Stock market symbol
TSX: MKP
TORONTO, Feb. 17 /CNW/ - MCAP Inc. ("MCAP" or the "Company") reported net
income of $5.0 million for the fourth quarter of 2005, up from $2.7 million a
year earlier. Earnings per share for the quarter were $0.41 compared to $0.23
last year. For the year ended December 31, 2005, net income was $14.1 million,
up from $11.6 million in the prior year, and earnings per share were $1.18
compared to $1.12 in the prior year.
In April 2004, MCAP reorganized its involvement in the mortgage
origination and servicing business (the "Business Reorganization"). The
transactions comprising the Business Reorganization included the sale of MCAP
Financial Corporation ("MFC") to MCAP Commercial Limited Partnership ("MCLP")
and the acquisition of a 25% limited partnership interest in MCLP. Prior to
the Business Reorganization, the Company consolidated MFC. The Company now
equity accounts for the income from the mortgage origination and servicing
business based on its 25% minority interest in MCLP.
Net Investment Income: Net investment income in the quarter was
$6.2 million compared to $3.5 million in 2004. The majority of the increase
over the prior year relates to gains from sales of marketable securities.
Mortgage interest income was $5.5 million compared to $4.9 million last
year, an increase of $572,000. Approximately 60% of MCAP's mortgages are
floating rate, and increases in the bank prime rate gave rise to a 0.46%
increase in the yield on the portfolio.
Fee income was $928,000 compared to $755,000 last year. MCAP has
increased its portfolio of residential construction loans and the fees are
largely attributable to these mortgages.
Marketable securities income was $1.8 million compared to $68,000 last
year. Gains from sales of marketable securities were $1.4 million in the
quarter including the reversal of prior write-downs of $468,000 as MCAP sold
down its portfolio in the face of market uncertainty regarding the taxation of
income trusts. This compared to losses of $227,000 in the fourth quarter last
year, including a write-down of $224,000 taken on two securities in the
portfolio. Unrealized gains on the portfolio at the end of December were
$2.5 million compared to $5.3 million at September 30, 2005.
Equity income from the Company's 25% ownership in MCLP was $953,000
compared to $189,000 last year. MCLP realized significant income from the
origination of commercial term and construction loans and from securitization
transactions.
Debenture interest and expenses were $3.1 million compared to
$2.9 million in 2004. This is largely the result of a 0.21% increase in the
average interest rate.
Mortgage expenses were $755,000 compared to $541,000 in the same period
last year. This is attributable to a larger construction loan portfolio which
has higher servicing fees than other types of loans.
Recoveries of losses of $40,000 are the result of a decrease in the
mortgage portfolio in the quarter and the related general allowance. Impaired
loans net of specific allowances (excluding insured mortgages) were 0.53%,
down from 0.54% at December 31, 2004. This is up from 0.36% at September 30,
2005.
Operating Expenses: Operating expenses were $1.1 million compared to
$1.2 million in 2004.
Income Taxes: The Company is a Mortgage Investment Corporation ("MIC")
under the Income Tax Act (Canada) (the "Tax Act"). As such, it is permitted to
deduct from income for tax purposes dividends paid to shareholders during the
year and within 90 days thereafter. During the quarter, management determined
that as a result of changes in MCAP's operations over the past two years, it
is now more likely than not that sufficient dividends will be paid to
shareholders in future periods to recover current and future taxes. This
change has been reflected in the Company's consolidated financial statements
retroactively to January 1, 2005. Accordingly, the charge for the Company's
current and future tax liability arising from the fourth quarter of 2005 of
$683,000 was recorded directly to retained earnings. The provision for taxes
of $28,000 recorded in the consolidated statement of income relates to large
corporation, corporate minimum and other taxes which cannot be recovered from
payment of future dividends.
Financial Position: As of December 31, 2005, total consolidated assets
were $434 million, up $5 million from September 30, 2005. Cash balances ended
the year at $33 million, a $31 million increase in the quarter. This increase
reflects significant mortgage repayments near the end of the year and a
deliberate strategy to increase cash balances at year-end to assist in a
conversion of the debenture administration system scheduled to take place in
the first quarter of 2006. Significant decreases in assets in the quarter
include $8 million in marketable securities reflecting the Company's sell down
of its portfolio, $7 million in mortgages and $11 million in loans and other
investments. Debenture liabilities increased $16 million in the quarter, and
the Company repaid its $15 million bank line of credit. Total shareholders'
equity of $81 million was up $2 million from September 30, 2005.
Total assets were down $20 million from December 31, 2004. This change
reflects a $14 million decrease in cash year over year and a $31 million
decrease in loans and other investments, offset by a $22 million increase in
mortgages. The decrease in loans and other investments relates to a decrease
in warehousing loans to MCLP, the sale of bonds with respect to MCLP's
residential construction mortgage securitization program and repayments on
investor loans to finance investments in securitization programs managed by
MCLP. The most significant increase in mortgages relates to strategic growth
in the residential construction portfolio to achieve better spreads at
manageable risk compared to other mortgage categories. The debenture
liabilities decreased $24 million during the year. Total shareholders' equity
of $81 million was up $6 million from December 31, 2004. The majority of this
change reflects increases in share capital as shares were issued for cash in
September and are also issued quarterly under the dividend reinvestment plan
at the average closing price for the 20 days preceding such issues.
Outlook: The key to earnings growth in 2006 for the Company will be to
optimize its leverage. MCAP is subject to maximum asset levels under both the
Tax Act and the Trust and Loan Companies Act. The maximum asset level
permitted under the Tax Act, which is the most constraining for the Company,
effectively limits assets to 6 times capital on a non-consolidated basis,
adjusted to cost for tax purposes. The Company manages to a level of 5.75
times to provide a prudent cushion between the maximum and total actual
assets. At December 31, 2005, the Company was underinvested by $54 million
against the 5.75 internal limit. The challenge for the Company in the first
half of 2006 will be to fully invest the balance sheet while maintaining
historical spreads. The Company is consciously targeting higher yielding
mortgage assets at manageable levels of risk. MCAP's operations and income are
a function of the interest rate environment and the availability of mortgage
product at reasonable yields. The availability of mortgage product for the
Company and the yields thereon will be dependent on market competition.
Dividend: The Board of Directors declared a first quarter dividend of
$0.55 per share to be paid March 31, 2006 to shareholders of record as of
March 15, 2006. This dividend comprises the regular quarterly dividend which
the Board increased to $0.21 (from $0.19) and a $0.34 extra dividend. The
Board designated $0.12 of this dividend as a capital gains dividend.
Under the Tax Act, the Company can deduct dividends paid up to 90 days
following year-end against the previous year's taxable income. The extra
dividend now declared is necessary to fully offset taxable income in 2005 and
reflects a combination of factors, but primarily the capital gains realized on
the marketable securities portfolio in the year. While there will generally be
an element of dividend adjustment in the first quarter of each year to equate
dividends to taxable income, the amount of such adjustment will depend on
factors which cannot be predicted.
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Selected Quarterly Financial Data (Unaudited)
(In thousands of dollars, except per share amounts)
Year Ended December 31,
2005 Q1 Q2 Q3 Q4 Total
-- -- -- -- -----
Net Investment Income $3,915 $3,704 $3,873 $6,222 $17,714
Net Income $3,030 $2,929 $3,108 $5,049 $14,116
Earnings per share, basic $0.26 $0.25 $0.26 $0.41 $1.18
Earnings per share,
diluted $0.26 $0.25 $0.26 $0.41 $1.18
Dividends per share
Regular $0.40 $0.19 $0.075 $0.19 $0.855
Capital Gains - - 0.115 - 0.115
-------- -------- -------- -------- --------
Total $0.40 $0.19 $0.190 $0.19 $0.970
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Year Ended December 31,
2004 Q1 Q2 Q3 Q4 Total
-- -- -- -- -----
Net Investment Income $8,075 $7,595 $3,227 $3,540 $22,437
Net Income $2,546 $4,288 $2,065 $2,702 $11,601
Earnings per share, basic $0.25 $0.43 $0.21 $0.23 $1.12
Earnings per share,
diluted $0.24 $0.41 $0.21 $0.23 $1.09
Dividends per share
Regular $0.27 $0.17 $ - $0.06 $0.50
Capital Gains - - 0.17 0.44 0.61
-------- -------- -------- -------- --------
Total $0.27 $0.17 $0.17 $0.50 $1.11
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
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MCAP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (dollars in thousands)
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December 31 September 30 December 31
As at 2005 2005 2004
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Assets
Investments
Cash and cash equivalents $ 33,093 $ 1,683 $ 47,315
Marketable securities 14,764 22,616 12,965
Mortgages 335,675 343,126 314,157
Loans and other investments 32,755 43,314 63,358
Equity investment in MCAP
Commercial Limited Partnership 16,811 15,858 14,896
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433,098 426,597 452,691
Accounts receivable 116 454 753
Capital assets 541 260 134
Other assets 614 696 787
Future tax asset - 966 -
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$ 434,369 $ 428,973 $ 454,365
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Liabilities and Shareholders' Equity
Liabilities
Debentures $ 347,182 $ 331,566 $ 371,335
Accounts payable and accrued
charges 5,346 3,302 7,654
Future taxes payable 677 - 411
Loans payable - 15,000 -
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353,205 349,868 379,400
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Shareholders' Equity
Share capital 75,880 75,880 71,927
Contributed surplus 510 510 510
Retained earnings 4,774 2,715 2,528
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81,164 79,105 74,965
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$ 434,369 $ 428,973 $ 454,365
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CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited) (dollars in thousands except for per share amounts)
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For the Quarters Ended Years Ended
December 31 December 31
2005 2004 2005 2004
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Investment Income
Mortgage interest $ 5,459 $ 4,887 $ 20,225 $ 16,229
Interest on cash and
cash equivalents 108 102 412 659
Fees 928 755 3,356 4,920
Marketable securities 1,843 68 3,802 755
Equity income from MCAP
Commercial Limited
Partnership 953 189 1,915 613
Other income 770 973 3,097 4,924
Gain (loss) on sale of
mortgages (9) 168 (17) 1,494
Gain on sale of MCAP
Financial Corporation - - - 4,967
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10,052 7,142 32,790 34,561
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Financial Expenses
Debenture interest and
expenses 3,115 2,879 11,688 9,876
Mortgage expenses 755 541 2,740 1,831
Provision for (recovery of)
losses (40) 182 648 417
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3,830 3,602 15,076 12,124
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Net Investment Income 6,222 3,540 17,714 22,437
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Operating Expenses
Salaries and administrative 1,075 1,163 3,332 8,799
Occupancy 31 12 122 463
Information systems 39 1 131 781
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1,145 1,176 3,585 10,043
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Income Before Income Taxes 5,077 2,364 14,129 12,394
Provision for (recovery of)
income taxes and large
corporation taxes 28 (338) 13 793
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Net Income $ 5,049 $ 2,702 $ 14,116 $ 11,601
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Retained earnings,
beginning of period 2,715 5,683 2,528 2,761
Income taxes charged to
retained earnings (683) - (302) -
Dividends declared (2,307) (5,857) (11,568) (11,834)
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Retained earnings, end of
period $ 4,774 $ 2,528 $ 4,774 $ 2,528
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Earnings per share $ 0.41 $ 0.23 $ 1.18 $ 1.12
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Diluted earnings per share $ 0.41 $ 0.23 $ 1.18 $ 1.09
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Dividends per share $ 0.19 $ 0.50 $ 0.97 $ 1.11
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Weighted average number of
shares (000's) 12,141 11,472 11,918 10,353
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Weighted average number of
diluted shares (000's) 12,141 11,472 11,918 10,616
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Further Information: Complete copies of the Company's 2005 Annual Report
will be filed on SEDAR at www.sedar.com and on the Company's website at
www.mcapinc.com by March 31st.
This report may contain forward-looking statements, including statements
regarding the business and anticipated financial performance of the Company.
These statements 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. These and other factors should be considered
carefully and undue reliance should not be placed on the Company's forward-
looking statements. The Company does not undertake to update any forward-
looking statements.
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