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Press release from CNW Group

MCAN Mortgage Corporation Reports Third Quarter Earnings

Friday, November 11, 2011

MCAN Mortgage Corporation Reports Third Quarter Earnings16:24 EST Friday, November 11, 2011Stock market symbol TSX: MKP TORONTO, Nov. 11, 2011 /CNW/ - MCAN Mortgage Corporation's ("MCAN", the "Company" or "we") net income for the third quarter of 2011 was $7.6 million, down from $10.7 million in the prior year. Earnings per share were $0.45 compared to $0.74 during the same quarter in the prior year. The decrease from the prior year is primarily due to substantially lower fee income and equity income from MCAP Commercial LP ("MCLP"), and the reversal of a significant construction loan individual allowance in the prior year.  Estimated taxable income for the quarter was $4.5 million, or $0.27 per share.  The prior year was exceptionally high at $9.4 million, or $0.66 per share.We issued 2.3 million common shares in April, raising net proceeds of approximately $31 million.  This share issuance created $178 million of additional asset capacity for MCAN.  We intend to deploy this capacity in a timely manner so as to avoid significant dilution, however we experienced slower than anticipated asset growth in the third quarter, leaving us with $177 million of asset capacity at September 30th.  In light of current market concerns, we have moderated the risk profile of our assets at this point in time.  We continue to focus on investing in mortgages with sound borrower equity, reasonable market acceptance through pre-sales on construction loans and acceptable risk-adjusted returns.  The majority of our growth for the year to date has arisen from the acquisition of seasoned single family residential mortgage portfolios with good payment histories and healthy borrower equity that were underwritten at market values from two years ago.The consolidated financial statements for the quarter ended September 30, 2011 are the third 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 on-balance 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 - $879 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 third 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 $11.4 million for the quarter, a decrease of $3.0 million from $14.4 million during the same quarter in the prior year.  Net investment income consisted of $5.4 million from corporate assets (2010 - $8.2 million) and $6.0 million from securitized assets (2010 - $6.1 million).  The decrease is primarily due to substantially lower fee income and equity income from MCLP, and the reversal of a significant construction loan individual allowance in the prior year.  Income from securitized assets includes a $4.9 million positive fair market value adjustment to derivative financial instruments (positive $4.3 million in 2010).Net Investment Income - Corporate AssetsMortgage interest income increased to $8.2 million in the current year from $6.8 million in the prior year as a result of a $140 million increase in the average mortgage portfolio from $377 million to $517 million, partially offset by a 0.85% decrease in the average mortgage yield from 7.32% in 2010 to 6.47% in 2011. Mortgage interest income includes $341,000 (2010 - $702,000) 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 September 30, 2011, we held discounted mortgages with a net discount of $10 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 decreased from $396,000 to $102,000, primarily due to a significantly lower average portfolio balance in the current year.Equity income from our ownership interest in MCLP was $360,000 during the quarter compared to $1.2 million in the prior year as a result of lower mortgage gains and fee income.Fees were $333,000 in the quarter, down from $1.3 million in the prior year.  Fees consist of fee income from a profit sharing arrangement relating to mortgage portfolios acquired by MCLP of $82,000 (2010 - $883,000) and other mortgage fees of $251,000 ($2010 - $438,000).  Prior year fee income from profit sharing was extremely high by historical standards, while other mortgage fees can be volatile and difficult to predict.Marketable securities income was $427,000 for the quarter compared to $nil in the prior year, as we did not acquire any marketable securities until late 2010.Term deposit interest and expenses increased to $3.3 million in the current year from $1.8 million in the prior year, primarily due to a $176 million increase in the average outstanding balance from $334 million in 2010 to $510 million in 2011 and an increase in the average term deposit interest rate to 2.45% in 2011 from 2.08% in 2010.Provisions for credit losses were $80,000 for the quarter compared to a recovery of $1.0 million for the same period of the prior year.  The prior year recovery included the full recovery of a $2 million construction loan individual allowance upon payout with no principal loss.  There was a collective mortgage recovery of $12,000 during the quarter compared to a provision of $418,000 in the prior year, which relates to an increase in mortgages that attract an allowance during the prior year compared to the current year.  In addition, we increased individual mortgage allowances by $95,000 in the quarter compared to a net increase of $445,000 in the prior year, not including the aforementioned $2 million individual allowance reversal.  The remaining composition of both years includes financial investments and other loans provision activity.  Mortgage write-offs were $59,000 during the quarter compared to $28,000 during the same quarter in the prior year.Net Investment Income - Securitized AssetsMortgage interest income decreased to $5.0 million in the current year from $6.1 million in the prior year as a result of a $384 million decrease in the average mortgage portfolio over 2010.  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 $1.5 million from $1.0 million in the prior year due to an increase in the average portfolio from 2010.Other securitization income was $2.0 million in the quarter compared to $2.2 million in the prior year, consisting primarily of interest rate swap receipts of $1.9 million (2010 - $2.0 million).Interest on financial liabilities from securitization was $7.5 million for the quarter, up from $7.4 million in the prior year due to a slight increase in the average interest rate.The positive fair market value adjustment to derivative financial instruments of $4.9 million (2010 - $4.3 million) for the quarter relates to the CMB interest rate swaps.  The unrealized portion of this fair market value adjustment can be volatile as it is driven by changes in the forward interest rate curve.  From an economic perspective, this adjustment is 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 market value adjustment to derivative financial instruments. Operating Expenses:  Operating expenses were $1.6 million compared to $1.5 million during the same quarter in the prior year.Income Taxes:  There was a $2.2 million provision for income taxes in the third quarter of 2011, consistent with the prior year.  In both years, we incurred a deferred tax expense as a result of the significant positive fair market value adjustments to derivative financial instruments.Credit Quality:  Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.65% ($14 million) at September 30, 2011, compared to 0.67% ($15 million) at June 30, 2011.  Impaired corporate mortgages as a percentage of the corporate portfolio increased marginally to 2.51% at September 30, 2011 from 2.46% at June 30, 2011.Total mortgage arrears of $80 million as at September 30, 2011 decreased from $87 million at June 30, 2011.  Mortgage arrears are comprised of $52 million of insured securitized mortgages and $28 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 September 30, 2011, total consolidated assets were $3.8billion, an increase of $9 million from June 30, 2011.  Corporate assets increased by $17 million during the quarter, while securitized assets decreased by $9 million.  Changes in corporate assets included increases of $31 million in single family mortgages and $11 million in commercial loans, partially offset by decreases of $23 million in residential construction loans and $4 million in cash.  Term deposit liabilities were $521 million at September 30, 2011, up $7 million from June 30, 2011.  Total shareholders' equity of $156 million increased by $3.2 million from June 30, 2011. Activity for the quarter consisted of net income of $7.6 million and the issuance of $226,000 of new common shares through the dividend reinvestment plan, partially offset by the third 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 2.1% and 1.9% for 2011 and 2012, respectively.  The Canadian economy saw improved growth in the third quarter of 2011, as temporary factors that depressed growth in the second quarter unwound.  However, we expect slower growth to continue through 2012.We continue to prudently grow our mortgage portfolio.  Average term deposit rates are expected to remain flat as central banks maintain neutral monetary policy to enable economic growth. We expect asset growth and the resulting increase in net investment income to be offset to an extent by lower discount income from our acquired mortgage portfolios.We continue to focus on investing in mortgages with sound borrower equity, reasonable market acceptance through pre-sales on construction loans and acceptable risk-adjusted returns.  In light of global economic uncertainty and the instability of financial markets, we will be closely monitoring market conditions in the geographic markets in which we invest. We have moderated the risk profile of our assets at this point in time. Our mortgage portfolio is currently in a sound position with a low level of impaired mortgages.  In addition, we have good geographic and borrower diversification. We will continue to expand the Canadian markets in which we invest, maintain prudent lending practices and look for quality assets with compelling risk adjusted returns.Dividend:  The Board of Directors declared a fourth quarter dividend of $0.27 per share to be paid January 3, 2012 to shareholders of record as of December 2, 2011.Changes to Board of Directors:  David MacIntosh retired from the Board of Directors effective November 11, 2011 after 11 years of service.  The Board would like to thank Mr. MacIntosh for his long service and valuable contribution to MCAN.Karen Weaver, CPA, ICD.D was appointed to the Board of Directors effective November 11, 2011.  Ms. Weaver currently serves as the Executive Vice President and Chief Financial Officer of First Capital Realty Inc.Further Information:  Complete copies of the Company's 2011 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.comon November 14, 2011.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 primary objective is to generate a reliable stream of income by investing its corporate funds in a portfolio of mortgages (including single family residential, residential construction, non-residential construction and commercial loans), as well as other types of financial investments, loans and real estate 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 100% of dividends, except for capital gains dividends, which are deducted at 50%.  Such dividends are received by the shareholders as interest income and capital gains dividends, 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