News
Equitable Group assets surpass $3 billion in third quarter
TSX Symbol: ETC
TORONTO, Nov. 1 /CNW/ - Equitable Group Inc. ("Equitable" or the
"Company") today reported its financial results for the three months ended
September 30, 2007 - including substantial growth in assets based on record
mortgage production.Third Quarter Highlights
- Mortgage production reached a quarterly record of $779.4 million
- Assets grew 38.1% to $3.33 billion as at September 30, 2007, from
$2.41 billion as at September 30, 2006
- Net income increased 23.0% to $8.8 million from $7.1 million a year
earlier
- Diluted earnings per share increased 13.6% to $0.67 compared to
$0.59 a year ago
- Annualized return on average equity was 18.2% compared to 20.3% a
year earlier
- No loan losses were recorded in the period and mortgages in arrears
90 days or more amounted to just 0.08% of total mortgages
- Equitable Trust's total capital ratio was 11.3% compared to 11.1% a
year earlier
Nine-Month Period Highlights
- Net income increased 23.9% to $24.3 million from $19.6 million a
year earlier
- Diluted earnings per share increased 17.9% to $1.91 compared to
$1.62 a year earlier
- Annualized return on average equity was 18.5% compared to 19.5% a
year earlierDividend
The Company's Board of Directors has declared a dividend in the amount of
$0.10 per share payable on January 4, 2008 to shareholders of record at the
close of business on December 14, 2007.
Management Commentary
"This was a good quarter for Equitable driven by a significant increase
in assets, which well surpassed $3 billion for the first time in the Company's
history," said Andrew Moor, President and CEO. "Asset expansion was registered
in each of our core niches including single-family dwelling and mixed use
mortgages receivable - which are long-term focus areas. Looking deeper,
Equitable set a new quarterly record for mortgage originations in the third
quarter, including a record funding of $450.3 million of conventional product
other than warehoused mortgages. We also took advantage of credit market
turmoil by buying insured mortgages that became available for purchase, which
contributed to significant year-over-year growth in securitization activity
within our CMHC-MBS program. This is just one of several highlights of a
strong quarter."
Impact of Credit Market Volatility
Equitable has no investments in Asset Backed Commercial Paper ("ABCP"),
does not utilize ABCP to securitize mortgages and does not provide back-up
credit facilities to any ABCP conduits.
The impact on Equitable of recent global credit market turmoil was,
however, apparent in two areas.
First, in its warehoused mortgage business, Equitable experienced higher
than expected mortgage balances and interest income as these mortgages were
discharged at a slower rate than anticipated due to the slowdown in
securitization activity by its customers.
Second, interest rate spreads were narrowed between short-term GICs that
Equitable uses to fund its floating rate mortgages, and the Prime Rate, the
benchmark against which Equitable prices these mortgages. This was due to
greater competition in the GIC market resulting in higher rates paid without a
further increase in Prime. As a result, net income grew at a slower rate than
asset growth.
"This compression was disappointing given the fact that spreads rebounded
in early July following the Bank of Canada's Prime Rate increase," said Mr.
Moor. "However, in the context of market turmoil, the 23.0% year-over-year
increase Equitable did achieve in third quarter net income was more than
satisfactory. Going forward, our goal remains to drive earnings as a means of
building shareholder value."
Retirement of Board Member
Geoffrey Bledin has announced his intention to retire from the Company's
Board of Directors in December.
"Geoffrey's retirement is consistent with our expectations and the timing
reflects the fact that Andrew has made a very smooth and effective transition
into his new role as President and CEO," said Austin Beutel, Chairman of the
Board. "We thank Geoffrey for his support during this important period and we
wish him well in retirement."
The Company is progressing on schedule with the recruitment of a Chief
Financial Officer following the retirement of Stephen Coffey at the end of the
third quarter and expects to make an appointment in the near future.
Outlook
"Our outlook for the remainder of the year is positive based on strong
fundamentals in our niches and the Bank of Canada's recent decision to hold
the line on interest rates, which supports real estate activity," said Mr.
Moor. "The challenge area is spreads and to address this, we have raised rates
on new mortgage loans. This strategy is designed to enhance margins between
mortgage pricing and the cost of GIC funding. It will not, however, have a
meaningful impact on the total portfolio for several quarters as only a modest
percentage of Equitable's portfolio matures in any given period."
Mr. Moor added that following several quarters of record expansion, the
Company is focused on growing its Return on Equity through effective capital
allocation strategies. This approach is consistent with Equitable's adherence
to disciplined lending practices and its dedication to maintaining the
financial strength that is key to achieving profitable long-term growth.
Longer-term, Equitable believes the re-intermediation of credit markets
will be positive for regulated financial institutions such as Equitable. It
means there will be "less competition from lenders using securitization
markets, particularly for single-family dwelling and mixed use mortgage
lending," said Mr. Moor. "If this expectation is fulfilled, Equitable will
grow faster in these niches than in our other businesses. In our view, this
would have a positive impact on Equitable's ROE."
Third Quarter Webcast
Management will discuss Equitable's results during a conference call
beginning at 8:30 a.m. ET today. To listen to the audio webcast, log on to
www.equitablegroupinc.com. To participate in the call, please dial
416-644-3419.
MD&A
The Company will post its MD&A for the three and nine months ended
September 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.
Certain forward-looking statements are made in this news release,
including statements regarding possible future business. Investors are
cautioned that such forward-looking statements involve risks and uncertainties
detailed from time to time in the Company's periodic reports filed with
Canadian regulatory authorities. Many factors could cause actual results,
performance or achievements to be materially different from any future
results, performance or achievements that may be expressed or implied by such
forward-looking statements. Equitable does not undertake to update any
forward-looking statements, oral or written, made by itself or on its behalf.
See the MD&A for further information on forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(for the three and nine months ended September 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 September 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 as follows:- residential mortgages - either single-family dwellings or multi-unit
(apartments, nursing homes etc.)
- commercial mortgages
- construction mortgages
- residential and commercial mortgages held for sale (often referred to
as "warehoused mortgages" because they usually remain on the Company's
books for short durations of up to six months) which are originated by
third-party lenders who require financing prior to pooling and
eventually selling the mortgages to investors
- 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.
The third quarter was a time of significant volatility and change in
global credit markets. In Canada, changes in credit market conditions led to
widely-publicized difficulties in the Asset Backed Commercial Paper ("ABCP")
market that a number of the Company's competitors use to fund their mortgage
portfolios. In the latter half of the quarter, Canadian financial markets
significantly reduced mortgage securitization activity compared to prior
quarters other than securitization backed by the strength of a government
guarantee.
These market changes had limited impact on the Company due to the fact
that Equitable:- had no investments in commercial paper
- does not utilize ABCP to securitize its mortgages
- has not provided back-up credit facilities to any ABCP conduitsLong term, management believes that Equitable will benefit from the
re-intermediation of credit markets as there will be less competition from
securitization conduits in its core lending niches (see "Outlook").
The changes in the credit markets did affect the Company's performance in
the quarter in two areas.
First as a result of the slowdown in securitization activity, customers
in its warehouse business discharged mortgages at a slower rate than was
anticipated. This resulted in higher mortgage balances and interest income
than otherwise would have been the case. This, along with substantial growth
in each of its three niches (single-family, multi-unit and commercial), pushed
Equitable's assets well beyond the $3 billion mark in the third quarter for
the first time in the Company's history. Mortgage originations achieved a new
quarterly high of $779.4 million in third quarter 2007, including a record
funding of $450.3 million of conventional mortgages other than warehoused
mortgages. Overall, the increase in mortgage originations of 59.2% over the
same period in 2006 translated in to a 36.1% increase in the mortgage
portfolio on a year-over-year basis and 26.3% increase from the beginning of
the year.
Second, the Company experienced strong demand for its GIC products
throughout the quarter as investors sought safety by depositing funds in
regulated financial institutions. The pricing of these GICs was compressed
compared to the Prime interest rate, the benchmark against which Equitable
prices its floating rate loans. Management believes this compression reflected
greater than normal competition in the GIC market as other financial
institutions sought to raise GIC funds rather than face increased costs in
other short-term money markets. Primarily as a result of the compression in
interest rate spreads on the Company's floating rate loans, net income
increased at a slower rate than assets.
Equitable's performance during the nine month period ended September 30,
2007 equaled or exceeded its growth objectives for the full year with the
exception of the growth rate in diluted earnings per share ("EPS"), which, as
expected was impacted by the issuance of 769,231 common shares on April 30,
2007 and spread compression.Table 1: Performance against objectives
Performance Performance
for the three for the nine
months ended or months ended or
2007 as at as at
Objectives September 30, 2007 September 30, 2007
-------------------------------------------------------------------------
Growth in assets(1)
- year-over-year 18-22% 38.1% 38.1%
Increase in net
income(1) 18-22% 23.0% 23.9%
Increase in diluted
earnings per share
("EPS")(1) 18-22% 13.6% 17.9%
Return on average
equity ("ROAE")(1) 18-22% 18.2% 18.5%
Productivity ratio
- Tax Equivalent
Basis ("TEB")(2) 32-35% 34.2% 33.9%
(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 October 31, 2007, the Company's Board declared a quarterly dividend in
the amount of $0.10 per share, payable on January 4, 2008, to shareholders of
record at the close of business December 14, 2007.
Table 2: Selected financial information
($ thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
OPERATIONS
Net income $ 8,788 $ 7,144 $ 24,260 $ 19,586
Earnings per share
- basic 0.68 0.60 1.94 1.65
Earnings per share
- diluted 0.67 0.59 1.91 1.62
Net interest income(1) 16,846 13,455 47,061 37,400
Total revenue 49,556 37,572 136,952 102,400
Return on weighted average
equity - annualized 18.2% 20.3% 18.5% 19.5%
Return on average assets
- annualized 1.1% 1.2% 1.1% 1.2%
Productivity ratio
- TEB(1)(2) 34.2% 32.7% 33.9% 32.6%
BALANCE SHEET AND
OFF-BALANCE SHEET
Total assets $ 3,332,572 $ 2,413,811
Mortgages receivable 2,698,634 1,981,594
Shareholders' equity 197,851 142,897
Mortgage-backed security
assets under
administration 1,848,719 1,862,789
COMMON SHARES
Number of common shares
outstanding at period end 12,940,099 11,908,245
Dividends per share $ 0.30 $ 0.30
Book value per share $ 15.29 $ 12.00
Share price - close 29.00 29.47
Market capitalization 375,263 350,936
CREDIT QUALITY
Realized loan losses
- net of recoveries $ 21 $ 21
Mortgages in arrears
90 days or more as a
% of total mortgages 0.08% 0.05%
Net impaired mortgages(3)
as a % of total mortgages 0.08% 0.06%
Allowance for credit
losses as a % of gross
impaired mortgages 409.8% 278.2%
(1) See explanation of treatment of net mortgage commitment fees and
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 September 30, 2007 increased 23.0%
year-over-year to $8.8 million and increased 17.5% from the second quarter of
2007. With the increase in Prime Rate (which Equitable uses to price its
floating rate mortgages) on July 10, 2007, net interest margin expanded at the
beginning of the quarter, as expected. However, this increase was offset later
in the quarter as interest rates on short-term GICs used to fund floating rate
mortgages increased due to unfavourable credit conditions noted above without
a further increase in Prime Rate.Table 3: Net interest income
Three months ended Three months ended
($ thousands) September 30, 2007 September 30, 2006
Interest revenues or interest Revenue/ Average Revenue/ Average
expenses derived from: Expense rate Expense rate
derived from:
Assets:
Liquidity investments $3,570 3.9% $2,170 3.9%
Equity securities - TEB(1) 3,023 6.6% 2,272 6.6%
Mortgage loans 42,102 6.7% 32,156 6.7%
Total interest earning
assets - TEB(1) 48,695 6.4% 36,598 6.4%
Total assets - TEB(1) 48,695 6.2% 36,598 6.2%
Liabilities and
shareholders' equity:
Customer deposits 29,178 4.2% 21,094 4.1%
Bank term loan 752 6.7% 594 6.8%
Subordinated debt 592 7.3% 475 7.5%
Total interest bearing
liabilities 30,522 4.3% 22,163 4.1%
Total liabilities and
shareholders' equity 30,522 3.9% 22,163 3.8%
Net interest income
- TEB(1)(2) 18,173 14,435
Net interest margin
- TEB(1)(2) 2.3% 2.5%
Less: Taxable equivalent
adjustment(1) (1,327) (980)
Add: Net mortgage
commitment fees(2) 719 -
Less: Deposit agent
commissions(2) (1,907) -
Net interest income per
financial statements 15,658 13,455
Nine months ended Nine months ended
($ thousands) September 30, 2007 September 30, 2006
Interest revenues or interest Revenue/ Average Revenue/ Average
expenses derived from: Expense Rate Expense Rate
Assets:
Liquidity investments $10,420 4.2% $5,897 4.0%
Equity securities - TEB(1) 8,999 7.1% 6,206 6.7%
Mortgage loans 115,290 6.4% 87,605 6.4%
Total interest earning
assets - TEB(1) 134,709 6.2% 99,708 6.2%
Total assets - TEB(1) 134,709 6.0% 99,708 6.0%
Liabilities and
shareholders' equity:
Customer deposits 79,679 4.0% 56,622 3.9%
Bank term loan 2,198 6.9% 1,478 6.8%
Subordinated debt 1,775 7.4% 1,567 7.6%
Total interest bearing
liabilities 83,652 4.1% 59,667 4.0%
Total liabilities and
shareholders' equity 83,652 3.8% 59,667 3.6%
Net interest income
- TEB(1)(2) 51,057 40,041
Net interest margin
- TEB(1)(2) 2.3% 2.4%
Less: Taxable equivalent
adjustment(1) (3,996) (2,641)
Add: Net mortgage
commitment fees(2) 2,012 -
Less: Deposit agent
commissions(2) (4,847) -
Net interest income per
financial statements 44,226 37,400
(1) See explanation of TEB at the end of this MD&A.
(2) See explanation of treatment of net mortgage commitment fees and
deposit agent commissions at the end of this MD&A.Total interest revenues on a TEB increased 33.1% to $48.7 million in the
third quarter, compared to $36.6 million in the comparable 2006 period, due
primarily to growth in the Company's interest-earning asset base. Mortgage
revenues increased $9.9 million or 30.9% in the third quarter 2007 over 2006,
while average rates remained consistent at 6.7% for both periods. Equity
securities' income on a TEB increased $0.8 million or 33.1% compared to the
same period in the prior year due primarily to the increase in the average
size of the portfolio of $47.4 million.
Interest rates on average customer deposits outstanding during the third
quarter of 2007 increased to 4.2% from 4.1% in 2006 due to increases in
interest rates prevailing in the GIC market. Overall interest expense on
customer deposits for the quarter grew $8.1 million or 38.3% over 2006 due to
these higher interest rates as well as a 34.1% increase in average customer
deposits outstanding during the third quarter of 2007 compared to 2006.
During the third quarter of 2007, the Company entered into an additional
$105.0 million of interest rate swaps in order to hedge interest rates on term
GICs used to fund floating rate mortgages. 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
at the time of designation.
Net interest income - TEB increased $3.7 million or 25.9% to
$18.2 million in the third quarter of 2007 compared to the $14.4 million
earned during the same period of 2006. In conjunction with the adoption of new
accounting policies for financial instruments effective January 1, 2007,
deposit agent commissions are accounted for as a component of interest expense
and net mortgage commitment fees as a component of mortgage interest income.
This change from prior years' 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 $1.5 million for the three months ended September 30, 2007,
compared to $2.0 million in the third quarter a year ago. The decrease is
primarily related to the classification of net mortgage commitment fees as a
component of mortgage interest income. This change from prior periods'
presentation has not been applied retroactively in conjunction with the
adoption of new accounting policies for financial instruments in 2007.
During the third quarter, the Company securitized, through the CMHC-MBS
program, $124.2 million of mortgages compared to $36.4 million during the
comparable period in 2006. Much of this increase was the result of the Company
buying insured mortgages that became available for purchase as a result of
challenging conditions in the credit markets. Gains on sale of mortgages were
$0.4 million, an increase from the $0.1 million gain in the comparable period
of 2006. Gross margins on the securitization of mortgages remained consistent
at 25 basis points in the third quarter of 2007 compared to 26 basis points in
the comparable period. Excess interest net of servicing fees was $0.7 million
during the third quarter of 2007, a decrease of $0.2 million from the
$0.9 million earned in the third quarter of 2006. This change was due to a
decrease in average outstanding securitized mortgages during the third quarter
of 2007 which was $1.82 billion compared to $1.89 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. In conjunction with the adoption of the 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 $7.0 million in the third quarter compared to
$5.4 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.
Included in non-interest expenses during the third 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 the quarter ended September 30, 2006. The offset to this expense
was an increase to contributed surplus in the same amount.
The Company's productivity ratio - TEB was 34.2% in the third quarter of
2007 compared to 32.7% in the third quarter of 2006. This increase is
primarily the result of expensing $0.3 million of deposit agent commissions in
the most recent quarter when certain term GICs were designated as "held-for-
trading" compared to no such charge in the prior year. Had the Company not
chosen to manage its interest rate risk through swap activity, the
productivity ratio in the most recent quarter would have been comparable to
the prior year at 32.9%. This ratio (the lower, the more efficient the
operations) is a non-GAAP financial measure. In 2007 it is calculated by
dividing non-interest expenses, plus deposit agent commissions, by the sum of
net interest income - TEB, net mortgage commitment fees (as illustrated in
Table 3), and other income.
BALANCE SHEET
Mortgages
The Company's mortgage lending is focused on first charges for real
estate in three primary niches: single-family dwelling, multi-unit residential
and commercial. At September 30, 2007, single-family dwelling mortgages
represented the largest portion of the portfolio (see Table 4) and increased
27.3% from December 31, 2006 and 36.8% from September 30, 2006. Multi-unit
residential mortgages increased 40.0% compared to a year earlier and increased
29.5% from December 31, 2006. Commercial mortgages increased 60.8% from a year
ago and 40.6% from December 31, 2006. Growth in all of these mortgage lending
activities reflects strong demand.Table 4: Mortgages receivable
September 30, 2007 December 31, 2006
($ thousands) $ % of total $ % of total
Single-family dwelling 944,370 35.1% 741,732 34.8%
Multi-unit residential 738,333 27.4% 570,312 26.7%
Commercial 605,835 22.5% 431,017 20.2%
Conventional mortgages held
for sale 323,468 12.0% 268,396 12.6%
Construction 61,605 2.3% 87,043 4.1%
CMHC-insured 20,193 0.7% 33,617 1.6%
----------- -----------
Total mortgage principal 2,693,804 100.0% 2,132,117 100.0%
Deferred net mortgage
commitment fees, net
premiums and sundry 133 1,423
----------- -----------
Mortgages reported 2,693,937 2,133,540
Accrued interest 13,397 10,168
Allowances for credit losses (8,700) (8,046)
----------- -----------
Total mortgages receivable 2,698,634 2,135,662
----------- -----------
----------- -----------
September 30, 2006
($ thousands) $ % of total
Single-family dwelling 690,579 34.9%
Multi-unit residential 527,380 26.7%
Commercial 376,816 19.0%
Conventional mortgages held
for sale 261,866 13.2%
Construction 90,532 4.6%
CMHC-insured 31,637 1.6%
-----------
Total mortgage principal 1,978,810 100.0%
Deferred net mortgage
commitment fees, net
premiums and sundry 1,174
-----------
Mortgages reported 1,979,984
Accrued interest 9,431
Allowances for credit losses (7,821)
-----------
Total mortgages receivable 1,981,594
-----------
-----------Mortgage principal increased $561.7 million or 26.3% during the
nine-month period ended September 30, 2007 and increased $715.0 million or
36.1% since September 30, 2006. The Company funded a total of $779.4 million
of mortgages during the third quarter, an increase of 59.2% over last year's
third quarter when a total of $489.7 million of mortgages were funded.
Conventional mortgages (other than warehoused mortgages) funded during
the third quarter of 2007 amounted to $450.3 million, an increase of 128.9%
year-over-year. CMHC mortgages funded during the third quarter of 2007
amounted to $112.4 million compared to $43.7 million a year earlier.
Conventional mortgages repaid and discharged during the third quarter of 2007
totalled $271.0 million compared to $305.3 million a year earlier.
In conjunction with the adoption of the new accounting policies for
financial instruments, commencing in 2007 deferred finders fees and deferred
mortgage commitment fees are accounted for as a component of mortgages
receivable. Formerly, these were presented as a component of other assets and
other liabilities, respectively. This change from prior periods' presentation
has not been applied retroactively.
Table 5 shows mortgage principal funded by segment.Table 5: Mortgage production
Three Months Ended
September 30, 2007 September 30, 2006
Mortgage Mortgage
Principal Principal
($ thousands) Funded % of total Funded % of total
Conventional
mortgages
other than
warehoused
mortgages $450,264 57.8% $196,708 40.2%
Warehoused
mortgages 216,699 27.8% 249,279 50.9%
CMHC-insured
mortgages 112,410 14.4% 43,711 8.9%
------------------------------------------------------
Total $779,373 100.0% $489,698 100.0%
Nine Months Ended
September 30, 2007 September 30, 2006
Mortgage Mortgage
Principal Principal
($ thousands) Funded % of total Funded % of total
Conventional
mortgages
other than
warehoused
mortgages $1,127,867 52.5% $631,188(1) 42.2%
Warehoused
mortgages 761,207 35.5% 635,534(1) 42.5%
CMHC-insured
mortgages 256,421 12.0% 228,465 15.3%
------------------------------------------------------
Total $2,145,495 100.0% $1,495,187 100.0%
(1) Amounts have been adjusted by $19.6 million (warehoused up,
conventional other than warehoused down) from prior reports in order
to correct a misclassification.The timing of warehoused mortgage production and discharges can lead to
significant volatility in balances held in the warehouse mortgage program. The
level of warehouse discharge activity during the third quarter was abnormally
low reflecting the lower levels of activity in securitization markets.
Table 6 is a continuity schedule for warehoused mortgages.Table 6: Warehoused mortgage program
Three Months Ended Nine Months Ended
September September September September
($ thousands) 30, 2007 30, 2006 30, 2007 30, 2006
Principal balance,
beginning of period $212,059 $172,794 $268,396 $163,743
Production 216,699 249,279 761,207 635,534
Repayments and discharges (105,290) (160,207) (706,135) (537,411)
-------------------------------------------
Principal balance,
end of period $323,468 $261,866 $323,468 $261,866
Net increase in principal
balance $111,409 $89,072 $55,072 $98,123Mortgage Credit Quality
The Company did not realize any credit losses during either the third
quarter of 2007 or 2006. Mortgages in arrears 90 days or more amounted to
0.08% of total principal outstanding at September 30, 2007 compared to 0.05%
of total principal outstanding at September 30, 2006. Mortgages identified as
impaired amounted to 0.08% of total mortgage principal outstanding at
September 30, 2007, compared to 0.14% a year earlier. The provision for credit
losses for the third quarter of 2007 of $225 thousand was equal to the amount
recorded in the comparable prior year period.Table 7: Asset categories
September 30, 2007 December 31, 2006 September 30, 2006
Asset % of Asset % of Asset % of
($ thousands) Amount total Amount total Amount total
Liquidity
investments $399,059 12.0% $260,490 9.9% $231,180 9.6%
Equity
securities 170,262 5.1% 166,669 6.4% 137,015 5.7%
Mortgage
loans 2,698,634 81.0% 2,135,662 81.3% 1,981,594 82.1%
Loan securit-
izations -
retained
interests 53,335 1.6% 48,271 1.8% 49,591 2.0%
Other assets 11,282 0.3% 14,663 0.6% 14,431 0.6%
------------------------------------------------------------
Total $3,332,572 100.0% $2,625,755 100.0% $2,413,811 100.0%Total assets at September 30, 2007 increased $706.8 million or 26.9% from
$2.63 billion at December 31, 2006 and increased $918.8 million or 38.1% from
$2.41 billion at September 30, 2006. Management expanded the Company's
portfolio of liquidity investments towards the end of the third quarter as a
prudent approach during a period of credit market uncertainty. Total liquid
resources including liquidity investments and equity securities comprised
17.1% of total assets at September 30, 2007, compared to 16.3% at December 31,
2006 and 15.3% as at September 30, 2006.
Liquidity investments at the end of the quarter consisted of
$341.6 million of treasury bills issued by the Government of Canada,
promissory notes and bonds issued by certain provinces of Canada, $40.4
million of third party NHA-mortgage backed securities and $17.0 million was
held as cash in bank accounts with major Canadian banks. The Company has no
investments in commercial paper.
Equity securities are comprised of preferred shares. At September 30,
2007 equity securities were $3.6 million or 2.2% higher than at December 31,
2006 and $33.2 million or 24.3% higher compared to September 30, 2006.
Management evaluated the available returns on its preferred share portfolio as
part of its disciplined approach to capital allocation. As a result of this
third quarter analysis, $23.9 million of preferred shares that were determined
to provide returns below the Company's hurdle rates were sold for a gain of
$15 thousand. Tax exempt dividend income from equity securities assists in
lowering the Company's effective tax rate. The Company's effective tax rate
was 26.9% for the nine months ended September 30, 2007 compared to 28.2% for
the period ended September 30, 2006.
Loan securitizations - retained interests increased $5.1 million to
$53.3 million at September 30, 2007 from $48.3 million at December 31, 2006
and were $3.7 million or 7.5% higher than a year ago. Total mortgages in the
CMHC-MBS program outstanding at September 30, 2007 were $1.85 billion, a
$14.1 million decrease from $1.86 billion at September 30, 2006 but an
increase 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 September 30,
2007 increased $645.9 million or 27.6% from December 31, 2006 and
$839.3 million or 39.2% from September 30, 2006. 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 September 30, 2007 decreased $3.4 million from
December 31, 2006 and $3.1 million from a year earlier. 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 September 30, 2007, December 31, 2006 or at
September 30, 2006.
As stated elsewhere in the MD&A, commencing in 2007 deferred finders fees
and deferred mortgage commitment fees are accounted for as a component of
mortgages receivable. Formerly, these were presented as a component of other
assets and other liabilities, respectively. In addition, deferred deposit
agent commissions are required to be presented as a component of customer
deposits. Formerly, these were presented as an "other" asset. These changes
from prior periods' presentation have not been applied retroactively.
Shareholders' Equity
Total shareholders' equity increased $48.1 million or 32.1% to
$197.9 million at September 30, 2007 from $149.7 million at December 31, 2006
and grew 38.5% compared to September 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, 25,400 common shares were issued for cash proceeds of $0.4 million
which was added to common share capital during the third quarter of 2007
compared to 4,600 common shares issued and $85 thousand cash proceeds added to
common share capital in the third quarter of 2006. At September 30, 2007, the
Company had 12,940,099 common shares issued and outstanding, up 1,031,854 or
8.7% from 11,908,245 common shares issued and outstanding at September 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
September 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 $1.6 million at September 30, 2007,
with a net gain of $3.3 million recorded during the third quarter of 2007. For
the nine months ended September 30, 2007, other comprehensive loss includes a
loss of $2.3 million related to unrealized loss, net of income tax recovery,
on the Company's preferred share portfolio. During the third quarter of 2007,
as a result of the proposed terms of a takeover bid for BCE Inc., there has
been a significant increase in the value of BCE preferred shares held by the
Company. The net gain in accumulated other comprehensive income recorded
during the third quarter of 2007 was largely attributed to the increase in
value of the BCE preferred shares.
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 - 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 this total was 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 $25.0 million equity issue and
the subsequent investment of the net proceeds to increase Tier 1 capital in
Equitable Trust. The net impact of these measures, along with the growth in
total assets and retained earnings, is that Equitable Trust's total capital
ratio at September 30, 2007 was 11.3% compared to 10.6% at December 31, 2006
and 11.1% at September 30, 2006.
Given the rapid pace of asset expansion, and the Company's dedication to
achieving profitable growth while maintaining its solid financial base,
management has embarked on a series of measures to increase regulatory capital
levels. These measures include slowing the growth of risk weighted assets and
examining different approaches to raising Tier 2 capital.
Table 8 summarizes Equitable Trust's regulatory capital position.Table 8: Capital measures (relating solely to Equitable Trust)
($ thousands) September December September
30, 2007 31, 2006 30, 2006
Tier 1 capital $196,060 $148,466 $141,910
Tier 2 capital 76,564 60,000 60,000
Total capital 272,624 208,466 201,910
Total risk weighted assets 2,419,745 1,967,779 1,819,062
Total capital as a % of total
risk weighted assets 11.3% 10.6% 11.1%
Authorized asset to capital
multiple 17.5x 17.5x 17.5x
Utilized asset to capital
multiple 12.2x 12.6x 12.0xOSFI has issued guidance on new capital requirements in accordance with
the Bank for International Settlements, Basel II pronouncements. These
pronouncements will result in a revision to Equitable Trust's capital
requirements based on the nature of its assets and the introduction of
additional capital requirements based on the operational and other risks of
Equitable Trust. Calculation of capital under Basel II takes effect on
January 1, 2008.
Eight Quarter Summary
Table 9 summarizes the Company's performance over the last eight
quarters. Generally, the real estate market experiences periods of seasonality
at different times of the year, but traditionally, this has had little impact
on Equitable's results. Of much greater importance, as stated elsewhere in
this MD&A, is any movement in interest rates and interest rate spreads.Table 9: Summary of quarterly results
($ thousands, except assets
and per share amounts) 2007 2006
Q3 Q2 Q1 Q4
Total assets at quarter end - $ millions 3,333 2,901 2,866 2,626
Total revenues - TEB(1) 50,883 46,177 43,888 41,941
Total revenues 49,556 44,728 42,668 40,819
Net interest income - TEB(1)(2) 18,173 16,787 16,097 15,359
Net interest income(2) 16,846 15,338 14,877 14,237
Net earnings 8,788 7,480 7,992 7,752
EPS - basic $ 0.68 $ 0.59 $ 0.67 $ 0.65
EPS - diluted $ 0.67 $ 0.59 $ 0.66 $ 0.64
ROAE 18.2% 17.0% 21.1% 21.0%
2006 2005
Q3 Q2 Q1 Q4
Total assets at quarter end - $ millions 2,414 2,244 2,113 2,012
Total revenues - TEB(1) 38,552 34,885 31,604 28,881
Total revenues 37,572 34,008 30,820 27,867
Net interest income - TEB(1)(2) 14,435 13,463 12,143 12,017
Net interest income(2) 13,455 12,586 11,359 11,003
Net earnings 7,144 6,609 5,833 5,562
EPS - basic $ 0.60 $ 0.56 $ 0.49 $ 0.47
EPS - diluted $ 0.59 $ 0.55 $ 0.49 $ 0.46
ROAE 20.3% 19.8% 18.6% 18.1%
(1) For an explanation of TEB see the end of this MD&A.
(2) See explanation of treatment of net mortgage commitment fees and
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 September 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 sensitivity of the Company's 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
$394.1 million at September 30, 2007 compared to $260.5 million at December
31, 2006 and $231.2 million at September 30, 2006. Total liquid resources,
including marketable equity securities, were $564.3 million at September 30,
2007 compared to $427.2 million as at December 31, 2006 and $368.2 million at
September 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 12 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
September 30, 2007, would positively impact net interest income before any tax
effect for the following 12 month period by $3.3 million. If interest rates
were to decrease 1% on an immediate and sustained basis as at September 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 12 month period would be
$7.8 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 investment 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 or equivalent and higher rated securities comprised 72.3%
of the preferred share equity securities portfolio at September 30, 2007,
compared to 78.5% 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 September 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 third quarter ended September 30, 2007 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. As expected, Stephen
Coffey, Senior Vice-President and Chief Financial Officer retired from the
Company on September 30, 2007. The Company has engaged a recruitment firm to
assist in hiring a new Chief Financial Officer.
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 nine months ended
September 30, 2007, this gross-up amounted to $4.0 million as compared to
$2.6 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. The new
accounting policies for financial instruments further requires deferred net
mortgage commitment fees, comprised of deferred finders fees and deferred
mortgage commitment fees, to be accounted for as a component of mortgages
receivable on the balance sheet with the amortization of these fees reported
as a component of mortgage interest income. In prior years, deferred finders
fees and deferred mortgage commitment fees were reported as a component of
other assets and other liabilities on the balance sheet, respectively, with
the related amortization reported as other income. 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 and net mortgage commitment fees on the same basis as that
presented in the prior year.
UPDATED SHARE INFORMATION
As a result of the issuance of 769,231 common shares on April 30, 2007
and the exercise of employee stock options, the Company had 12,940,099 common
shares issued and outstanding at September 30, 2007. There are unexercised
options to purchase 619,611 common shares and a further 674,399 common shares
are reserved for option grants.
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.
OUTLOOK
Based on Equitable's performance during the nine months ended
September 30, 2007, management remains confident in the Company's ability to
achieve all performance objectives with the exception of its EPS growth
target. As previously noted, the EPS growth target of 18-22% is unattainable
because of the April 2007 issuance of new shares.
At the time of writing, demand for residential and commercial mortgage
financing remains strong in the Company's primary niche markets. Resale
housing activity in Equitable's target geographical territories (Ontario and
Alberta) remains strong and, while the Prime Rate increased in July, the most
recent decision by the Bank of Canada to hold the line on interest rates is
expected to be supportive of ongoing real estate market activity this year.
Looking forward, Equitable has increased the pricing on new mortgage
loans. Management believes this strategy is appropriate from a competitive
perspective - given the reduced supply of capital generally available in the
market due to credit turmoil - and should serve to expand the margins between
new mortgage pricing and the cost of GIC funding. However, due to the fact
that only a modest percentage of Equitable's mortgage portfolio matures in any
given quarter, this repricing strategy is not expected to have a meaningful
impact on net interest margins for several quarters. In addition, following
several quarters of strong asset expansion, the Company expects to slow the
rate of loan growth to allow regulatory capital levels to increase. Management
believes this strategy is consistent with the Company's adherence to
disciplined lending practices and its focus on maintaining the financial
strength that is key to achieving profitable long-term growth.
Looking further forward, the Company is anticipating that there will be
less competition from lenders using securitization conduits, particularly for
single-family dwelling mortgage assets. If this expectation is fulfilled,
Equitable would expect to grow its single-family dwelling business faster than
other components of its mortgage portfolio. Management believes this will have
a positive impact on Equitable's long-term ROE performance.
October 31, 2007CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 2007 - UNAUDITED
With comparative figures as at December 31, 2006 and September 30, 2006
(In thousands of dollars)
-------------------------------------------------------------------------
September December September
30, 2007 31, 2006 30, 2006
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $287,096 $107,842 $110,724
Investments (note 3) 282,225 319,317 257,471
Loan securitizations - retained
interests (note 4) 53,335 48,271 49,591
Mortgages receivable (note 5) 2,698,634 2,135,662 1,981,594
Other assets (note 6) 11,282 14,663 14,431
-------------------------------------------------------------------------
$3,332,572 $2,625,755 $2,413,811
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Liabilities:
Customer deposits (note 7) $3,036,454 $2,389,755 $2,189,158
Future income taxes payable 8,237 4,700 5,772
Other liabilities (note 8) 13,466 21,564 15,984
Bank term loan (note 10) 44,595 34,750 34,750
Subordinated debt (note 11) 31,969 25,250 25,250
-------------------------------------------------------------------------
3,134,721 2,476,019 2,270,914
Shareholders' equity:
Capital stock (note 12) 86,861 57,849 57,663
Contributed surplus (note 12) 1,570 1,539 1,445
Retained earnings 110,709 90,348 83,789
Accumulated other comprehensive
income (loss) (note 13) (1,289) - -
-------------------------------------------------------------------------
197,851 149,736 142,897
-------------------------------------------------------------------------
$3,332,572 $2,625,755 $2,413,811
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 - UNAUDITED
With comparative figures for the three and nine month periods ended
September 30, 2006
(In thousands of dollars, except per share amounts)
-------------------------------------------------------------------------
Three months ended Nine months ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------
Interest income:
Mortgages $42,821 $32,156 $117,302 $87,605
Investments 3,191 2,072 9,823 5,716
Other 2,075 1,390 5,600 3,746
-------------------------------------------------------------------------
48,087 35,618 132,725 97,067
Interest expense:
Customer deposits 29,178 21,094 79,679 56,622
Deposit agent
commissions (note 2) 1,907 - 4,847 -
Term loan 752 594 2,198 1,478
Subordinated debt 592 475 1,775 1,567
-------------------------------------------------------------------------
32,429 22,163 88,499 59,667
-------------------------------------------------------------------------
Interest income, net 15,658 13,455 44,226 37,400
Provision for credit
losses (note 5) 225 225 675 675
-------------------------------------------------------------------------
Net interest income after
provision for credit losses 15,433 13,230 43,551 36,725
Other income:
Mortgage commitment income
and other fees (note 2) 289 938 922 2,414
Net gain (loss) on sale or
redemption of investments 14 1 (1) 3
Loan securitizations -
retained interests
(note 4) 1,166 1,015 3,306 2,916
-------------------------------------------------------------------------
1,469 1,954 4,227 5,333
-------------------------------------------------------------------------
Net interest income and
other income 16,902 15,184 47,778 42,058
Non-interest expenses:
Compensation and benefits 2,844 2,472 8,205 6,862
Deposit agent commissions
(note 2) - 1,183 - 3,339
Other 2,220 1,703 6,389 4,586
-------------------------------------------------------------------------
5,064 5,358 14,594 14,787
Income before income taxes 11,838 9,826 33,184 27,271
Income taxes (recovery)
(note 9):
Current 2,203 3,134 4,260 8,451
Future 847 (452) 4,664 (766)
-------------------------------------------------------------------------
3,050 2,682 8,924 7,685
-------------------------------------------------------------------------
Net income $8,788 $7,144 $24,260 $19,586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share:
Basic $0.68 $0.60 $1.94 $1.65
Diluted $0.67 $0.59 $1.91 $1.62
Weighted average number
of shares outstanding:
Basic 12,920,606 11,904,267 12,492,458 11,867,544
Diluted 13,037,944 12,094,030 12,671,737 12,061,306
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 - UNAUDITED
With comparative figures for the three and nine month periods ended
September 30, 2006
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Nine months ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------
Common shares:
Balance, beginning
of period $86,339 $57,569 $57,849 $55,510
Common shares issued
(note 12)
Gross proceeds of
equity issue - - 25,000 -
Issue expenses, net of
tax recovery of $498 - - (962) -
Proceeds from exercise of
employee stock options 448 85 4,413 1,965
Transfer from contributed
surplus relating to the
exercise of stock options 74 9 561 188
-------------------------------------------------------------------------
Balance, end of period 86,861 57,663 86,861 57,663
Contributed surplus:
Balance, beginning
of period 1,415 1,362 1,539 1,327
Stock-based compensation
(note 12) 229 92 592 306
Transfer to common shares
relating to the exercise
of stock options (74) (9) (561) (188)
-------------------------------------------------------------------------
Balance, end of period 1,570 1,445 1,570 1,445
Retained earnings:
Balance, beginning
of period 103,215 77,835 90,348 67,771
Transition adjustment -
Financial instruments
(note 2) - - (113) -
Net income 8,788 7,144 24,260 19,586
Dividends (1,294) (1,190) (3,786) (3,568)
-------------------------------------------------------------------------
Balance, end of period 110,709 83,789 110,709 83,789
Accumulated other
comprehensive income
(loss):
Balance, beginning of
period (4,557) - - -
Transition adjustment -
Financial instruments
(note 2) - - 302 -
Other comprehensive
income (loss) (note 13) 3,268 - (1,591) -
-------------------------------------------------------------------------
Balance, end of period (1,289) - (1,289) -
-------------------------------------------------------------------------
Total shareholders' equity $197,851 $142,897 $197,851 $142,897
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 - UNAUDITED
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Nine months ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------
Net income $8,788 $7,144 $24,260 $19,586
Other comprehensive income
(loss)
Available-for-sale assets,
change in unrealized gains
(losses) (note 13) 3,122 - (1,755) -
Reclassification to
earnings for realization
of available-for-sale
assets fair value
changes (note 13) 146 - 164 -
-------------------------------------------------------------------------
Other comprehensive
income (loss) 3,268 - (1,591) -
-------------------------------------------------------------------------
Comprehensive income $12,056 $7,144 $22,669 $19,586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 - UNAUDITED
With comparative figures for the three and nine month periods ended
September 30, 2006
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Nine months ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income $8,788 $7,144 $24,260 $19,586
Non-cash items:
Financial instruments -
fair value adjustments
and reclassifications (2,047) - 593 -
Loan securitizations -
gains on sale of
mortgages (445) (95) (1,283) (515)
Amortization 76 109 435 327
Provision for credit
losses 225 225 675 675
Net gain on sale or
redemption of investments (14) (1) 1 (3)
Future income taxes
(recovery) 2,695 (452) 3,536 (766)
Stock-based compensation 229 92 592 306
Amortization of premiums
on investments 970 637 3,033 2,171
-------------------------------------------------------------------------
10,477 7,659 31,842 21,781
Changes in operating
assets and liabilities:
Other assets 3,468 (2,074) 3,696 (3,603)
Other liabilities (6,353) (3,505) (8,781) (6,648)
-------------------------------------------------------------------------
7,592 2,080 26,757 11,530
Financing activities:
Increase in customer
deposits 423,116 165,861 646,868 380,203
Issuance (redemption) of
subordinated debt, net - - 6,719 (6,444)
Receipt (repayment) of
bank term loan, net - - 9,845 15,000
Dividends paid on
common shares (1,294) (1,190) (3,786) (3,568)
Issuance of common shares 448 85 28,451 1,965
-------------------------------------------------------------------------
422,270 164,756 688,097 387,156
Investing activities:
Purchase of investments (3,022) (70,891) (126,919) (120,251)
Proceeds on sale or
redemption of investments 81,417 14,873 157,802 55,041
Investments in mortgages
receivable (784,839) (490,399) (2,152,678) (1,496,523)
Mortgage principal
repayments 269,481 303,083 1,314,975 965,471
Proceeds from loan
securitizations 121,982 36,064 262,020 220,269
Loan securitizations -
retained interests 3,236 3,812 9,861 11,378
Purchase of capital assets (253) (131) (661) (561)
-------------------------------------------------------------------------
(311,998) (203,589) (535,600) (365,176)
Increase (decrease) in cash
and cash equivalents 117,864 (36,753) 179,254 33,510
Cash and cash equivalents,
beginning of period 169,232 147,477 107,842 77,214
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $287,096 $110,724 $287,096 $110,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprised of:
Deposits at banks $21,235 $13,693 $21,235 13,693
Short term investments 270,076 106,848 270,076 106,848
Cheques and other items
in transit (4,215) (9,817) (4,215) (9,817)
-------------------------------------------------------------------------
$287,096 $110,724 $287,096 $110,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow
information:
Interest paid $23,276 $15,871 $74,785 $50,471
Income taxes paid 1,908 2,558 12,145 11,460
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007
(In thousands of dollars, except per share amounts)
-------------------------------------------------------------------------
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 a component of other assets, with amortization being
reported as a non-interest expense.
- Deferred net mortgage commitment fees, comprised of deferred finders
fees and deferred mortgage commitment fees, are accounted for as a
component of mortgages receivable on the balance sheet with the
amortization of these fees, being calculated on an effective yield
basis, reported as a component of mortgage interest income. In prior
years, deferred finders fees and deferred mortgage commitment fees
were reported as a component of other assets and other liabilities
on the balance sheet, respectively, with the related amortization
reported as other income.
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:
-------------------------------------------------------------------------
Income
Gross 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:
-------------------------------------------------------------------------
September December September
30, 2007 31, 2006 30, 2006
-------------------------------------------------------------------------
Preferred shares $170,262 $166,669 $135,896
Government bonds, treasury bills
and notes 111,963 152,648 120,456
Common shares - - 1,119
-------------------------------------------------------------------------
$282,225 $319,317 $257,471
-------------------------------------------------------------------------
Investments are accounted for at settlement date. Net unrealized gains
(losses) included in carrying value on the balance sheet as at
September 30, 2007 as required by the change in accounting policies
described in note 2 are as follows:
-------------------------------------------------------------------------
September
30, 2007
-------------------------------------------------------------------------
Preferred shares $(2,914)
Government bonds, treasury bills and notes (262)
-------------------------------------------------------------------------
$(3,176)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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, September 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
September 30, 2007 (December 31, 2006 - $Nil, September 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 September 30, 2007,
outstanding securitized mortgages totalled $1,848,719 (December 31, 2006
- $1,807,479, September 30, 2006 - $1,862,789), 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 $262,020
(September 30, 2006 - $220,270). The Company retained the rights to
future excess interest on the residential mortgages valued at $14,645
(September 30, 2006 - $8,450) and received net cash flows on interests
retained of $11,884 (September 30, 2006 - $13,779). 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 $1,479 (September 30, 2006 - $1,000)
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:
-------------------------------------------------------------------------
September
30, 2007
-------------------------------------------------------------------------
Loan securitizations - retained interests $1,158
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The components of income from loan securitizations - retained interests
are as follows:
-------------------------------------------------------------------------
September September
30, 2007 30, 2006
-------------------------------------------------------------------------
Gain on sale of mortgages $1,283 $515
Excess interest net of servicing fee 2,023 2,401
-------------------------------------------------------------------------
$3,306 $2,916
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
September 30, 2007, December 31, 2006 and September 30, 2006 relating to
forward contracts on Government of Canada bonds, where the counterparties
for which are chartered banks, are as follows:
-------------------------------------------------------------------------
September 30, 2007 December 31, 2006 September 30, 2006
-------------------------------------------------------------------------
Bond term Notional Fair Notional Fair Notional Fair
(years) amount value amount value amount value
-------------------------------------------------------------------------
1 to 5 $2,700 $2,658 $14,400 $14,289 $19,400 $19,382
5 to 10 4,800 4,675 21,800 22,444 32,400 34,149
-------------------------------------------------------------------------
$7,500 $7,333 $36,200 $36,733 $51,800 $53,531
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $(83) is disclosed in note 8, other
liabilities.
(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 $59 is disclosed
in note 6, other assets.
5. Mortgages receivable:
(a) Mortgages receivable and impaired mortgages:
-------------------------------------------------------------------------
September 30, 2007 Allowance for credit losses
------------------------------
Gross amount Specific General Total Net amount
-------------------------------------------------------------------------
Residential
mortgages $1,728,549 $50 $5,969 $6,019 $1,722,530
Other mortgages 635,215 - 1,873 1,873 633,342
Mortgages held for
securitization
or for sale 330,173 - 808 808 329,365
Accrued interest 13,397 - - - 13,397
-------------------------------------------------------------------------
$2,707,334 $50 $8,650 $8,700 $2,698,634
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2006 Allowance for credit losses
-------------------------------
Gross amount Specific General Total Net amount
-------------------------------------------------------------------------
Residential
mortgages $1,283,522 $1,580 $4,060 $5,640 $1,277,882
Other mortgages 417,972 - 1,526 1,526 416,446
Mortgages held for
securitization
or for sale 278,490 - 655 655 277,835
Accrued interest 9,431 - - - 9,431
-------------------------------------------------------------------------
$1,989,415 $1,580 $6,241 $7,821 $1,981,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in mortgages held for securitization or for sale are Canadian
Government insured mortgages of $6,632, as at September 30, 2007
(December 31, 2006 - $18,551, September 30, 2006 - $16,480). 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 $16. 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 September 30,
2007, December 31, 2006 and September 30, 2006.
The principal outstanding and net carrying amount of mortgages receivable
classified as impaired as at September 30, 2007 aggregated $2,123
(December 31, 2006 - $1,138, September 30, 2006 - $2,811) and $2,073
(December 31, 2006 - $978, September 30, 2006 - $1,231), respectively.
The Company has commitments to fund a total of $301,934 (December 31,
2006 - $279,278, September 30, 2006 - $361,953) of mortgages as at the
end of the period.
(b) Allowance for credit losses:
-------------------------------------------------------------------------
September 30, 2007
-------------------------------------------------------------------------
Specific General
allowance allowance Total
-------------------------------------------------------------------------
Balance, beginning of period $160 $7,886 $8,046
Provision for credit losses (89) 764 675
Recoveries 29 - 29
Realized losses (50) - (50)
-------------------------------------------------------------------------
Balance, end of period $50 $8,650 $8,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2006
-------------------------------------------------------------------------
Specific General
allowance allowance Total
-------------------------------------------------------------------------
Balance, beginning of period $2,087 $5,080 $7,167
Provision for credit losses (486) 1,161 675
Recoveries - - -
Realized losses (21) - (21)
-------------------------------------------------------------------------
Balance, end of period $1,580 $6,241 $7,821
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Other assets:
-------------------------------------------------------------------------
September December September
30, 2007 31, 2006 30, 2006
-------------------------------------------------------------------------
Income taxes recoverable $4,441 $- $-
Capital assets 2,489 2,263 1,736
Accrued interest on non-mortgage assets 1,648 1,866 2,676
Other receivables 1,874 1,868 1,909
Prepaid expenses and other 741 2,378 1,942
Mortgage commitments (note 4) 59 - -
Derivative financial instruments -
interest rate swaps (note 14) 30 - -
Deferred deposit agent commissions
(note 2) - 6,288 6,168
-------------------------------------------------------------------------
$11,282 $14,663 $14,431
-------------------------------------------------------------------------
7. Customer deposits:
-------------------------------------------------------------------------
September December September
30, 2007 31, 2006 30, 2006
-------------------------------------------------------------------------
Cashable GICs, payable on demand $847,962 $570,455 $489,586
GICs with fixed maturity dates 2,134,448 1,766,011 1,653,561
Accrued interest 62,293 53,289 46,011
Deferred deposit agent commissions
(note 2) (8,249) - -
-------------------------------------------------------------------------
$3,036,454 $2,389,755 $2,189,158
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in GICs with fixed maturity dates are $115,000 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 $169 and is included in
interest expense.
8. Other liabilities:
-------------------------------------------------------------------------
September December September
30, 2007 31, 2006 30, 2006
-------------------------------------------------------------------------
Securitized mortgage servicing
liability $6,281 $6,044 $6,111
Accounts payable and accrued
liabilities 4,689 6,860 6,083
Mortgagor realty taxes 2,413 5,089 2,133
Derivative financial instruments -
securitization activities (note 4) 83 - -
Income taxes payable - 3,571 1,657
-------------------------------------------------------------------------
$13,466 $21,564 $15,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
-------------------------------------------------------------------------
September September
30, 2007 30, 2006
-------------------------------------------------------------------------
Canadian statutory income tax rate 35.9% 36.1%
Increase (decrease) resulting from:
Tax exempt income (7.7%) (7.4%)
Future tax rate reductions (1.5%) (0.8%)
Non-deductible expenses and other 0.2% 0.3%
-------------------------------------------------------------------------
Effective income tax rate 26.9% 28.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September
loans rate received date 31, 2006 period period 30, 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 September
Loans rate received date 31, 2005 period period 30, 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 September
series Rate date date 31, 2006 period period 30, 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 September
series rate date date 31, 2005 period period 30, 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:
-------------------------------------------------------------------------
September 30, 2007 September 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 1,015,631 28,451 126,305 1,965
Transfer from contributed
surplus relating to the
exercise of stock options - 561 - 188
-------------------------------------------------------------------------
Balance, end of period 12,940,099 $86,861 11,908,245 $57,663
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 August 2012. A summary of the Company's stock option activity
and related information for the periods ended September 30, 2007 and
September 30, 2006 is as follows:
-------------------------------------------------------------------------
September 30, 2007 September 30, 2006
-------------------------------------------------------------------------
Weighted Weighted
Number average Number average
of stock exercise of stock exercise
options price options price
-------------------------------------------------------------------------
Outstanding, beginning
of period 749,011 $20.54 768,539 $18.07
Granted 180,000 34.03 - -
Exercised (246,400) 17.91 (126,305) 15.56
Forfeited/cancelled (63,000) 20.47 (14,000) 23.04
-------------------------------------------------------------------------
Outstanding, end of period 619,611 $25.52 628,234 $18.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end of period 102,500 $18.29 141,511 $17.34
-------------------------------------------------------------------------
Under the fair value-based method of accounting for stock options, the
Company has recorded compensation expense in the amount of $592
(September 30, 2006 - $306) 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 September 30, 2007, a total of 180,000
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
4.1%; (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 $6.72.
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.
-------------------------------------------------------------------------
September
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
of $(1,546) (2,734)
Reclassification to earnings for loss on sale or
redemption of investments, net of income taxes of $91 161
-------------------------------------------------------------------------
Balance, end of period (2,030)
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 of income taxes of $554 979
Reclassification to earnings for loan securitizations -
retained interests, net of income taxes of $2 3
-------------------------------------------------------------------------
Balance, end of period 741
-------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $(1,289)
-------------------------------------------------------------------------
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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 September 30,
2007, December 31, 2006 and September 30, 2006:
-------------------------------------------------------------------------
September 30, 2007
-------------------------------------------------------------------------
Floating
rate or Total
within 1 1 to 3 3 months within
month months to 1 year 1 year
-------------------------------------------------------------------------
Total assets $1,860,729 $111,100 $363,146 $2,334,975
Total liabilities
and equity 1,390,724 277,938 478,235 2,146,897
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Interest rate
sensitive gap $470,005 $(166,838) $(115,089) $188,078
-------------------------------------------------------------------------
Cumulative gap $470,005 $303,167 $188,078 $188,078
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 14.10% 9.10% 5.64% 5.64%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest
5 years years sensitive Total(a)(b)
-------------------------------------------------------------------------
Total assets $926,405 $55,107 $16,085 $3,332,572
Total liabilities
and equity 880,277 31,969 273,429 3,332,572
-------------------------------------------------------------------------
Interest rate
sensitive gap $46,128 $23,138 $(257,344) $ -
-------------------------------------------------------------------------
Cumulative gap $234,206 $257,344 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 7.03% 7.72% 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%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September 30, 2006
-------------------------------------------------------------------------
Floating
rate or Total
within 1 1 to 3 3 months within
month months to 1 year 1 year
-------------------------------------------------------------------------
Cumulative gap $397,868 $267,906 $131,762 $131,762
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 16.48% 11.10% 5.46% 5.46%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest
5 years years sensitive Total
-------------------------------------------------------------------------
Cumulative gap $188,870 $190,688 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as
a percentage of
total assets 7.82% 7.90% 0.00% 0.00%
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-------------------------------------------------------------------------
(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 $30 is disclosed in
note 6, other assets.
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.
For further information:
For further information: Andrew Moor, (416) 513-3519
™ Trademark of Equitable Bank, All Rights Reserved
EQ Bank is a trade name of Equitable Bank.
