MCAN Mortgage Corporation reports third quarter earnings

    Stock market symbol
    TSX: MKP

    TORONTO, Nov. 7 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company"
or "we") reported net income of $10.4 million for the third quarter of 2008,
up from $3.1 million a year earlier. Earnings per share for the quarter were
$0.73 compared to $0.21 last year. Net income for the nine months ended
September 30, 2008 was $20.4 million, up from $11.7 million a year earlier,
while earnings per share in the same period were $1.44 compared to $0.89 in
2007.
    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 resulted in significant incremental income in the third quarter.
While the net result was a record for quarterly income and earnings per share,
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 quarter increased
from $4.1 million in 2007 to $12.5 million in 2008.

    During the quarter, we realized $1.6 million relating to the partial
recovery of purchase price discounts on mortgages that we acquired. A further
$875,000 was earned under a profit sharing arrangement with MCLP, also
relating to the partial recovery of purchase price discounts on mortgages that
MCLP acquired.
    Mortgage interest income for the quarter increased from $7.2 million to
$9.7 million. The average portfolio size increased by $56 million as our
additional capacity resulting from the rights offering completed in July 2007
was deployed. In addition, the average mortgage yield increased from 7.36% in
2007 to 8.62% in 2008. The significant increase in yield was a result of
higher effective yields on the mortgages in the acquired portfolios. 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. In the
third quarter, payout volumes were significantly higher than anticipated.
    As at September 30, 2008, we held discounted mortgages with an aggregate
discount of $36 million. We are entitled to 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.
    The prime rate decreased by 1.50% for the twelve months ended September
30, 2008. This decrease has negatively impacted mortgage interest income, as
approximately 56% of our mortgages at quarter end were floating rate loans.
However, this negative impact has been more than offset by the higher
effective yields on the mortgages in the acquired portfolios. Although we have
been attempting to reduce our floating rate mortgage portfolio in 2008, it
increased significantly in the quarter from 45% at June 30, 2008. We sold a
significant portfolio of fixed rate mortgages to create capacity to fund the
portfolio acquisitions, of which $34 million were floating rate at quarter
end.
    Interest on loans and investments decreased from $1.4 million to $1.3
million. The effect of a significantly lower average prime rate in the current
year offset the impact of a higher average portfolio balance.
    Fees increased from $858,000 to $1.6 million, primarily due to $875,000
received from MCLP related to the profit sharing noted above.
    Equity income from our ownership interest in MCLP was $1.2 million in the
quarter compared to $946,000 in 2007. In the third quarter, MCLP recognized
significant income from its sharing in the income from the mortgages in the
acquired portfolios, both on its own account and from MCAN.
    We recognized securitization income of $1.7 million during the quarter
relating to the securitization of insured mortgages through the CMB program,
compared to a loss of $141,000 in the prior year. In the current year,
up-front gains from securitization have been significant as a result of wide
interest rate spreads between mortgages and government bonds. In addition,
residual securitization income, which includes the yield on the interest-only
strips and CMB liabilities, penalty income and fair value changes in certain
CMB assets and liabilities, increased significantly. At quarter end, we
recorded a write-down of $260,000 on the interest-only strips related to the
March 2007 and June 2007 CMB issuances. Both issuances have had higher than
anticipated principal repayment levels, which has decreased expected future
cash flows as the assets in which we reinvest principal collections generally
yield less than the securitized mortgages. The loss in 2007 was primarily due
to write-downs of certain interest-only strips as a result of a change in
permitted investments for CMB principal collections.
    We sold our remaining marketable securities portfolio in the third
quarter, resulting in a loss of $107,000. In the prior year, marketable
securities income was $40,000.
    During the quarter, we earned $3.5 million from sales of mortgages. These
sales related primarily to the acquired portfolios.
    Term deposit interest and expenses increased from $4.9 million in 2007 to
$5.2 million in 2008. There was an increase of $54 million in the average
outstanding balance as a result of increased capacity from the rights
offering, partly offset by a decrease in the average term deposit interest
rate to 4.29% in 2008 from 4.46% in 2007. 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.
    In the third quarter of 2007, we recorded a $700,000 write-down on 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"). The write-down was increased to
$794,000 at December 31, 2007. 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. In the third quarter of 2008, we recorded an additional write-down of
$800,000 based on our current estimate of net realizable value.
    Allowances for loan losses were decreased by $64,000 during the quarter
compared to an increase of $334,000 in the prior year. Write-offs for the
quarter were not material. Impaired loans net of specific allowances were
0.89% ($4.3 million), compared to 0.93% ($4.2 million) at June 30, 2008 and
0.61% ($2.4 million) at September 30, 2007. We continue to proactively monitor
loan arrears and take prudent steps to collect overdue accounts. Total
mortgages past due but not impaired increased from $18 million at June 30,
2008 to $25 million at September 30, 2008. The increase is consistent with the
general deterioration in the Canadian economy.

    Operating Expenses: Operating expenses increased to $2.1 million in 2008
from $1.0 million in 2007, primarily due to incentives payable with respect to
the acquisition of mortgage portfolios.

    Financial Position: As of September 30, 2008, total consolidated assets
were $588 million, an increase of $36 million from June 30, 2008. The change
in assets since June 30, 2008 consists of increases of $22 million in
mortgages, $3 million in loans and investments, $6 million in cash and $4
million in other assets. Term deposit liabilities were $466 million at
September 30, 2008, up $29 million from June 30, 2008. Total shareholders' 
equity of $109 million increased by $3 million from June 30, 2008. Activity
for the quarter consisted of net income of $10.4 million and the issuance of
$156,000 of new common shares, partially offset by the third quarter dividend
of $3.6 million, a charge to retained earnings of $2.8 million relating to
current and future income taxes and a decrease to accumulated other
comprehensive income of $1.5 million.

    Outlook: The continuing disruption in debt markets has afforded us with
opportunities to acquire mortgages on a profitable basis. While these
transactions are opportunistic and cannot necessarily be planned, we expect
that the disruption in debt markets will not materially improve for several
months, and as such future opportunities may present themselves. We plan to
retain investment capacity so that we can take advantage of these
opportunities.

    Decreases in the prime rate during 2008 are expected to have an adverse
effect on net investment income over the next several quarters. Subsequent to
quarter end, the prime rate decreased by 0.75%. 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
2008 in order to minimize this compression. We are generally targeting fixed
rate mortgages, rather than floating rate mortgages. Higher profitability from
the CMB program and the acquired portfolios has more than 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 $1.9 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 fourth quarter dividend of
$0.25 per share to be paid January 2, 2009 to shareholders of record as of
December 15, 2008.
    We expect to pay a special dividend on March 31, 2009 in addition to the
regular March 31, 2009 dividend that is sufficient to fully offset 2008
taxable income. Based on results to September 30, 2008, we expect to pay a
special dividend of approximately $0.20, but this special dividend will be
revised subject to fourth quarter results.

    Further Information: Complete copies of the Company's 2008 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 by November 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.

For further information: 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