News
Equitable Group reports 2007 second quarter
TSX Symbol: ETC
TORONTO, Aug. 2 /CNW/ - Equitable Group Inc. today reported its financial
results for the three and six months ended June 30, 2007 - a period that
featured record mortgage production and the successful completion of a
secondary offering of common shares that bolstered the Company's regulatory
capital in support of future growth.Second Quarter Highlights
- Net income increased 13.2% to $7.5 million from $6.6 million a year
earlier despite a modest reduction in net interest margin.
- Diluted earnings per share increased 7.3% to $0.59 compared to $0.55
a year ago - reflecting the impact of the April 30, 2007 issuance of
769,231 new common shares.
- Return on average equity was 17.0% compared to 19.8% a year earlier.
- Assets expanded 29.3% to $2.90 billion from $2.24 billion a year
earlier - despite the repayment and discharge of $388.5 million of
short-term warehoused mortgages.
- There were no loan losses in the period and mortgages in arrears
90 days or more amounted to 0.14% of total mortgages.
- Equitable Trust's total capital ratio was 12.4% compared to 11.6% at
June 30, 2006.
Six Month Highlights
- Net income increased 24.4% to $15.5 million from $12.4 million a year
earlier.
- Diluted earnings per share increased 20.4% to $1.24 compared to $1.03
a year ago.
- Annualized return on average equity was 19.0% compared to 19.2% a
year earlier.Dividend
The Company's Board declared a dividend in the amount of $0.10 per share
payable October 4, 2007 to shareholders of record at the close of business
September 14, 2007.
Management Commentary
"Equitable established a new high water mark - $702 million - for
quarterly mortgage production and achieved profitable year-over-year growth in
the second quarter," said Andrew Moor, President and CEO. "At the same time,
however, the pace of earnings growth was constrained due to a modest reduction
in net interest margin (2.3% versus 2.5% a year ago). This was caused by an
increase in interest rates on short-term GICs used to fund our floating rate
mortgages without a corresponding increase in the prime rate to which our
floating rate mortgages are tied. With the prime rate increase in July, this
situation has subsequently corrected itself. As a result of this factor, and
the dilution caused by our recent equity offering, we did not track as closely
to our annual performance objectives as we would have liked for earnings
growth, ROAE and our productivity ratio in the quarter. Even so, we made
important progress for the future by enhancing Equitable Trust's regulatory
capital through the equity offering and adding selectively to our human
resources in preparation for future growth."
During the second quarter, the Company recruited William Edmunds to fill
the role of Senior Vice President, Credit and Chief Risk Officer. Mr. Edmunds
has extensive professional credit experience in both commercial and retail
environments, has managed mortgage operations and is an important addition to
the Company's leadership team. Most recently, he was President and Chief Risk
Officer of GE Money Trust Company, and, among his many other career
highlights, served as Vice President, Credit and Portfolio Administration at
TD Asset Finance Corp., and in various capacities at the Toronto-Dominion Bank
starting in 1972. He is a Certified General Accountant and a Fellow of the
Institute of Canadian Bankers.
Said Stephen Coffey, Senior Vice President and CFO: "During the second
quarter, our productivity ratio on a taxable equivalent basis was 35.4%. While
this was higher than our objective for the year primarily as a result of the
lag in net interest income growth due to higher interest rates, Equitable
remains a very efficient lender and we remain committed to achieving our
productivity objectives for the year."
Mortgages Receivable
Year over year growth in the Company's mortgage portfolio was registered
in all of its niches:- Single family dwelling mortgages increased 19.3% to $795.3 million.
- Multi-unit residential mortgages increased 22.7% to $623.9 million.
- Commercial mortgages increased 44.0% to $535.5 million.
- Conventional mortgages held for sale increased 22.7% to
$212.1 million.
- Construction loans increased 28.2% to $110.9 million.The Company also continued to advance its growth initiative in Alberta
where $45.3 million in single family dwelling mortgages were originated during
the second quarter.
During the second quarter, the Company discharged two very significant
short-term warehoused mortgage pools, which somewhat masked the very positive
impact of record production volume.
Outlook
"To date in the third quarter, demand in our mortgage niches remains
strong and this, coupled with current market forecasts, should support
ongoing, profitable growth for the balance of the year," said Mr. Moor.
"Importantly, with the increase in the prime rate announced subsequent to the
second quarter (July 10, 2007), we've also seen a recovery in the net interest
margin between mortgages and customer deposits. This should have a positive
impact on earnings performance relative to the second quarter. In total, over
the first six months of 2007, we believe we have established a solid
foundation to pursue our growth and profit objectives for the year."
Second Quarter Webcast
Equitable's second 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 416 915 5761.
MD&A
The Company will post its MD&A for the three and six months ended
June 30, 2007 on its website www.equitablegroupinc.com this morning. This
document will also be archived on the site.
About Equitable Group Inc.
Equitable Group Inc. is a leading niche mortgage lender that focuses on
single family dwelling, multi-unit residential and commercial mortgage
financing in selected geographic territories in Canada. It conducts business
through its wholly-owned subsidiary, The Equitable Trust Company, which was
founded in 1970. Equitable is also a nationally-licensed deposit-taking
institution. Equitable's non-branch business model, valued relationships with
third-party mortgage professionals and deposit-taking agents, and disciplined
lending practices have allowed the Company to grow profitably and efficiently
for many years. 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.
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.
The interim unaudited consolidated financial statements and notes have
not been reviewed by the Company's auditors but have been reviewed and
approved by the Company's Audit Committee and Board of Directors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(for the three and six months ended June 30, 2007)
This Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the interim unaudited consolidated financial statements for
the period ended June 30, 2007, as well as the audited consolidated financial
statements and MD&A for the year ended December 31, 2006, available on SEDAR
at www.sedar.com. Except as indicated below, the factors discussed and
referred to in the MD&A for 2006 remain substantially unchanged.
OVERVIEW
Equitable Group Inc. ("Equitable" or the "Company") is a niche mortgage
lender. Its core business is to raise funds by selling GICs to depositors and
to lend these funds to borrowers on the security of first mortgages on real
estate. It does this through its wholly-owned subsidiary - The Equitable Trust
Company ("Equitable Trust"). The Company's mortgage products bear fixed or
floating rates of interest and are primarily for fixed terms. The mortgages
are segregated into the following classifications:- residential mortgages - either single family dwellings or multi-unit
(apartments, nursing homes etc.)
- commercial mortgages
- construction mortgages
- residential and commercial mortgages held for sale which are
originated by third-party lenders who require financing prior to
pooling and eventually selling the mortgages to investors. These
conventional mortgages held for sale usually stay on the books of the
Company for periods of up to six months and are therefore often
referred to as 'warehoused' mortgages.
- residential insured mortgages for securitization through the Canada
Mortgage and Housing Corporation Mortgage-Backed Securities
("CMHC-MBS") programEquitable conducts business through Equitable Trust, which is regulated
by the Office of the Superintendent of Financial Institutions - Canada
("OSFI"). Equitable Trust has prescribed capital requirements based on the
type and amount of assets on its balance sheet and on certain off-balance
sheet items. For this reason, Equitable focuses on capital management as a
means to balance growth and Return on Average Equity ("ROAE") targets.
During the second quarter of 2007, Equitable generated 13.2% growth in
net income compared to the same period in 2006 supported by 29.3% year-over-
year growth in assets. The Company also increased its staff complement -
including hiring a Senior Vice-President, Credit and Chief Risk Officer,
advanced its presence in Alberta, established interest rate swap facilities at
two chartered banks, and successfully completed a $25.0 million secondary
offering of common shares with the proceeds used to enhance regulatory
capital. As a result of these developments, management believes the Company
improved its positioning for the future.
At the same time, however, the pace of second quarter growth in earnings
was lower, compared to recent periods of record high performance, due to
several factors. Notably, growth in net income was negatively impacted by a
compression in net interest margin resulting from an increase in interest
rates without a corresponding increase in the prime rate (see "Earnings"
review below). As expected, earnings per share ("EPS") and ROAE were also
affected by the Company's April 30, 2007 issuance of 769,231 common shares. As
a result, on a diluted basis, second quarter 2007 EPS was $0.59 compared to
$0.55 in the second quarter of 2006 - a 7.3% increase - but 10.6% lower than
first quarter 2007 EPS of $0.66. At 17.0%, second quarter ROAE was also lower
than in the first quarter of 2007 and in the corresponding quarter of 2006.
While the Company funded a record $701.9 million in total mortgages
including a record $406.6 million of conventional mortgages other than
warehoused mortgages during the second quarter, the increase in mortgage
production did not translate into as large an increase in the mortgage
portfolio at June 30, 2007 as might have been expected. This was due to two
large repayments and discharges (aggregating $388.5 million) of warehoused
mortgages during the quarter compared to repayments and discharges of
$212.4 million in the first quarter of 2007 and $116.5 million in the second
quarter a year earlier. The timing of warehoused mortgage discharges is not
predictable and these mortgages tend to be short term in nature compared to
other conventional mortgages. Of primary importance, however, is that the
outstanding principal of conventional mortgages other than warehoused
mortgages registered a quarterly increase of $152.6 million, or 8.0% to
$2.07 billion at June 30, 2007 from $1.91 billion outstanding at March 31,
2007.
Despite the factors which impeded Equitable's ability to achieve its
performance objectives in the second quarter (see table below), Equitable's
performance over the first half of 2007 (six months ended June 30, 2007)
equaled or exceeded its growth objectives for the full year.Table 1: Performance against objectives
Performance Performance
for the three for the six
2007 months ended or months ended or
Objectives as at June 30, 2007 as at June 30, 2007
-------------------------------------------------------------------------
Growth in assets(1)
- year-over-year 18-22% 29.3% 29.3%
Increase in net
income(1) 18-22% 13.2% 24.4%
Increase in diluted
earnings per share
("EPS")(1) 18-22% 7.3% 20.4%
Return on average
equity ("ROAE")(1) 18-22% 17.0% 19.0%
Productivity ratio
- Tax Equivalent
Basis ("TEB")(1)(2) 32-35% 35.4% 33.8%
(1) Asset growth performance is based upon current period end balances as
compared to those of the prior year; net income and EPS performance
is based upon performance comparisons to the comparable prior year
periods; ROAE is presented on an annualized basis.
(2) See explanation of TEB at the end of this MD&A.On August 1, 2007, the Company's Board declared a quarterly dividend in
the amount of at $0.10 per share. The $0.10 per share dividend is payable on
October 4, 2007, to shareholders of record at the close of business
September 14, 2007.
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("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
Group Inc, 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 you not to place undue
reliance upon any such forward-looking statements, which speak only as of the
date they are made.
Forward-looking statements relate to, among other things, realizing the
value of Equitable's assets, capitalizing on 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 February 26, 2007. Forward-looking statements
are based on management's current plans, estimates, projections, beliefs and
opinions, and Equitable does not undertake to update forward-looking
statements should assumptions related to these plans, estimates, projections,
beliefs and opinions change.Table 2: Selected financial information
($ thousands, except share and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
OPERATIONS
Net income $ 7,480 $ 6,609 $ 15,472 $ 12,442
Earnings per share
- basic 0.59 0.56 1.26 1.05
Earnings per share
- diluted 0.59 0.55 1.24 1.03
Net interest income(1) 15,338 12,586 30,215 23,945
Total revenue 44,728 34,008 87,396 64,828
Return on weighted average
equity - annualized 17.0% 19.8% 19.0% 19.2%
Return on average assets
- annualized 1.0% 1.2% 1.1% 1.2%
Productivity ratio
- TEB(1) (2) 35.4% 33.1% 33.8% 32.5%
BALANCE SHEET AND OFF-
BALANCE SHEET
Total assets $ 2,901,194 $ 2,244,458
Mortgages receivable 2,313,024 1,831,586
Shareholders' equity 186,412 136,766
Mortgage-backed security
assets under
administration 1,785,271 1,914,418
COMMON SHARES
Number of common shares
outstanding at period end 12,914,699 11,903,645
Dividends per share $0.20 $0.20
Book value per share $14.43 $11.49
Share price - close 32.05 26.25
Market capitalization 413,916 312,471
CREDIT QUALITY
Realized loan losses -
net of recoveries $ 21 $ 21
Mortgages in arrears 90 days
or more as a % of
total mortgages 0.14% 0.03%
Net impaired mortgages(3) as
a % of total mortgages 0.13% 0.05%
Allowance for credit losses as
a % of gross impaired mortgages 271.6% 311.7%
(1) See explanation of treatment of deposit agent commissions at the end
of this MD&A.
(2) See explanation of TEB at the end of this MD&A.
(3) Gross mortgage principal of impaired loans less specific reserves.FINANCIAL REVIEW
EARNINGS
Net income for the three months ended June 30, 2007 increased 13.2% year-
over-year to $7.5 million. Compared to recent quarters, this slower rate of
growth resulted from a decrease in the Company's net interest margin, which
stood at 2.3% in the second quarter of 2007 compared to 2.5% in the same
period a year ago. This reduction in net interest margin was caused by an
increase in interest rates on short-term GICs used to fund floating rate
mortgages - without a corresponding increase in the prime rate to which the
floating rate mortgages are tied. These floating rate mortgages generally
comprise approximately 50% of the Company's mortgage portfolio (50.9% as at
June 30, 2007 and 51.7% as at December 31, 2006). Management believes the
increase in the prime rate on July 10, 2007 should improve the net interest
margin between mortgages and customer deposits in the third quarter compared
to the second quarter of 2007.Table 3: Net interest income
($ thousands) Three months ended Three months ended
June 30, 2007 June 30, 2006
Interest revenues or interest Revenue/ Average Revenue/ Average
expenses derived from: Expense Rate Expense Rate
Assets:
Liquidity investments $3,715 4.6% $2,003 4.2%
Equity securities - TEB(1) 3,261 6.7% 2,084 6.7%
Mortgage loans 37,415 6.5% 29,044 6.5%
Total interest earning assets
- TEB(1) 44,391 6.3% 33,131 6.3%
Total assets - TEB(1) 44,391 6.2% 33,131 6.1%
Liabilities and shareholders'
equity:
Customer deposits 26,147 4.1% 18,617 3.9%
Bank term loan 831 7.1% 559 7.0%
Subordinated debt 626 7.4% 492 7.5%
Total interest bearing liabilities 27,604 4.2% 19,668 4.0%
Total liabilities and shareholders'
equity 27,604 3.8% 19,668 3.6%
Net interest income - TEB(1)(2) 16,787 13,463
Net interest margin - TEB(1)(2) 2.3% 2.5%
Less: Taxable equivalent
adjustment(1) 1,449 877
Less: Deposit agent commissions(2) 1,542 -
Net interest income per financial
statements 13,796 12,586
($ thousands) Six months ended Six months ended
June 30, 2007 June 30, 2006
Interest revenues or interest Revenue/ Average Revenue/ Average
expenses derived from: Expense Rate Expense Rate
Assets:
Liquidity investments $6,850 4.7% $3,727 4.0%
Equity securities - TEB(1) 5,976 6.6% 3,934 6.4%
Mortgage loans 73,188 6.7% 55,449 6.4%
Total interest earning assets
- TEB(1) 86,014 6.4% 63,110 6.2%
Total assets - TEB(1) 86,014 6.3% 63,110 6.0%
Liabilities and shareholders'
equity:
Customer deposits 50,501 4.2% 35,528 3.8%
Bank term loan 1,446 6.9% 884 6.9%
Subordinated debt 1,183 7.4% 1,092 7.6%
Total interest bearing liabilities 53,130 4.3% 37,504 3.9%
Total liabilities and shareholders'
equity 53,130 3.9% 37,504 3.6%
Net interest income - TEB(1)(2) 32,884 25,606
Net interest margin - TEB(1)(2) 2.4% 2.4%
Less: Taxable equivalent
adjustment(1) 2,669 1,661
Less: Deposit agent commissions(2) 2,940 -
Net interest income per financial
statements 27,275 23,945
(1) See explanation of TEB at the end of this MD&A.
(2) See explanation of treatment of deposit agent commissions at the end
of this MD&A.Total interest revenues on a TEB were $44.4 million in the second quarter
compared to $33.1 million in the comparable 2006 period, an increase of 34.0%
due to growth in the Company's interest earning asset base and increases in
interest rates. Mortgage revenues increased $8.4 million or 28.8% in the
second quarter 2007 over 2006 while average rates remained consistent at 6.5%
for both periods. Equity securities' income on a TEB increased $1.2 million or
56.5% on a quarter-over-quarter basis due primarily to the larger portfolio.
Interest rates on average customer deposits outstanding for the second
quarter of 2007 increased to 4.1% from 3.9% in 2006 due to general increases
in interest rates, while overall interest expense on customer deposits for the
quarter grew $7.5 million or 40.4% over 2006 due to these higher interest
rates as well as a 32.4% increase in average customer deposits outstanding
during the second quarter of 2007 compared to 2006.
During the second quarter of 2007, the Company entered into $10.0 million
of interest rate swaps in order to hedge interest rates on one-year term GICs
used to fund floating rate mortgages. These swaps are derivative financial
instruments. Any change in their value is included in interest expense. The
GICs to which these swaps relate have been designated as held-for-trading
financial instruments and are carried at fair value. Any change in their value
is included in interest expense and all transaction costs related to raising
these GICs are expensed as incurred.
Net interest income - TEB increased $3.3 million or 24.7% to
$16.8 million for the second quarter of 2007 compared to the $13.5 million
earned during the same period in 2006. As a result of the new accounting
policies for financial instruments, deposit agent commissions are accounted
for as a component of interest expense. This change from prior periods'
financial statement presentation has not been applied retroactively and
certain elements of this MD&A have been presented in a manner so that certain
current ratios such as net interest margins - TEB and productivity ratios -
TEB are consistent with past MD&A presentation.
Other Income
Other income includes ancillary fees related to the mortgage portfolio,
gains on the securitization of mortgages and excess interest net of servicing
fee earned on mortgages issued through the Company's CMHC-MBS program. Sundry
income, gains or losses on the sale or redemption of investments and other
non- mortgage related fees are also included in other income. Other income
amounted to $1.8 million for the three months ended June 30, 2007, the same as
in the second quarter a year ago but 21.1% less than the $2.3 million earned
during the previous quarter when larger than usual discharge penalty income
was recorded in loan securitizations - retained interests. Mortgage related
fees increased to $1.0 million for the three months ended June 30, 2007
compared to $0.8 million in the comparable period of 2006 due primarily to the
increase in the production of non-warehoused conventional mortgages in the
second quarter of 2007 (Table 5).
During the second quarter, the Company securitized, through the CMHC-MBS
program, $42.6 million of mortgages compared to $86.7 million during the
comparable period in 2006. Even though securitization activity in the second
quarter of 2007 was less than half that of the comparable 2006 period, gains
on sale of mortgages were the same as in the comparable period of 2006 at $0.1
million. Gross margins on the securitization of mortgages increased to 32
basis points in the second quarter of 2007 from 16 basis points in the
comparable period due to a widening of spreads on this business. Excess
interest net of servicing fees was $0.6 million during the second quarter of
2007, a decrease of $0.2 million from the $0.8 million earned in the second
quarter of 2006. This change was due to a decrease in outstanding securitized
mortgages which stood at $1.79 billion at June 30, 2007 compared to $1.91
billion a year earlier.
Non-Interest Expenses
Non-interest expenses include all of the expenses not related to interest
or credit provisions required to operate Equitable's business. The major
elements of non-interest expenses consist primarily of salaries and benefits,
premises and equipment expenses, capital taxes, insurance and other general
and administrative expenses. In prior periods, deposit agent commissions were
included in non-interest expenses. As a result of adopting new accounting
policies for financial instruments, commencing in 2007 deposit agent
commissions are accounted for as a component of interest expense. This change
from prior periods' presentation has not been applied retroactively and
commentary on non-interest expenses in this MD&A is presented including
deposit agent commissions so that comparison with prior periods' results is
meaningful. For more information, see the Non-GAAP Financial Measures section
at the end of this MD&A. Non-interest expenses and deposit agent commissions
totalled $6.6 million in the second quarter compared to $5.0 million during
the same period in 2006. This increase primarily reflected higher employment
levels to support growth and variable expenses related to the expansion of the
business including deposit agent commissions as well as office and equipment
costs to accommodate growth in staff. Also, the Company realized a one-time
charge of $245 thousand in the second quarter of 2007 related to the failure
of a lawyer to register a mortgage. The Company is pursuing a legal remedy.
Included in non-interest expenses during the second quarter of 2007 was a
charge for stock-based compensation expense in the amount of $0.2 million
related to grants of options from 2004 to 2007 compared to a $0.1 million
charge for both the quarter ended June 30, 2006 and the previous quarter. The
offset to this expense was an increase to contributed surplus in the same
amount.
The Company's productivity ratio - TEB was 35.4% in the second quarter of
2007 compared to 33.1% in the second quarter of 2006. This increase primarily
relates to a lag in net interest income growth due to the factors outlined in
the "Earnings" section above, an increase in expenses and the one-time charge
outlined above. Excluding the one-time charge, the productivity ratio - TEB in
the second quarter would have been 34.1%. This ratio (the lower, the more
efficient the operations) is a non-GAAP financial measure. In 2007 it is
calculated by dividing non-interest expenses, plus deposit agent commissions,
by the sum of net interest income - TEB, as illustrated in Table 2, and other
income. When not measured on a TEB, these ratios were 38.4% and 35.1% in the
second quarter of 2007 and 2006 respectively.
BALANCE SHEET
Mortgages
The Company's mortgage lending is focused on first charges for real
estate in three primary niches: single family dwelling, multi-unit residential
and commercial. At June 30, 2007, single family dwelling mortgages represented
the largest portion of the portfolio (see Table 4). This portion of the
portfolio increased 7.2% from December 31, 2006 and 19.3% from June 30, 2006.
Multi-unit residential mortgages increased 22.7% compared to a year earlier
and increased 9.4% from December 31, 2006. Commercial mortgages increased
44.0% from a year ago and 24.2% from December 31, 2006. Growth in all of these
mortgage lending activities reflects strong demand.
The composition of the Company's mortgage portfolio at June 30, 2007
reflects management's mortgage asset weighting strategy as shown in the
following table together with comparisons for prior periods.Table 4: Mortgages receivable
June 30, 2007 December 31, 2006
($ thousands) $ % of total $ % of total
Single family dwelling 795,281 34.4% 741,732 34.8%
Multi-unit residential 623,902 27.0% 570,312 26.7%
Commercial 535,497 23.2% 431,017 20.2%
Conventional mortgages held
for sale 212,059 9.2% 268,396 12.6%
Construction 110,862 4.8% 87,043 4.1%
CMHC-insured 31,996 1.4% 33,617 1.6%
----------- -----------
Total mortgage principal 2,309,597 100.0% 2,132,117 100.0%
Net premiums and sundry 1,271 1,423
----------- -----------
Mortgages reported 2,310,868 2,133,540
Accrued interest 10,631 10,168
Allowances for credit losses (8,475) (8,046)
----------- -----------
Total mortgages receivable 2,313,024 2,135,662
----------- -----------
----------- -----------
June 30, 2006
($ thousands) $ % of total
Single family dwelling 666,779 36.5%
Multi-unit residential 508,659 27.8%
Commercial 371,813 20.3%
Conventional mortgages held
for sale 172,794 9.4%
Construction 86,447 4.7%
CMHC-insured 24,487 1.3%
-----------
Total mortgage principal 1,830,979 100.0%
Net premiums and sundry (332)
-----------
Mortgages reported 1,830,647
Accrued interest 8,535
Allowances for credit losses (7,596)
-----------
Total mortgages receivable 1,831,586
-----------
-----------Mortgage principal increased $177.5 million or 8.3% during the six month
period ended June 30, 2007 and increased $478.6 million or 26.1% since
June 30, 2006. The Company funded a total of $701.9 million of mortgages
during the quarter, an increase of 68.9% over last year's second quarter when
a total of $415.6 million of mortgages were funded. Conventional mortgages
(other than warehoused mortgages) funded during the second quarter of 2007
amounted to $406.6 million, an increase of 155.2% year-over-year. CMHC
mortgages funded during the second quarter of 2007 amounted to $45.7 million
compared to $69.9 million a year earlier. Conventional mortgages repaid and
discharged during the second quarter of 2007 totalled $642.5 million and
included $388.5 million of short-term warehoused mortgages. In the second
quarter of 2006, $265.8 million of conventional mortgages were repaid and
discharged including $116.5 million of warehoused mortgages. These warehoused
mortgage discharge levels are considered normal relative to the short term
duration of these mortgages.
Table 5 segments mortgage principal funded.Table 5: Mortgage Production
Three Months Ended
June 30, 2007 June 30, 2006
Mortgage Mortgage
Principal Principal
($ thousands) Funded % of total Funded % of total
Conventional
mortgages
other than
warehoused
mortgages $406,625 57.9% $159,355(1) 38.3%
Warehoused
mortgages 249,643 35.6% 186,398(1) 44.9%
CMHC-insured
mortgages 45,652 6.5% 69,884 16.8%
---------------------------------------------------
Total $701,920 100.0% $415,637 100.0%
Six Months Ended
June 30, 2007 June 30, 2006
Mortgage Mortgage
Principal Principal
($ thousands) Funded % of total Funded % of total
Conventional
mortgages
other than
warehoused
mortgages $677,603 49.6% $434,479(1) 43.2%
Warehoused
mortgages 544,508 39.9% 386,256(1) 38.4%
CMHC-insured
mortgages 144,011 10.5% 184,754 18.4%
---------------------------------------------------
Total $1,366,122 100.0% $1,005,489 100.0%
(1) Amounts have been adjusted by $19.6 million (warehoused up,
conventional other than warehoused down) from prior reports in order
to correct a misclassification.The timing of the production and discharges of the Company's warehoused
mortgages can lead to "lumpiness" in terms of the growth trends of the
Company's total mortgages receivable as demonstrated by the variation in
discharge amounts in Table 6. This table indicates a net decrease in
warehoused mortgages during the second quarter of 2007 of $138.8 million
compared to a net increase a year earlier of $69.9 million. During the first
quarter of 2007, warehoused mortgages grew by a net amount of $82.5 million.
Thus, although the Company has achieved its highest mortgage production ever
in the second quarter of 2007, including record production of non-warehoused
mortgages, the net growth in total mortgage principal from the first quarter
of 2007 to the second quarter of 2007 of $14.4 million does not serve to
illustrate these records in mortgage production.Table 6 represents a continuity schedule for warehoused mortgages.
Table 6: Warehoused Mortgage Program
Three Months Ended Six Months Ended
($ thousands) June 30, June 30, June 30, June 30,
2007 2006 2007 2006
Principal balance, beginning
of period $350,886 $102,905 $268,396 $163,743
Production 249,643 186,398 544,508 386,256
Repayments and discharges (388,470) (116,509) (600,845) (377,205)
--------------------------------------------
Principal balance,
end of period $212,059 $172,794 $212,059 $172,794
Net increase (decrease) in
principal balance $(138,827) $69,889 $(56,337) $9,051Mortgage Credit Quality
The Company did not realize any credit losses during the second quarter
of 2007 compared to $21 thousand a year earlier and $50 thousand in the first
quarter of 2007. An $8 thousand recovery was realized during the second
quarter. Mortgages in arrears 90 days or more amounted to 0.14% of total
principal outstanding at June 30, 2007 compared to 0.03% of total principal
outstanding at June 30, 2006. While this represents an increase in arrears
over 90 days, these arrears statistics remain low and management does not
believe the increase is reflective of any change in the market or in
Equitable's lending practices. Mortgages identified as impaired amounted to
0.14% of total mortgage principal outstanding at June 30, 2007, compared to
0.13% a year earlier. The provision for credit losses for the second quarter
of 2007 of $225 thousand was equal to the amount recorded in the comparable
prior year period and in the first quarter.Table 7: Asset Categories
June 30, 2007 December 31, 2006 June 30, 2006
Asset % of Asset % of Asset % of
($ thousands) Amount total Amount total Amount total
Liquidity
investments $331,256 11.4% $260,490 9.9% $215,348 9.6%
Equity
securities 195,864 6.8% 166,669 6.4% 134,218 6.0%
Mortgage
loans 2,313,024 79.7% 2,135,662 81.3% 1,831,586 81.6%
Loan securit-
izations -
retained
interests 46,491 1.6% 48,271 1.8% 50,971 2.3%
Other assets 14,559 0.5% 14,663 0.6% 12,335 0.5%
-------------------------------------------------------------------------
Total $2,901,194 100.0% $2,625,755 100.0% $2,244,458 100.0%Total assets at June 30, 2007 increased $275.4 million or 10.5% from
$2.63 billion at December 31, 2006 and increased $656.7 million or 29.3% from
$2.24 billion at June 30, 2006. Liquidity investments include cash and cash
equivalents as well as government bonds and notes. Total liquid resources
include liquidity investments and equity securities which comprised 18.2% of
total assets at June 30, 2007, compared to 16.3% at December 31, 2006 and
15.6% as at June 30, 2006.
Equity securities are comprised of preferred shares. At June 30, 2007
equity securities were $29.2 million or 17.5% higher than at December 31, 2006
and $61.6 million or 45.9% higher compared to June 30, 2006. Tax exempt
dividend income from equity securities assists in lowering the Company's
effective tax rate. The Company's effective tax rate was 27.5% for the six
months ended June 30, 2007 compared to 28.7% for the period ended June 30,
2006.
Loan securitizations - retained interests decreased $1.8 million to
$46.5 million at June 30, 2007 from $48.3 million at December 31, 2006 and are
$4.5 million or 8.8% lower than a year ago. The decline from June 30, 2006 was
due to a decrease in mortgage-backed security assets under administration at
June 30, 2007 as compared to June 30, 2006, and to the shorter average
duration of securitized mortgages at June 30, 2007 as compared to a year
earlier. Total mortgages in the CMHC-MBS program outstanding at June 30, 2007
were $1.79 billion, a $129.1 million decrease from $1.91 billion at June 30,
2006 but down only slightly from $1.81 billion outstanding at December 31,
2006.
Liabilities
Customer deposits are utilized to fund the bulk of the Company's asset
acquisitions and consist of GICs, sourced primarily through a national
distribution network of deposit agents. Customer deposits at June 30, 2007
increased $229.7 million or 9.8% from December 31, 2006 and $582.8 million or
29.4% from June 30, 2006. Sales of cashable GICs, first introduced in 2005,
continued to increase. Cashable GICs totalled $800.1 million at June 30, 2007,
up 79.8% from the June 30, 2006 balance of $444.9 million and 40.3% greater
than the December 31, 2006 balance of $570.5 million. Commencing in 2007, as
stated elsewhere in this MD&A, deferred deposit agent commissions are required
to be presented as a component of customer deposits. Formerly, these were
presented as an other asset.
Future income taxes payable result from differences between the
measurement of assets and liabilities for financial statement purposes, as
opposed to tax purposes, and relate primarily to the Company's securitization
activities, allowance for credit losses and the unrealized losses of its
equity securities portfolio.
Other Assets and Liabilities
Other assets at June 30, 2007 remained relatively unchanged from
December 31, 2006 and increased $2.2 million or 18.0% from a year earlier due
primarily to an increase in income taxes recoverable. In 2007, largely as a
result of the mark-to-market treatment of equity securities for tax purposes,
income tax installments paid exceeded tax liabilities at June 30, 2007 and are
recorded as an other asset.
Other liabilities include the future servicing liability of securitized
mortgages, realty taxes collected from borrowers, accounts payable, income
taxes payable in 2006 and periodic drawings under the Company's bank line of
credit facility. No drawings were made on this line at June 30, 2007,
December 31, 2006 or at June 30, 2006.
Shareholders' Equity
Total shareholders' equity increased $36.7 million or 24.5% to
$186.4 million at June 30, 2007 from $149.7 million at December 31, 2006 and
grew 36.3% compared to June 30, 2006. The Company completed a $25.0 million
equity issue on April 30, 2007 with the sale of 769,231 common shares to the
public. Also, as a result of the exercise of employee stock options, 108,000
common shares were issued for cash proceeds of $2.0 million which was added to
common share capital during the second quarter of 2007 compared to 31,000
common shares issued and $0.56 million cash proceeds added to common share
capital in the second quarter of 2006. At June 30, 2007, the Company had
12,914,699 common shares issued and outstanding, up 1,011,054 or 8.5% from
11,903,645 common shares issued and outstanding at June 30, 2006.
Shareholders' equity now includes accumulated other comprehensive loss as
a result of the adoption of the new accounting policies outlined in Note 2 to
the interim unaudited consolidated financial statements for the period ended
June 30, 2007.
Accumulated other comprehensive loss includes the after tax change in
unrealized gains and losses on available-for-sale investments and retained
interests - loan securitizations. This category of equity appears for the
first time in 2007 and prior periods have not been restated.
Other comprehensive loss amounted to $4.9 million at June 30, 2007,
$4.5 million of which was recorded during the second quarter of 2007. For the
six months ended June 30, 2007, other comprehensive loss is primarily
comprised of a loss of $4.8 million related to unrealized losses, net of
income tax recovery, on the Company's preferred share portfolio; $3.3 million
of which is attributable to BCE Inc. preferred shares. Subsequent to June 30,
2007, there has been a significant increase in the value of these BCE
preferred shares as a result of the proposed terms of a takeover bid for BCE
Inc. The balance of the other comprehensive loss relating to the Company's
preferred share portfolio relates to lower preferred share fair values as a
result of the increase in interest rates during the second quarter of 2007.
Also, as a result of adopting the new financial instrument accounting
policies, the opening balance of retained earnings has been adjusted to
reflect the January 1, 2007 fair values of assets and liabilities required to
be, or designated to be, characterized as held-for-trading. Changes in the
fair values of these held-for-trading assets and liabilities, which include
CMHC mortgages to be securitized, mortgage commitments on CMHC mortgages to be
securitized, GICs designated as held-for-trading and derivative financial
instruments, will flow through the statement of income.
Capital Management
The Company maintains a capital management policy to govern the quality
and quantity of capital utilized by Equitable Trust, the Company's wholly
owned subsidiary, in its regulated operations. The objective of the policy is
to ensure that adequate capital requirements are met, while providing
sufficient return to investors. As well, the Company requires sufficient
regulatory capital to meet the needs of its asset growth targets. During the
first six months of 2007, the Company took two major steps to increase
regulatory capital. The first was the authorization for Equitable Trust to
issue up to $40.0 million of series 7 subordinated debentures eligible as
Tier 2 capital. A total of $22.0 million of these debentures were issued in
the first quarter of 2007, $12.5 million of which were financed by the receipt
of a bank loan. During the second quarter of 2007, Equitable Trust redeemed
$5.4 million of series 5 subordinated debentures. The second step to increase
regulatory capital was the Company's $25.0 million equity issue and the
subsequent investment of the net proceeds to increase Tier 1 capital in
Equitable Trust. As a result of these measures, Equitable Trust's total
capital ratio at June 30, 2007 was 12.4% compared to 10.6% at December 31,
2006 and 11.6% at June 30, 2006. Also, the discharge of warehoused mortgages
increases total capital ratios through the reduction of risk weighted assets,
as was the case at June 30, 2007.Table 8 summarizes Equitable Trust's regulatory capital position.
Table 8: Capital measures (relating solely to Equitable Trust)
($ thousands) June 30, December 31, June 30,
2007 2006 2006
Tier 1 capital $185,385 $148,466 $135,462
Tier 2 capital 76,564 60,000 60,000
Total capital 261,949 208,466 195,462
Total risk weighted assets 2,107,986 1,967,779 1,685,403
Total capital as a % of total
risk weighted assets 12.4% 10.6% 11.6%
Authorized asset to capital
multiple 17.5x 17.5x 17.5x
Utilized asset to capital
multiple 11.1x 12.6x 11.5xOSFI has issued guidance on new capital requirements in accordance with
the Bank for International Settlements, Basel II pronouncements. These include
a revision of capital requirements based on the nature of the Equitable
Trust's assets and an introduction of additional capital requirements based on
the operational and other risks of Equitable Trust. Calculation of capital
under Basel II takes effect on January 1, 2008.
Eight Quarter Summary
Table 9 summarizes the Company's performance over the last eight
quarters. Generally, the real estate market experiences periods of seasonality
at different times of the year, but traditionally, this has had little impact
on Equitable's results. Of much greater importance, as stated elsewhere in
this MD&A, is any movement in interest rates.Table 9: Summary of Quarterly Results
($ thousands, except assets
and per share amounts) 2007 2006
Q2 Q1 Q4 Q3
Total assets at quarter end - $ millions 2,901 2,866 2,626 2,414
Total revenues - TEB(1) 46,177 43,888 41,941 38,552
Total revenues 44,728 42,668 40,819 37,572
Net interest income - TEB(1)(2) 16,787 16,097 15,359 14,435
Net interest income(2) 15,338 14,877 14,237 13,455
Net earnings 7,480 7,992 7,752 7,144
EPS - basic $ 0.59 $ 0.67 $ 0.65 $ 0.60
EPS - diluted $ 0.59 $ 0.66 $ 0.64 $ 0.59
ROAE 17.0% 21.1% 21.0% 20.3%
2006 2005
Q2 Q1 Q4 Q3
Total assets at quarter end - $ millions 2,244 2,113 2,012 1,821
Total revenues - TEB(1) 34,885 31,604 28,881 26,530
Total revenues 34,008 30,820 27,867 25,667
Net interest income - TEB(1)(2) 13,463 12,143 12,017 10,439
Net interest income(2) 12,586 11,359 11,003 9,576
Net earnings 6,609 5,833 5,562 4,985
EPS - basic $ 0.56 $ 0.49 $ 0.47 $ 0.42
EPS - diluted $ 0.55 $ 0.49 $ 0.46 $ 0.42
ROAE 19.8% 18.6% 18.1% 16.8%
(1) For an explanation of TEB see the end of this MD&A.
(2) See explanation of treatment of deposit agent commissions at the end
of this MD&A.OFF BALANCE SHEET ACTIVITIES
The Company's off balance sheet activities include its securitization
activities, its interest rate hedging derivative financial instruments and its
commitments to fund mortgages (see Notes 4, 5 and 14 to the interim unaudited
consolidated financial statements for the period ended June 30, 2007). For
additional information regarding these and other off balance sheet items,
please also refer to pages 34 to 36 in the Company's 2006 Annual Report.
RISKS AND UNCERTAINTIES
The Company faces a number of risks. Please refer to pages 36 to 42 in
the Company's 2006 Annual Report, page 9 in the December 31, 2006 Annual
Information Form and pages 7 to 11 of the Short Form Prospectus dated
April 23, 2007, all of which are available at www.sedar.com for further
information on risks of the business. The risk factors below are not all-
inclusive, but do include risks which vary as the assets and liabilities of
the Company change.
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.
Interest rate risk involves the Company's sensitivity of earnings to
sudden changes in interest rates.
Credit risk is the risk of financial loss resulting from the failure of a
borrower or any counterparty to fully honour its financial or contractual
obligations.
Liquidity Risk Management
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 mortgage funding and investment purchase commitments, mortgage
renewals or extensions and any GIC redemptions. On a daily basis, the Company
raises funds based upon asset growth, target liquidity levels and forecasts of
its future liquidity requirements. 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
$326.3 million at June 30, 2007 compared to $260.5 million at December 31,
2006 and $215.3 million at June 30, 2006. Total liquid resources, including
marketable equity securities, were $522.1 million at June 30, 2007 compared to
$427.2 million as at December 31, 2006 and $349.6 million at June 30, 2006.
Interest Rate Risk Management
The Company's primary method of mitigating interest rate risk is matching
asset and liability maturity or re-pricing terms, employing derivatives to
simulate re-pricing matching, 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 income.
The Company manages its asset and liability maturity or re-pricing
profile by adjusting GIC interest rates on a daily basis to raise GICs with
the appropriate maturities to best match the maturity or re-pricing profile of
assets being funded. The Company closely monitors the effects of possible
interest rate changes on both net interest income for the following twelve
month period and on the economic value of shareholders' equity using simulated
interest rate change sensitivity modeling and assumptions of borrower and
depositor behavior based upon historical experience. As estimated by the
Company, an immediate and sustained 1% increase in interest rates as of
June 30, 2007, would positively impact net interest income before any tax
effect for the following twelve month period by $2.4 million. If interest
rates were to decrease 1% on an immediate and sustained basis as at June 30,
2007, and if cashable GICs were to stay on the books until maturity in the
manner forecast by management, the estimated negative impact to net interest
income before any tax effect for the following twelve month period would be
$6.9 million.
The Company has adopted 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 targeted 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 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 affects the value of the hedge. These hedges are derivative
financial instruments and are required to be carried at fair value under the
new financial instrument accounting policies.
Credit Risk Management
Under the Company's lending criteria, all mortgages are individually
evaluated under a risk rating system to determine the level of risk
attributable to each loan.
In accordance with sound business and financial practices, Equitable
Trust's credit risk policies include the 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 in order to determine the appropriate loan loss reserves
required. Reviews of credit policies and lending practices are regularly
undertaken by senior management and approved by Equitable Trust's Investment
Committee.
Equitable Trust's Investment Committee meets on a quarterly basis to
review the status of the Company's investments portfolio, the transactions
during the past quarter and the portfolio characteristics such as term, credit
rating and type of security. 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 73.2% of the
preferred share equity securities portfolio at June 30, 2007, compared to
78.6% a year earlier.
Changes in Accounting Policies
Significant accounting policies are detailed on pages 51 to 67 of the
Company's 2006 Annual Report. Effective January 1, 2007, the Company adopted
new accounting policies issued by the Canadian Institute of Chartered
Accountants: Financial Instruments - Recognition and Measurement, Hedges,
Comprehensive Income and Financial Instruments - Disclosure and Presentation.
A new section of shareholders' equity - Accumulated other comprehensive income
- has been created by virtue of the adoption of these new standards. Please
refer to Note 2 of the interim unaudited consolidated financial statements for
further details on these accounting changes.
Please also see Note 15 of the interim unaudited consolidated financial
statements for the period ended June 30, 2007 for information on future
accounting changes.
Changes in Internal Control over Financial Reporting:
There are no changes in the Company's internal control over financial
reporting that occurred during the second quarter ended June 30, 2007 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Subsequent to the quarter
end, the Company appointed William Edmunds Senior Vice-President, Credit and
Chief Risk Officer and Stephen Coffey, Senior Vice-President and Chief
Financial Officer announced his intention to resign from the Company effective
September 30, 2007.
Non-Generally Accepted Accounting Principles ("GAAP") Financial Measures
The presentation of financial information on a taxable equivalent basis
("TEB") is a common practice of presentation in the banking and trust company
industries and does not have a standardized meaning within GAAP. Therefore,
TEB calculations may not be comparable to similar measures presented by other
companies. On a selective basis, Equitable uses TEB in analyzing 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. For the six months ended June 30,
2007, this gross-up amounted to $2.7 million as compared to $1.7 million
during the comparable period in 2006.
The adoption on January 1, 2007 of new accounting policies for financial
instruments requires that Equitable report deferred deposit agent commissions
as a component of customer deposits and the amortization or current expense of
these deferred charges as a component of interest expense in its financial
statements. Formerly, deferred deposit agent commissions were reported in
other assets and amortization was presented as a non-interest expense. Prior
period presentation is not restated. In order to make comparisons of current
results for net interest income, net interest margins and productivity ratios
meaningful, this MD&A presents deposit agent commissions on the same basis as
that presented in the prior year.
Updated Share Information
As a result of the issue of 769,231 common shares on April 30, 2007 and
the exercise of employee stock options, the Company currently has 12,914,699
common shares issued and outstanding. There are unexercised options to
purchase 635,011 common shares and a further 656,459 common shares are
reserved for option grants.
OUTLOOK
The Company's outlook, expressed in its annual MD&A, remains unchanged.
Demand for residential and commercial mortgage financing is strong in the
Company's primary niche markets, resale housing activity in Equitable's target
geographical markets is robust and, while the prime rate has recently
increased, the interest rate environment is currently supportive to the real
estate industry. Activity levels so far in the third quarter are strong and
management continues to position Equitable to take advantage of these
conditions through the continuation of disciplined niche lending practices.
Based on Equitable's performance during the first half of 2007, except
for the impact on EPS of the increased number of shares resulting from its
equity issue, management remains confident of the Company's ability to achieve
its 2007 targets and performance objectives.
During this time of strong demand, the Company remains committed to its
disciplined lending practices and intends to continue to build a well
balanced, quality portfolio based primarily on single family, multi-unit
residential and commercial mortgage lending. The Company is investigating new
geographical market opportunities and will cautiously expand its single family
dwelling operations when opportunities are identified.
August 1, 2007CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2007 - UNAUDITED
With comparative figures as at December 31, 2006 and June 30, 2006
(In thousands of dollars)
-------------------------------------------------------------------------
June 30, December 31, June 30,
2007 2006 2006
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $169,232 $107,842 $147,477
Investments (note 3) 357,888 319,317 202,089
Loan securitizations - retained
interests (note 4) 46,491 48,271 50,971
Mortgages receivable (note 5) 2,313,024 2,135,662 1,831,586
Other assets (note 6) 14,559 14,663 12,335
-------------------------------------------------------------------------
$2,901,194 $2,625,755 $2,244,458
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Liabilities:
Customer deposits (note 7) $2,613,504 $2,389,755 $2,023,297
Future income taxes payable 5,541 4,700 6,224
Other liabilities (note 8) 19,173 21,564 18,171
Bank term loan (note 10) 44,595 34,750 34,750
Subordinated debt (note 11) 31,969 25,250 25,250
-------------------------------------------------------------------------
2,714,782 2,476,019 2,107,692
Shareholders' equity:
Capital stock (note 12) 86,339 57,849 57,569
Contributed surplus (note 12) 1,415 1,539 1,362
Retained earnings 103,215 90,348 77,835
Accumulated other comprehensive
(loss) (note 13) (4,557) - -
-------------------------------------------------------------------------
186,412 149,736 136,766
-------------------------------------------------------------------------
$2,901,194 $2,625,755 $2,244,458
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 - UNAUDITED
With comparative figures for the three and six month periods ended
June 30, 2006
(In thousands of dollars, except per share amounts)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Interest income:
Mortgages $37,415 $29,044 $73,188 $55,449
Investments 3,478 1,890 6,632 3,644
Other 2,049 1,320 3,525 2,356
-------------------------------------------------------------------------
42,942 32,254 83,345 61,449
Interest expense:
Customer deposits 26,147 18,617 50,501 35,528
Deposit agent commissions
(note 2) 1,542 - 2,940 -
Term loan 831 559 1,446 884
Subordinated debt 626 492 1,183 1,092
-------------------------------------------------------------------------
29,146 19,668 56,070 37,504
-------------------------------------------------------------------------
Interest income, net 13,796 12,586 27,275 23,945
Provision for credit
losses (note 5) 225 225 450 450
-------------------------------------------------------------------------
Net interest income after
provision for credit losses 13,571 12,361 26,825 23,495
Other income:
Mortgage commitment income
and other fees 1,016 802 1,926 1,476
Net gain (loss) on sale or
redemption of Investments - - (15) 2
Loan securitizations -
retained interests
(note 4) 770 952 2,140 1,901
-------------------------------------------------------------------------
1,786 1,754 4,051 3,379
-------------------------------------------------------------------------
Net interest income and
other income 15,357 14,115 30,876 26,874
Non-interest expenses:
Compensation and benefits 2,780 2,342 5,361 4,390
Deposit agent commissions
(note 2) - 1,111 - 2,156
Other 2,257 1,577 4,169 2,883
-------------------------------------------------------------------------
5,037 5,030 9,530 9,429
Income before income taxes 10,320 9,085 21,346 17,445
Income taxes (recovery)
(note 9):
Current 2,978 2,284 5,033 5,317
Future (138) 192 841 (314)
-------------------------------------------------------------------------
2,840 2,476 5,874 5,003
-------------------------------------------------------------------------
Net income $7,480 $6,609 $15,472 $12,442
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share:
Basic $0.59 $0.56 $1.26 $1.05
Diluted $0.59 $0.55 $1.24 $1.03
Weighted average number
of shares outstanding:
Basic 12,592,821 11,894,569 12,274,836 11,848,877
Diluted 12,776,704 12,081,098 12,485,598 12,044,672
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 - UNAUDITED
With comparative figures for the three and six month periods ended
June 30, 2006
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Common shares:
Balance, beginning
of period $60,050 $56,959 $57,849 $55,510
Common shares issued
(note 12)
Gross proceeds of
equity issue 25,000 - 25,000 -
Issue expenses, net of
tax recovery of $498 (962) - (962) -
Proceeds from exercise of
employee stock Options 1,966 555 3,965 1,880
Transfer from contributed
surplus relating to the
exercise of stock options 285 55 487 179
-------------------------------------------------------------------------
Balance, end of period 86,339 57,569 86,339 57,569
Contributed surplus:
Balance, beginning
of period 1,485 1,323 1,539 1,327
Stock-based compensation
(note 12) 215 94 363 214
Transfer to common shares
relating to the exercise
of stock options (285) (55) (487) (179)
-------------------------------------------------------------------------
Balance, end of period 1,415 1,362 1,415 1,362
Retained earnings:
Balance, beginning
of period 97,025 72,417 90,348 67,771
Transition adjustment -
Financial instruments
(note 2) - - (113) -
Net income 7,480 6,609 15,472 12,442
Dividends (1,290) (1,191) (2,492) (2,378)
-------------------------------------------------------------------------
Balance, end of period 103,215 77,835 103,215 77,835
Accumulated other
comprehensive income
(loss):
Balance, beginning of period (63) - - -
Transition adjustment -
Financial instruments
(note 2) - - 302 -
Other comprehensive income
(loss) (note 13) (4,494) - (4,859) -
-------------------------------------------------------------------------
Balance, end of period (4,557) - (4,557) -
-------------------------------------------------------------------------
Total shareholders' equity $186,412 $136,766 $186,412 $136,766
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 - UNAUDITED
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Net income $7,480 $6,609 $15,472 $12,442
Other comprehensive income
(loss)
Available-for-sale assets,
change in unrealized
gains (losses) (note 13) (4,886) - (4,877) -
Reclassification to
earnings for realization
of available-for-sale
assets fair value changes
(note 13) 392 - 18 -
-------------------------------------------------------------------------
Other comprehensive
income (loss) (4,494) - (4,859) -
-------------------------------------------------------------------------
Comprehensive income $2,986 $6,609 $10,613 $12,442
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 - UNAUDITED
With comparative figures for the three and six month periods ended
June 30, 2006
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income $7,480 $6,609 $15,472 $12,442
Non-cash items:
Financial instruments -
fair value adjustments
and reclassifications 2,564 - 2,640 -
Loan securitizations -
gains on sale of
mortgages (135) (143) (838) (420)
Amortization 159 109 359 218
Provision for
credit losses 225 225 450 450
Net (gain) loss on sale
or redemption of
investments - - 15 (2)
Future income taxes
(recovery) (138) 192 841 (314)
Stock-based compensation 215 94 363 214
Amortization of premiums
on investments 992 653 2,063 1,534
-------------------------------------------------------------------------
11,362 7,739 21,365 14,122
Changes in operating
assets and liabilities:
Other assets (4,118) (115) 228 (1,529)
Other liabilities 3,380 2,026 (2,428) (3,143)
-------------------------------------------------------------------------
10,624 9,650 19,165 9,450
Financing activities:
Increase in customer
deposits 8,977 110,592 223,752 214,342
Issuance (redemption) of
subordinated debt, net (2,731) (2,603) 6,719 (6,444)
Receipt (repayment) of
bank term loan, net (2,655) 15,000 9,845 15,000
Dividends paid on
common shares (1,290) (1,191) (2,492) (2,378)
Issuance of common shares 26,004 555 28,003 1,880
-------------------------------------------------------------------------
28,305 122,353 265,827 222,400
Investing activities:
Purchase of investments (62,615) (29,400) (123,897) (49,360)
Proceeds on sale or
redemption of
investments 39,816 25,377 76,385 40,168
Investments in
mortgages receivable (701,984) (415,839) (1,367,839) (1,006,124)
Mortgage principal
repayments 645,083 267,216 1,045,494 662,388
Proceeds from loan
securitizations 41,502 84,239 140,038 184,205
Loan securitizations -
retained interests 3,332 4,092 6,625 7,566
Purchase of capital assets (50) (390) (408) (430)
-------------------------------------------------------------------------
(34,916) (64,705) (223,602) (161,587)
-------------------------------------------------------------------------
Increase in cash and
cash equivalents 4,013 67,298 61,390 70,263
Cash and cash equivalents,
beginning of period 165,219 80,179 107,842 77,214
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $169,232 $147,477 $169,232 $147,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprised of:
Deposits at banks $85,666 $140,993 $85,666 $140,993
Short term investments 89,967 15,000 89,967 15,000
Cheques and other items
in transit (6,401) (8,516) (6,401) (8,516)
-------------------------------------------------------------------------
$169,232 $147,477 $169,232 $147,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow
information:
Interest paid $27,163 $18,715 $51,509 $34,600
Income taxes paid 6,294 2,455 13,340 8,902
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
1. Basis of preparation:
These interim unaudited consolidated financial statements should be read
in conjunction with the notes to the consolidated financial statements
for the year ended December 31, 2006 as set out on pages 51 to 67 of the
2006 Annual Report. These interim unaudited consolidated financial
statements have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") using the same accounting
policies and methods of computation as were used in the preparation of
the consolidated financial statements for the year ended December 31,
2006 except as described in note 2.
These interim unaudited consolidated financial statements reflect amounts
which must, of necessity, be based on the best estimates and judgment of
management with appropriate consideration as to materiality. Actual
results may differ from these estimates.
Certain comparative figures have been reclassified to conform with the
current period's presentation.
2. Changes in accounting policy:
Effective January 1, 2007, the Company adopted new accounting standards
issued by the Canadian Institute of Chartered Accountants ("CICA"):
Comprehensive Income, Financial Instruments - Recognition and
Measurement, Hedges and Financial Instruments - Disclosure and
Presentation. As a result of adopting these standards, a new category,
accumulated other comprehensive income (loss), has been added to
shareholders' equity and certain unrealized gains and losses are reported
in accumulated other comprehensive income (loss) until realization.
As a result of adopting these new accounting standards, certain financial
assets and liabilities are measured at fair value with the remainder
recorded at amortized cost. Under the new standards, adjustments to the
previously recorded amounts have been made either to retained earnings or
to accumulated other comprehensive income (loss) as at January 1, 2007.
The Company has not restated prior period consolidated financial
statements.
Significant aspects of the Company's implementation of these new
standards include:
- Investments in preferred shares, government bonds, treasury bills
and notes and loan securitizations - retained interests have been
designated as available-for-sale and are reported on the balance
sheet at fair value with changes in fair value included in other
comprehensive income, net of income taxes.
- Government guaranteed mortgages held for securitization and
commitments to fund government guaranteed mortgages for
securitization have been recorded on the balance sheet at fair
value, with changes in fair value included in loan
securitizations - retained interests in the statement of income.
- Cash and cash equivalents, mortgages, with the exception of
government guaranteed mortgages held for securitization, customer
deposits, with the exception of those designated as
held-for-trading, bank term loans and subordinated debt continue
to be recorded at amortized cost using the effective interest
method.
- Guaranteed investment certificates designated as held-for-trading
have been recorded on the balance sheet at fair value, with
changes in fair value included in interest expense in the
statement of income.
- Derivative financial instruments are recorded on the balance sheet
at fair value, with changes in fair value included in loan
securitizations - retained interests for derivatives relating to
securitization activities and in interest expense for derivatives
relating to interest rate swaps.
- Deferred deposit agent commissions are accounted for as a
component of customer deposits with the amortization of these
commissions, with the exception of commissions relating to
customer deposits designated as held-for-trading being expensed as
incurred, being calculated on an effective yield basis as a
component of interest expense. In prior years, deferred deposit
agent commissions were reported as an other asset, with
amortization being reported as a non-interest expense.
For financial instruments measured at fair value where active market
prices are available, bid prices are used for financial assets and ask
prices used for financial liabilities. For those financial instruments
measured at fair value where an active market is not available, fair
value estimates are determined using valuation methods which refer to
observable market data and include discounted cash flow analysis and
other commonly used valuation techniques.
Transition adjustments - financial instruments recorded at January 1,
2007 relate to:
-------------------------------------------------------------------------
Gross Income Taxes Net
-------------------------------------------------------------------------
Retained earnings - increase (decrease)
Fair value adjustment of government
guaranteed mortgages held for
securitization $(5) $(2) $(3)
Fair value of government
guaranteed mortgage commitments
for securitization 284 103 181
Fair value of derivatives (456) (165) (291)
-------------------------------------
$(177) $(64) $(113)
Accumulated other comprehensive
income (loss)
Available-for-sale investments,
unrealized gains (losses) $850 $307 $543
Available-for-sale loan
securitizations - retained
interests, unrealized gains
(losses) (378) (137) (241)
-------------------------------------
$472 $170 $302
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. Investments:
(a) Carrying value:
-------------------------------------------------------------------------
June 30, December 31, June 30,
2007 2006 2006
-------------------------------------------------------------------------
Preferred shares $195,864 $166,669 $133,099
Government bonds, treasury bills
and notes 162,024 152,648 67,871
Common shares - - 1,119
-------------------------------------------------------------------------
$357,888 $319,317 $202,089
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investments are accounted for at settlement date. Net unrealized gains
(losses) included in carrying value on the balance sheet as at June 30,
2007 as required by the change in accounting policies described in note 2
are as follows:
-------------------------------------------------------------------------
June 30, 2007
-------------------------------------------------------------------------
Preferred shares $(6,484)
Government bonds, treasury bills and notes (381)
-------------------------------------------------------------------------
$(6,865)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Derivative financial instruments:
The Company's equity securities contain embedded derivatives which are
bifurcated from the investment and valued separately. These embedded
derivatives do not currently have significant value and therefore they
are not reported separately.
(c) Credit facility:
The Company has a bank line of credit facility. Under this facility, the
Company may borrow up to $35.0 million (December 31, 2006 -
$35.0 million, June 30, 2006 - $35.0 million) for short-term liquidity
purposes. The facility is secured by the Company's investments in
preferred shares. There was no outstanding balance on the line as at
June 30, 2007 (December 31, 2006 - $Nil, June 30, 2006 - $Nil).
4. Loan securitizations:
(a) Retained interests:
The Company securitizes Canadian government guaranteed residential
mortgage loans through the creation of mortgage-backed securities and
removes the mortgages from the balance sheet. As at June 30, 2007,
outstanding securitized mortgages totalled $1,785,271 (December 31,
2006 - $1,807,479, June 30, 2006 - $1,914,418), substantially all of
which are multi-family residential mortgage loans.
During the period, the Company securitized Canadian government guaranteed
residential mortgage loans and received net cash proceeds of $140,038
(June 30, 2006 - $184,205). The Company retained the rights to future
excess interest on the residential mortgages valued at $6,062 (June 30,
2006 - $7,145) and received net cash flows on interests retained of
$7,927 (June 30, 2006 - $9,047). 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 $981 (June 30, 2006 - $810) relating to loans
securitized during the period.
Retained interests are accounted for at settlement date. The fair value
of the retained interests is determined with internal valuation models
using market data inputs, where possible, by discounting the expected
future cash flows at like term Government of Canada bond interest rates
plus a spread. Net unrealized gains (losses) included in carrying value
on the balance sheet as required by the change in accounting policies
described in note 2 are as follows:
-------------------------------------------------------------------------
June 30, 2007
-------------------------------------------------------------------------
Loan securitizations - retained interests $(270)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The components of income from loan securitizations - retained interests
are as follows:
-------------------------------------------------------------------------
June 30, June 30,
2007 2006
-------------------------------------------------------------------------
Gain on sale of mortgages $838 $420
Excess interest net of servicing fee 1,302 1,481
-------------------------------------------------------------------------
$2,140 $1,901
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There are no expected credit losses, as the mortgages underlying the
retained interests are government guaranteed.
(b) Derivative financial instruments:
The Company enters into hedging transactions to manage market interest
rate exposures on government guaranteed mortgages held for securitization
and commitments for government guaranteed mortgages to be securitized,
typically for periods of up to 90 days. Hedge instruments outstanding at
June 30, 2007, December 31, 2006 and June 30, 2006 relating to forward
contracts on Government of Canada bonds, where the counterparties for
which are chartered banks, are as follows:
-------------------------------------------------------------------------
June 30, 2007 December 31, 2006 June 30, 2006
-------------------------------------------------------------------------
Bond term Notional Fair Notional Fair Notional Fair
(years) amount value amount value amount value
-------------------------------------------------------------------------
1 to 5 $200 $194 $14,400 $14,289 $3,700 $3,689
5 to 10 32,200 31,411 21,800 22,444 54,300 54,126
-------------------------------------------------------------------------
$32,400 $31,605 $36,200 $36,733 $58,000 $57,815
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The hedge instruments are fair value hedges and are required to be
classified as held-for-trading and carried at fair value. The fair values
of the hedge instruments are determined by reference to the ask side of
the related Government of Canada bonds as at the reporting date. The
period end fair value of hedges of $35 is disclosed in note 6, other
assets.
(c) Mortgage commitments:
Mortgage commitments for government guaranteed mortgages to be
securitized are designated as held-for-trading and are carried at fair
value. Fair value is determined by reference to the bid side of a like
term Government of Canada bond plus a spread between the bond yield and
the mortgage rate. Changes in fair value reflect changes in interest
rates which have occurred since the mortgage interest rate was committed
to. The period end fair value of mortgage commitments of $40 is disclosed
in note 6, other assets.
5. Mortgages receivable:
(a) Mortgages receivable and impaired mortgages:
-------------------------------------------------------------------------
June 30, 2007 Allowance for credit losses
------------------------------
Gross amount Specific General Total Net amount
-------------------------------------------------------------------------
Residential
mortgages $1,506,532 $50 $5,962 $6,012 $1,500,520
Other mortgages 573,919 - 1,933 1,933 571,986
Mortgages held for
securitization
or for sale 230,417 - 530 530 229,887
Accrued interest 10,631 - - - 10,631
-------------------------------------------------------------------------
$2,321,499 $50 $8,425 $8,475 $2,313,024
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2006 Allowance for credit losses
------------------------------
Gross amount Specific General Total Net 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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 30, 2006 Allowance for credit losses
------------------------------
Gross amount Specific General Total Net amount
-------------------------------------------------------------------------
Residential
mortgages $1,234,036 $1,570 $4,091 $5,661 $1,228,375
Other mortgages 414,580 - 1,503 1,503 413,077
Mortgages held for
securitization
or for sale 182,031 - 432 432 181,599
Accrued interest 8,535 - - - 8,535
-------------------------------------------------------------------------
$1,839,182 $1,570 $6,026 $7,596 $1,831,586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in mortgages held for securitization or for sale are Canadian
Government insured mortgages of $18,333, as at June 30, 2007
(December 31, 2006 - $18,551, June 30, 2006 - $9,214). These Government
of Canada guaranteed loans held for securitization have been designated
as held-for-trading and are carried at fair value determined by reference
to the bid side of a like term Government of Canada bond plus a spread
between the bond yield and the mortgage rate. Changes in fair value
reflect changes in interest rates which have occurred since the mortgage
interest rate was committed to. The period end fair value adjustment of
Government of Canada guaranteed loans held for securitization is ($105).
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 June 30, 2007, December 31, 2006 and
June 30, 2006.
The principal outstanding and net carrying amount of mortgages receivable
classified as impaired as at June 30, 2007 aggregated $3,120
(December 31, 2006 - $1,138, June 30, 2006 - $2,437) and $3,070
(December 31, 2006 - $978, June 30, 2006 - $867), respectively.
The Company has commitments to fund a total of $422,074 (December 31,
2006 - $279,278, June 30, 2006 - $330,760) of mortgages as at the end of
the period.
(b) Allowance for credit losses:
-------------------------------------------------------------------------
June 30, 2007
-------------------------------------------------------------------------
Specific General
allowance allowance Total
-------------------------------------------------------------------------
Balance, beginning of period $160 $7,886 $8,046
Provision for credit losses (89) 539 450
Recoveries 29 - 29
Realized losses (50) - (50)
-------------------------------------------------------------------------
Balance, end of period $50 $8,425 $8,475
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 30, 2006
-------------------------------------------------------------------------
Specific General
allowance allowance Total
-------------------------------------------------------------------------
Balance, beginning of period $2,087 $5,080 $7,167
Provision for credit losses (496) 946 450
Recoveries - - -
Realized losses (21) - (21)
-------------------------------------------------------------------------
Balance, end of period $1,570 $6,026 $7,596
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Other assets:
-------------------------------------------------------------------------
June 30, December 31, June 30,
2007 2006 2006
-------------------------------------------------------------------------
Income taxes recoverable $4,736 $- $-
Prepaid expenses and other 3,673 2,378 1,767
Capital assets 2,312 2,263 1,714
Accrued interest on
non-mortgage assets 1,885 1,866 1,251
Other receivables 1,878 1,868 1,516
Mortgage commitments (note 4) 40 - -
Derivative financial instruments -
securitization activities (note 4) 35 - -
Deferred deposit agent
commissions (note 2) - 6,288 6,087
-------------------------------------------------------------------------
$14,559 $14,663 $12,335
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Customer deposits:
-------------------------------------------------------------------------
June 30, December 31, June 30,
2007 2006 2006
-------------------------------------------------------------------------
Cashable GICs, payable on demand $800,132 $570,455 $444,947
GICs with fixed maturity dates 1,766,058 1,766,011 1,538,442
Accrued interest 54,858 53,289 39,908
Deferred deposit agent
commissions (note 2) (7,544) - -
-------------------------------------------------------------------------
$2,613,504 $2,389,755 $2,023,297
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in GICs with fixed maturity dates are $10,000 of GICs designated
as held-for-trading. These GICs are carried at fair market value
determined by reference to market interest rates of like term GICs as at
the reporting date. Changes in fair value reflect changes in interest
rates which have occurred since the GICs were issued. The period end fair
value adjustment of these GICs is $3.
8. Other liabilities:
-------------------------------------------------------------------------
June 30, December 31, June 30,
2007 2006 2006
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities $7,554 $6,860 $5,584
Securitized mortgage servicing
liability 6,187 6,044 6,421
Mortgagor realty taxes 5,429 5,089 5,085
Derivative financial instruments -
interest rate swaps (note 14) 3 - -
Income taxes payable - 3,571 1,081
-------------------------------------------------------------------------
$19,173 $21,564 $18,171
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Income taxes:
The provision for income taxes shown in the statement of income differs
from that obtained by applying statutory income tax rates to income
before income taxes for the following reasons:
-------------------------------------------------------------------------
June 30, June 30,
2007 2006
-------------------------------------------------------------------------
Canadian statutory income tax rate 36.1% 36.1%
Increase (decrease) resulting from:
Tax exempt income (8.0%) (6.0%)
Future tax rate reductions (0.8%) (1.5%)
Non-deductible expenses and other 0.2% 0.1%
-------------------------------------------------------------------------
Effective income tax rate 27.5% 28.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Bank term loans:
The Company has received three non-revolving term loans from Canadian
Western Bank. 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, $15,000 of Series 6 and $12,500 of
Series 7 of the Subordinated Debentures of the Company's subsidiary, The
Equitable Trust Company ("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.
-------------------------------------------------------------------------
2007 Out- Received Repaid Out-
Bank Date standing during during standing
term Interest loan Maturity December the the June 30,
loans rate received date 31, 2006 period period 2007
-------------------------------------------------------------------------
Loan 1 6.37% March 2005 March 2010 $19,750 $ - $2,655 $17,095
Loan 2 6.82% April 2006 April 2011 15,000 - - 15,000
Loan 3 6.41% March 2007 March 2012 - 12,500 - 12,500
-------------------------------------------------------------------------
$34,750 $12,500 $2,655 $44,595
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006 Out- Received Repaid Out-
Bank Date standing during during standing
term Interest loan Maturity December the the June 30,
loans rate received date 31, 2005 period period 2006
-------------------------------------------------------------------------
Loan 1 6.37% March 2005 March 2010 $19,750 $ - $ - $19,750
Loan 2 6.82% April 2006 April 2011 - 15,000 - 15,000
-------------------------------------------------------------------------
$19,750 $15,000 $ - $34,750
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
Out- Issued Redeemed Out-
2007 Inter- standing during during standing
Debenture est Issue Maturity December the the June 30,
series Rate date date 31, 2006 period period 2007
-------------------------------------------------------------------------
Series 5 7.31%- 2004/ January 2015 $20,250 $ - $2,731 $17,519
7.58% 05
Series 6 7.27% 2006 January 2016 5,000 - - 5,000
Series 7 7.10% 2007 January 2017 - 9,450 - 9,450
-------------------------------------------------------------------------
$25,250 $9,450 $2,731 $31,969
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Out- Issued Redeemed Out-
2006 Inter- standing during during standing
Debenture est Issue Maturity December the the June 30,
series Rate date date 31, 2005 period period 2006
-------------------------------------------------------------------------
Series 4 7.54%- 2003 January 2013 $11,444 $ - $11,444 $ -
8.15%
Series 5 7.31%- 2004/ January 2015 20,250 - - 20,250
7.58% 05
Series 6 7.27% 2006 January 2016 - 5,000 - 5,000
-------------------------------------------------------------------------
$31,694 $5,000 $11,444 $25,250
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Shareholders' equity:
(a) Capital stock:
Authorized:
Unlimited number of common shares
Unlimited number of preferred shares
Issued:
Common shares:
-------------------------------------------------------------------------
June 30, 2007 June 30, 2006
-------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount
-------------------------------------------------------------------------
Balance, beginning
of period 11,924,468 $57,849 11,781,940 $55,510
Issued during the
period 990,231 28,003 121,705 1,880
Transfer from
contributed surplus
relating to the
exercise of stock
options - 487 - 179
-------------------------------------------------------------------------
Balance, end of
period 12,914,699 $86,339 11,903,645 $57,569
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company completed an equity issue on April 30, 2007. As a result of
this issue, 769,231 common shares were issued to the public for cash
proceeds of $25,000 before issue expenses. Transaction costs related to
the issue have been capitalized net of income taxes recovered.
(b) Stock-based compensation plans:
Stock option 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 March 2012. A summary of the Company's stock option activity and
related information for the periods ended June 30, 2007 and June 30, 2006
is as follows:
-------------------------------------------------------------------------
June 30, 2007 June 30, 2006
-------------------------------------------------------------------------
Weighted Weighted
Number of average Number of average
stock exercise stock exercise
options price options price
-------------------------------------------------------------------------
Outstanding, beginning
of period 749,011 $20.54 768,539 $18.07
Granted 150,000 34.49 - -
Exercised (221,000) 17.94 (121,705) 15.45
Forfeited/cancelled (43,000) 21.85 - -
-------------------------------------------------------------------------
Outstanding, end of
period 635,011 $24.65 646,834 $18.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end of
period 107,900 $18.28 146,111 $17.37
-------------------------------------------------------------------------
Under the fair value-based method of accounting for stock options, the
Company has recorded compensation expense in the amount of $363 (June 30,
2006 - $214) related to grants of options in 2004 to 2007 under the stock
option plan. This amount has been credited to contributed surplus. During
the period ended June 30, 2007, a total of 150,000 stock options were
granted (2006 - nil). The fair value of options granted in 2007 is
estimated at the date of grant using the Black-Scholes valuation model,
with the following assumptions: (i) risk-free rate of 4.0%; (ii) expected
option life of 4.0 years; (iii) expected volatility of 23.0%; and (iv)
expected dividends of 1.2%. The weighted average fair value of each
option granted was $6.71.
13. Accumulated other comprehensive income (loss):
Accumulated other comprehensive income (loss) includes the after tax
change in unrealized gains and losses on available-for-sale investments
and retained interests - loan securitizations.
-------------------------------------------------------------------------
June 30, 2007
-------------------------------------------------------------------------
Available-for-sale investments:
Transition adjustment on adoption of new accounting
standards, net (note 2) $543
Losses from changes in fair value, net of income taxes
(recovered) of ($2,796) (4,944)
Reclassification to earnings for gain (loss) on sale or
redemption of investments, net of income taxes paid of $9 16
-------------------------------------------------------------------------
Balance, end of period (4,385)
Available-for-sale loan securitizations - retained interests:
Transition adjustment on adoption of new accounting
standards, net (note 2) (241)
Gains from changes in fair value, net income taxes of $38 67
Reclassification to earnings for loan securitizations -
retained interests, net of income taxes of $1 2
-------------------------------------------------------------------------
Balance, end of period (172)
-------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $(4,557)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. 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 re-pricing date, as at June 30, 2007,
December 31, 2006 and June 30, 2006:
-------------------------------------------------------------------------
June 30, 2007
-------------------------------------------------------------------------
Floating
rate or Total
within 1 1 to 3 3 months within
month months to 1 year 1 year
-------------------------------------------------------------------------
Total assets $1,437,055 $91,751 $401,377 $1,930,183
Total liabilities
and equity 1,177,760 178,058 439,788 1,795,606
-------------------------------------------------------------------------
Interest rate
sensitive gap $259,295 $(86,307) $(38,411) $134,577
-------------------------------------------------------------------------
Cumulative gap $259,295 $172,988 $134,577 $134,577
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 8.94% 5.96% 4.64% 4.64%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest
5 years years sensitive Total(a)
-------------------------------------------------------------------------
Total assets $901,199 $57,215 $12,597 $2,901,194
Total liabilities
and equity 815,182 31,969 258,437 2,901,194
-------------------------------------------------------------------------
Interest rate
sensitive gap $86,017 $25,246 $(245,840) $ -
-------------------------------------------------------------------------
Cumulative gap $220,594 $245,840 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 7.60% 8.47% 0.00% 0.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2006
-------------------------------------------------------------------------
Floating
rate or Total
within 1 1 to 3 3 months within
month months to 1 year 1 year
-------------------------------------------------------------------------
Cumulative gap $261,613 $83,012 $113,316 $113,316
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 9.96% 3.16% 4.32% 4.32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest
5 years years sensitive Total
-------------------------------------------------------------------------
Cumulative gap $203,091 $211,366 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 7.73% 8.05% 0.00% 0.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 30, 2006
-------------------------------------------------------------------------
Floating
rate or Total
within 1 1 to 3 3 months within
month months to 1 year 1 year
-------------------------------------------------------------------------
Cumulative gap $388,273 $236,174 $120,168 $120,168
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 17.30% 10.52% 5.35% 5.35%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest
5 years years sensitive Total
-------------------------------------------------------------------------
Cumulative gap $175,087 $184,251 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 7.80% 8.21% 0.00% 0.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Totals include interest sensitive interest rate hedges at the
notional amount.
(b) Accrued interest is excluded in calculating interest sensitive assets
and liabilities.
(c) 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.
The Company has interest rate hedging facilities available at chartered
banks secured by investments in preferred shares and cash equivalents.
Interest rate swaps are classified as held-for-trading and are carried at
fair market value with changes in fair value included in interest
expense. The period end fair value of these hedges of ($3) is disclosed
in note 8, other liabilities.
15. Future accounting changes:
The CICA has issued a new accounting standard: "Capital Disclosures"
which will be in effect for the Company for its 2008 fiscal year. This
standard requires the disclosure of qualitative and quantitative
information enabling financial statement users to evaluate the Company's
objectives, policies and processes for managing capital.
The CICA plans to converge Canadian GAAP for public companies with
International Financial Reporting Standards ("IFRS") over a transition
period expected to end in 2011. The impact of IFRS convergence of
financial reporting standards on the Company's consolidated financial
statements is not yet determinable.%SEDAR: 00020356E
For further information:
For further information: Andrew Moor, (416) 513-3519; Stephen Coffey, (416) 515-7000
™ Trademark of Equitable Bank, All Rights Reserved
EQ Bank is a trade name of Equitable Bank.
