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Press release from CNW Group

MCAN Mortgage Corporation reports second quarter earnings

Wednesday, August 10, 2011

MCAN Mortgage Corporation reports second quarter earnings08:00 EDT Wednesday, August 10, 2011Stock market symbolTSX: MKPTORONTO, Aug. 10, 2011 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the second quarter of 2011 remained strong at $7.2 million, although down from $9.9 million in the prior year. Earnings per share were $0.44 compared to $0.69 during the same quarter in the prior year. Prior year income was exceptionally high, as it included a significantly higher positive fair market value adjustment and certain one-time items related to our securitized portfolio, partially offset by a higher provision for income taxes. Estimated taxable income for the quarter was $5.5 million, comparable to $5.7 million in the prior year, while on a per share basis it decreased to $0.34 from $0.39 in the prior year.On April 18, 2011, we completed a public share offering of 2,300,000 common shares at a price of $14.50 per share, for net proceeds of approximately $31 million after deducting $2.3 million of issuance costs. The purpose of the share issuance was to create additional asset capacity to grow our corporate asset portfolio. The fact that we have not yet fully deployed this new capital has caused dilution to our second quarter earnings per share.Based on our target assets to capital ratio (governed by our tax status as a mortgage investment corporation), the share issuance created an additional $178 million of asset capacity. As at June 30, 2011, we had total remaining asset capacity of $185 million, such that we have now used up almost all of our asset capacity from prior to the share issuance.The consolidated financial statements for the quarter ended June 30, 2011 are the second quarter that we have prepared in accordance with International Financial Reporting Standards ("IFRS"). For periods up to and including the year ended December 31, 2010, we prepared our consolidated financial statements in accordance with Canadian Generally Accepted Accounting Principles ("CGAAP").The most significant changes to our financial statements are as follows:We have recognized $3.1 billion of new assets and $3.1 billion of new liabilities, primarily due to the onbalance sheet treatment of mortgages securitized through the Canada Mortgage Bonds ("CMB") program. As the securitization issuances mature, the securitization liability and related assets (securitized mortgages and principal reinvestment assets) will be removed from the balance sheet. Since we are not currently participating in new CMB issuances, we expect that the Company's securitization assets and liabilities will decrease significantly over the next three years. The CMB securitization liabilities mature as follows: 2012 - $1.1 billion, 2013 - $1.1 billion, 2014 - $882 million, 2015 - $47 million.We now recognize ongoing CMB program mortgage interest income, principal reinvestment income and securitization liability interest expense on the accrual basis. We reversed up-front gains from securitization previously recognized under CGAAP through opening retained earnings on transition to IFRS.Fair market value changes in the CMB interest rate swaps are no longer generally offset by fair market value changes in CMB interest-only strips, as the interest-only strips do not exist under IFRS due to the reversal of up-front gains from securitization previously recognized under CGAAP. The lack of an offset has led to increased volatility to net income under IFRS despite the fact that, from an economic perspective, interest rate risk remains largely mitigated through the interest rate swaps.We now recognize current and deferred taxes through the statement of income, which has led to increased volatility to net income. Under CGAAP, we charged current and deferred taxes directly to retained earnings.MCAN paid its regular $0.27 per share dividend in the second quarter.The Company separates its assets into its corporate and securitized portfolios for reporting purposes. Corporate assets represent the Company's core strategic investments, and are funded by term deposits and share capital. Securitization assets consist primarily of mortgages securitized through the CMB program and reinvestment assets purchased with mortgage principal repayments and are funded by financial liabilities from securitization.Net Investment Income: Net investment income was $9.7 million for the quarter, a decrease of $4.9 million from $14.6 million during the same quarter in the prior year. Net investment income consisted of $6.2 million from corporate assets (unchanged from the prior year) and $3.6 million from securitized assets (2010 - $8.4 million). Excluding fair market value adjustments on derivative financial instruments, net investment income on securitized assets was $1.8 million compared to $3.7 million in the prior year. The decrease from the prior year relates primarily to certain one-time items related to our securitized portfolio recognized in 2010.Net Investment Income - Corporate AssetsMortgage interest income increased to $8.0 million in the current year from $6.7 million in the prior year as a result of a $152 million increase in the average mortgage portfolio from $351 million to $503 million, partially offset by a 1.46% decrease in the average mortgage yield from 8.00% in 2010 to 6.54% in 2011. Mortgage interest income includes $516,000 (2010 - $1.2 million) of discount income on MCAN's acquired mortgage portfolios, which caused the majority of the decrease in the mortgage yield over the prior year.As at June 30, 2011, we held discounted mortgages with a net discount of $11 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 2011 to 2032. The realization of the discount is dependent on if and when cash is received.Interest on financial investments and other loans increased to $1.0 million in the current year from $925,000 in the prior year, primarily due to an $876,000 gain on the sale of a financial investment. Excluding this item, interest on financial investments and other loans decreased from the prior year due to a smaller average portfolio.Equity income from our ownership interest in MCAP Commercial LP ("MCLP") was $578,000 during the quarter compared to $231,000 in the prior year.Fees were $366,000 in the quarter, down from $991,000 in the prior year. Fees consist of fee income from a profit sharing arrangement relating to mortgage portfolios acquired by MCLP of $130,000 (2010 - $635,000) and other mortgage fees of $236,000 (2010 - $356,000).Term deposit interest and expenses increased to $3.1 million in the current year from $1.7 million in the prior year, primarily due to a $185 million increase in the average outstanding balance from $324 million in 2010 to $509 million in 2011. The average term deposit interest rate increased by 0.36% from 2.00% in 2010 to 2.36% in 2011.Provisions for credit losses were $257,000 for the quarter compared to $284,000 for the same period of the prior year. Collective mortgage provisions were $336,000 in the quarter compared to $143,000 during the same quarter in the prior year due to growth in the mortgage portfolio. In addition, we reduced individual mortgage allowances by $76,000 in the quarter compared to an increase of $62,000 during the same quarter in the prior year. The remaining composition of both years includes financial investments and other loans provision activity. Mortgage write-offs were $138,000 during the quarter compared to $nil during the same quarter in the prior year.Net Investment Income - Securitized AssetsMortgage interest income decreased to $5.5 million in the current year from $7.2 million in the prior year as a result of a $379 million decrease in the average mortgage portfolio over 2010, and a 0.62% decrease in the average mortgage yield. The average yield was exceptionally high in the prior year due to significantly higher than usual penalty income. As the securitized mortgages repay, we reinvest the collected principal in certain permitted investments, which include financial investments and short-term investments.Interest on financial investments increased to $1.4 million from $512,000 in the prior year due to a significant increase in the average portfolio from 2010.Other securitization income was $2.2 million in the quarter compared to $3.3 million in the prior year, consisting primarily of interest rate swap receipts of $2.2 million (2010 - $3.0 million). Interest rate swap receipts from the prior year include significant receipts from partial unwinds of interest rate swaps, which are recognized directly into income.Interest on financial liabilities from securitization was $7.4 million for the quarter, up from $7.2 million in the prior year. The increase was primarily due to a $19 million increase in the average outstanding liability over the prior year, partially offset by a slight decrease of 0.08% in the average interest rate.There was a positive fair market value adjustment to derivative financial instruments of $1.7 million (2010 - $4.7 million) relating to the CMB interest rate swaps. These fair market value changes can be volatile as they are driven by changes in the forward interest rate curve. From an economic perspective, these fair value changes are generally offset by changes in future expected income from securitized mortgages and principal reinvestment assets that have a floating interest rate. We regularly monitor our interest rate swap hedge position to minimize our exposure to interest rate risk. From an accounting perspective, changes in future expected income from these floating rate assets are not reflected in the consolidated statement of income, which can cause significant volatility to net income since there is no offset to the fair value changes in the interest rate swaps.Operating Expenses: Operating expenses were $1.8 million compared to $1.4 million during the same quarter in the prior year. The increase relates primarily to higher salaries and benefits due to the absence of a permanent Chief Executive Officer in the prior year, in addition to a net increase of two new employees in the current year.Income Taxes: There was a $733,000 provision for income taxes in the second quarter of 2011 compared to a provision of $3.3 million in the prior year. The prior year provision was significantly higher, as we incurred a substantial deferred tax expense on our significantly higher positive fair market value adjustment to derivative financial instruments.Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.67% ($15 million) at June 30, 2011, compared to 0.63% ($15 million) at March 31, 2011. Impaired corporate mortgages as a percentage of the corporate portfolio decreased to 2.46% at June 30, 2011 from 2.76% at March 31, 2011.Total mortgage arrears of $87 million as at June 30, 2011 decreased from $92 million at March 31, 2011. The $89 million of mortgage arrears is comprised of $61 million of insured securitized mortgages and $26 million of corporate mortgages, relating to uninsured single family and 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.Financial Position: As of June 30, 2011, total consolidated assets were $3.8 billion, an increase of $48 million from March 31, 2011. The change included an increase of $25 million in our corporate mortgage portfolio (consisting primarily of an increase of $25 million in construction loans) in addition to increases of $9 million in marketable securities and $8 million in cash. Term deposit liabilities were $514 million at June 30, 2011, up $16 million from March 31, 2011. Total shareholders' equity of $153 million increased by $34 million from March 31, 2011 primarily due to the net proceeds of $31 million from the public share issuance. Other activity for the quarter consisted of net income of $7.2 million, the issuance of $213,000 of new common shares related to the dividend reinvestment plan and $299,000 related to the Executive Share Purchase Plan, partially offset by the second quarter dividend of $4.5 million.Outlook: The Canadian economy has continued to expand, although domestic demand has been somewhat slower than initially anticipated by economists. The economy is projected to expand with GDP growth of 2.8% and 2.6% for 2011 and 2012 respectively. The Canadian economy saw slower growth in the second quarter of 2011 due to the impact of higher energy costs.Canadian mortgage rates are expected to remain stable for the balance of 2011. The Canadian housing market is in transition to a more moderate and sustainable pace of activity. Interest rates have remained low and are expected to remain so, by historical standards.House prices in Canada have continued to stabilize to date in 2011, with most regions showing steady appreciation. Recent strong gains in Vancouver and Toronto have distorted the national average, however we expect these markets to return to more sustainable levels such that house price appreciation will be in line with inflation. The Canadian housing market continues to be balanced, with the monthly supply of listings in line with demand. This stability has allowed MCAN to continue to grow moderately by focusing on our core housing markets for uninsured single family and residential construction mortgages.The public share offering completed in April provided approximately $31 million of additional share capital resulting in approximately $178 million of new asset capacity. With this new capacity we plan to focus on core lending growth in our corporate mortgage portfolio, which will help to facilitate our growth plans in Canadian residential markets. We plan to expand our lending in the Canadian markets in which we invest, and establish new business in Manitoba, Quebec and the Atlantic provinces. We will continue to explore options for potential future participation in the CMB program and insured mortgage-backed securities markets. We plan to maintain our financial strength while growing our corporate asset portfolio. Growth will be moderate and measured so as to ensure that we are not adversely impacted by changing conditions in the housing markets.Dividend: The Board of Directors declared a third quarter dividend of $0.27 per share to be paid September 30, 2011 to shareholders of record as of September 2, 2011.Further Information: Complete copies of the Company's 2011 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 10, 2011.MCAN is a public company listed on the Toronto Stock Exchange ("TSX") under the symbol MKP and is areporting issuer in all provinces and territories in Canada. MCAN also qualifies as a mortgage investmentcorporation ("MIC") under the Income Tax Act (Canada) (the "Tax Act").The Company's primary objective is to generate a reliable stream of income by investing its corporate funds ina portfolio of mortgages (including single family residential, residential construction, non-residentialconstruction and commercial loans), as well as other types of financial investments, loans and real estateinvestments. MCAN employs leverage by issuing term deposits eligible for Canada Deposit InsuranceCorporation ("CDIC") deposit insurance up to a maximum of five times capital (on a non-consolidated taxbasis) as permitted by the Tax Act. The term deposits are sourced through a network of independent financialagents. As a MIC, MCAN is entitled to deduct from income for tax purposes 50% of capital gains dividendsand 100% of other dividends paid. Such dividends are received by the shareholders as capital gains dividendsand interest income, respectively.MCAN also participates in the CMB program, and other securitizations of insured mortgages.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 2011 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 Website: www.mcanmortgage.com e-mail: mcanexecutive@mcanmortgage.com William Jandrisits President and Chief Executive Officer (416) 591-2726 Tammy Oldenburg Vice President and Chief Financial Officer (416) 847-3542