up from $5.1 million a year earlier. Earnings per share for the quarter were $0.45 compared to $0.36 last year.

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 has led to significant incremental income in the past few quarters. 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 first quarter increased from $6.1 million in 2008 to $7.7 million in 2009.

During the quarter, we realized $662,000 (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 $6.7 million due to a $32 million decrease in the average mortgage portfolio size and a 0.14% decrease in the average mortgage yield.

The prime rate was 2.50% as at March 31, 2009, a significant decrease from 5.25% as at March 31, 2008. This decrease has negatively impacted mortgage interest income, as approximately 58% of our mortgages at quarter end were floating rate loans. However, this negative impact has been mostly 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 March 31, 2009, we held discounted mortgages with a net discount of $32 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 $1.9 million to $1.2 million due to a lower average prime rate in the current year and the receipt of a significant one-time interest payment in the prior year upon the payout of a securitization investment.

Fees increased from $799,000 to $2.3 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 $149,000 during the quarter compared to $301,000 in the prior year. In the current year, MCLP recognized significant income from its residential mortgage business, however this income was largely offset by negative fair value adjustments.

We recognized securitization income of $2.3 million during the quarter compared to $2.0 million in the prior year. Up-front gains from securitization increased from $1.2 million in the prior year to $1.9 million in the current year as a result of wider interest rate spreads between mortgages and government bonds. Residual securitization income decreased from $835,000 in the prior year to $391,000 in the current year, as fair value adjustments to CMB-related financial instruments had a negative impact to income of $898,000 (2008 - positive impact of $599,000). Forward interest rates have been volatile since early 2008, which can lead to unanticipated income variances in either direction.

Term deposit interest and expenses decreased from $5.4 million in 2008 to $4.0 million in 2009 due to a 0.83% decrease in the average interest rate and a $39 million decrease 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.

Allowances for loan losses were increased by $300,000 during the quarter compared to an increase of $597,000 for the same period last year. During the quarter, we reduced our specific allowances by $20,000. Write-offs were $92,000 during the quarter. Impaired loans net of specific allowances were 1.42% ($6.2 million) at March 31, 2009, compared to 0.80% ($3.4 million) at December 31, 2008 and 0.76% ($3.4 million) at March 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 $31 million at December 31, 2008 to $29 million at March 31, 2009, however total arrears increased by $1 million during the first quarter from $34 million to $35 million. Our current arrears levels are a reflection of the general deterioration in the Canadian economy. There were no other assets in arrears at quarter end.

Operating Expenses: Operating expenses increased from $922,000 to $1.3 million, mainly due to increased professional fees and salaries and benefits incurred during the quarter.

Financial Position: As of March 31, 2009, total consolidated assets were $544 million, a decrease of $26 million from December 31, 2008. The decrease in assets since December 31, 2008 consists of decreases of $27 million in cash and $15 million in loans and investments, partially offset by an increase of $15 million in mortgages. Term deposit liabilities were $412 million at March 31, 2009, down $14 million from December 31, 2008. Total shareholders' equity of $114 million decreased by $2 million from December 31, 2008. Activity for the quarter consisted of the first quarter dividend of $9.7 million and a decrease to accumulated other comprehensive income of $1.5 million, partially offset by net income of $6.4 million, the issuance of $691,000 of new common shares and a recovery of $1.8 million to retained earnings 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 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 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 order to minimize this compression. We are generally targeting fixed rate mortgages, rather than floating rate mortgages. 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 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 expect this will also continue throughout the year. Property values have declined over the past year, and we anticipate further declines.

The disruption in the financial markets has not yet resolved itself and this could be several months away. Management does not believe that this disruption has materially affected the capital or liquidity of the Company.

Dividend: The Board of Directors declared a second quarter dividend of $0.25 per share to be paid June 30, 2009 to shareholders of record as of June 15, 2009.

Further Information: Complete copies of the Company's 2009 First 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 May 15, 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

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

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index