Press release from CNW Group
MCAN MORTGAGE CORPORATION REPORTS THIRD QUARTER EARNINGS
Friday, November 12, 2010
Stock market symbol TSX: MKP
TORONTO, Nov. 12 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported strong results in the third quarter of 2010, with reported net income of $8.8 million, up 33% from $6.6 million in the prior year. Earnings per share were $0.61 compared to $0.46 in the prior year. Current year results included increases in fee income and equity income from MCAP Commercial LP ("MCLP"), a reversal of a significant specific mortgage allowance upon payout and lower term deposit interest and expenses, partially offset by decreases in mortgage interest income, interest on loans and investments and securitization income.
Impaired mortgages as a percentage of total mortgages decreased to 3.40% at September 30, 2010 from 4.04% at June 30, 2010, although total mortgage arrears increased from $36 million to $47 million 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 third quarter, consistent with our regular quarterly dividend. Over the past twelve months, the cumulative MCAN shareholder return as measured on the Toronto Stock Exchange (share price appreciation plus reinvestment of all dividends) has been 15%.
Net Investment Income: Net investment income was $10.4 million for the quarter, an increase of $2.4 million from $8.0 million in the prior year.
During the quarter, we realized $702,000 (included in mortgage interest income) relating to the partial recovery of purchase price discounts on MCAN's acquired portfolios, compared to $1.2 million in the prior year. We also received $845,000 (included in fees) from MCLP from a profit sharing arrangement relating to discounted mortgages acquired by MCLP, up from $476,000 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 $6.7 million to $6.3 million, primarily due to the aforementioned decrease in discount income from MCAN's acquired portfolios. In addition, there was a $6 million decrease in the average mortgage portfolio and a 0.66% decrease in the average mortgage yield.
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 have decreased by 0.36% if interest owing but not accrued was excluded from the yield calculation.
Interest on loans and investments decreased from $736,000 to $396,000 as a result of a lower average portfolio balance in the current year.
As at September 30, 2010, we held discounted mortgages with a net discount of $17 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 $1.6 million compared to $2.3 million in the prior year. Current quarter income includes residual securitization income of $1.6 million (2009 - $604,000). The increase over the prior year in residual securitization income is primarily due to net positive fair value changes from CMB interest-only strips and interest rate swaps compared to negative overall activity in the prior year. We did not participate in any new mortgage securitizations during the quarter, while there was a gain from securitization of $1.7 million in the prior year.
Fee income increased from $1.2 million to $1.9 million, primarily due to the $369,000 increase noted above in fees received from MCLP related to profit sharing on its discounted mortgage portfolios.
We had equity income from our ownership interest in MCLP of $1.7 million during the quarter, up from $707,000 in the prior year. MCLP recognized a significant one-time gain in the current year.
Term deposit interest and expenses decreased from $2.9 million to $1.8 million as a result of a 1.09% decrease in the average term deposit rate and a $19 million decrease in the average outstanding balance from the prior year. The decrease in the average term deposit rate from the prior year is a result of the funding rate on new term deposits being significantly lower than that of the maturing term deposits despite recent increases in the prime rate.
Allowances for loan losses were decreased by $987,000 during the quarter compared to an increase of $174,000 for the same period of the prior year, primarily due to the reversal of a previously recorded $2 million residential construction loan specific allowance upon its full payout. We increased general mortgage allowances by $454,000 in the current year compared to a reduction of $375,000 in the prior year. In addition, we increased other specific mortgage allowances by $445,000 in the current year compared to an increase of $573,000 in the prior year. We also increased an existing allowance by $100,000 to $200,000 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 loan and investment allowance activity. Mortgage write-offs were $28,000 during the quarter compared to $58,000 in the prior year.
Impaired mortgages as a percentage of total mortgages (net of specific allowances) were 3.40% ($13 million) at September 30, 2010, compared to 4.04% ($16 million) at June 30, 2010 and 5.88% ($21 million) at September 30, 2009.
Total mortgage arrears of $47 million as at September 30, 2010 increased from $35 million at September 30, 2009 and $36 million at June 30, 2010, attributable primarily to residential construction loans. 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: Operating expenses were $1.5 million compared to $1.4 million in the prior year.
Financial Position: As of September 30, 2010, total consolidated assets were $506 million, an increase of $23 million from June 30, 2010. The change in assets since June 30, 2010 relates primarily to increases of $18 million in cash and $4 million in derivative financial instruments. Term deposit liabilities were $353 million at September 30, 2010, up $15 million from June 30, 2010. Total shareholders' equity of $127 million increased by $4.6 million from June 30, 2010. Activity for the quarter consisted of net income of $8.8 million, the issuance of $886,000 of new common shares and an increase to accumulated other comprehensive income of $628,000, partially offset by a charge of $2.0 million to retained earnings relating to current and future taxes and the third quarter dividend of $3.8 million.
Outlook: During 2010 we have continued to carry unutilized investment capacity, a continuation from the decrease in assets experienced in 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 stabilized, 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 decreased since 2009 as maturing deposits have been replaced by new deposits at significantly lower rates. This decrease has contributed to improved spread income in 2010.
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 2010. As this trend continues, we expect an increase in our mortgage portfolio and lower mortgage arrears.
Dividend: The Board of Directors declared a fourth quarter dividend of $0.26 per share to be paid January 4, 2011 to shareholders of record as of December 15, 2010.
We expect to pay an extra dividend on March 31, 2011 in addition to the regular March 31, 2011 dividend that will be sufficient to fully offset 2010 taxable income. Based on estimated taxable income to September 30, 2010, we expect to pay an extra dividend of approximately $0.50, but this extra dividend will be revised subject to fourth quarter results.
Further Information: Complete copies of the Company's 2010 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 on November 12, 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.
For further information:
MCAN Mortgage Corporation
President and Chief Executive Officer
Vice President and Chief Financial Officer