Stock market symbol TSX: MKP
TORONTO, Aug. 8 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported net income of $4.9 million for the second quarter of 2008, up from $4.2 million a year earlier. Earnings per share for the quarter were $0.35 compared to $0.33 last year. Net income for the six months ended June 30, 2008 was $10.0 million, up from $8.6 million a year earlier, while earnings per share in the same period were $0.71 compared to $0.68 in 2007. The 2007 year-to-date earnings per share have been restated from $0.69 to $0.68 and 2007 second quarter earnings per share have been restated from $0.34 to $0.33 to reflect the dilutive impact of the rights offering that we completed in July 2007.
Net Investment Income: Net investment income for the second quarter increased from $5.1 million in 2007 to $6.1 million in 2008. The increase is primarily due to increases in securitization income and equity income from MCAP Commercial LP ("MCLP") and a decrease in provisions, partially offset by lower marketable securities income in 2008.
Mortgage interest income increased from $6.5 million to $7.5 million. The average portfolio increased by $58 million as our additional capacity from the rights offering was deployed. This increase was partially offset by a decrease in the average mortgage yield from 7.14% in 2007 to 6.81% in 2008. Approximately 45% of our mortgages are floating rate (prime-based) loans, down from 52% at March 31, 2008, and the prime rate has dropped by 1.25% over the past twelve months. During the quarter, we increased our fixed rate mortgage portfolio and decreased our floating rate mortgage portfolio to minimize the reduction to net investment income due to compressed spreads.
Interest on loans and investments decreased from $1.5 million to $1.2 million as a result of decreases in the prime rate.
Equity income from our ownership in MCLP increased from $460,000 to $707,000. MCLP earned origination fees from large construction projects and significant income from its single-family operations in the quarter.
We recognized securitization income of $1.3 million during the quarter relating to the securitization of insured mortgages through the Canada Mortgage Bonds program, an increase of $812,000 from the prior year. The increase is primarily due to significantly wider interest rate spreads between mortgages and government bonds compared to last year.
Marketable securities income decreased from $421,000 to $3,000, as the portfolio was largely liquidated in the second half of 2007.
Term deposit interest and expenses increased from $4.3 million in 2007 to $5.2 million in 2008. The average interest rate increased to 4.55% in 2008 from 4.29% in 2007 due to an increase in market rates for new fundings, and the average outstanding balance increased by $58 million as a result of increased capacity from the rights offering.
At December 31, 2007, we held an unrated subordinated loan investment in a securitization program which is subject to the proposed restructuring of Third Party ABCP by the Pan-Canadian Investors Committee (the "Montreal Accord"), on which we had recorded a write-down of $794,000. To protect our investment, we acquired the assets of that securitization program in the first quarter, which included $4.1 million of commercial paper of a securitization program previously R1 (high) rated which is also subject to the Montreal Accord. We reversed the $794,000 write-down previously taken on the unrated subordinated loan upon its repayment and recorded a write-down of $1.2 million on the new commercial paper based upon our best estimate of net realizable value. We did not record any additional write-downs in the second quarter, as we believe that our best estimate of net realizable value is still appropriate.
Allowances for loan losses were decreased by $299,000 during the quarter compared to an increase of $4,000 in the prior year. Write-offs for the quarter were $50,000, primarily due to an individual construction loan. Impaired loans net of specific allowances were 0.93%, compared to 0.76% at March 31, 2008 and 0.43% at June 30, 2007.
Operating Expenses: Operating expenses increased to $1.2 million in 2008 from $955,000 in 2007.
Financial Position: As of June 30, 2008, total consolidated assets were $552 million, a decrease of $895,000 from March 31, 2008. The change in assets since March 31, 2008 consists of a decrease of $14 million in mortgages, mostly offset by increases of $9 million in loans and investments and $5 million in cash. Term deposit liabilities were $437 million at June 30, 2008, down $5 million from March 31, 2008. Total shareholders' equity of $106 million increased by $3 million from March 31, 2008. Activity for the quarter consisted of net income of $4.9 million, the issuance of $147,000 of new common shares and an increase to accumulated other comprehensive income of $1.6 million, partially offset by the second quarter dividend of $3.3 million and a charge to retained earnings of $241,000 relating to current and future income taxes.
Outlook: Our primary objective is to fully invest the balance sheet while maintaining acceptable and sustainable returns. We are subject to maximum asset levels under both the Income Tax Act (Canada) (the "Tax Act") and the Trust and Loan Companies Act. The maximum asset level permitted under the Tax Act, which is the most constraining for us, effectively limits assets to 6 times capital on a non-consolidated basis, measured at tax values. We manage our assets to a level of 5.75 times capital to provide a prudent cushion between the maximum and total actual assets. We had expected to fully invest our remaining capacity from the rights offering by the end of the second quarter, but were underinvested by $47 million at quarter end. We are continuing to seek new mortgage sources and expect to be fully invested by the end of the third quarter of 2008. Maintaining our balance sheet at full investment will depend on our ability to find assets with satisfactory yields at manageable levels of risk. Our operations and income are a function of the interest rate environment and the availability of mortgage product at reasonable yields. The availability of mortgage product and the yields thereon is based on market competition.
Decreases in the prime rate during 2008 are expected to have an adverse effect on net investment income over the next several quarters. In order to minimize the reduction to net investment income due to spread compression on floating rate mortgages, we increased our fixed rate mortgage portfolio and decreased our floating rate mortgage portfolio in the second quarter. We are generally targeting fixed rate mortgages, rather than floating rate mortgages for the balance of the year. Higher profitability from the CMB program has largely offset the reduction in spread income. As a result, we remain optimistic about our income prospects for the remainder of the year. Subsequent to the end of the quarter, we earned approximately $3.5 million from the sale of mortgages.
Slower economic activity has moderated housing market activity, compared to last year, and this is expected to continue for the balance of the year. While the credit environment is also less favourable than it was last year, the Canadian residential property market continues to exhibit stable fundamentals.
The disruption in debt markets has not yet resolved itself and this could be several months away. This disruption has not affected the capital or liquidity of the Company.
Dividend: The Board of Directors declared a third quarter dividend of $0.25 per share (increased from $0.23 per share) to be paid September 30, 2008 to shareholders of record as of September 15, 2008.
Further Information: Complete copies of the Company's 2008 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 by August 14, 2008.
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 2008 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.