MCAN MORTGAGE CORPORATION REPORTS FIRST QUARTER EARNINGS

Stock market symbol
TSX: MKP

TORONTO, May 31, 2011 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported net income in the first quarter of 2011 of $7.1 million, up from $4.1 million during the same quarter in the prior year. Earnings per share were $0.49 compared to $0.29 during the same quarter in the prior year. Estimated taxable income increased to $4.3 million from $4.1 million during the same quarter in the prior year, and on a per share basis increased to $0.30 from $0.29 in the prior year.

The consolidated financial statements for the quarter ended March 31, 2011 are the first 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.

  • 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.

Current year results include a non-cash negative fair market value adjustment of $3.2 million related to the CMB program interest rate swaps. During the same quarter in the prior year, there was a negative adjustment of $1.5 million. This adjustment does not impact taxable income or dividend distributions. Current year results also include an income tax recovery of $5.2 million, compared to $656,000 during the same quarter in the prior year.

Total consolidated assets were $3.7 billion at March 31, 2011, an increase of $63 million from December 31, 2010. The change included an increase of $75 million in our corporate mortgage portfolio, which included increases of $68 million in uninsured single family mortgages and $7 million in insured single family mortgages.

During the quarter, we were able to utilize the majority of our unused lending capacity consistent with our strategic plan. In order to facilitate future growth, we completed a public share offering of 2,300,000 common shares on April 18, 2011, at a price of $14.50 per common share, for net proceeds of approximately $31 million.

MCAN paid a regular $0.27 per share dividend in the first quarter, an increase from $0.26 per share in the fourth quarter of 2010. In addition, MCAN paid an extra dividend of $0.73 in the first quarter.

Our strategic plan includes growth in our mortgage portfolio throughout 2011, which we plan to achieve by taking advantage of opportunities in the single family mortgage and residential construction loan markets, and through a measured increase in our commercial mortgage portfolio. To facilitate our growth plans, we plan to expand the Canadian markets in which we invest to further reduce existing geographic concentrations in our current portfolio in Alberta, Ontario and British Columbia.

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 $3.5 million for the quarter, a decrease of $1.3 million from $4.8 million during the same quarter in the prior year. Net investment income consisted of $5.3 million from corporate assets ($5.0 million in 2010) and a loss of $1.8 million from securitized assets ($259,000 loss in 2010). The loss from securitized assets includes a $3.2 million negative fair market value adjustment to derivative financial instruments (negative $1.5 million in 2010).

Net Investment Income - Corporate Assets

Mortgage interest income increased to $7.6 million in the current year from $5.8 million in the prior year as a result of a $144 million increase in the average mortgage portfolio, partially offset by a 0.61% decrease in the average mortgage yield from 7.62% in 2010 to 7.01% in 2011. Mortgage interest income includes $519,000 (2010 - $661,000) relating to the partial recovery of purchase price discounts on MCAN's acquired mortgage portfolios.

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.

As at March 31, 2011, we held discounted mortgages with a net discount of $14 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 $877,000 to $145,000 as a result of a significantly lower average portfolio balance.

Equity income from our ownership interest in MCAP Commercial LP ("MCLP") was $807,000 during the quarter compared to $259,000 in the prior year.

Fees were $205,000 in the quarter, down from $637,000 in the prior year. Fees consist of fee income from a profit sharing arrangement relating to mortgage portfolios acquired by MCLP of $5,000 (2010 - $204,000) and other mortgage fees of $200,000 (2010 - $433,000).

Term deposit interest and expenses increased to $2.6 million in the current year from $1.9 million in the prior year, primarily due to a $127 million increase in the average outstanding balance from $335 million in 2010 to $462 million in 2011. The average term deposit interest rate decreased to 2.19% in 2011 from 2.21% in 2010.

Provisions for credit losses were $333,000 for the quarter compared to $135,000 for the same period of the prior year. Collective mortgage provisions were $360,000 in the quarter compared to $190,000 during the same quarter the prior year. In addition, we reduced individual mortgage allowances by $25,000 in the quarter compared to a reduction of $43,000 during the same quarter in the prior year. The remaining composition of both years consists of financial investments and other loans provision activity. Mortgage write-offs were $75,000 during the quarter compared to $32,000 during the same quarter in the prior year.

Net Investment Income - Securitized Assets

Mortgage interest income decreased to $5.5 million in the current year from $6.3 million in the prior year as a result of a $419 million decrease in the average mortgage portfolio over 2010, partially offset by a 0.34% increase in the average mortgage yield. 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 $1.3 million from $355,000 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 $2.0 million in the prior year, consisting primarily of interest rate swap receipts of $2.1 million (2010 - $1.9 million).

Interest on financial liabilities from securitization was $7.5 million for the quarter, up from $7.3 million in the prior year. The increase was primarily due to a $44 million increase in the outstanding liability over the prior year. The average interest rate increased slightly from 3.71% to 3.74%.

The negative fair market value adjustment to derivative financial instruments of $3.2 million (2010 - negative $1.5 million) relates 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 $1.7 million compared to $1.3 million during the same quarter in the prior year.

Income Taxes: There was a $5.2 million recovery of income taxes in the first quarter of 2011 compared to a recovery of $656,000 in the prior year. The significant current year recovery was primarily due to the payment of the substantially higher than usual March 31, 2011 dividend of $14.5 million.

Credit Quality: Impaired mortgages as a percentage of total mortgages (net of individual allowances) were 0.63% ($15 million) at March 31, 2011, unchanged from December 31, 2010. Impaired corporate mortgages as a percentage of corporate mortgages decreased to 2.76% at March 31, 2011 from 3.06% at December 31, 2010. While MCAN's arrears levels remain high by historical standards, we have not realized material losses since the onset of the recent recession.

Total mortgage arrears of $92 million as at March 31, 2011 were consistent with December 31, 2010 and were $100 million at January 1, 2010. The $92 million of mortgage arrears is comprised of $65 million of insured securitized mortgages and $27 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 March 31, 2011, total consolidated assets were $3.7 billion, an increase of $63 million from December 31, 2010. The change in assets since December 31, 2010 relates primarily to an increase of $75 million in corporate mortgages, $34 million in short-term investments, and $65 million in financial investments, partially offset by decreases of $29 million in cash and $90 million in securitized mortgages. Term deposit liabilities were $497 million at March 31, 2011, up $76 million from December 31, 2010. Total shareholders' equity of $119 million decreased by $6.3 million from December 31, 2010.

Activity for the quarter consisted of net income of $7.1 million, and the issuance of $943,000 of new common shares related to the dividend reinvestment plan, more than offset by the first quarter dividend of $14.5 million.

Outlook: The Canadian economy continued to demonstrate strength with GDP growth of 2.9% in 2010, while forecasted GDP growth for 2011 and 2012 is 2.9% and 2.6% respectively. The unemployment rate at the end of 2010 was approximately 8%, and has improved to approximately 7.7% as of the end of first quarter of 2011.

Canadian mortgage rates are expected to remain stable in 2011. Rates could increase if economic growth and inflation increase more significantly than anticipated. Interest rates have remained low and are expected to remain so, by historical standards. The recent level of the Canadian dollar also presents challenges as its strength and potential increases in domestic interest rates will further compromise the competitiveness of Canadian exports.

After a strong 2010, housing starts in 2011 are expected to edge lower. The general consensus is that of a soft landing overall. Housing activity should decline slightly limiting price gains to the rate of core inflation. New home sales for 2011 are expected to be 174,800 down from 186,200 in 2010. The first quarter of 2011 saw a measured reduction in year over year housing activity however, as a whole the Canadian market continues to be balanced with a monthly supply of listings of just under six months.

The market for new housing construction has to date shown evidence of slowing in 2011, in part due to government initiatives aimed at reducing the potential risks from an overheated housing market. Changes by the Canada Mortgage and Housing Corporation to its mortgage programs reducing maximum amortization terms and permitted loan to value ratios on all new and refinanced mortgages are intended to reduce leverage in the mortgage market, protecting home owners from future defaults. The impact to housing markets will be a measured reduction in home sale volumes as purchasers adjust to increased equity requirements and higher monthly mortgage payments.

Overall, the Canadian housing market is expected to remain in balance, with new home sales stabilizing to more normal levels against historical averages and existing home sales finding a more stable level, slowing the price increases seen over previous years.

Further Information: Complete copies of the Company's 2011 First 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 June 1, 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 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.

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.

SOURCE MCAN Mortgage Corporation

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


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