News
Equitable Group reports record fourth quarter 2006 results, sets out its objectives for 2007
TSX Symbol: ETC TORONTO, Feb. 27 /CNW/ - Equitable Group Inc. today reported its financial results for the three and 12 months ended December 31, 2006 - setting new records in both periods. It also published a range of objectives for 2007. Fourth Quarter Highlights- Net earnings increased 39.4% to $7.8 million from $5.6 million a year earlier. - Diluted earnings per share were 39.1% higher at $0.64 compared to $0.46 last year. - Return on average equity increased to 21.0% compared to 18.1% a year earlier. - Assets expanded 30.5% to $2.63 billion from $2.01 billion a year earlier. - Growth was registered in all mortgage niches: Mortgage originations grew 52.1% to $661.3 million from $434.7 million last year. - Productivity ratio (the lower the better) declined to 30.6% on a tax equivalent basis from 32.6% a year ago. 2006 Highlights - Net earnings increased 38.4% to $27.3 million compared to $19.8 million a year earlier. - Diluted earnings per share were 37.0% higher at $2.26 compared to $1.65 in 2005. - Return on average equity was 19.9%, up from 17.0% in 2005. - Growth was registered in all mortgage niches: single family dwelling mortgage assets increased 18.1% ($113.5 million), commercial mortgage assets increased 47.5% ($138.8 million), mortgages held for sale increased 63.9% ($104.7 million), and multi-unit residential grew 13.9% ($69.6 million). - Mortgage originations grew 50.6% to $2.16 billion from $1.43 billion last year. - Productivity ratio (the lower the better) was 32.0% on a tax equivalent basis compared to 31.9% a year ago. - Realized loan loss was $21 thousand - which was fully recovered in early 2007.Dividend The Company declared a dividend in the amount of $0.10 per share payable April 4, 2007 to shareholders of record at the close of business March 16, 2007. The Board has chosen to maintain the quarterly dividend at $0.10, which will cause the payout ratio to fall below Equitable's previous practice of paying approximately 25% of trailing (previous year) earnings as a dividend. In commenting on the dividend payout, Austin Beutel, Chairman of the Board said: "Equitable continued to demonstrate profitable growth in 2006 and expects further growth in 2007. Since our Company is earning, after taxes, approximately 20% return on equity, the Board has decided to retain a higher proportion of net earnings to finance growth rather than issue additional shares from treasury, which would result in some dilution of shareholders' ownership. "The quarterly dividend at 10 cents per share is equivalent to an approximate payout of 17.4% of 2006 earnings and affords a yield of 1.3%. The yield is in line with the payout and yield of other companies in the financial sector and elsewhere that are enjoying good growth and will result in a higher automatic reinvestment of shareholder funds in what the Board considers to be an attractive opportunity. The Board will continue to review the Company's dividend payout policy on a quarterly basis." Management Commentary "We are delighted with Equitable's results in both the fourth quarter and full year," said Geoffrey Bledin, President and CEO. "To us, the highlights of both reporting periods are the growth in profitability and assets, which far surpassed our performance targets. In addition, we strengthened our team to meet the demands of growth and yet improved productivity. Against all measures, in fact, Equitable enjoyed an outstanding year, once again demonstrating the value of disciplined yet opportunistic niche mortgage lending." "From an earnings perspective, we achieved 42.9% growth in total interest revenues in 2006 due to the substantial expansion of our asset base," said Stephen Coffey, Senior Vice President and CFO. "Net interest margin also increased to 2.4% from 2.3% in 2005 due to an increase in the prime rate during the first half of 2006. Normally, prime rate increases only result in temporary improvements in net interest margins but this past year, the benefit was prolonged because of a combination of our mortgage mix and market GIC rates." Mortgage Credit Quality Highlights- Mortgage principal in arrears over 61 days as a percentage of total mortgage principal was 0.08% in 2006, an improvement compared to an already minimal 0.17% in 2005. - Mortgages identified as impaired amounted to 0.05% of total mortgage principal outstanding at period end compared to 0.21% a year ago. - Realized credit loss was $21,000 (representing 0.001% of average principal outstanding) in 2006 versus $0 in 2005 - however, this loss was recovered in its entirety in January 2007.Geographic Expansion At period end 2006, Equitable had almost $60 million in total mortgages outstanding in the Alberta single family dwelling market. This long-term geographic expansion began in 2005 with very conservative "learn first, grow second" goals and the Company has continued to systematically increase its presence and partnerships in this growing region. At period end 2005, total Alberta mortgages outstanding were $8.1 million. Equitable has now expanded its focus beyond Calgary to Edmonton. Due to growth in Alberta, as well as activity in other national niches (such as warehoused mortgages), Ontario represented approximately 83.0% of mortgage principal outstanding at period end compared to 88.7% a year ago. Equitable has also recently expanded its focus in Ontario to markets outside the Greater Toronto Area, most particularly Ottawa. 2007 Range of Objectives Equitable today published a new range of financial objectives for 2007. These include:- 18-22% growth in assets over 2006 - 18-22% growth in net earnings over 2006 - 18-22% growth in diluted earnings per share over 2006 - 18-22% return on average equity - 32-35% productivity ratio on a tax equivalent basisLooking Ahead "Equitable entered 2007 with strong momentum in all mortgage niches," said Mr. Bledin, "and we are well positioned for another strong year. In context, however, as we look forward to 2007, we believe it's important to set performance targets in broader ranges than we have in the past to reflect two realities. One, we are starting with a higher opening asset base, which makes growth in percentage terms more difficult to achieve, and two, we believe it's important to acknowledge the possibility that the market environment may not be as favourable in 2007 as it has been in the recent past. However, we retain our desire to see Equitable do as it has in the past: meet or exceed our performance targets by a considerable margin. "As we move into the year, we expect to continue our disciplined yet opportunistic pursuit of profitable growth. Operationally, as announced in early January, we received approval to issue up to $40 million in subordinated debentures, eligible for Tier 2 capital treatment to support our growth. And strategically, we intend to continue to strengthen our position under the leadership of our incoming President and CEO Andrew Moor. Andrew's first day on the job is March 1 and we look forward to profiting from his leadership, experience, contacts and ideas over the long term." Fourth Quarter Webcast Equitable's fourth quarter webcast begins at 10 am eastern time today. To listen, please log on to www.equitablegroupinc.com. To participate in the call, please dial 416 644 3419. MD&A The Company will post its MD&A for the three and 12 months ended December 31, 2006 on its website www.equitablegroupinc.com this morning. This document will be archived on the site. About Equitable Group Inc. Equitable Group Inc. provides first mortgage financing through its wholly-owned subsidiary, The Equitable Trust Company. It also offers Guaranteed Investment Certificates to depositors as a nationally-licensed deposit-taking institution. Equitable Trust was founded in 1970, and by following a prudent, results-driven approach, Equitable has become a leader in its primary niches: alternative single family dwelling as well as multi-unit residential mortgage lending. The common shares of Equitable Group Inc. are listed on the Toronto Stock Exchange under the trading symbol of "ETC". For more information visit www.equitablegroupinc.com. Certain forward-looking statements are made in this news release, including statements regarding possible future business. Investors are cautioned that such forward-looking statements involve risks and uncertainties detailed from time to time in the Company's periodic reports filed with Canadian regulatory authorities. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Equitable does not undertake to update any forward-looking statements, oral or written, made by itself or on its behalf. See the MD&A for further information on forward-looking statements. Management's Discussion and Analysis of Financial Condition and Results of Operations (for the year ended December 31, 2006) Business Overview Equitable Group Inc. ("Equitable" or the "Company") is a niche lender providing residential first mortgage financing through its wholly-owned subsidiary, The Equitable Trust Company ("Equitable Trust"). Equitable Trust was founded in 1970. The primary sources of the Company's revenue are interest income derived from its mortgage financing business and interest and dividend income from its investments. In addition, the Company earns income from commitment, renewal and discharge fees on its mortgage portfolio and from the securitization of mortgages and recurring income from its continuing interest in these mortgages within the Canada Mortgage and Housing Corporation ("CMHC") mortgage backed securities ("MBS") program. The Company's business model is based on outsourcing mortgage origination to independent mortgage brokers and outsourcing deposit origination to independent deposit agents rather than using a branch network to conduct its business. Equitable's business model and the growing nature of its mortgage lending niches have contributed to strong long-term financial results. In the five years ended December 31, 2006, the Company's net earnings grew at a compound annual rate of 22.8%, its assets grew 29.3% compounded annually and return on average shareholders' equity averaged 17.2%. Business Strategies The Company's business strategies, set out below, are intended to support the Company's dual objectives of achieving long-term profitable growth while maintaining strong productivity and solid mortgage credit quality:- Maintain a niche market focus on mortgage financing of single family dwelling properties and multi-unit residential properties in targeted geographic regions; - Complement the focus on residential property financing with selective mortgage lending on commercial properties and warehoused mortgages ("conventional mortgages held for sale"); - Emphasize a strict, disciplined approach to mortgage financing, concentrating on sound product underwriting; - Support growth at low cost by: - funding its mortgage financing operations through deposits from the public across Canada in the form of Canada Deposit Insurance Corporation ("CDIC") insured GICs; - outsourcing mortgage origination and deposit-taking functions without using a branch network; - Develop and nurture strategic business alliances in the mortgage financing industry; - Utilize effective regulatory capital planning; - Foster a strong growth orientation and culture.2006 Operating Highlights During 2006, Equitable expanded its asset base, strategic alliances with mortgage originators, staffing levels and its geographical scope of operations. This expansion was consistent with the Company's stated strategies. It was carried out with the same attention to mortgage credit quality and the same disciplined approach that the Company has demonstrated in the past.More specifically: - Equitable expanded its warehoused mortgage assets in keeping with its ability to capitalize on market niche opportunities. - Equitable extended its presence in Alberta by entering the Edmonton market for single family dwelling mortgage lending, while growing its mortgage business in Calgary (established in 2005) and expanding its substantial coverage in Ontario, its primary geographic region, by lending in the Ottawa area. - To ensure that all of these areas of expansion remain well financed and managed on a disciplined basis, Equitable completed a Series 6 Subordinated Debenture financing, the proceeds of which are eligible as regulatory capital for leverage purposes, and increased staffing levels in key operational areas.2006 Financial Highlights In 2006, Equitable set new performance records for both earnings and asset growth. Although the Company increased staffing levels to support ongoing growth and public company corporate governance requirements, it also achieved its stated productivity ratio objectives. The following table provides a useful summary that should be read in conjunction with the "Financial Review" sections below.Table 1: Selected financial information ($ thousands, except share, per share and employee amounts) 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- OPERATIONS $ % Net earnings 27,338 19,757 14,978 7,581 38.4% Earnings per share - basic $ 2.30 $ 1.68 $ 1.33 $ 0.62 36.9% Earnings per share - diluted $ 2.26 $ 1.65 $ 1.30 $ 0.61 37.0% Net interest income 51,637 37,906 26,780 13,731 36.2% Total revenue 143,219 100,432 74,767 42,787 42.6% Return on weighted average equity 19.9% 17.0% 15.5% Return on average assets 1.2% 1.1% 1.1% Productivity ratio(1) - TEB(2) 32.0% 31.9% 32.5% Number of employees at year end 107 82 54 BALANCE SHEET AND OFF BALANCE SHEET Total assets 2,625,755 2,012,252 1,543,251 613,503 30.5% Mortgages receivable 2,135,662 1,678,420 1,302,084 457,242 27.2% Shareholders' equity 149,736 124,608 107,553 25,128 20.2% Mortgage-backed security assets under administration 1,807,479 1,878,405 1,858,442 (70,926) (3.8%) COMMON SHARES Number of common shares outstanding at year end 11,924,468 11,781,940 11,680,750 1.2% Dividends per share $ 0.40 $ 0.32 $ 0.13 $ 0.08 25.0% Book value per common share $ 12.56 $ 10.58 $ 9.21 $ 1.98 18.7% Common share price - close $ 31.20 $ 24.60 $ 22.85 $ 6.60 26.8% Market capitalization 372,043 289,836 266,905 82,207 28.4% CREDIT QUALITY Realized loan losses(1) 21 0 0 Mortgages in arrears 61 days or more as a % of total mortgages(1) 0.08% 0.17% 0.17% Net impaired mortgages as a % of total mortgages(1) 0.05% 0.09% 0.16% Allowance for credit losses as a % of gross impaired mortgages 707.0% 199.8% 141.8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes: (1) The lower the better. (2) Productivity ratio - Tax Equivalent Basis ("TEB") is a non-GAAP financial measure derived by dividing non-interest expense by the sum of net interest income - TEB and other income. See explanation at the end of this Management's Discussion and Analysis ("MD&A").2006 Performance Versus Objectives Equitable achieved or surpassed all of its financial targets for 2006, its third year as a public company and 36th year since business inception. Asset growth was 30.5%, well in excess of Equitable's previously stated 2006 objective of 20%. Similarly, the 38.4% increase in net earnings comfortably exceeded the 2006 objective of 20% while the 19.9% Return on Average Equity ("ROAE") achieved the stated objective of greater than 17% return. Based on this performance, management has set new targets for 2007. The following table sets out the Company's financial objectives for 2006, its 2006 performance and its objectives for 2007.Table 2: Performance and objectives 2006 2006 2007 Objectives Performance Objectives ------------------------------------------------------------------------- % growth in assets over those at the end of the prior year 20% 30.5% 18-22% % increase in net earnings over that of the prior year 20% 38.4% 18-22% greater return on average equity than 17% 19.9% 18-22% % increase in EPS(1), over that of the prior year 20% 37.0% 18-22% productivity ratio - TEB(2), the lower the better 32 to 34% 32.0% 32 to 35% ------------------------------------------------------------------------- Notes: (1) Earnings per share - diluted. (2) See explanation of TEB at the end of this MD&A.In recent years, Equitable has exceeded its performance targets by considerable margins. As management looks forward to 2007, it is adjusting its expectations to reflect the higher opening asset base from which the Company is operating and to reflect the possibility that the market environment may not be as buoyant in 2007 as it has been in the recent past. Outlook While overall market conditions could be more challenging in 2007 as compared to recent years, management believes Equitable is well positioned to meet its financial objectives for 2007. Revenues and net interest income are expected to increase as a result of continued asset growth and customer demand in the Company's market niches. Asset and revenue growth, in combination with stable interest rates, an efficient productivity ratio and minimal loan losses are expected to positively impact net earnings and ROAE. Dividends and Outlook As a result of its 2006 growth and the capital required to sustain this growth, the Company's Board has chosen to maintain the quarterly dividend at $0.10 per share. This will cause the Company's payout ratio to fall below the previously stated target of 25% of trailing net earnings. The Board believes, however, that given the Company's strong prospects and current level of ROAE, shareholders will benefit by leaving additional funds in the Company. The $0.10 per share dividend payment has been declared by the Board for payment on April 4, 2007 to shareholders of record as at March 16, 2007. Financial Review - Earnings Net interest income Net interest income is the main driver of profitability for the Company. It is measured on a TEB so that income from equity securities may be compared on a pre-tax basis to ordinary interest income. The following table illustrates the Company's interest income and interest margin performance in 2006 compared to 2005, all presented on a TEB.Table 3: Net interest income 2006 2005 Average Revenue/ Average Average Revenue/ Average ($ thousands) balance Expense rate Balance Expense rate ------------------------------------------------------------------------- Interest revenues or interest expenses derived from: Assets: Liquidity investments 210,150 8,925 4.2% 129,517 3,642 2.8% Equity securities - TEB(1) 139,252 8,719 6.3% 94,600 6,166 6.5% Mortgage loans 1,898,443 121,406 6.4% 1,483,942 88,026 5.9% ------------------------------------------------------------------------- Total interest earning assets - TEB(1) 2,247,845 139,050 6.2% 1,708,059 97,834 5.7% ------------------------------------------------------------------------- Total assets - TEB(1) 2,319,004 139,050 6.0% 1,777,752 97,834 5.5% ------------------------------------------------------------------------- Liabilities and shareholders' equity: Customer deposits 2,054,209 79,537 3.9% 1,563,786 53,351 3.4% Bank term loan 27,250 2,072 6.8%(2) 9,875 1,043 6.7%(2) Subordinated debt 28,472 2,041 7.5%(2) 30,422 2,382 7.7%(2) ------------------------------------------------------------------------- Total interest bearing liabilities 2,109,931 83,650 4.0% 1,604,083 56,776 3.5% ------------------------------------------------------------------------- Total liabilities and shareholders' equity 2,319,004 83,650 3.6% 1,777,752 56,776 3.2% ------------------------------------------------------------------------- Net interest income - TEB(1) 55,400 41,058 Net interest margin - TEB(1) 2.4% 2.3% Less: Taxable equivalent adjustment 3,763 3,152 Net interest income per financial statements 51,637 37,906 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes: (1) See explanation of TEB at the end of this MD&A. (2) In order to provide more accurate disclosure, the average rate is calculated based on the weighted average outstanding bank term loan and subordinated debt during 2006 and 2005 using month-end balances outstanding.Total interest revenues increased $41.2 million or 42.1% to $139.1 million in 2006 compared to $97.8 million in 2005. This increase was primarily due to growth in mortgages. Mortgage interest revenues increased $33.4 million or 37.9% in 2006 over 2005. The average prime rate in 2006, based on the rate in effect at each month-end, was 5.81% compared to 4.42% in 2005. As a result of prime rate increases during the first six months of 2006, Equitable's net interest margin increased to 2.4% in 2006, from 2.3% in 2005. Generally, interest on the Company's floating rate mortgages is immediately affected by any change in the prime rate while the effect on liabilities is staggered. Only the Company's cashable GIC products might be immediately affected by an increase in the prime rate through early redemption and reinvestment by GIC holders. All other GICs would be re-priced as they mature. Therefore, an increase in the prime rate of interest usually leads only to temporary improvements in net interest margins for the Company; however, due to the mortgage mix and market GIC interest rates during 2006, the Company has been able to benefit from a longer than temporary increase in margins. The TEB adjustment of $3.8 million in 2006 was 19.4% higher than in 2005 due to increased dividends received from the Company's larger equity securities portfolio. Premiums or discounts on preferred shares with defined maturity or re-pricing dates (retractable, wind-up shares, fixed/floating securities) within the equity securities portfolio are amortized against the dividend income from these securities. Interest income from the Company's liquidity investments increased $5.3 million or 145.1% from 2005 due to higher interest rates in 2006 compared to 2005 along with a larger debt securities portfolio prompted by greater liquidity requirements. Interest expense on average customer deposits outstanding increased to 3.9% in 2006 from 3.4% in 2005 due to the increases in interest rates previously mentioned. Overall interest expense on customer deposits grew $26.2 million or 49.1% over 2005 due to this increase in rates along with a 31.4% increase in average customer deposits outstanding. Outlook Certain economists predict that the prime rate will remain stable throughout 2007. Based in part on these forecasts, management believes Equitable will be able to achieve close to the same net interest margins in 2007 as it realized in 2006. Revenue growth and earnings targets for 2007 should also be achieved with further growth in the Company's interest earning asset base. Other income The components of securitization income are excess interest, net of servicing fee and gain on sale of mortgages. Total income from loan securitizations increased $0.1 million or 1.5% to $3.9 million in 2006 up slightly from $3.8 million in 2005. Increased competition for multi-unit residential mortgages has led to lower profit margins on the securitization of these loans in 2006 as compared to 2005. Gross margin on the securitization of CMHC mortgages decreased to 26 basis points in 2006 from 42 basis points in 2005. As a result, gain on sale of mortgages was lower in 2006 than in 2005. Excess interest, net of servicing fee, increased $0.5 million or 18.2% in 2006 over 2005. This increase reflects the receipt of interest penalties on the early discharge of certain securitized mortgages. Mortgage commitment income and other fees (consisting of mortgage related fees, commitment and renewal fees and other non-mortgage related fees) increased by $1.4 million or 69.4% because mortgage originations were greater in 2006 than in 2005. Net gain on sale or redemption of investments was $0.7 million in 2006 as a result of the sale of a common share investment in the fourth quarter. This compares to a loss of $0.1 million in 2005. In 2006, the Company did not write down any of its preferred share positions. In 2005, the Company wrote down its preferred share positions by $0.6 million.Table 4: Other income ($ thousands) 2006 2005 Change from 2005 ------------------------------------------------------------------------- $ % Loan securitizations - excess interest net of servicing fee 3,182 2,693 489 18.2% Loan securitizations - gain on sale of mortgages 708 1,141 (433) (37.9%) ------------------------------------------------------------------------- Total income from loan securitizations 3,890 3,834 56 1.5% Mortgage commitment income and other fees 3,373 1,991 1,382 69.4% Net gain(loss) on sale or redemption of investments 669 (75) 744 n/a ------------------------------------------------------------------------- Total 7,932 5,750 2,182 37.9% ------------------------------------------------------------------------- -------------------------------------------------------------------------Outlook Management believes that other income will not change significantly in 2007 compared to 2006. Securitization levels in 2007 are expected to approximate the experience in 2006, however, if competition for multi-unit mortgages increases, this activity may decrease. It is possible that increased mortgage funding in 2007 could augment commitment fee income. Management does not expect the Company to realize any significant gains or losses in its equity securities portfolio in 2007. Non-interest expenses Total non-interest expenses increased $5.4 million or 35.9% in 2006. The most significant non-interest expenses were compensation and benefits, including directors' fees and stock-based compensation expense. At December 31, 2006, Equitable employed 107 staff compared to 82 a year earlier. Included in compensation and benefits in both 2006 and 2005 was $0.4 million of expense related to stock option grants to directors and employees (see Shareholders' Equity discussion for details on the stock option plan). The second most significant non-interest expense was GIC deposit agent commissions amounting to $4.7 million, compared to $3.4 million in 2005, a 39.0% increase. The increase in deposit agent commissions over 2005 levels was due to an increase in agent sourced GIC deposits during 2006 which stood at $2.27 billion outstanding at December 31, 2006, as compared to $1.65 billion a year earlier. These commissions are expensed over the term of the GICs to which they relate. Other non-interest expenses increased with the expanded operations of the Company during 2006. Non-interest expenses excluding compensation and benefits and GIC deposit agent commissions totalled $6.6 million in 2006, an increase of $1.1 million or 19.6% over $5.5 million in 2005. The Company's productivity ratio - TEB remained relatively flat at 32.0% in 2006 as compared to the 31.9% in 2005 - and in line with management's overall objective for the year. This ratio (the lower the better) reflects the benefits of the Company's low-cost business model based on outsourcing.Table 5: Non-interest expenses and productivity ratio ($ thousands) 2006 2005 Change from 2005 ------------------------------------------------------------------------- $ % Compensation and benefits 9,022 6,052 2,970 49.1% GIC deposit agent commissions 4,669 3,360 1,309 39.0% Capital taxes, licences, regulatory fees and Insurance 2,299 2,010 289 14.4% Premises and equipment 1,573 1,103 470 42.6% Marketing, travel and communications 874 796 78 9.8% Mortgage servicing 768 743 25 3.4% Legal, audit and related services 453 301 152 50.5% Other 621 557 64 11.5% ------------------------------------------------------------------------- Total 20,279 14,922 5,357 35.9% Productivity Ratio - TEB(1) 32.0% 31.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes: (1) See explanation of TEB at the end of this MD&A.Outlook Management is targeting a productivity ratio - TEB of between 32% and 35% in 2007. It intends to achieve this attractive ratio by levering its low cost business model and through proactive expense management. Income Taxes The Company's effective tax rate in 2006 was 28.8% compared to 29.5% in 2005. Tax-exempt dividend income from portfolio securities continued to assist in lowering the Company's effective tax rate. The Company recorded a one-time tax benefit in the amount of $0.3 million in the third quarter of 2006 relating to a special dividend received on an investment in common shares. As well, future income tax expense decreased $0.3 million due to a decrease in the future federal enacted tax rate. The effective tax rate is less than the statutory 36.1% tax rate, in 2006 due in part to these items, but for both 2006 and 2005 primarily due to tax-exempt income earned in the equity securities portfolio. Income taxes are allocated between current and future taxes. Future taxes result from timing differences between the Company's financial statement earnings and its earnings for tax purposes. These future taxes are established at the rates expected to be in effect at the date of the reversal of the timing differences. Outlook Management expects to be able to achieve an effective tax rate of between 30% and 32% in 2007 by actively managing taxation through the Company's investments in its tax-exempt/preferred, income yielding, equity securities portfolio. Financial Review - Balance Sheet Mortgages All of Equitable's mortgages are first charges on real estate. The composition of the Company's mortgage portfolio as at December 31, 2006 reflects management's mortgage asset mix strategy and is shown in the table below together with comparisons for prior periods.Table 6: Mortgages receivable % of % of % of ($ thousands) 2006 total 2005 total 2004 total ------------------------------------------------------------------------- Single family dwelling 741,732 34.8% 628,240 37.5% 510,146 39.2% Multi-unit residential 570,312 26.7% 500,666 29.8% 463,391 35.6% Commercial 431,017 20.2% 292,200 17.4% 232,943 17.9% Conventional mortgages held for Sale 268,396 12.6% 163,743 9.8% 45,120 3.5% Construction 87,043 4.1% 61,836 3.7% 26,680 2.0% CMHC-insured 33,617 1.6% 30,452 1.8% 24,063 1.8% ------------------------------------------------------------------------- Total mortgage principal 2,132,117 100.0% 1,677,137 100.0% 1,302,343 100.0% Net premiums and sundry 1,423 1,422 590 ------------------------------------------------------------------------- Mortgages reported 2,133,540 1,678,559 1,302,933 Accrued interest 10,168 7,028 5,593 Allowances for credit losses (8,046) (7,167) (6,442) ------------------------------------------------------------------------- Total mortgages receivable 2,135,662 1,678,420 1,302,084 ------------------------------------------------------------------------- -------------------------------------------------------------------------Mortgage lending activity increased in all of the Company's niches in 2006. The biggest increase was in conventional mortgages held for sale (see below). This changed the Company's mortgage portfolio mix in that single family dwelling and multi-unit residential mortgages declined to 61.5% of total mortgage principal compared to 67.3% a year ago. However, single family dwelling and multi-unit residential mortgages remain the Company's primary niches. Single family dwelling mortgages represented the largest portion of the portfolio at December 31, 2006 at 34.8%. They increased $113.5 million or 18.1% from December 31, 2005. In this niche, Equitable is an alternative lender to borrowers who are unable to satisfy the underwriting criteria of conventional mortgage lenders. This is a large and, management believes, growing niche market. The Company's second largest niche was multi-unit residential mortgages. Here, the mortgage portfolio increased by $69.6 million or 13.9% from December 31, 2005. In this niche, the Company provides mortgages on properties such as apartment buildings and retirement residences. In terms of dollar growth, Equitable's fastest-growing niche in 2006 was commercial mortgage lending. Commercial mortgages increased $138.8 million or 47.5% from December 31, 2005. Despite this growth, Equitable remained highly selective in the commercial area as part of its risk management activities and continued to apply its self-imposed cap on commercial mortgages to ensure this portfolio does not exceed 25% of Equitable's total portfolio in any given year. The Company believes this limit is prudent in managing overall portfolio risk. The growth leader on a percentage basis among Equitable's niches in 2006 was conventional mortgages held for sale where mortgage principal increased 63.9%. These mortgages are comprised of residential (42.4% of the 2006 portfolio) and commercial mortgages (57.6% in 2006) originated by third-party lenders who require financing prior to pooling and eventually selling the mortgages to investors. These mortgages usually stay on the books of the Company for periods of up to six months and are therefore often referred to as 'warehoused' mortgages. Equitable derives several advantages from participating in this market niche:- no broker commission is paid on origination; - the loans are floating rate and therefore easily matched with short- term GICs; - the yields from carrying the loans are attractive.Construction mortgages increased $25.2 million or 40.8% compared to December 31, 2005 to comprise 4.1% of the portfolio. CMHC-insured mortgages comprised 1.6% of the portfolio while principal balance outstanding increased $3.2 million over that of the preceding year. Floating rate mortgages within the portfolio increased 36.2% to $1.10 billion at December 31, 2006 from $0.81 billion at December 31, 2005 and represent 51.7% of the portfolio compared to 48.3% last year. The vast majority of Equitable's mortgages are sourced each year by the Company's network of independent mortgage brokers. Equitable also has an arrangement with First National Financial LP ("FNFLP"), one of Canada's leading mortgage specialists, to source and administer the mortgages in the Company's CMHC-MBS program and conventional mortgage product, including a component of mortgages held for sale. FNFLP originated approximately $771.0 million or 36.2% of the Company's outstanding reported mortgage principal as at December 31, 2006 approximately the same as the 36.1% of the outstanding reported principal a year earlier. The Company's conventional mortgages held for sale and CMHC-insured mortgages are located across Canada. CMHC-insured mortgages are funded almost exclusively for securitization through the CMHC-MBS program. When they are securitized, the Company records a gain on sale; it also retains the rights and obligations with respect to servicing the mortgages. In contrast, when the Company sells the conventional mortgages held for sale, it records no gain or loss and has no rights or obligations with respect to the mortgages after they have been discharged. At December 31, 2006 approximately 83.0% of the Company's mortgage principal was secured by properties located in Ontario, compared to 88.7% at December 31, 2005. This change is primarily due to the continued expansion of the Company's single family Alberta operations and to an increase in warehoused mortgages on properties located outside Ontario. The Company's single family dwelling Alberta presence is growing with just over $58.5 million in total mortgages outstanding at year-end, compared to $8.1 million at December 31, 2005. Mortgage principal increased $455.0 million or 27.1% during 2006 to $2.13 billion at year-end. Mortgage production is classified into three major sub-categories: conventional (uninsured) mortgage production other than warehoused mortgages, warehoused mortgages and CMHC-insured production. The Company funded $985.3 million of non-warehoused conventional mortgages during 2006, up 8.5% from $908.2 million in 2005. Warehoused mortgage production in 2006 increased $645.5 million or over three and a half times that of 2005. CMHC insured mortgages funded during 2006 amounted to $278.4 million compared to $276.4 million in 2005. The combined conventional and insured mortgage production in 2006 was 50.6% greater than in 2005.Table 7: Mortgage production 2006 2005 Mortgage Mortgage Principal % of Principal % of ($ thousands) Funded total Funded total ------------------------------------------------------------------------- Conventional mortgages other than warehoused mortgages 985,306 45.7% 908,238 63.4% Warehoused mortgages 892,868 41.4% 247,363 17.3% CMHC-insured mortgages 278,362 12.9% 276,357 19.3% ------------------------------------------------------------------------- Total 2,156,536 100.0% 1,431,958 100.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2004 Mortgage Principal % of ($ thousands) Funded total Change from 2005 ------------------------------------------------------------------------- $ % Conventional mortgages other than warehoused mortgages 722,240 60.6% 77,068 8.5% Warehoused mortgages 98,246 8.3% 645,505 261.0% CMHC-insured mortgages 370,942 31.1% 2,005 0.7% ------------------------------------------------------------------------- Total 1,191,428 100.0% 724,578 50.6% ------------------------------------------------------------------------- -------------------------------------------------------------------------Outlook Management believes Equitable can maintain good growth in mortgage assets in 2007 assuming stable interest rates and business conditions, because of the Company's unique niches. As part of its ongoing growth strategy, the Company will continue to emphasize single family dwelling and multi-unit residential mortgage areas, as well as conventional mortgages held for sale. Mortgage Credit Quality The Company realized a $21 thousand credit loss on one mortgage during 2006, its first loss in over five years. This loss was subsequently recovered in its entirety in early 2007.Table 8: Mortgage credit quality ($ thousands) 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- $ % Credit quality measures: Gross impaired mortgage principal 1,138 3,587 4,543 (2,449) (68.3%) Allowance for credit losses 8,046 7,167 6,442 879 12.3% Allowance for credit losses as a % of gross impaired mortgages 707.0% 199.8% 141.8% Mortgage principal in arrears over 61 days 1,725 2,806 2,187 (1,081) (38.5%) Mortgage principal in arrears over 61 days as a % of total mortgage principal 0.08% 0.17% 0.17% Continuity of Allowance for Credit Losses: Balance beginning of year 7,167 6,442 5,737 Provision charged to statement of earnings 900 725 700 Realized losses deducted from allowance (21) - - Recovery of prior year losses added to allowance - - 5 ------------------------------------------------------------------------- Balance end of year 8,046 7,167 6,442 ------------------------------------------------------------------------- -------------------------------------------------------------------------Mortgages in arrears 61 days or more amounted to 0.08% of total principal outstanding at December 31, 2006, compared to 0.17% in December 31, 2005. Mortgages identified as impaired amounted to 0.05% of total mortgage principal outstanding as at December 31, 2006, compared to 0.21% a year earlier. The Company has increased its provision for credit losses in 2006 by 24.1% to $0.9 million, from $0.7 million in 2005, to reflect substantial growth in the portfolio. Outlook Management expects the Company to maintain its track record of minimal loan losses. Although deterioration in housing affordability may lead to a modest increase in arrears in the mortgage industry generally, management expects its disciplined lending policies, the quality of the Company's borrowers and its collection practices will result in continued low arrears. Cash, Cash Equivalents, Investments and Liquidity Practices The Company maintains two components of liquid resources. The first is holdings which are eligible as liquidity for regulatory purposes at Equitable Trust. These include cash, short-term investments and government guaranteed bonds, treasury bills and notes. The second component is investments which are not eligible as liquidity for regulatory purposes at Equitable Trust. These include preferred and common shares which have been utilized as security for a credit facility of $35.0 million with the Company's bank for short-term liquidity purposes. At December 31, 2006 liquid assets eligible for regulatory purposes increased 63.0% to represent 9.9% of total assets compared to 7.9% of total assets at December 31, 2005. This increase was due to increased liquidity requirements related to the shorter average term of GICs and the increase in cashable GICs in the GIC portfolio. As well, Company liquidity requirements include the funding of mortgage investments. Mortgage commitments at December 31, 2006 were $279.3 million, down 9.3% from $308.0 million at December 31, 2005. Cash and cash equivalents increased $30.6 million to $107.8 million at December 31, 2006 from $77.2 million at December 31, 2005 and longer-term government bonds, treasury bills and notes increased $70.1 million or 84.8% to $152.6 million from $82.6 million during the same period. Equity securities increased $54.8 million or 49.0% to $166.7 million at December 31, 2006 from $111.8 million a year earlier. This increase relates to the Company's strategy of earning additional tax-exempt income in an effort to manage its effective tax rate.Table 9: Liquid resources ($ thousands) 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- $ % Deposits with regulated financial institutions 21,688 46,039 39,942 (24,351) (52.9%) Government guaranteed debt instruments 238,802 113,771 59,281 125,031 109.9% ------------------------------------------------------------------------- Liquid assets for regulatory purposes 260,490 159,810 99,223 100,680 63.0% Equity securities 166,669 111,833 77,367 54,836 49.0% ------------------------------------------------------------------------- Total liquid assets 427,159 271,643 176,590 155,516 57.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total liquid assets for regulatory purposes as a % of total assets 9.9% 7.9% 6.4% Total liquid assets as a % of total assets 16.3% 13.5% 11.4% ------------------------------------------------------------------------- -------------------------------------------------------------------------Outlook In 2007, management expects the Company will, at all times, continue to maintain liquid assets eligible for regulatory purposes at levels equivalent to 20% of its GICs coming due in the next 100 days. Further, it expects to increase its equity securities portfolio in order to manage its effective tax rate - provided that additional equity investments meet the Company's investment criteria. Loan Securitizations - Retained Interests Total mortgages in the CMHC-MBS program remained relatively constant at $1.81 billion at December 31, 2006 and $1.88 billion at December 31, 2005. Securitization activity during the past two years was also relatively consistent with $273.7 million of CMHC-insured multi-unit residential mortgages securitized during 2006, an increase of $3.7 million or 1.4% from the 2005 level of $270.0 million. Loan securitizations - retained interests amounted to $48.3 million at December 31, 2006, a decrease of $3.3 million or 6.4% from December 31, 2005. The decrease was due to the shorter duration of the securitized mortgage portfolio at the end of 2006 as compared to 2005. Loan securitizations - retained interests represent the discounted future earnings to be received relating to the insured mortgages securitized through the CMHC-MBS program. It is presented gross of the estimated future servicing liability included in other liabilities representing the future cost of servicing these securitized mortgages. For further information, see Note 4 to the Company's Consolidated Financial Statements for the year ended December 31, 2006 (the "Consolidated Financial Statements") and the Critical Accounting Estimates, Financial Instruments and Off-Balance Sheet Arrangements sections of this MD&A. Outlook Securitization levels may decrease in 2007 if competition increases for multi-unit product. Otherwise, the Company's management expects securitization activity in 2007 to approximate 2006 levels. Deposits Sales of cashable GICs continued to show strong growth in 2006, up $221.6 million or 63.5% on a year over year basis. At December 31, 2006, cashable GICs represented 24.4% of total deposits outstanding versus 19.7% in 2005. This product is a one year GIC, cashable at any time upon demand. The Company's other GIC products consist of 30-day to five-year fixed term GICs. The Company is licensed in all jurisdictions in Canada to accept deposits. Deposit principal outstanding increased $564.5 million or 31.9% to $2.34 billion at December 31, 2006 from $1.77 billion at December 31, 2005. Accrued interest has increased 44.0% over the December 31, 2005 balance, reflecting higher interest rates and GICs at December 31, 2006 than at December 31, 2005.Table 10: Deposits ($ thousands) 2006 2005 2004 Change - from 2005 ------------------------------------------------------------------------- $ % Cashable GIC deposits 570,455 348,885 - 221,570 63.5% Fixed term GIC deposits 1,766,011 1,423,066 1,355,620 342,945 24.1% Accrued interest on deposits 53,289 37,004 29,028 16,285 44.0% ------------------------------------------------------------------------- Total 2,389,755 1,808,955 1,384,648 580,800 32.1% ------------------------------------------------------------------------- -------------------------------------------------------------------------Outlook Management expects the Company will increase its deposit base in 2007 by increasing market share through existing deposit brokers. Subordinated Debt and Bank Term Loan Subordinated debt is subordinated to the rights of the Company's depositors and other creditors. It represents eligible regulatory Tier 2 capital for Equitable Trust to a maximum level of 50% of Tier 1 capital (Equitable Trust's shareholder's equity) and forms an integral part of the Company's capital management plan. Subordinated debt is issued for a period of 10 years. Subject to regulatory approval, debt is redeemed each year in an amount equal to 20% of the prior year's net earnings. The Company may redeem additional subordinated debt if it so chooses, with the approval of the Office of the Superintendent of Financial Institutions ("OSFI"). Subordinated debt of $11.4 million was redeemed in 2006, compared to $3.5 million in 2005.Table 11: Subordinated debentures and bank term loan Interest ($ thousands) Rate 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- $ % Subordinated debentures Series 3 8.48%-8.82% - - 3,530 n/a n/a Series 4 7.54%-8.15% - 11,444 11,444 (11,444) (100%) Series 5 7.31%-7.58% 20,250 20,250 14,175 - - Series 6 7.27% 5,000 - - 5,000 n/a ------------------------------------------------------------------------- Total sub debt 25,250 31,694 29,149 (6,444) (20.3%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Bank term loans 6.37% 19,750 19,750 - - - 6.82% 15,000 - - 15,000 n/a ------------------------------------------------------------------------- Total term loans 34,750 19,750 - 15,000 75.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total sub debt and term loans 60,000 51,444 29,149 8,556 16.6% ------------------------------------------------------------------------- -------------------------------------------------------------------------During 2006, Equitable Trust completed its issuance of Series 6 subordinated debentures. A total of $20.0 million of debentures were issued; $5.0 million directly to subscribers and $15.0 million purchased by the Company as the parent of Equitable Trust using proceeds from a five-year bank term loan in the same amount. On consolidation of Equitable Trust, a total of $34.8 million of inter-company subordinated debt was eliminated and the $34.8 million bank term loan is presented in the Company's Consolidated Financial Statements. The Company is in compliance with all of the covenants required by the bank lender. It is a Company objective to provide ongoing financing of Equitable Trust's regulatory capital requirements using an appropriate mixture of Tier 1 and Tier 2 capital. By doing so, management intends to achieve a better return on equity than would be the case without the use of Tier 2 capital. Outlook Management expects the Company (through Equitable Trust) will maintain an optimal mix of Tier 1 and Tier 2 capital in 2007 to assist it in meeting its corporate capital and return objectives. Management took an important step in this regard in January 2007 when Equitable Trust sought and received authorization from OSFI to issue up to $40 million of subordinated debentures, Series 7, during 2007. Other Assets, Future Income Taxes and Other Liabilities Other assets increased $4.1 million or 38.4% to $14.7 million as at December 31, 2006 from $10.6 million a year earlier. Other assets include deferred GIC commissions paid to deposit brokers, capital assets consisting of leasehold improvements, office furniture and computer equipment and sundry receivables and prepaid expenses. The largest component of these assets was deferred GIC commissions. These are commissions paid to deposit agents; they are expensed over the term of the GICs to which they relate. Deferred GIC commissions have not increased in proportion to the increase in agent-sourced GICs due to the shorter average term of the GICs sourced by deposit brokers during 2006. Other receivables and prepaids also include accrued interest on non-mortgage assets which has increased $1.0 million from $0.9 million at December 31, 2005 to $1.9 million at December 31, 2006 due to the increase in assets eligible for regulatory liquidity purposes.Table 12: Other assets, future income taxes and other liabilities ($ thousands) 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- $ % Other assets Deferred GIC commissions 6,288 5,791 3,803 497 8.6% Other receivables and prepaids 6,112 3,301 3,582 2,811 85.2% Capital assets 2,263 1,502 1,370 761 50.7% ------------------------------------------------------------------------- Total 14,663 10,594 8,755 4,069 38.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- $ % Future income taxes and Other liabilities Accounts payable and accrued liabilities 6,860 4,315 2,111 2,545 59.0% Securitized mortgage servicing liability 6,044 6,460 6,180 (416) (6.4%) Mortgagor realty taxes 5,089 5,266 4,595 (177) (3.4%) Future income taxes 4,700 6,538 8,040 (1,838) (28.1%) Income taxes payable 3,571 4,666 975 (1,095) (23.5%) ------------------------------------------------------------------------- Total 26,264 27,245 21,901 (981) (3.6%) ------------------------------------------------------------------------- -------------------------------------------------------------------------Future income taxes payable result from differences between the measurement of assets and liabilities for financial statement purposes as opposed to tax purposes. A large portion of these future taxes relate to the Company's securitization activities net of its general allowance for credit losses. Future income taxes decreased primarily as a result of the increase in non-tax-deductible mortgage credit reserves and the shorter duration of the securitized mortgages at December 31, 2006 in comparison to 2005. The securitized mortgage servicing liability relates to the Company's estimate of the future costs of FNFLP's servicing of the mortgages in the CMHC-MBS portfolio. Outlook Management expects that any change in other assets, future income taxes and other liabilities in 2007 will either not be significant or will be in proportion to the change in the associated assets or liabilities. Shareholders' Equity Total shareholders' equity increased $25.1 million or 20.2% to $149.7 million at December 31, 2006, from $124.6 million at December 31, 2005. In 2006, the Company issued 142,528 common shares and added $2.1 million to common share capital through the exercise of employee stock options. In 2005, the Company issued 101,190 common shares and added $0.7 million to common share capital through the exercise of employee stock options. The Company has a stock option plan for directors and eligible employees. At the Equitable Group annual general meeting held in May 2006, the Company's shareholders approved an amendment to the plan. Under this change, as options are exercised, additional options can be reserved until total options reserved for stock option grants are 10% of the then issued and outstanding common shares of the Company. The Company uses its stock option plan to motivate and reward its valued workforce. During 2006, a total of 140,000 options were granted to employees. In 2005, 135,000 options were granted to directors and employees. Total options outstanding at December 31, 2006 amounted to 6.3% of issued common shares compared to 6.5% a year earlier. Stock-based compensation expense has been added to contributed surplus. The Company's dividend payout ratio in 2006 was 25% of the prior year's net earnings, equivalent to an annual dividend of $0.40 per share. At the present time, the Board is maintaining the quarterly dividend at $0.10 per share in 2007, resulting in a lower payout ratio but providing the Company with additional capital to support growth.Table 13: Shareholders' equity ($ thousands) 2006 2005 2004 Change from 2005 ------------------------------------------------------------------------- $ % Shareholders' equity: Common shares 57,849 55,510 54,815 2,339 4.2% Contributed surplus 1,539 1,327 959 212 16.0% Retained earnings 90,348 67,771 51,779 22,577 33.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total shareholders' equity 149,736 124,608 107,553 25,128 20.2% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Dividends paid 4,761 3,765 1,517 996 26.5% Dividends per share $ 0.40 $ 0.32 $ 0.13 $ 0.08 25.0% ------------------------------------------------------------------------- -------------------------------------------------------------------------Capital Management The Company maintains a capital management policy to govern both the quality and quantity of capital utilized by Equitable Trust in its regulated operations. The objective of the policy is to ensure that regulatory capital requirements are met, while providing sufficient return to investors. Capital Guidelines, as stipulated by OSFI, require that:- total capital be in excess of 10% of total risk-weighted assets in order for a company to be considered "well capitalized"; - Tier 1 capital be no less than 7% of total risk-weighted assets; - Tier 2 capital not exceed 50% of Tier 1 capital; - the ratio of total assets to capital not exceed 17.5 times. As shown in the following table, Equitable Trust met these standards at December 31, 2006, 2005 and 2004. Table 14: Capital measures (relating solely to Equitable Trust): ($ thousands) 2006 2005 2004 ------------------------------------------------------------------------- Tier 1 capital 148,466 122,793 106,210 Tier 2 capital 60,000 51,444 29,149 Total risk weighted assets 1,967,779 1,504,815 1,168,328 Tier 1 capital as a % of total risk weighted assets 7.5% 8.2% 9.1% Tier 2 capital as a % of total risk weighted assets 3.1% 3.4% 2.5% Total capital as a % of total risk weighted assets 10.6% 11.6% 11.6% Authorized asset to capital multiple 17.5x 17.5x 17.5x Utilized asset to capital multiple 12.6x 11.6x 11.4x ------------------------------------------------------------------------- -------------------------------------------------------------------------Risk-weighted assets are derived from assigning an OSFI mandated risk weighting of 0%, 20%, 50% or 100% to individual asset components on the balance sheet. As indicated in the Table 14, Equitable Trust had a total capital ratio of 10.6% at December 31, 2006 and 11.6% at December 31, 2005. Total regulatory capital at December 31, 2006 increased $34.2 million or 19.6% over December 31, 2005. The increase was due to the additional regulatory capital raised through the issuance of Series 6 Subordinated Debentures in 2006, earnings retained in 2006 net of dividends paid, and the increase in contributed surplus. The Company's utilized asset to capital multiple at December 31, 2006 was 12.6 times, significantly less than the authorized maximum of 17.5 times. Outlook Equitable Trust will maintain regulatory capital at levels sufficient to support the asset growth it expects to achieve in 2007 through the retention and accumulation of Tier 1 and Tier 2 capital. Fourth Quarter Review The fourth quarter of 2006 was the Company's most profitable quarter on record. ROAE was 21.0% compared to 18.1% in the fourth quarter of 2005.Other highlights of the fourth quarter included: - a 39.4% increase in net earnings to $7.8 million, from $5.6 million in the fourth quarter of 2005; - a 39.1% increase in earnings per share (diluted) to $0.64 per share compared to $0.46 in the same period in 2005; - a 38.3% increase in earnings per share (basic) to $0.65, up from $0.47 in the same period in 2005; - a 52.1% increase in mortgage originations, which totalled $661.3 million compared to $434.7 million a year earlier; - a 30.5% or $613.5 million increase in total assets compared to a year ago; - a productivity ratio - TEB of 30.6% compared to 32.6% in the fourth quarter of 2005; and - a book value per common share of $12.56 compared to $10.58 at the end of 2005.A major contributing factor in asset expansion in 2006 was fourth quarter warehoused loan originations. These mortgages are invariably temporary in nature and as such, management expects the loans will stay on the Company's books for periods of up to six months only. The timing of initial funding and subsequent discharge can lead to lumpiness in asset growth in the short term, but provides a positive contribution to earnings. The following earnings statement summary provides additional details.Table 15: Earnings Statement - Fourth Quarter 2006 and 2005 Three months ended ($ thousands, except share and Dec 31, Dec 31, per share amounts) 2006 2005 ------------------------------------------------------------------------- Interest income: Mortgages 33,801 24,512 Investments 2,533 1,504 Other 1,886 543 ------------------------------------------------------------------------- 38,220 26,559 Interest expense: Customer deposits 22,915 14,610 Subordinated debt 474 614 Bank term loan 594 332 ------------------------------------------------------------------------- 23,983 15,556 ------------------------------------------------------------------------- Interest income, net 14,237 11,003 Provision for credit losses 225 200 ------------------------------------------------------------------------- Net interest income after provision for credit losses 14,012 10,803 Other income: Mortgage commitment income and other fees 959 522 Net gain (loss) on sale or redemption of investments 666 (119) Loan securitizations - retained interests 974 905 ------------------------------------------------------------------------- 2,599 1,308 ------------------------------------------------------------------------- Net interest income and other income 16,611 12,111 Non-interest expenses: Compensation and benefits 2,160 1,758 Deposit agent commissions 1,330 934 Other 2,002 1,646 ------------------------------------------------------------------------- 5,492 4,338 ------------------------------------------------------------------------- Earnings before income taxes 11,119 7,773 Income taxes: Current 4,439 2,391 Future (1,072) (180) ------------------------------------------------------------------------- 3,367 2,211 ------------------------------------------------------------------------- Net earnings 7,752 5,562 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share: Basic $ 0.65 $ 0.47 Diluted $ 0.64 $ 0.46 Weighted average number of shares outstanding: Basic 11,911,900 11,780,419 Diluted 12,120,576 11,965,385 ------------------------------------------------------------------------- -------------------------------------------------------------------------During the fourth quarter, the balance of average interest earning assets was $2.45 billion, up 32.4% from $1.85 billion during the fourth quarter of 2005. Mortgage interest income increased 37.9% to $33.8 million in the fourth quarter of 2006 compared to $24.5 million a year earlier due to the increase in the mortgage portfolio and higher interest rates. Investment income increased 68.4% on a quarter-over-quarter basis due to increases in debt and equity securities portfolios. Net interest income increased $3.2 million or 29.4% on a quarter-over-quarter basis due to expansion in the Company's asset base and the increase in prime interest rates. The Company realized no loan losses during the fourth quarter of either 2006 or 2005. The provision for credit losses increased 12.5% or $25 thousand on a quarter-over-quarter basis due to the Company's prudence in increasing its credit reserves in response to increases in the mortgage portfolio. Other income increased $1.3 million or 98.7% in the fourth quarter of 2006 compared to 2005 largely as a result of a gain on the sale of a common share investment in the amount of $0.7 million and increased mortgage fees related to higher originations. Non-interest expenses increased 26.6% in the fourth quarter of 2006 compared to the same quarter of 2005 due to increased staff levels and increased general operating activity. Productivity ratio - TEB for the 2006 fourth quarter was 30.6%, a noticeable improvement over the ratio of 32.6% from a year earlier. The effective tax rate in the fourth quarter of 2006 was 30.3%, compared to 28.4% a year earlier. Fourth quarter 2006 net earnings were 8.5% higher than in the third quarter of 2006, while earnings per share (diluted) in the fourth quarter of 2006 increased $0.05 or 8.5% over the third quarter of 2006. Total assets also grew sequentially by 8.7% from September 30, 2006. ROAE increased to 21.0% in the fourth quarter compared to 20.3% in the third quarter of 2006. Summary of Quarterly Results Key performance highlights of the past eight quarters are presented in the following table.Table 16: Summary of Quarterly Results ($ thousands, except assets and per share amounts) 2006 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Total assets at quarter end - $ millions 2,626 2,414 2,244 2,113 Net interest income - TEB(1) 15,359 14,435 13,463 12,143 Less TEB(1) adjustment 1,122 980 877 784 Net interest income per financial statements 14,237 13,455 12,586 11,359 Other income 2,599 1,954 1,754 1,625 Net interest margin - TEB(1) 2.4% 2.5% 2.5% 2.4% Total revenues - TEB(1) 41,941 38,552 34,885 31,604 Total revenues 40,819 37,572 34,008 30,820 Net earnings 7,752 7,144 6,609 5,833 Return on average equity 21.0% 20.3% 19.8% 18.6% Return on average assets - annualized 1.2% 1.2% 1.2% 1.1% EPS - basic $ 0.65 $ 0.60 $ 0.56 $ 0.49 EPS - diluted $ 0.64 $ 0.59 $ 0.55 $ 0.49 Productivity ratio - TEB(1) 30.6% 32.7% 33.1% 32.0% Mortgage production: Conventional mortgages other than warehoused mortgages 334,518 196,708 178,955 275,125 Warehoused mortgages 276,934 249,279 166,798 199,857 CMHC-insured mortgages 49,897 43,711 69,884 114,870 ----------------------------------- Total 661,349 489,698 415,637 589,852 ----------------------------------- ----------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands, except assets and per share amounts) 2005 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Total assets at quarter end - $ millions 2,012 1,821 1,788 1,704 Net interest income - TEB(1) 12,017 10,439 9,843 8,759 Less TEB(1) adjustment 1,014 863 719 556 Net interest income per financial statements 11,003 9,576 9,124 8,203 Other income 1,308 1,451 1,324 1,667 Net interest margin - TEB(1) 2.5% 2.3% 2.3% 2.2% Total revenues - TEB(1) 28,881 26,530 25,039 23,134 Total revenues 27,867 25,667 24,320 22,578 Net earnings 5,562 4,985 4,728 4,482 Return on average equity 18.1% 16.8% 16.7% 16.6% Return on average assets - annualized 1.2% 1.1% 1.1% 1.1% EPS - basic $ 0.47 $ 0.42 $ 0.40 $ 0.38 EPS - diluted $ 0.46 $ 0.42 $ 0.40 $ 0.38 Productivity ratio - TEB(1) 32.6% 32.2% 31.9% 30.6% Mortgage production: Conventional mortgages other than warehoused mortgages 285,688 194,383 260,538 167,629 Warehoused mortgages 65,242 61,661 68,791 51,669 CMHC-insured mortgages 83,781 64,492 84,883 43,201 ----------------------------------- Total 434,711 320,536 414,212 262,499 ----------------------------------- ----------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes: (1) For an explanation of TEB see the end of this MD&A.This summary of quarterly results shows the effects of the Company's growing asset base and increased capital, as well as increasing prime interest rates. Throughout the eight quarters summarized, the Company continued to increase its asset base primarily through mortgage growth and, to a lesser extent, through growth in its equity securities portfolio. This growth has led to continually higher net interest income - TEB and not adjusted for TEB - in all quarters. As a result of steady increases in earnings and capital management practices, ROAE has also continually risen on a quarterly basis from 16.6% in the first quarter of 2005 to 21.0% in the fourth quarter of 2006. Generally, in the mortgage industry, originations are lower in the first quarter than in other quarters due to seasonality; this seasonality has, however, not traditionally impacted Equitable's business. Changes in Accounting Policies Including Initial Adoption A summary of the Company's significant accounting policies is presented in Note 1 to the Consolidated Financial Statements. During 2006, the Canadian Institute of Chartered Accountants ("CICA") issued accounting requirements regarding Stock Based Compensation for Employees Eligible to retire before the Vesting Date. The fair value of options granted to employees who are eligible to retire within the vesting period will be recognized over the required period of service rather than the grant's vesting period. There has been no significant effect on the Company's earnings or contributed surplus in adopting this policy. The CICA has issued three new accounting standards: Financial Instruments - Recognition and Measurement, Hedges, and Comprehensive Income, which are effective for the Company as of January 1, 2007. As a result of adopting these standards, a new category, accumulated other comprehensive income, will be added to shareholders' equity and certain unrealized gains and losses will be reported in other comprehensive income until realization. Effective January 1, 2007, certain financial assets and liabilities will be measured at fair value and others at amortized cost. Any adjustment of the previous carrying amounts will be recognized as an adjustment to either accumulated other comprehensive income or retained earnings at January 1, 2007 and prior period financial statements will not be restated. Significant components of the Company's implementation of the standards include:(a) Cash and cash equivalents and investments have been designated as available for sale and will be recorded on the balance sheet at fair value with changes in fair value recorded in other comprehensive income. (b) Mortgages held for securitization or for sale and derivative financial instruments will be recorded on the balance sheet at fair value with changes in fair value recorded in the statement of earnings. (c) Mortgages, other than those held for securitization or for sale, deposits and subordinated debentures will continue to be recorded at amortized cost.Critical Accounting Estimates The Company's critical accounting estimates are primarily in the areas of credit risk and allowance for credit losses and loan securitizations - retained interests. The policies and methodology used to determine these estimates and the significance of these accounting estimates to the Company's financial condition have been outlined in this Management's Discussion and Analysis and in Note 1 to the Consolidated Financial Statements. The allowance for credit losses reflects management's best estimate of probable losses in the mortgage portfolio as at the balance sheet date. In order to assess the likelihood of a loss, management takes into consideration a great variety of information, including economic factors, developments affecting particular property types and geographic areas, the age of a mortgage and specific issues with respect to individual borrowers. Changes in any of these factors may cause future assessment of credit risk to be significantly different from current assessments and could affect the level of allowance for credit losses being maintained by the Company. The Company's general allowance for credit losses of $7.9 million as at December 31, 2006 represented 0.37% of total mortgage principal outstanding. A 0.01% movement in the general allowance for credit losses, up or down, would increase or decrease the allowance by $0.2 million. The Company uses estimates in valuing its retained interests in loan securitizations. This valuation and changes thereto affect the gain on sale of mortgages in a securitization and could affect the measurement of excess interest net of servicing fee. Management uses its best estimates in determining the value of retained interests on each securitization, taking into account current interest rates, the terms of the mortgages being sold, the propensity for prepayment and the cost of the future servicing of the sold mortgages. On a quarterly basis, management reassesses its estimates to satisfy themselves that these estimates are still valid under the then current economic environment. Management uses historical data to support any amendments to its estimation methodology and the carrying value of its loan securitizations - retained interests. A sensitivity analysis of two adverse changes in the estimate used to value the Company's retained interests in loan securitizations is presented in Note 4 to the Consolidated Financial Statements. Basel II Implementation In June 2004, the Basel Committee on Banking Supervision released its report entitled "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" ("Basel II"). The new framework, expected to take effect January 1, 2008, is designed to more closely align regulatory capital requirements with underlying risks by introducing substantive changes in the treatment of credit and operational risks. There are several accepted approaches for measuring risk under the new Basel framework. Equitable Trust will be utilizing the simpler approaches allowed by the regulators. As a result of the more risk-based capital attribution approach called for under Basel II, potential capital reductions or increases might be possible; however, it is too early at this stage to predict the impact. Off-Balance Sheet Arrangements The Company is responsible for servicing the mortgages it has securitized through the CMHC-MBS program, including the collection of principal and interest, payments to MBS investors, and the management and collection of mortgages in arrears. Under a contract expiring December 2009, the Company has entered into a servicing agreement with FNFLP as the sub-servicer of the securitized mortgage portfolio. Should FNFLP be unable or unwilling to act as sub-servicer, the Company can choose either to service the mortgages itself or to appoint a replacement sub-servicer. The Company has recorded a liability of $6.0 million in other liabilities for the future servicing of mortgages in the CMHC-MBS program which have been securitized subsequent to June 2001. The servicing liability for mortgages securitized prior to that time has been netted against the asset loan securitizations - retained interests. Financial Instruments The Company uses Government of Canada bond forwards to hedge interest rate risk on CMHC-insured multi-unit residential mortgages and mortgage commitments targeted for securitization. The risk is that interest rates rise between the rate commitment date and the sale date, leading to a reduced value of the mortgage upon securitization. The hedge acts to significantly reduce the likelihood that the proceeds on the sale of the mortgage (made up of the fair value of the mortgage and the fair value of bond forward) will vary from the fair value of the mortgage at the date of rate commitment as a result of interest rate movements. For more information on hedges and forward bond contracts see Note 4 to the Consolidated Financial Statements. Contractual Obligations The material contractual obligations of the Company at December 31, 2006 are outlined in the following table.Table 17: Contractual obligations Payments due by period Less than 4 - 5 After ($ thousands) Total 1 year 1 - 3 years years 5 years ------------------------------------------------------------------------- GIC principal and interest 2,504,199 1,700,191 399,659 404,349 - Subordinated debt principal and interest(1) 40,677 1,882 3,765 3,765 31,265 Bank term loans principal and interest 43,184 2,281 4,568 36,335 - Operating leases(2) 882 407 435 40 - ------------------------------------------------------------------------- Total contractual obligations 2,588,942 1,704,761 408,427 444,489 31,265 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes: (1) These obligations do not include any pre-maturity redemptions relating to prior year's earnings as these are subject to regulatory approval. (2) In addition to these minimum lease payments for premises rental, the Company will pay its share of common area maintenance and realty taxes over the term of the lease.In addition to these contractual obligations, the Company is responsible to CMHC for the ongoing servicing of the mortgages it has securitized through the CMHC-MBS program. This obligation is discussed in "Off-Balance Sheet Arrangements". Related Party Transactions Certain of the Company's employees, directors and shareholders have purchased GICs and subordinated debt from the Company in the ordinary course of business, at market terms and conditions. Note 14 to the Consolidated Financial Statements provides further detail on these transactions. Risk Management Overview The Boards of Directors and the Committees of the Boards of both the Company and Equitable Trust play an active role in monitoring operational and structural risk and in determining the policies that are best suited to mitigating these risks. It is management's responsibility to illustrate and communicate the existing and potential risks that the Company endures, or may endure, to the Board. It is the Board's responsibility to ensure that this communication is as complete and as detailed as is necessary in order to enable them to establish effective risk management policies. The Board of Directors of the Company and the Board of Directors of Equitable Trust each has an Audit Committee and a Corporate Governance Committee. The Board of Directors of Equitable Trust has, in addition, an Investment Committee, a Human Resources and Compensation Committee and a Conduct Review Committee. Liquidity Risk Management Liquidity risk relates to the Company's ability to redeem its deposit obligations as they come due or otherwise arise, and to fund asset commitments as scheduled. Mitigating liquidity risk requires the Company to match its asset and liability maturities and to keep sufficient liquid assets on hand at all times to meet its mortgage funding and investment purchase commitments and GIC redemptions. Eligible liquid assets for regulatory purposes consist of cash and cash equivalents and debt instruments guaranteed by governments. Assets eligible for regulatory liquidity purposes were $260.5 million as at December 31, 2006 and $159.8 million at December 31, 2005. The increase on a year-over-year basis is prompted by liquidity requirements related to the potential redemption of deposit obligations. It is the Company's policy to maintain, at all times, regulatory liquid assets at levels equivalent to or greater than 20% of GICs maturing in the next 100 days (including all cashable GICs). At December 31, 2006 these maturities amounted to $1.33 billion compared to $0.86 billion as at December 31, 2005. Total liquid resources, including the Company's equity securities portfolio, were $427.2 million at December 31, 2006 and $271.6 million as at December 31, 2005. As part of its liquidity contingency planning, the Company has a line of credit with its bank in the amount of $35.0 million, which is secured by shares in its equity securities portfolio. Interest Rate Risk Management Interest rate risk involves the sensitivity of the Company's earnings to changes in interest rates. The Company's primary method of mitigating interest rate risk is matching asset and liability maturity/re-pricing profiles (the "profile"), closely monitoring interest rates and acting upon any mismatch in a timely fashion to ensure that any sudden or prolonged change in interest rates does not significantly affect the Company's net interest earnings. The Company manages its asset liability profile by adjusting GIC interest rates on a daily basis to raise GICs with characteristics that match the profile of assets being funded. It is the Company's policy not to allow an annual maturity gap, on all maturities with terms greater than twelve months, in excess of 5% of total assets. The Company uses simulated interest rate change sensitivity modeling to estimate the effects of various interest rate change scenarios on net interest income for the twelve months following the measurement date and on the economic value of shareholders' equity. Certain assumptions, such as pre-maturity redemptions of GICs and early payouts of mortgages, based upon actual experience, are built into the economic value model for simulation purposes. The probabilities of cashable GIC redemptions are also modeled. When interest rates increase, it is expected that the majority of these depositors will redeem their GICs in order to obtain a better rate. Conversely, when interest rates decrease, it is assumed that the majority will hold their GICs until maturity. In the event of an immediate and sustained 1% interest rate increase, net interest income before any tax effect, for the twelve month period following December 31, 2006, would increase $1.5 million. If interest rates were to decrease and if cashable GICs were to stay on the books until maturity, net interest income before any tax effect for the following twelve month period would decrease $4.4 million. The Company uses a consistent and disciplined approach to hedging the interest rate risk attached to its MBS activities. MBS interest rate risk refers to the risk that interest rates will vary between the time a mortgage interest rate is committed to and the time the underlying mortgage is securitized and that the change in rates will reduce the value of the mortgage being sold. The Company hedges the interest rate risk for all mortgages that are to be sold through the CMHC-MBS program. Hedging protects the Company from losses due to changes in interest rates during the relevant period. The hedge is initiated on the date that the mortgage is priced and committed to and is terminated on the date that the pool is sold. Changes in interest rates affect the price at which the mortgage pool is sold and inversely affect the value of the hedge. All costs related to hedging activities are matched to mortgages and are accounted for when the mortgage is securitized under the CMHC-MBS program. Commencing January 1, 2007, the Company will adopt the new CICA guidelines for financial instruments, hedges and comprehensive income which will affect how the change in valuation of CMHC-insured mortgages targeted for securitization and their related hedges are accounted for. Credit Risk Management Credit risk is the risk of financial loss resulting from a borrower or any counterparty failing to fully honour its financial or contractual obligations to the Company. Under the Company's lending criteria, all mortgages are individually evaluated under a risk rating system to assess the level of risk to be attributed to each loan. In accordance with sound business and financial practices, Equitable Trust's credit risk policies provide for an annual review of all commercial loans and mortgages. In addition, all loans that are in arrears are reviewed to determine whether any should be classified as doubtful or as a potential loss. Generally, a loan is classified as impaired when management is of the opinion that there is no longer reasonable assurance of full and timely collection of principal and interest. On a regular basis, management reviews all loans in these categories and determines appropriate loan loss reserves. Reviews of credit policies and lending practices are regularly undertaken by senior management and approved by Equitable Trust's Investment Committee. The Committee meets on a quarterly basis to review all new lending activity during the quarter and to review significant trends in the industry in order to better direct credit policies. Equitable Trust's Investment Committee reviews the Company's debt and equity securities portfolio each quarter. The review covers the current status of investments, the transactions during the past quarter, the portfolio characteristics (such as term, credit rating and type of security), and compliance with OSFI regulations. Investment policies are reviewed regularly by Equitable Trust's Investment Committee to ensure that the type, credit quality, duration and concentration of investments in marketable securities are appropriate, prudent and consistent with the risk profile targets adopted by the Company. P-2 and better rated securities comprised 89.0% of the preferred share equity securities portfolio at December 31, 2006, compared to 76.2% a year earlier. Changes in Borrower Creditworthiness The factors used to determine a borrower's creditworthiness are subject to change over time. These factors can be summarized in terms of character (of borrowers), capacity (to repay loans), capital (resources of borrowers that can be used to cover any shortfalls), collateral (in support of loans) and conditions (of loans). Deterioration in these factors could lead to difficulties in the repayment of loans, which could result in higher loan losses. An increase in loan losses could have a material and adverse effect on the operating results of Equitable. Accuracy and Completeness of Information on Customers and Counterparties Equitable depends on the accuracy and completeness of financial information such as financial statements for commercial mortgages and proof of employment and income verification for residential mortgages in deciding whether to extend credit. Equitable's financial condition and earnings could be negatively impacted to the extent it relies on financial information that does not comply with generally accepted accounting principles, that is materially misleading, or that does not fairly present, in all material respects, the financial condition and results of operations of the customers and counterparties. Environmental Risk Management A mortgage may go into default if a borrower is unable to repay loans due to environmental cleanup costs. Equitable may become directly liable for cleanup costs if it is deemed to have taken control or ownership of a contaminated property. Equitable will not grant mortgages where there are known or suspected environmental liabilities which could expose Equitable to potential costs of pollution clean up. Equitable has risk assessment criteria, policies and procedures to detect environmental contamination of properties prior to entering into a mortgage. Operating Risks Outsourcing Risk Equitable uses outsourcing to control costs, enhance service levels, and obtain mortgages and deposits in quantities and on terms that meet its requirements. Outsourcing any of the administrative functions to third parties runs the risk of failure or that the products obtained through third parties will be insufficient for Equitable's requirements. Should a provider of administrative services fail to perform in accordance with Equitable's expectations, the Company would be required to find an alternative service provider or take back that administrative function. If the service were taken in-house, extra costs in the form of additional staff and overhead might result. Reliance on Independent Mortgage Brokers and Deposit Agents Equitable's business model does not use retail branches to obtain GICs or mortgages. Equitable, through its Deposit department, is reliant on members of the Investment Dealers Association and the Federation of Canadian Independent Deposit Brokers to raise funds. Equitable's mortgage originations depend on a network of independent mortgage brokers, mortgage brokerages and other financial institutions. Under adverse circumstances, Equitable may find it difficult to attract new deposits from agents or mortgage business from brokers to sustain current operating requirements. The failure by Equitable to sustain or increase its current level deposits or mortgage origination from these sources could negatively affect the financial condition and operating results of the Company. A single mortgage broker, FNFLP, originated 36% of Equitable's outstanding mortgages as at December 31, 2006 under a long-term agreement that expires in December 2009. Management believes it has a strong partnership with FNFLP; however, should this agreement not be renewed, the Company would have to find another partner. If the Company were to lose a major mortgage broker or deposit agent, it would have to replace the product supplied by that broker, either from existing or new brokers or retail agents, in order to meet corporate targets. Reliance on Key Personnel Equitable's operations depend on the abilities, experience and efforts of its management and other key employees. Should any of these persons be unable or unwilling to continue in their employment, this could have a material adverse effect on the business, financial condition and results of the operations of the Company. Information Systems and Technology Equitable depends on the successful operation and uninterrupted functioning of its computer and data processing systems and software. The failure of these systems could interrupt operations or materially impact Equitable's ability to originate, process or adjust items associated with deposits. If sustained or repeated, a system failure could negatively affect the operating results of Equitable. Equitable also depends on automated software to match the maturity and repricing terms of its deposit liabilities and mortgage assets. If such software fails or is unavailable on a prolonged basis, Equitable could be required to take alternative steps to complete such activities, which could have a short-term negative effect on its operations. General Economic Conditions Industry Growth: The residential mortgage business in Canada has ---------------- benefited from historically low interest rates. There is a risk that upward movement in interest rates or a deteriorating economy will slow the pace of housing sales and affect the growth in the residential mortgage market. This may negatively affect the Company's mortgage business through slower growth. A decrease in commercial mortgage and warehoused mortgage activity could also result from an increase in interest rates. Weakness in general economic conditions could also cause default rates to increase as creditworthiness decreases for borrowers who are more highly leveraged. Profitability: The spread between interest paid on GICs and interest -------------- charged on mortgages and earned on investments creates Equitable's net interest income. The mortgage and investment portfolios of the Company include assets whose value can fluctuate because of changing interest rates and economic and market conditions. In addition, some of these assets may be difficult to sell at any given time. Changes in Competition The residential and commercial first mortgage business is highly competitive. The Company's products compete with those offered by other trust companies, banks, insurance companies, and other financial institutions in the jurisdictions in which it operates, especially Ontario and Alberta. Many of these companies are better capitalized than Equitable and hold a larger percentage of the Canadian residential and commercial mortgage business than Equitable. There is always a risk that there will be new entrants in the market who are better capitalized with more efficient systems and operations that could impact the Company's market share in its mortgage lending and deposit taking activities. Regulatory Risk The Trust and Loan Companies Act and Regulations ("TLCA") and provincial and territorial legislation require Equitable Trust to file annual and other reports on its financial condition, impose restrictions on transactions with related parties and set out requirements governing capital and other matters. The activities of Equitable Trust are supervised by OSFI. Changes to laws and regulations, including changes in their interpretation or application, could affect Equitable, limiting the products or services it may provide and increasing the ability of competitors to compete with its products or services. Also, Equitable Trust's failure to comply with applicable laws and regulations could result in sanctions and financial penalties that could adversely impact its earnings and damage its reputation Equitable Trust undertakes reasonable and prudent measures designed to achieve compliance with governing laws and regulations including its legislative compliance management framework. There is, however, no guarantee that it will always be in compliance or deemed to be in compliance by the Regulators. Litigation Risk Management It is possible that litigation, and, in particular class action litigation, may increase in Canada as a result of changes in Canadian securities laws. Litigation risk is also inherent in mortgage lending. The Company has taken steps to reduce the likelihood of lawsuits and to address the threat of class actions under the new regime by adopting a Disclosure Control Policy and Procedure, maintaining an appropriate Directors and Officers insurance policy and providing written indemnities to directors and officers. Reputation Risk Management Reputation Risk is the risk to the Company's earnings from breaches of legislation, the Code of Conduct, failure to manage operational risk or a compliance failure and includes external factors (such as industry trends or downturns in the market) which are beyond the Company's control. Equitable's management oversees the Company's risk management framework through its Enterprise Risk Management Program that has been approved by the Board. The Enterprise Risk Management Program includes the assessment of real and potential reputation risk, in addition to specific duties, responsibilities, and reporting mechanisms to evaluate the adequacy of and adherence to risk management controls and practices. Responsibilities of Management and the Board of Directors Management is responsible for the information disclosed in this MD&A and the accompanying Consolidated Financial Statements and has in place appropriate information systems and procedures to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, performs an oversight role with respect to all public financial disclosures made by the Company and has reviewed and approved this MD&A and the accompanying Consolidated Financial Statements. Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is accumulated and communicated to senior management, including the President and Chief Executive Officer (CEO) and the Senior Vice President and Chief Financial Officer (CFO), on a timely basis, so that appropriate decisions can be made regarding public disclosure. Management has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in the rules of the Canadian Securities Administrators) as of December 31, 2006. Based on that evaluation, management has concluded that these disclosure controls and procedures were effective. Internal Control over Financial Reporting Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian generally accepted accounting principles ("GAAP"). Management has evaluated the design of the Company's internal control over financial reporting as of December 31, 2006 to provide reasonable assurance regarding the reliability of financial reporting. The evaluation was conducted in accordance with the framework established by the Committee of Sponsoring Organizations of the Treadway Commission for Smaller Business, a recognized control model, and the requirements of Multilateral Instrument 52-109 of the Canadian Securities Administrators. Based on this evaluation, management has concluded that the design of internal control over financial reporting was effective. Changes in Internal Control over Financial Reporting There were no changes in the Company's internal control over financial reporting that occurred during the fourth quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Forward-Looking Statements Certain statements in this MD&A contain forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Equitable, or developments in Equitable's business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Forward-looking information includes all disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. Forward-looking statements may also include, without limitation, any statement relating to future events, conditions or circumstances. Equitable cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made. Often, but not always, forward-looking statements can be identified by the use of words or phrases such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates" or "forecasts". Other phrases or words may include "intends", "anticipates", or "does not anticipate", "believes", or state that certain actions, events or results "may", "could", "would", "might", or "will" be taken, occur or be achieved. Forward-looking statements relate to, among other things, realizing the value of Equitable's assets, capitalizing on increasing market demand for Equitable's mortgage products, executing Equitable's strategic plan, and the demand for Equitable's deposit products. The risks and uncertainties that may affect forward-looking statements include, among others, risks involved in fluctuating interest rates and general economic conditions, legislative and regulatory developments, the nature of Equitable's customers, competition and other risks detailed from time to time in Equitable's filings with Canadian provincial securities regulators, including Equitable's Annual Report and Annual Information Form dated March 19, 2007. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions. Equitable does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change. The "Outlook" sections in this MD&A are forward-looking, as previously defined, and actual outcomes are uncertain. When reviewing these "Outlook" sections specifically and the rest of the MD&A generally, readers are advised to consider the risks regarding forward-looking statements. Non-Generally Accepted Accounting Principles Financial Measures The presentation of financial information on a taxable equivalent basis ("TEB") is a common practice in the banking and trust company industries and does not have a standardized meaning within generally accepted accounting principles (GAAP). Therefore, TEB calculations may not be comparable to similar measures presented by other companies. On a selective basis, Equitable uses TEB in the discussion of revenues, interest margins and productivity ratios in this MD&A. The TEB methodology grosses up tax exempt income, such as dividends from equity securities, by an amount which makes this income comparable on a pre-tax basis to regular taxable income such as mortgage interest. In 2006 the gross-up amounted to $3.8 million and in 2005 it was $3.2 million. February 26, 2007Consolidated Financial Statements of EQUITABLE GROUP INC. Years ended December 31, 2006 and 2005Management's Responsibility for Financial Reporting The consolidated financial statements of Equitable Group Inc. (the "Company") are prepared by management, which is responsible for the integrity and fairness of the information presented. The information provided herein, in the opinion of management, has been prepared, within reasonable limits of materiality, using appropriate accounting policies that are in accordance with Canadian generally accepted accounting principles as well as the requirements of the Office of the Superintendent of Financial Institutions Canada ("OSFI") as these apply to its subsidiary, The Equitable Trust Company, based on informed judgments and estimates of the expected effects of current events and transactions. Management maintains a system of internal control to meet its responsibility for the integrity of the financial statements. Management also administers a program of ethical business conduct, which includes quality standards in hiring and training employees, written policies and a written corporate code of conduct. The Board of Directors of the Company (the "Board") oversees management's responsibilities for the financial statements through the Audit Committee. The Audit Committee conducts a detailed review of the financial statements with management and internal and external auditors before recommending their approval to the Board. The Company's subsidiary, The Equitable Trust Company, is federally regulated under the Trust and Loan Companies Act (Canada) by OSFI. On a regular basis, OSFI conducts an examination to assess the operations of The Equitable Trust Company and its compliance with statutory requirements and sound business practices. KPMG LLP has been appointed as external auditors by the shareholders to examine the financial statements of the Company in accordance with Canadian generally accepted auditing standards. The external auditors have unrestricted access to and periodically meet with the Audit Committee, with and without management present, to discuss their audits and related matters."Geoffrey Bredin" "Stephen Coffey" Geoffrey Bredin, CA Stephen Coffey, CA President and Chief Senior Vice-President and Executive Officer Chief Finacial Officer February 26, 2007Auditors' Report to the Shareholders We have audited the consolidated balance sheets of Equitable Group Inc. as at December 31, 2006 and 2005 and the consolidated statements of earnings, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. "KPMG LLP" Chartered Accountants Toronto, Canada February 26, 2007EQUITABLE GROUP INC. Consolidated Balance Sheets (In thousands of dollars) December 31, 2006 and 2005 ------------------------------------------------------------------------- 2006 2005 ------------------------------------------------------------------------- Assets Cash and cash equivalents (note 2) $ 107,842 $ 77,214 Investments (note 3) 319,317 194,429 Loan securitizations - retained interests (note 4) 48,271 51,595 Mortgages receivable (note 5) 2,135,662 1,678,420 Other assets (note 6) 14,663 10,594 ------------------------------------------------------------------------- $ 2,625,755 $ 2,012,252 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Liabilities: Customer deposits (note 7) $ 2,389,755 $ 1,808,955 Future income taxes (note 8) 4,700 6,538 Other liabilities (note 9) 21,564 20,707 Bank term loan (note 10) 34,750 19,750 Subordinated debt (note 11) 25,250 31,694 ----------------------------------------------------------------------- 2,476,019 1,887,644 Shareholders' equity (note 12): Capital stock 57,849 55,510 Contributed surplus 1,539 1,327 Retained earnings 90,348 67,771 ----------------------------------------------------------------------- 149,736 124,608 Commitments and contingencies (note 13) ------------------------------------------------------------------------- $ 2,625,755 $ 2,012,252 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. On behalf of the Board: "Signed" Director ----------- "Signed" Director ----------- EQUITABLE GROUP INC. Consolidated Statements of Earnings (In thousands of dollars, except per share amounts) Years ended December 31, 2006 and 2005 ------------------------------------------------------------------------- 2006 2005 ------------------------------------------------------------------------- Interest income: Mortgages $ 121,406 $ 88,026 Investments 8,249 5,013 Other 5,632 1,643 ----------------------------------------------------------------------- 135,287 94,682 Interest expense: Customer deposits 79,537 53,351 Subordinated debt 2,041 2,382 Bank term loan 2,072 1,043 ----------------------------------------------------------------------- 83,650 56,776 ------------------------------------------------------------------------- Interest income, net 51,637 37,906 Provision for credit losses(note 5) 900 725 ------------------------------------------------------------------------- Net interest income after provision for credit losses 50,737 37,181 Other income: Mortgage commitment income and other fees 3,373 1,991 Net gain (loss) on sale or redemption of investments 669 (75) Loan securitizations - retained interests (note 4) 3,890 3,834 ----------------------------------------------------------------------- 7,932 5,750 ------------------------------------------------------------------------- Net interest income and other income 58,669 42,931 Non-interest expenses: Compensation and benefits 9,022 6,052 Deposit agent commissions 4,669 3,360 Other 6,588 5,510 ----------------------------------------------------------------------- 20,279 14,922 ------------------------------------------------------------------------- Earnings before income taxes 38,390 28,009 Income taxes (recovery) (note 8): Current 12,890 9,754 Future (1,838) (1,502) ----------------------------------------------------------------------- 11,052 8,252 Net earnings $ 27,338 $ 19,757 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 12): Basic $ 2.30 $ 1.68 Diluted 2.26 1.65 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. EQUITABLE GROUP INC. Consolidated Statements of Changes in Shareholders' Equity (In thousands of dollars) Years ended December 31, 2006 and 2005 ------------------------------------------------------------------------- 2006 2005 ------------------------------------------------------------------------- Capital stock: Balance, beginning of year $ 55,510 $ 54,815 Common shares issued (note 12): Proceeds from exercise of employee stock options 2,138 666 Transfer from contributed surplus relating to the exercise of stock options 201 29 ----------------------------------------------------------------------- Balance, end of year 57,849 55,510 Contributed surplus: Balance, beginning of year 1,327 959 Stock-based compensation (note 12) 413 397 Transfer to common shares relating to the exercise of stock options (201) (29) ----------------------------------------------------------------------- Balance, end of year 1,539 1,327 Retained earnings: Balance, beginning of year 67,771 51,779 Net earnings 27,338 19,757 Dividends (4,761) (3,765) ----------------------------------------------------------------------- Balance, end of year 90,348 67,771 ------------------------------------------------------------------------- Total shareholders' equity $ 149,736 $ 124,608 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. EQUITABLE GROUP INC. Consolidated Statements of Cash Flows (In thousands of dollars) Years ended December 31, 2006 and 2005 ------------------------------------------------------------------------- 2006 2005 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings $ 27,338 $ 19,757 Non-cash items: Loan securitizations - gains on sale of mortgages (708) (1,141) Amortization of capital assets 513 370 Provision for credit losses 900 725 Net (gain) loss on sale or redemption of investments (669) 75 Future income taxes (1,838) (1,502) Stock-based compensation 413 397 Amortization of premiums on investments, net 3,111 3,727 ----------------------------------------------------------------------- 29,060 22,408 Changes in operating assets and liabilities: Other assets (3,308) (1,707) Other liabilities (1,368) 5,359 ----------------------------------------------------------------------- 24,384 26,060 Financing activities: Increase in customer deposits 580,800 424,307 Issuance of bank term loan 15,000 19,750 Issuance (redemption) of subordinated debt, net (6,444) 2,545 Dividends paid on common shares (4,761) (3,765) Issuance of common shares 2,138 666 ----------------------------------------------------------------------- 586,733 443,503 Investing activities: Purchase of investments (224,565) (179,483) Proceeds on sale or redemption of investments 97,235 117,900 Increase in mortgages receivable (2,158,998) (1,432,473) Mortgage principal repayments 1,424,726 781,497 Proceeds from loan securitizations 267,756 266,200 Loan securitizations - retained interests 14,631 14,570 Purchase of capital assets (1,274) (502) ----------------------------------------------------------------------- (580,489) (432,291) ------------------------------------------------------------------------- Increase in cash and cash equivalents 30,628 37,272 Cash and cash equivalents, beginning of year 77,214 39,942 ------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 107,842 $ 77,214 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 67,172 $ 48,800 Income taxes paid 13,985 6,063 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. EQUITABLE GROUP INC. Notes to Consolidated Financial Statements (In thousands of dollars, except per share amounts) Years ended December 31, 2006 and 2005 ------------------------------------------------------------------------- Equitable Group Inc. (the "Company") was formed on January 1, 2004 as the parent company of its wholly owned subsidiary, The Equitable Trust Company ("Equitable Trust"). Equitable Trust is federally regulated under the Trust and Loan Companies Act (Canada) by the Office of the Superintendent of Financial Institutions Canada ("OSFI"). The Company operates principally in one industry segment as a deposit-taking institution investing in mortgages. 1. Significant accounting policies: These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The following notes describe the Company's significant accounting policies: (a) Basis of presentation: The financial statements include the assets, liabilities and results of operations of the Company and its wholly owned subsidiary, Equitable Trust, after the elimination of intercompany transactions and balances. (b) Cash and cash equivalents: Cash and cash equivalents consist of deposits with regulated financial institutions and highly liquid short-term investments, including government guaranteed investments and other money market instruments, whose term to maturity at date of purchase is less than three months. Interest earned on cash and cash equivalents is included in interest income - other in the statements of earnings. These short-term investments are carried at cost plus accrued interest which approximates fair value. (c) Investments: Investments are purchased with the intention of holding until maturity or until market conditions provide a better investment opportunity. Investments, including loan securitizations - retained interests, are carried at cost, adjusted for amortization of premiums and discounts to maturity. When there is an other than temporary decline in value, investments are written down to reflect the estimated loss. All gains and losses on the sale, redemption or write-down of investments are recorded in the statements of earnings. Interest income earned, amortization of premiums and discounts and dividends are included in interest income - investments in the statements of earnings. The fair value of investments is based on quoted market prices. (d) Mortgages receivable and revenue recognition: Mortgages receivable, other than mortgages held for securitization or for sale, are recorded at cost plus accrued interest, less an allowance for credit losses. Mortgages held for securitization or for sale are carried at the lower of cost or fair value. Fees relating to loan origination are amortized to income over the term of the mortgages to which they relate, and are included in other income in the statements of earnings. Interest on mortgages receivable is recorded on the accrual basis. The Company classifies a mortgage receivable as impaired when, in the opinion of management, there is reasonable doubt as to the collectibility, either in whole or in part, of principal or interest. Mortgages where payment is contractually past due 90 days are automatically placed on a non-accrual basis, unless management determines that there is no reasonable doubt as to the ultimate collectibility of principal and interest. Thereafter, interest income is recognized on a cash basis, but only after prior write-offs and provisions for losses have been recovered, provided there is no further doubt as to the collectibility of principal. Impaired loans are measured on the basis of expected future cash flows, discounted at the loan's effective interest rate. This impairment is reflected in the statements of earnings in the years in which the impairment is recognized. (e) Allowance for credit losses: The allowance for credit losses consists of both specific and general provisions. Specific provisions relate to individual loans that, in the opinion of management, are necessary to reflect the estimated net realizable value of the particular loan as described in (d) above. General provisions are based on management's assessment of probable, unidentified losses in the portfolio at the balance sheet dates that have not been specifically identified in the determination of specific provisions. The assessment includes statistical and qualitative analyses of the performance of the portfolio taking into account such factors as economic conditions, security and loan type, concentration risks and geographical exposure. Concentration of credit exposure may arise when a group of counterparties have similar economic characteristics or are located in the same geographical region. The ability of these counterparties to meet contractual obligations may be affected by changing economic or other conditions. The Company's mortgage portfolio is primarily related to property located in the Province of Ontario. (f) Loan securitizations: When loan receivables are sold in a securitization transaction under terms that transfer control to third parties, the transaction is recognized as a sale and the related loan assets are removed from the balance sheets. As part of the securitization, certain interests are retained including the right to receive the future excess interest spread and the mortgage servicing obligation. For securitizations entered into after July 1, 2001, the servicing liability is reported as a component of other liabilities. For securitizations entered into prior to this date, the servicing liability and the future excess interest spread are reported on a net basis. The retained interests are classified as investment account securities and are carried at cost or amortized cost. A gain or loss on the sale of the loan receivables is recognized immediately in the statements of earnings. The amount of the gain or loss recognized depends in part on the previous carrying amount of the loan receivables involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. To obtain fair values, the Company uses estimates based on the present value of future expected cash flows determined using management's best estimates of key assumptions including prepayment rates and discount rates commensurate with the risks involved. Subsequent to the securitization, any retained interests that cannot be contractually settled in such a way that the Company can recover substantially all of its recorded investment are adjusted to fair value and the charge is recognized immediately in the statements of earnings. The fair value of retained interests is determined using the present value of future expected cash flows in the manner described above. (g) Derivative financial instruments: The Company uses forward contracts on Government of Canada bonds to manage market interest rate exposure on mortgages held for securitization and commitments for mortgages to be securitized. Gains and losses on these hedge instruments are deferred in other assets and are recognized in the statements of earnings at the time the related mortgages are securitized in accordance with hedge accounting. Hedge accounting requires that certain documentation, designation and effectiveness standards be met. The fair value of derivative financial instruments is based on quoted market prices. (h) Stock-based compensation plan: The Company operates a stock option plan for directors and eligible employees of Equitable Trust. Under this plan, options are periodically awarded to participants to purchase common shares at prices equal to the closing market price of the shares on the date prior to the date the options were granted. Prior to the initial public offering of the Company's shares on March 18, 2004, the options were granted to purchase common shares at prices equal to the fair value of the shares as determined under the plan. The Company uses the fair value-based method of accounting for stock options and recognizes compensation expense based on the fair value of the options on the date of the grant which is determined using the Black-Scholes option pricing model. The fair value of the options is recognized over the vesting period of the options granted as compensation expense and contributed surplus. The contributed surplus balance is reduced as the options are exercised and the amount initially recorded for the options in contributed surplus is credited to capital stock. Compensation expense related to the stock-based compensation plan is included in the statements of earnings. (i) Income taxes: The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities represent the amount of tax applicable to temporary differences between the carrying amounts of the assets and liabilities and their values for tax purposes. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable earnings in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the years that include the date of enactment or substantive enactment. (j) Capital assets: Capital assets are carried at cost less accumulated amortization. Amortization is provided on a reducing-balance method over the estimated useful life of the assets as follows: ------------------------------------------------------------------ Furniture, fixtures and office equipment 20% Computer hardware and software 30% ------------------------------------------------------------------ ------------------------------------------------------------------ Leasehold improvements are amortized on a straight-line basis over the remaining term of the lease. (k) Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years. Actual results could differ from those estimates. (l) Fair values of financial instruments: The estimated fair value of mortgages receivable is determined using a discounted cash flow calculation and the market interest rates currently charged for mortgages receivable with similar terms and credit risks. Similarly, the estimated fair values of the customer deposits, loan securitizations - retained interests, bank term loan and subordinated debt are determined by discounting contractual cash flows, using market interest rates currently offered for similar terms. The fair values of cash and cash equivalents and certain other assets (note 6) and other liabilities (note 9) are assumed to approximate their carrying values due to their short-term nature. 2. Cash and cash equivalents: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Deposits with regulated financial institutions $ 21,688 $ 46,039 Short-term investments 86,154 31,175 --------------------------------------------------------------------- $ 107,842 $ 77,214 --------------------------------------------------------------------- --------------------------------------------------------------------- The weighted average effective yield of cash and cash equivalents is approximately 4.12% (2005 - 3.20%). 3. Investments: The analysis of investments at carrying value, by type and maturity, is as follows: ---------------------------------------------------------------------- ---------------------------------------------------------------------- Maturities --------------------------------------------- Within Over 1 - Over 3 - Over 5 1 year 3 years 5 years years Debt securities issued or guaranteed by: Canada $ 13,245 $ 18,322 $ - $ - Province or municipality 111,415 9,666 - - Equity securities: Preferred shares 48,613 39,937 54,877 23,242(1) Common shares - - - - --------------------------------------------------------------------- $ 173,273 $ 67,925 $ 54,877 $ 23,242 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------- 2006 2005 --------------------------------------------- Total Total carrying carrying value value Debt securities issued or guaranteed by: Canada $ 31,567 $ 34,681 Province or municipality 121,081 47,915 Equity securities: Preferred shares 166,669 110,714 Common shares - 1,119 --------------------------------------------- $ 319,317 $ 194,429 --------------------------------------------- --------------------------------------------- (1) Includes investments with no specific maturity. The analysis of investments at fair value is as follows: --------------------------------------------------------------------- 2006 --------------------------------------------------------------------- Estimated Carrying Unrealized Unrealized market value gains losses value --------------------------------------------------------------------- Debt securities issued or guaranteed by: Canada $ 31,567 $ 23 $ (29) $ 31,561 Province or municipality 121,081 274 (79) 121,276 Equity securities: Preferred shares 166,669 2,215 (841) 168,043 Common shares - - - - --------------------------------------------------------------------- $ 319,317 $ 2,512 $ (949) $ 320,880 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- 2005 --------------------------------------------------------------------- Estimated Carrying Unrealized Unrealized market value gains losses value --------------------------------------------------------------------- Debt securities issued or guaranteed by: Canada $ 34,681 $ 25 $ (116) $ 34,590 Province or municipality 47,915 171 (138) 47,948 Equity securities: Preferred shares 110,714 1,504 (773) 111,445 Common shares 1,119 337 - 1,456 --------------------------------------------------------------------- $ 194,429 $ 2,037 $ (1,027) $ 195,439 --------------------------------------------------------------------- --------------------------------------------------------------------- The weighted average effective yield for debt securities is 4.15% (2005 - 3.20%) based on yield to maturity, and for preferred shares is 4.05% (2005 - 3.82%). The Company has established a bank line of credit facility. Under this facility, the Company may borrow up to $35,000 for short-term liquidity purposes. The facility is secured by the Company's investments in equity securities. There was no outstanding balance on the line as at December 31, 2006 (2005 - nil). 4. Loan securitizations - retained interests: The Company securitizes Government of Canada guaranteed residential mortgage loans through the creation of mortgage-backed securities and removes the mortgages from the balance sheets. As at December 31, 2006, outstanding securitized mortgages totalled $1,807,479 (2005 - $1,878,405), substantially all of which are multi-family residential mortgage loans. During 2006, the Company securitized Government of Canada guaranteed multi-family residential mortgage loans and received net cash proceeds of $267,756 (2005 - $266,200). The Company retained the rights to future excess interest on the mortgages valued at $10,385 (2005 - $10,672) and received net cash flows on interests retained of $17,813 (2005 - $17,263). The Company retained the responsibility for servicing the mortgages and enjoys the right to receive the future excess interest spread. The Company has outsourced the servicing of the transferred loans to an unrelated third party and has recorded a servicing liability of $6,044 (2005 - $6,460) which is included in other liabilities (note 9). The amount of servicing liability amortized during the year was $1,436 (2005 - $1,285). The components of income from loan securitizations - retained interests are as follows: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Gain on sale of mortgages $ 708 $ 1,141 Excess interest, net of servicing fee 3,182 2,693 --------------------------------------------------------------------- $ 3,890 $ 3,834 --------------------------------------------------------------------- --------------------------------------------------------------------- The valuation of the future excess interest spread includes an excess spread of 0.79% (2005 - 0.84%), and the key assumption of a discount rate of 4.97% (2005 - 5.08%). There are no expected credit losses as the mortgages are government guaranteed, and no prepayment rate estimates as under the terms of the multi-family residential mortgages, prepayment penalties are sufficient to ensure that the Company will receive all of its investment upon the early discharge of any mortgage. The following table presents the key economic assumption and the sensitivity of the fair value of retained interests to two adverse changes in the key assumption as at December 31, 2006. The following sensitivity analysis is hypothetical and should be used with caution. --------------------------------------------------------------------- Multi-family residential loans --------------------------------------------------------------------- Carrying value of retained interests $ 48,271 Discount rate 4.97% Impact of a 10% adverse change $ (650) Impact of a 20% adverse change $ (1,300) --------------------------------------------------------------------- --------------------------------------------------------------------- The Company estimates that the future excess interest spread and servicing liability will be received or paid as follows: --------------------------------------------------------------------- Excess interest Servicing spread liability --------------------------------------------------------------------- 2007 $ 11,387 $ 1,341 2008 9,280 1,173 2009 7,143 912 2010 5,671 753 2011 4,507 628 Thereafter 10,283 1,237 --------------------------------------------------------------------- $ 48,271 $ 6,044 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company's securitization activities are subject to market risk, which represents the potential for changes in the value of assets and liabilities due to fluctuations in market interest rates. The Company enters into hedging transactions to manage market interest rate exposures on mortgages held for securitization and commitments for mortgages to be securitized, typically for periods of up to 90 days. Hedging gains and losses are recognized at the time the related mortgages are securitized. Hedge instruments outstanding at December 31, 2006 and 2005 relating to forward contracts on Government of Canada bonds, where the counterparties are chartered banks, are as follows: --------------------------------------------------------------------- 2006 ----------------------------------- Bond term Notional Market Unrealized (years) amount value loss --------------------------------------------------------------------- 1 to 5 $ 14,400 $ 14,289 $ (55) 5 to 10 21,800 22,444 (393) --------------------------------------------------------------------- $ 36,200 $ 36,733 $ (448) --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- 2005 ----------------------------------- Bond term Notional Market Unrealized (years) amount value loss --------------------------------------------------------------------- 1 to 5 $ 10,200 $ 10,381 $ (16) 5 to 10 39,200 42,320 (382) --------------------------------------------------------------------- $ 49,400 $ 52,701 $ (398) --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Mortgages receivable: (a) Mortgages receivable and impaired mortgages: ------------------------------------------------------------------------- Allowance for credit losses Gross ----------------------------------- Net 2006 amount Specific General Total amount ------------------------------------------------------------------------- Residential mortgages $1,373,842 $ 160 $ 5,168 $ 5,328 $1,368,514 Other mortgages 472,635 - 2,047 2,047 470,588 Mortgages held for securitization or for sale 287,063 - 671 671 286,392 Accrued interest 10,168 - - - 10,168 ------------------------------------------------------------------------- $2,143,708 $ 160 $ 7,886 $ 8,046 $2,135,662 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Allowance for credit losses Gross ----------------------------------- Net 2005 amount Specific General Total amount ------------------------------------------------------------------------- Residential mortgages $1,184,434 $ 2,087 $ 3,634 $ 5,721 $1,178,713 Other mortgages 320,496 - 1,037 1,037 319,459 Mortgages held for securitization or for sale 173,629 - 409 409 173,220 Accrued interest 7,028 - - - 7,028 ------------------------------------------------------------------------- $1,685,587 $ 2,087 $ 5,080 $ 7,167 $1,678,420 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Included in mortgages held for securitization or for sale are Government of Canada insured mortgages of $18,551 (2005 - $9,664). These loans held for securitization, together with the related interest rate hedges, are carried at the lower of cost or fair value. Loans held for sale include loans which are to be pooled and discharged subsequent to the balance sheet date at their investment cost. These loans are carried at the lower of cost or fair value. There are no foreclosed assets held for sale at December 31, 2006 and 2005. The principal outstanding and net carrying amount of mortgages receivable classified as impaired as at December 31, 2006 aggregated $1,138 (2005 - $3,587) and $978 (2005 - $1,500), respectively. As at December 31, 2006, the estimated fair value of mortgages receivable is $2,137,143 (2005 - $1,691,570). The weighted average effective yield of mortgages receivable is 6.56% (2005 - 5.98%) based on the yield to maturity. (b) Allowance for credit losses: --------------------------------------------------------------------- 2006 --------------------------------------------------------------------- Specific General allowance allowance Total --------------------------------------------------------------------- Balance, beginning of year $ 2,087 $ 5,080 $ 7,167 Provision for credit losses (1,906) 2,806 900 Realized credit losses (21) - (21) --------------------------------------------------------------------- Balance, end of year $ 160 $ 7,886 $ 8,046 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- 2005 --------------------------------------------------------------------- Specific General allowance allowance Total --------------------------------------------------------------------- Balance, beginning of year $ 2,438 $ 4,004 $ 6,442 Provision for credit losses (351) 1,076 725 Realized credit losses - - - --------------------------------------------------------------------- Balance, end of year $ 2,087 $ 5,080 $ 7,167 --------------------------------------------------------------------- --------------------------------------------------------------------- (c) The following table presents information about the Company's reported and securitized mortgage principal: --------------------------------------------------------------------- Principal amount of Gross mortgages 61 principal or more days 2006 amount past due --------------------------------------------------------------------- Residential mortgages $ 3,313,749 $ 6,415 Other mortgages 627,270 - --------------------------------------------------------------------- Total mortgages reported and securitized 3,941,019 6,415 Less mortgages securitized 1,807,479 4,690 --------------------------------------------------------------------- Mortgages reported prior to accrued interest (note 5(a)) $ 2,133,540 $ 1,725 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Principal amount of Gross mortgages 61 principal or more days 2005 amount past due --------------------------------------------------------------------- --------------------------------------------------------------------- Residential mortgages $ 3,157,465 $ 6,476 Other mortgages 399,499 105 --------------------------------------------------------------------- Total mortgages reported and securitized 3,556,964 6,581 Less mortgages securitized 1,878,405 3,775 --------------------------------------------------------------------- Mortgages reported prior to accrued interest (note 5(a)) $ 1,678,559 $ 2,806 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. Other assets: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Deferred guaranteed investment certificate ("GIC") commissions $ 6,288 $ 5,791 Prepaid expenses and other 2,378 977 Capital assets 2,263 1,502 Other receivables 1,868 1,469 Accrued interest on non-mortgage assets 1,866 855 --------------------------------------------------------------------- $ 14,663 $ 10,594 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Customer deposits: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Cashable GICs, payable on demand $ 570,455 $ 348,885 GICs with fixed maturity dates 1,766,011 1,423,066 Accrued interest 53,289 37,004 --------------------------------------------------------------------- $ 2,389,755 $ 1,808,955 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company issues GICs to depositors. As at December 31, 2006, the estimated fair value of customer deposits is $2,336,869 (2005 - $1,770,063). The weighted average effective yield to maturity of customer deposits is 4.02% (2005 - 3.51%). 8. Income taxes: The provision for income taxes shown in the statements of earnings differs from that obtained by applying statutory income tax rates to the earnings before the provision for income taxes for the following reasons: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Canadian statutory income tax rate 36.1 % 36.1 % Increase (decrease) resulting from: Tax-exempt income (7.1)% (7.1)% Non-deductible expenses 0.4 % 0.5 % Future tax rate decreases (0.6)% - --------------------------------------------------------------------- Effective income tax rate 28.8 % 29.5 % --------------------------------------------------------------------- --------------------------------------------------------------------- The net future income tax liability is comprised of: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Future income tax assets: Allowance for credit losses $ 2,608 $ 1,910 Share issue expenses 425 647 Deferred mortgage fees 608 558 Other 466 415 ------------------------------------------------------------------- 4,107 3,530 Future income tax liabilities: Deferred GIC commissions 2,141 2,092 Loan securitizations - retained interests 6,666 7,976 ------------------------------------------------------------------- 8,807 10,068 --------------------------------------------------------------------- Net future income tax liability $ 4,700 $ 6,538 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Other liabilities: --------------------------------------------------------------------- 2006 2005 --------------------------------------------------------------------- Accounts payable and accrued liabilities $ 6,860 $ 4,315 Securitized mortgage servicing liability 6,044 6,460 Mortgagor realty taxes 5,089 5,266 Income taxes payable 3,571 4,666 --------------------------------------------------------------------- $ 21,564 $ 20,707 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Bank term loan: The Company has received two non-revolving bank term loans totalling $34,750, $19,750 of which was received on March 17, 2005 and $15,000 on April 17, 2006. Each loan is for a fixed term of five years with the balance of the loan, together with all accrued and unpaid interest, due on the fifth anniversary of the loan. The proceeds of the loans were used to purchase $19,750 of Series 5 and $15,000 of Series 6 of the Subordinated Debentures of the Company's subsidiary, Equitable Trust. The loans are repayable in full at the option of the Company at any time during their term and as collateral for the loans, the Company has provided a promissory note, a general security agreement, a pledge of all the issued and outstanding shares in the capital of Equitable Trust and an assignment of the Subordinated Debentures purchased from Equitable Trust using the proceeds of the loans. Interest is payable monthly on the $19,750 loan at 6.37% and on the $15,000 loan at 6.82%. As at December 31, 2006, the estimated fair value of the bank term loan is $34,792 (2005 - $19,721). 11. Subordinated debt: The Company has issued debentures which are subordinated to the deposits and other liabilities of the Company and which are repayable at any time without penalty. Any redemption of this debt, contractual or earlier, is subject to regulatory approval. Interest is paid quarterly. ------------------------------------------------------------------------- Inter- Outstanding, Outstanding, Debenture est Issue Maturity December December series rate date date 31, 2005 Issued Redeemed 31, 2006 ------------------------------------------------------------------------- Series 4 7.54% - 2003 January $ 11,444 $ - $ 11,444 $ - 8.15% 2013 Series 5 7.31% - 2004/ January 20,250 - - 20,250 7.58% 05 2015 Series 6 7.27% 2006 January - 5,000 - 5,000 2016 ------------------------------------------------------------------------- $ 31,694 $ 5,000 $ 11,444 $ 25,250 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Inter- Outstanding, Outstanding, Debenture est Issue Maturity December December series rate date date 31, 2004 Issued Redeemed 31, 2005 ------------------------------------------------------------------------- Series 3 8.48% - 2002 January $ 3,530 $ - $ 3,530 $ - 8.82% 2012 Series 4 7.54% - 2003 January 11,444 - - 11,444 8.15% 2013 Series 5 7.31% - 2004/ January 14,175 6,075 - 20,250 7.58% 05 2015 ------------------------------------------------------------------------- $ 29,149 $ 6,075 $ 3,530 $ 31,694 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at December 31, 2006, the estimated fair value of subordinated debt is $25,836 (2005 - $33,074). 12. Shareholders' equity: (a) Capital stock: Authorized: Unlimited preferred shares Unlimited common shares Issued: ------------------------------------------------------------------------- 2006 2005 ------------------------------------------------------------------------- Number of Number of shares Amount shares Amount ------------------------------------------------------------------------- Common shares: Balance, beginning of year 11,781,940 $ 55,510 11,680,750 $ 54,815 Issued 142,528 2,138 101,190 666 Transfer from contributed surplus relating to the exercise of stock options - 201 - 29 ------------------------------------------------------------------------- Balance, end of year 11,924,468 $ 57,849 11,781,940 $ 55,510 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During 2006, 142,528 (2005 - 101,190) shares were issued as a result of the exercise of employee stock options for cash consideration of $2,138 (2005 - $666) and $201 (2005 - $29) was transferred from contributed surplus to common shares as a result of these exercises. The weighted average number of shares outstanding used to calculate basic and diluted earnings per share is as follows: ------------------------------------------------------------------ 2006 2005 ------------------------------------------------------------------ Basic 11,878,724 11,747,564 Relating to stock options 197,521 198,901 ------------------------------------------------------------------ Diluted 12,076,245 11,946,465 ------------------------------------------------------------------ ------------------------------------------------------------------ (b) Capital requirements and dividend restrictions: The Company's subsidiary, Equitable Trust, is subject to minimum capital requirements as prescribed by OSFI under the Trust and Loan Companies Act (Canada). In addition, OSFI must be notified of any dividend declaration, and there are restrictions as to the amount of dividends which can be paid out in any fiscal year. (c) Stock-based compensation plan: Under the Company's stock option plan, options on common shares are periodically granted to eligible participants for terms of five years and vest over a four or five-year period. The maximum number of common shares available for issuance under the plan is 10% of the Company's issued and outstanding common shares. The outstanding options expire on various dates to November 2011. A summary of the Company's stock option activity and related information for the years ended December 31, 2006 and 2005 is as follows: ------------------------------------------------------------------------- 2006 2005 ------------------------------------------------------------------------- Weighted Weighted Number average Number average of stock exercise of stock exercise options price options price ------------------------------------------------------------------------- Outstanding, beginning of year 768,539 $ 18.07 809,729 $ 15.86 Granted 140,000 28.75 135,000 24.13 Exercised (142,528) 15.00 (101,190) 6.57 Forfeited/cancelled (17,000) 22.58 (75,000) 20.67 ------------------------------------------------------------------------- Outstanding, end of year 749,011 20.54 768,539 18.07 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Exercisable, end of year 157,400 $ 18.49 126,611 $ 17.28 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes information relating to stock options outstanding and exercisable at December 31, 2006: ------------------------------------------------------------------ Options Options outstanding exercisable ------------------------------------------------------------------ Weighted average remaining Exercise Number contractual Number price outstanding life (years) exercisable ------------------------------------------------------------------ $ 9.07 7,111 1.9 - $ 17.50 464,500 2.1 127,000 $ 20.40 39,400 2.9 12,400 $ 24.25 24,000 3.4 4,000 $ 24.10 74,000 3.9 14,000 $ 28.75 140,000 4.9 - ------------------------------------------------------------------ ------------------------------------------------------------------ Under the fair value-based method of accounting for stock options, the Company has recorded compensation expense in the amount of $413 (2005 - $397) related to grants of options under the stock option plan. This amount has been credited to contributed surplus. The fair value of options granted during the year is estimated at the date of grant using the Black-Scholes valuation model, with the following assumptions: (i) risk-free rate of 3.9% (2005 - 3.9%); (ii) expected option life of 4.0 years (2005 - 4.0 years); (iii) expected volatility of 19.0% (2005 - 19.0%); and (iv) expected dividends of 2.3% (2005 - 2.2%). The fair value of each option granted was $3.49 (2005 - $2.92). 13. Commitments and contingencies: (a) The Company is committed to annual payments under two non-cancellable operating leases for office premises through 2011 in the total amount of approximately $882. Annual payments are: --------------------------------------------------------------------- 2007 $ 407 2008 407 2009 28 2010 28 2011 12 --------------------------------------------------------------------- --------------------------------------------------------------------- In addition to these minimum lease payments for premises rental, the Company will pay its share of common area maintenance and realty taxes over the term of the leases. (b) The Company has commitments to fund a total of $279,278 (2005 - $307,970) of mortgages in the ordinary course of business at year end. (c) The Company is subject to various claims and litigation arising from time to time in the ordinary course of business. Management has determined that the aggregate liability, if any, that may result from various outstanding legal proceedings would not be material and no provisions have been recorded in these financial statements. 14. Related party transactions: Certain of the Company's employees and directors have purchased GIC deposits and/or subordinated debt from the Company. These purchases were made in the ordinary course of business at terms comparable to those offered to unrelated parties. As at December 31, 2006, employees and directors have purchased $2,622 (2005 - $53,179) of GIC deposits and $8,425 (2005 - $7,604) of subordinated debt. 15. Future accounting changes: Financial instruments: The Canadian Institute of Chartered Accountants has issued four new accounting standards: Handbook Section 3855, Financial Instruments - Recognition and Measurement, Handbook Section 3865, Hedges, Handbook Section 1530, Comprehensive Income and Handbook Section 3251, Equity, which are effective for the Company as of January 1, 2007. As a result of adopting these standards, a new category, accumulated other comprehensive income, will be added to shareholders' equity, and certain unrealized gains and losses will be reported in other comprehensive income until realization. Effective January 1, 2007, certain financial assets and liabilities will be measured at fair value and others at amortized cost. Any adjustment of the previous carrying amounts will be recognized as an adjustment to either accumulated other comprehensive income or retained earnings at January 1, 2007 and prior period financial statements will not be restated. 16. Interest rate sensitivity: The following table shows the Company's position with regard to interest rate sensitivity of assets, liabilities and equity on the date of the earlier of contractual maturity or repricing date, as at December 31, 2006: ------------------------------------------------------------------------- Floating 0 - 3 4 - 12 1 - 5 rate months months years ------------------------------------------------------------------------- Assets:(a) Cash and cash equivalents $ 21,688 $ 86,154 $ - $ - Effective interest rate 3.82% 4.20% - - Investments - 53,492 119,781 122,802 Effective interest rate - 4.57% 4.01% 3.98% Loan securitizations - retained interests - 3,566 7,821 26,601 Effective interest rate - 4.99% 4.98% 5.15% Mortgages receivable(b) 1,103,742 88,776 257,118 682,766 Effective interest rate 6.56% 6.37% 6.70% 6.52% Other assets - - - - ------------------------------------------------------------------------- Total assets $ 1,125,430 $ 231,988 $ 384,720 $ 832,169 ------------------------------------------------------------------------- ----------------------------------------------------------- Greater than Non-interest 5 years sensitive Total ----------------------------------------------------------- Assets:(a) Cash and cash equivalents $ - $ - $ 107,842 Effective interest rate - - 4.12% Investments 23,242 - 319,317 Effective interest rate 4.10% - 4.10% Loan securitizations - retained interests 10,283 - 48,271 Effective interest rate 5.17% - 5.11% Mortgages receivable(b) - 3,260 2,135,662 Effective interest rate - - 6.55% Other assets - 14,663 14,663 ----------------------------------------------------------- Total assets $ 33,525 $ 17,923 $ 2,625,755 ----------------------------------------------------------- ------------------------------------------------------------------------- Floating 0 - 3 4 - 12 1 - 5 rate months months years ------------------------------------------------------------------------- Liabilities:(a) Customer deposits(b) $ 570,455 $ 703,951 $ 354,416 $ 707,644 Effective interest rate 3.86% 3.99% 4.17% 4.10% Other - - - - Bank term loan - - - 34,750 Effective interest rate - - - 6.56% Subordinated debt(b) - - - - Effective interest rate - - - - Shareholders' equity - - - - ------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 570,455 $ 703,951 $ 354,416 $ 742,394 ------------------------------------------------------------------------- Excess (deficiency) of assets over liabilities and shareholders' equity $ 554,975 $ (471,963) $ 30,304 $ 89,775 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets - 2005 $ 854,192 $ 127,329 $ 302,301 $ 694,010 Total liabilities and shareholders' equity - 2005 348,885 492,178 274,806 675,832 ------------------------------------------------------------------------- Excess (deficiency) of assets over liabilities and shareholders' equity - 2005 $ 505,307 $ (364,849) $ 27,495 $ 18,178 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------------------------------------- Greater than Non-interest 5 years sensitive Total ----------------------------------------------------------- Liabilities:(a) Customer deposits(b) $ - $ 53,289 $ 2,389,755 Effective interest rate - - 3.93% Other - 26,264 26,264 Bank term loan - - 34,750 Effective interest rate - - 6.56% Subordinated debt(b) 25,250 - 25,250 Effective interest rate 7.45% - 7.45% Shareholders' equity - 149,736 149,736 ----------------------------------------------------------- Total liabilities and shareholders' equity $ 25,250 $ 229,289 $ 2,625,755 ----------------------------------------------------------- Excess (deficiency) of assets over liabilities and shareholders' equity $ 8,275 $ (211,366) $ - ----------------------------------------------------------- ----------------------------------------------------------- Total assets - 2005 $ 19,254 $ 15,166 $ 2,012,252 Total liabilities and shareholders' equity - 2005 31,694 188,857 2,012,252 ----------------------------------------------------------- Excess (deficiency) of assets over liabilities and shareholders' equity - 2005 $ (12,440) $ (173,691) $ - ----------------------------------------------------------- ----------------------------------------------------------- (a) Accrued interest is excluded in calculating interest sensitive assets and liabilities. (b) Potential prepayments of fixed rate loans have not been estimated. Cashable GICs are included with floating rate liabilities as these are cashable by the depositor upon demand. Any prepayments of subordinated debt, contractual or otherwise, have not been estimated as these would require pre-approval by OSFI. An immediate and sustained 1% decrease in interest rates as at December 31, 2006 would negatively impact net interest income for the following 12-month period by $1,086 (2005 - $1,659) before adjusting for income taxes.
For further information:
For further information: Geoffrey Bledin, (416) 515-7000; Stephen Coffey, (416) 515-7000