MCAN MORTGAGE CORPORATION REPORTS STRONG FOURTH QUARTER EARNINGS AND AN INCREASE IN THE QUARTERLY DIVIDEND

Stock market symbol
TSX: MKP

TORONTO, Feb. 18 /CNW/ - MCAN Mortgage Corporation ("MCAN", the "Company" or "we") reported strong results in the fourth quarter of 2010, with reported net income of $6.1 million, unchanged from the prior year. Earnings per share for the quarter were $0.42 compared to $0.43 in the prior year. Highlights for the quarter included improved spread income and equity income from our investment in MCAP Commercial LP ("MCLP").

Net income for the year ended December 31, 2010 was $25.4 million, up from $24.7 million in 2009, while earnings per share were $1.76 compared to $1.73 in 2009. Our return on equity for the year was 20%.

Impaired mortgages as a percentage of total mortgages decreased to 3.06% at December 31, 2010 from 3.40% at September 30, 2010, while total mortgage arrears decreased from $47 million to $31 million during the same period. While MCAN's arrears levels remain high by historical standards, we have not realized material losses since the onset of the recent recession.

Net Investment Income: Net investment income was $8.1 million for the fourth quarter, unchanged from 2009.

Mortgage interest income increased from $7.4 million to $7.5 million as a result of a $64 million increase in the average mortgage portfolio, mostly offset by a 1.56% decrease in the average mortgage yield. The decrease in the yield was primarily due to a decrease in discount income from the mortgages in MCAN's acquired portfolios.

The mortgages in the acquired portfolios have higher effective yields than those in our regular portfolio, as they have been 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.

Interest owing but not accrued on impaired mortgages is included in the mortgage yield calculation to accurately represent the underlying portfolio. The mortgage yield for the quarter would have decreased by 0.33% if interest owing but not accrued was not included in the yield calculation.

During the quarter, we realized $1.2 million (included in mortgage interest income) relating to the partial recovery of purchase price discounts on MCAN's acquired portfolios, compared to $2.1 million realized in the prior year. We also received $515,000 (included in fees) from MCLP from a profit sharing arrangement relating to discounted mortgages acquired by MCLP, compared to $1.1 million in 2009. The volume of discount recoveries from the portfolios of both companies can be volatile and difficult to predict.

As at December 31, 2010, the discounted mortgages held on our balance sheet had a net outstanding 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. As such, it is difficult to accurately estimate the timing and quantum of the discount ultimately recovered.

Interest on loans and investments decreased from $910,000 to $309,000 as a result of a lower average portfolio balance in the current year.

We recognized securitization income of $37,000 during the quarter compared to $1.8 million in the prior year. Current quarter income includes residual securitization income of $37,000 (2009 - $1.3 million). The decrease in residual securitization income was primarily due to an increase in net negative fair value adjustments to CMB-related financial instruments from $207,000 in the prior year to $1.1 million in the current year. Forward interest rates were volatile in both years, which led to the unanticipated negative income variances. The negative impact of fair value adjustments in the current year was partly offset by an increase in refinancing and renewal gains. We did not participate in any new mortgage securitizations during the quarter, while there was a gain from securitization of $470,000 in the prior year.

Fees decreased from $1.9 million to $1.4 million, primarily due to the decrease noted above in fees received from MCLP related to profit sharing on its discounted mortgage portfolios.

Equity income from our ownership in MCLP was $1.8 million in the quarter compared to $523,000 in 2009. MCLP earned substantial income on its acquired portfolios and recognized a gain on the sale of certain financial and other assets.

Term deposit interest and expenses decreased from $2.5 million to $2.1 million as a result of a 0.30% decrease in the average interest rate, partially offset by a $29 million increase in the average outstanding balance. The decrease in the average term deposit rate from the prior year is a result of the funding rate on new term deposits being lower than that of the maturing term deposits despite recent increases in the prime rate.

Allowances for credit losses were increased by $46,000 during the quarter from $4.2 million to $4.3 million, compared to an increase of $1.4 million for the same period last year. Current year activity consisted of general mortgage provisions of $141,000 and a reversal of loan and investment provisions of $95,000, while the prior year balance consisted primarily of an increase to a specific mortgage provision. Write-offs for the quarter decreased to $6,000 from $16,000 in the prior year.

Impaired loans as a percentage of total mortgages (net of specific allowances) were 3.06% ($13 million) at December 31, 2010, compared to 3.40% ($13 million) at September 30, 2010 and 5.81% ($17 million) at December 31, 2009.

Total mortgage arrears of $31 million as at December 31, 2010 decreased from $47 million at September 30, 2010 and were unchanged from December 31, 2009. The decrease over September 30th is attributable primarily to residential construction loans. We continue to proactively monitor loan arrears and take prudent steps to collect overdue amounts. There were no other assets in arrears at quarter end.

Operating Expenses: Operating expenses of $2.0 million for the quarter were unchanged from the prior year.

Financial Position: As of December 31, 2010, total consolidated assets were $579 million, an increase of $73 million from September 30, 2010. The increase in assets since September 30, 2010 includes increases of $48 million in cash, $26 million in mortgages and $7 million in marketable securities, partially offset by decreases of $6 million in derivative financial instruments and $4 million in loans receivable and other investments. Term deposit liabilities were $421 million at December 31, 2010, an increase of $68 million from September 30, 2010. Total shareholders' equity of $129 million increased by $2.0 million from September 30, 2010. Activity for the quarter consisted of net income of $6.1 million, partially offset by the fourth quarter dividend of $3.8 million, a charge of $62,000 to retained earnings relating to current and future income taxes and a decrease to accumulated other comprehensive income of $306,000.

Outlook: In 2010, we grew our investment portfolio by taking advantage of unutilized investment capacity. We plan to continue to grow our mortgage portfolio throughout 2011 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 Canadian economy continued to demonstrate strength with GDP growth of 3.1% in 2010, while forecasted GDP growth for 2011 is 3.2%. The unemployment rate at the end of 2010 was approximately 8%, and is expected to improve to 7.8% by the end 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.

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 ("CMHC") to its mortgage programs reducing maximum amortization terms and permitted loan to value ratios on 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.

New home sales increased in 2010 after experiencing strong growth in the first half of the year due in part to the effect of new CMHC equity requirements from February 2010 and strong sales in Ontario and British Columbia from the mid-year introduction of new HST rules on housing. Sales in the second half of the year moderated. Forecasts for 2011 indicate a slowing in the housing market throughout Canada. New home sales are expected to decline to 174,800 units in 2011, down from 186,200 units in 2010.

Existing home sales decreased by 3.9% in 2010 to 447,010. In 2011, sales are expected to decrease to the 400,000 to 440,000 level, down from the 2005-2009 average of 478,500.

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.

Dividend: The Board of Directors declared a first quarter dividend of $1.00 per share to be paid March 31, 2011 to shareholders of record as of March 2, 2011. This dividend comprises the regular quarterly dividend of $0.27 per share (increased from $0.26 per share) and an extra dividend of $0.73 per share. Under the Income Tax Act (Canada), the Company can deduct dividends paid up to 90 days following year-end against the previous year's taxable income. The extra dividend declared is necessary to offset taxable income in 2010.

Selected Quarterly Financial Data
(Unaudited) (dollars in thousands, except for per share amounts)
           
Year Ended December 31, 2010 Q1 Q2 Q3 Q4 Total
           
Net investment income $6,106 $7,114 $10,374 $8,102 $31,696
Operating expenses 1,308 1,473 1,534 2,016 6,331
Income before income taxes 4,798 5,641 8,840 6,086 25,365
Provision for income taxes - - - - -
Net income $4,798 $5,641 $8,840 $6,086 $25,365
           
Basic and diluted earnings per share $0.33 $0.40 $0.61 $0.42 $1.76
Dividends per share
  Regular $0.26 $0.26 $0.26 $0.26 $1.04
  Extra 0.15 - - - 0.15
  Total $0.41 $0.26 $0.26 $0.26 $1.19
           
Year Ended December 31, 2009 Q1 Q2 Q3 Q4 Total
           
Net investment income $7,703 $6,875 $8,007 $8,056 $30,641
Operating expenses 1,269 1,268 1,410 1,952 5,899
Income before income taxes 6,434 5,607 6,597 6,104 24,742
Provision for income taxes - - - - -
Net income $6,434 $5,607 $6,597 $6,104 $24,742
           
Basic and diluted earnings per share $0.45 $0.39 $0.46 $0.43 $1.73
Dividends per share
  Regular $0.25 $0.25 $0.25 $0.26 $1.01
  Extra 0.43 - - - 0.43
  Total $0.68 $0.25 $0.25 $0.26 $1.44

 
CONSOLIDATED BALANCE SHEETS
(Unaudited) (dollars in thousands)
As at December 31 2010   September 30 2010   December 31 2009
 
Assets
Investments
  Cash and cash equivalents $ 89,373 $ 41,346 $ 89,843
  Marketable securities   6,608   -   -
  Mortgages   422,393   395,968   295,415
  Securitization investments   13,605   12,492   73,590
  Loans receivable and other investments   10,079   14,205   16,885
  Equity investment in MCAP Commercial LP   20,315   19,218   17,905
      562,373   483,229   493,638
               
  Derivative financial instruments   13,120   19,028   11,490
  Other assets   3,209   3,527   1,555
    $ 578,702 $ 505,784 $ 506,683
 
Liabilities and Shareholders' Equity
Liabilities
  Term deposits $ 421,061 $ 353,268 $ 360,744
  Securitization liabilities   7,000   8,846   5,048
  Accounts payable and accrued charges   10,809   9,165   11,001
  Future taxes payable   10,463   7,098   7,011
      449,333   378,777   383,804
 
Shareholders' Equity
  Share capital   100,112   100,112   98,490
  Contributed surplus   510   510   510
  Retained earnings   26,956   24,688   22,165
  Accumulated other comprehensive income   1,791   2,097   1,714
      129,369   127,407   122,879
    $ 578,702 $ 505,784 $ 506,683

 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (dollars in thousands except for per share amounts)
 
  Quarters Ended
December 31
Years Ended
December 31
    2010   2009   2010   2009
 
Investment Income
  Mortgage interest $ 7,521 $ 7,413 $ 25,828 $ 27,420
  Interest on loans and investments   309   910   2,507   3,878
  Securitization income   37   1,801   3,949   7,558
  Fees   1,382   1,893   5,561   8,024
  Equity income from MCAP Commercial LP   1,779   523   3,743   1,456
  Interest on cash and cash equivalents   105   34   230   234
  Marketable securities   31   -   31   -
    11,164   12,574   41,849   48,570
 
Financial Expenses
  Term deposit interest and expenses   2,134   2,525   7,619   13,133
  Mortgage expenses   882   615   2,921   2,761
  Provision for (recovery of) credit losses   46   1,378   (387)   2,035
    3,062   4,518   10,153   17,929
 
Net Investment Income   8,102   8,056   31,696   30,641
 
Operating Expenses
  Salaries and benefits   1,038   933   2,711   2,587
  General and administrative   978   1,019   3,620   3,312
    2,016   1,952   6,331   5,899
 
Income Before Income Taxes   6,086   6,104   25,365   24,742
Provision for income taxes   -   -   -   -
Net Income $ 6,086 $ 6,104 $ 25,365 $ 24,742
 
Basic and diluted earnings per share $ 0.42 $ 0.43 $ 1.76 $ 1.73
Dividends per share $ 0.26 $ 0.26 $ 1.19 $ 1.44
Weighted average number of basic and diluted
shares (000's)
  14,447   14,321   14,389   14,294

Further Information: Complete copies of the Company's 2010 Annual 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 March 31, 2011.

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 2010 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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