News
Equitable Group Reports Record 2008 First Quarter Results
Surpasses Earnings & ROE Targets
Opens Lending Operations in Manitoba, Alberta
Expresses Confident OutlookTSX Symbol: ETC
TORONTO, May 1 /CNW/ - Equitable Group Inc. ("Equitable" or the
"Company") today reported record financial performance for the three months
ended March 31, 2008 as well as significant progress towards its strategic
goals for 2008.First Quarter Financial Highlights
- Net income increased 21% to a record $9.7 million ($0.74 per share
diluted) compared to $8.0 million ($0.66 per share diluted) in the
first quarter of 2007.
- Return on equity was 18.8%, compared to Equitable's 2008 objective of
16% to 18%.
- Productivity ratio improved to 26.0% from 26.5% in the first quarter
a year ago - and was significantly better than the productivity ratio
target of 27% to 30% for 2008.
- No loan losses were realized in the first quarter.
Operational Highlights
- Single-Family mortgage principal increased to $508.5 million (18% of
principal outstanding) compared to $365.3 million (16% of principal
outstanding) at March 31, 2007, as Single-Family production increased
faster than the production of other mortgages due to the Company's
increased focus on this line of business.
- The Company opened its Single Family Lending Services business in
Manitoba subsequent to quarter end to complement existing operations
in Ontario and Alberta.
- Equitable introduced Commercial Mortgage - Broker Services to Alberta
to take advantage of long-term opportunities to fund mixed-use,
apartment, commercial and industrial building property mortgages.Dividend
The Company's Board of Directors has declared a dividend in the amount of
$0.10 per share payable on July 4, 2008 to shareholders of record at the close
of business on June 13, 2008.
Management Commentary
"Equitable opened 2008 in record fashion, surpassing all of our
performance objectives and beginning to deliver against our long-term plan,"
said Andrew Moor, President and Chief Executive Officer. "This plan calls for
us to build our lending businesses in segments where we have the best market
position, profit and sustainability potential, operate with a continuous
improvement focus, and fund future growth primarily from the retention of
earnings and non-dilutive forms of capital. Consistent with our plan, we have
expanded the geographic footprint of our Single Family and Broker Services
businesses to important new territories, started to shift mortgage assets to
meet our risk and return objectives, and added to our financial strength as
measured by an improvement in our total capital ratio, inclusive of general
reserves. We're still in the early stages of our long-range plan, but we are
delighted with progress to date."
This performance was achieved despite a decrease in Prime Rate of
25 basis points on January 23, 2008 and 50 basis points on March 5, 2008.
Decreases in Prime Rate reduces interest rate spreads and earnings, in the
short term, as the yield on variable mortgages decreases without an immediate
reduction interest rates paid on GIC deposits.
During the quarter, the Company's total capital ratio increased by 0.4%
to 11.4%. This increase in the capital ratio was achieved through a
combination of factors including, most significantly, growth in capital from
earnings' retention and management's actions to reduce risk weighted assets.
"Equitable produced above-target earnings growth and ROE, demonstrated
the value of our low cost business model with improved productivity and
preserved our outstanding record of credit quality," said Mr. Moor. "We also
began to see very early benefits from re-weighting and repricing our mortgage
portfolio, although these benefits will accrue to a much greater degree in
future years."
Outlook
"Equitable is on pace for a year of strong financial and strategic
progress," said Mr. Moor. "Through the first quarter and to date in the
second, demand for mortgage financing in our areas of greatest strength showed
continued strong demand. While we remain mindful of volatile economic and
market dynamics - and have factored these into our risk management process -
we are confident in Equitable's ability to meet our 2008 objectives. In fact,
due to the global credit contraction and changes in securitization, our
competitive position, particularly in the single-family marketplace, has been
strengthened. This substantially increases the value of our enterprise and
provides a long-term opportunity to improve interest rate spreads and
investment returns."
Mr. Moor said the Company's plans for the development of the business are
also on track. "We're excited by the long-term potential of our Single Family
operations in Manitoba and Broker Services operations in Alberta," said Mr.
Moor. "We are not expecting material contributions from either operation in
2008, but we do expect to put down solid roots in these communities by
building our mortgage broker relationships and increasing our brand profile.
These expansions create additional opportunity for incremental growth in our
core lending operations for the long term."
In 2008 so far, Prime Rate has decreased three times - including the most
recent reduction which came into effect April 23, 2008, subsequent to first
quarter end. Such reductions in Prime Rate compress net interest margin.
First Quarter Webcast
Management will discuss Equitable's results during a conference call
beginning at 10 a.m. ET today. To listen to the audio webcast, log on to
www.equitablegroupinc.com. To participate in the call, please dial
416-644-3416.
MD&A
The Company will post its MD&A for the three months ended March 31, 2008
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 financial institution focused on
single-family dwelling mortgage lending, Commercial Mortgage - Broker
Services, a business line that funds loans on a variety of properties
including mixed-use, apartment, commercial and industrial buildings, and
commercial lending in partnership with mortgage banking organizations.
Equitable is a nationally-licensed deposit-taking institution. It conducts
business through its wholly-owned subsidiary, The Equitable Trust Company,
which was founded in 1970. Equitable's non-branch business model, valued
relationships with independent 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 months ended March 31, 2008
This Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the interim unaudited consolidated financial statements for
the three month period ended March 31, 2008, as well as the audited
consolidated financial statements and MD&A for the year ended December 31,
2007. Except as indicated below, the factors discussed and referred to in the
MD&A for 2007 remain substantially unchanged. Certain comparative amounts have
been reclassified to conform with the current period's presentation.
Additional information about the Company, including its 2007 Annual
Information Form, is available on the Company's website at
www.equitablegroupinc.com and on the Canadian Securities Administrators'
website at www.sedar.com.
OVERVIEW
Equitable Group Inc. ("Equitable" or the "Company") is a niche mortgage
lender providing first mortgage financing through its wholly-owned subsidiary,
The Equitable Trust Company ("Equitable Trust"). The primary sources of the
Company's revenues are interest income derived from its mortgage financing
business and interest and dividend income from investments. The Company's
approach is to operate without a branch network to achieve low overheads. Its
business model is based on outsourcing mortgage origination to independent
mortgage brokers and outsourcing deposit origination to independent deposit
agents.
HIGHLIGHTS AND STRATEGY
During the first quarter of 2008, the Company achieved record earnings,
maintained strong credit quality, and made significant progress in pursuit of
its financial and strategic goals for the year.
Earnings PerformanceEarnings reached record levels, positioning the Company to meet its 2008
financial performance objectives:
- net income increased 21% over the first quarter of 2007 to
$9.7 million;
- diluted earnings per share increased 12% to $0.74 per share compared
to the same period in 2007;
- return on equity was 18.8% - in excess of the Company's 16-18%
objective set for 2008.Additionally, demonstrating the efficiency of the Company's approach to
business, the first quarter productivity ratio was 26.0% - an improvement over
the 26.5% ratio achieved in the same period of 2007.
Credit Quality
The Company's mortgage portfolio performed well with no loan losses being
realized during the quarter. Compared to the end of the fourth quarter of
2007, net impaired mortgages decreased by $0.2 million to 0.29% of total
mortgage assets.
Strategic DevelopmentsConsistent with its plan for the year, the Company:
- grew its Single-Family business faster than its other mortgage
businesses during the first quarter;
- expanded its Single-Family operation to Manitoba in early April;
- launched its Commercial Mortgage - Broker Services business in
Alberta.
Performance Against Objectives
On all key performance measures, Equitable's opening 2008 performance was
well ahead of its financial objectives for the year. Management believes this
performance positions the Company well to meet its performance objectives for
2008.
Table 1: Performance against objectives
Performance
for the three
months ended
2008 March 31,
Objectives 2008
-------------------------------------------------------------------------
Return on equity(1) 16-18% 18.8%
Percentage increase in net income over that of
the prior year(2) 16-20% 21.2%
Productivity ratio - Taxable Equivalent Basis
("TEB")(3) 27-30% 26.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Return on equity is calculated based on the weighted average equity
outstanding during the period. Results are presented on an annualized
basis.
(2) Net income is based upon performance comparisons to the comparable
prior year period.
(3) See explanation of Taxable Equivalent Basis ("TEB") in the Non-GAAP
Financial Measures section of this MD&A. Decrease in this ratio
reflects improved efficiencies.Equitable has also established a key objective of attaining a 13.0% total
capital ratio (including general allowances) by December 31, 2008. During the
quarter, Equitable made good progress towards this goal by increasing its
total capital ratio (including general allowances) to 11.4% from 11.0% at
January 1, 2008.
On April 30, 2008, the Company's Board declared a quarterly dividend in
the amount of $0.10 per share, payable on July 4, 2008, to shareholders of
record at the close of business June 13, 2008.
OUTLOOK
Management is confident in the Company's ability to achieve its
performance objectives for the year - based on the performance of the first
quarter, solid operational progress in executing against its plan and the
current strength of demand for mortgage financing in Equitable's niches.
Management continues to closely monitor the economic and credit market
landscape, which, while volatile at the present time, has not altered the
Company's outlook or plan for the year which was developed anticipating a more
challenging economic environment than in prior years.
Two Prime Rate decreases occurred in the first quarter as discussed in
this MD&A, and a third was effective on April 23, 2008, subsequent to first
quarter end. Such reductions in Prime Rate compress net interest margin, as
they did during the first quarter.
Equitable faces fewer competitors in its core mortgage markets than was
the case a year ago and this is expected to provide a long-term opportunity to
improve interest rate spreads on the Company's mortgage portfolio.
FINANCIAL OVERVIEW
Table 2 provides a summary of performance highlights for the first
quarter of 2008 and should be read in conjunction with the "Financial Review"
sections that follow.Table 2: Selected financial information
($ thousands, except share Change from
and per share amounts) Three Months Ended March 31, 2007
-------------------------------------------------------------------------
March 31, March 31,
2008 2007 $ %
OPERATIONS
Net income 9,685 7,992 1,693 21%
Earnings per share -
basic $ 0.75 $ 0.67 $ 0.08 12%
Earnings per share -
diluted $ 0.74 $ 0.66 $ 0.08 12%
Net interest income 17,610 14,101 3,509 25%
Total revenue 52,813 42,668 10,145 24%
Return on equity -
annualized(1) 18.8% 21.1%
Return on average assets
- annualized 1.1% 1.2%
Productivity ratio -
TEB(2)(3) 26.0% 26.5%
BALANCE SHEET AND
OFF-BALANCE SHEET
Total assets 3,368,371 2,866,393 501,978 18%
Mortgages receivable 2,810,856 2,299,043 511,813 22%
Shareholders' equity 211,936 158,497 53,439 34%
Mortgage-backed security
assets under
administration 1,969,620 1,815,824 153,796 8%
COMMON SHARES
Number of common shares
outstanding at period
end 12,962,710 12,037,468 8%
Dividends per share $ 0.10 $ 0.10 $ - 0%
Book value per share $ 16.35 $ 13.17 $ 3.18 24%
Common share price -
close $ 21.95 $ 32.75 $(10.80) (33%)
Market capitalization 284,531 394,227 (109,696) (28%)
CREDIT QUALITY
Realized loan losses -
net of recoveries 0 29
Mortgages in arrears
90 days or more as a %
of total mortgages 0.30% 0.13%
Net impaired mortgages(4)
as a % of total mortgages 0.29% 0.13%
Allowance for credit
losses as a % of gross
impaired mortgages 109.9% 251.9%
-------------------------------------------------------------------------
(1) Return on equity is calculated based on the weighted average equity
outstanding during the period.
(2) See explanation of TEB in the Non-GAAP Financial Measures section of
this MD&A.
(3) Decrease in this ratio reflects improved efficiencies.
(4) Gross mortgage principal of impaired mortgages less specific
allowances.
FINANCIAL REVIEW - EARNINGS
Net Income
For the three months ended March 31, 2008, net income increased 21% year-
over-year to $9.7 million and increased 40% from the fourth quarter of 2007.
This performance was achieved despite a decrease in Prime Rate of 25 basis
points on January 23, 2008 and 50 basis points on March 5, 2008, which had the
impact of decreasing the Company's interest rate spreads as the yield on
variable-rate mortgages decreased without an immediate reduction in the
pricing of GIC deposits.
Table 3: Net interest income
Three months ended Three months ended
($ thousands) March 31, 2008 March 31, 2007
-------------------------------------------------------------------------
Interest revenues
or interest
expenses Average Revenue/ Average Average Revenue/ Average
derived from: balance Expense rate balance Expense rate
Assets:
Liquidity
investments 327,283 4,291 5.3% 287,868 3,135 4.4%
Equity securities
- TEB(1) 153,668 2,596 6.9% 179,998 2,715 6.1%
Mortgage loans 2,828,593 45,692 6.6% 2,206,833 36,395 6.7%
-------------------------------------------------------------------------
Total interest
earning assets -
TEB(1) 3,309,544 52,579 6.4% 2,674,699 42,245 6.4%
-------------------------------------------------------------------------
Total assets -
TEB(1) 3,388,999 52,579 6.3% 2,746,074 42,245 6.3%
-------------------------------------------------------------------------
Liabilities and
shareholders'
equity:
Customer deposits 3,005,475 32,651 4.4% 2,443,280 25,752 4.3%
Bank term loans(2) 44,595 746 6.7% 41,000 615 6.8%
Subordinated
debentures(2) 31,969 584 7.3% 29,975 557 7.4%
-------------------------------------------------------------------------
Total interest
bearing
liabilities 3,082,039 33,981 4.5% 2,514,255 26,924 4.3%
-------------------------------------------------------------------------
Total liabilities
and shareholders'
equity 3,388,999 33,981 4.1% 2,746,074 26,924 4.0%
-------------------------------------------------------------------------
Net interest income
- TEB(1) 18,598 15,321
Net interest margin
- TEB(1) 2.2% 2.3%
Less: Taxable
equivalent
adjustment(1) (988) (1,220)
Net interest income
per financial
statements 17,610 14,101
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See explanation of TEB in the Non-GAAP Financial Measures section of
this MD&A.
(2) Average rate is calculated based on the weighted average balances
outstanding during the period for bank term loans and subordinated
debentures.Total interest revenues, using the TEB approach, increased 24% to
$52.6 million in the first quarter, compared to $42.2 million in the
comparable 2007 period, due primarily to growth in the Company's interest-
earning asset base. Mortgage revenues increased $9.3 million or 26% in the
first quarter of 2008 over 2007, while average rates remained relatively
consistent for both periods. The Company benefited from larger than expected
fees related to the early prepayment of certain mortgages during the quarter.
These fees are included in mortgage interest income. Equity securities' income
on a TEB decreased $0.1 million or 4% compared to the same period in the prior
year due primarily to the $26.3 million decrease in the average size of the
portfolio.
Interest rates on average customer deposits outstanding during the first
quarter of 2008 were consistent with rates in 2007. However, overall interest
expense on customer deposits grew $6.9 million or 27% over 2007 due primarily
to a 23% increase in average customer deposits outstanding during the first
quarter of 2008 compared to 2007. The market for customer deposits provides
ample funding for the Company's operations. The competitive demand for GIC
deposits from other financial institutions resulted in these short-term
deposits being raised at tighter spreads to Prime Rate than typically prevails
in the market, with a corresponding compression in interest rate spread on
floating rate mortgages.
During the first quarter of 2008, the Company entered into $117.0 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 $3.3 million or 21% to $18.6 million
in the first quarter of 2008 compared to $15.3 million earned during the same
period of 2007.
Other Income
Other income includes ancillary fees related to the mortgage portfolio,
gains on the securitization of mortgages and excess interest spread, net of
servicing fees earned on mortgages issued through the Canada Mortgage and
Housing Corporation ("CMHC") mortgage backed securities ("MBS") program.
Sundry income, gains or losses on investments and other non-mortgage related
fees are also included in other income. Other income amounted to $1.2 million
for the three months ended March 31, 2008, compared to $1.6 million in the
first quarter a year ago.
During the first quarter of 2008, the Company securitized, through the
CMHC-MBS program, $165.0 million of CMHC-insured mortgages compared to
$100.1 million during the comparable period in 2007. These mortgages were
originated during 2007 and were priced in the context of volatile market
conditions during the latter part of the year. The Company's securitization
activities were breakeven during the first quarter. Equitable has changed its
pricing and hedging approach to CMHC-insured mortgages being originated to
reflect current market conditions, and expects securitization margins to
revert to historical levels in upcoming quarters.
Non-Interest Expenses
The largest element of non-interest expenses consists of compensation and
benefits. The increase of $0.4 million compared to the prior year reflects
higher employment levels to support growth in the area of single-family
lending and an increased investment in compliance and support functions.
Included in compensation and benefit expenses during the first quarter of 2008
was a charge for stock-based compensation expense in the amount of
$0.2 million related to grants of options compared to a $0.1 million charge
for the quarter ended March 31, 2007. The offset to this expense was an
increase to contributed surplus in the same amounts.
The Company's productivity ratio-TEB was 26.0% in the first quarter of
2008 compared to 26.5% in the first quarter of 2007. This ratio (the lower,
the more efficient the operations) is a non-GAAP financial measure derived by
dividing non-interest expenses by the sum of net interest income - TEB and
other income. Management believes this ratio will increase over time as a
result of growth in single-family mortgages, which require more servicing;
however, the offset is an expected improvement in risk-adjusted returns on
equity.
FINANCIAL REVIEW - BALANCE SHEET
Mortgages
The Company's mortgage portfolio consists entirely of first charges on
real estate. At March 31, 2008, single-family dwelling mortgages represented
the largest portion of the portfolio (see Table 4).Table 4: Mortgages receivable - by property type
March 31, 2008 December 31, 2007 March 31, 2007
% of % of % of
($ thousands) $ total $ total $ total
-------------------------------------------------------------------------
Single-family
dwelling 750,371 27% 739,050 26% 591,451 26%
Mixed-use
property 303,051 11% 287,643 10% 205,573 10%
Multi-unit
residential 604,594 21% 660,071 23% 533,557 23%
Commercial 660,766 24% 652,783 23% 488,896 21%
Conventional
mortgages held
for sale 293,491 10% 272,370 9% 350,886 15%
Construction 85,446 3% 77,395 3% 93,485 4%
CMHC-insured 108,635 4% 178,971 6% 31,332 1%
-------------------------------------------------------------------------
Total mortgage
principal 2,806,354 100% 2,868,283 100% 2,295,180 100%
Deferred net
mortgage
commitment fees,
net premiums and
sundry 331 368 1,234
-------------------------------------------------------------------------
Mortgages
reported 2,806,685 2,868,651 2,296,414
Accrued interest 13,396 14,515 10,871
Allowances for
credit losses (9,225) (8,925) (8,242)
-------------------------------------------------------------------------
Total mortgages
receivable 2,810,856 2,874,241 2,299,043
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mortgage principal decreased $61.9 million or 2% during the three month
period ended March 31, 2008 as a result of both the securitization of CMHC-
insured multi-family mortgages and management's decision to slow the pace of
commercial mortgage growth in order to increase capital ratios and improve
overall investment returns on a risk-weighted basis.
Table 5: Mortgage principal - by lending business
March 31, 2008 December 31, 2007 March 31, 2007
% of % of % of
($ thousands) $ total $ total $ total
-------------------------------------------------------------------------
Single-Family
Lending Services 508,477 18% 488,656 17% 365,320 16%
Commercial
Mortgage -
Broker Services 636,742 23% 619,124 22% 502,494 22%
Commercial
Lending
Services 1,661,135 59% 1,760,503 61% 1,427,366 62%
-------------------------------------------------------------------------
Total mortgage
principal 2,806,354 100% 2,868,283 100% 2,295,180 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------The Company funded a total of $370.3 million of mortgages during the
first quarter, a decrease of 44% over last year's first quarter when a total
of $664.2 million of mortgages were funded. Consistent with the Company's
corporate objectives, Equitable's production of single-family mortgages
increased faster than production from its other lending businesses during the
first quarter.
Mortgage production from the Commercial Mortgage - Broker Services
business, which originates mortgages on mixed-use, apartment buildings,
commercial and industrial properties, declined 6% compared to the first
quarter of 2007. This decline was due to a reduction in larger loans being
originated in the quarter. Management expects a resumption of growth in this
business in the second quarter.
During the quarter, the Company focused its Commercial Lending Services
business on those niches that offer the best potential return, including
construction lending and CMHC-insured mortgages on multi-family apartment
buildings. In addition, Equitable significantly reduced the production of
conventional commercial loans in order to slow the growth in risk-weighted
assets and build its capital ratios. Commercial Lending Services funded a
total of $258.8 million during the quarter comprised of $102.6 million of
CHMC- insured loans, $25.2 million of construction loans, $70.5 million of
advances under the warehouse mortgage program and $60.5 million of
conventional mortgages.Table 6: Mortgage production - by lending business
Three Months Ended
March 31, 2008 March 31, 2007
Mortgage Mortgage
Principal % of Principal % of
($ thousands) Funded total Funded total
-------------------------------------------------------------------------
Single-Family Lending Services 64,787 17% 57,940 9%
Commercial Mortgage - Broker
Services 46,734 13% 49,765 7%
Commercial Lending Services 258,757 70% 556,497 84%
-------------------------------------------------------------------------
Total mortgage principal 370,278 100% 664,202 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 quarter was abnormally low,
by historical standards, reflecting ongoing disruption in the Commercial
Mortgage Backed Securities ("CMBS") market. Management does not anticipate any
repayments of mortgages into the CMBS market during the balance of 2008.
Table 7: Warehoused mortgage program
Three Months Ended
March 31, March 31,
($ thousands) 2008 2007
-------------------------------------------------------------------------
Principal balance, beginning of period 272,370 268,396
Production 70,458 294,865
Repayments and discharges (49,337) (212,375)
-------------------------------------------------------------------------
Principal balance, end of period 293,491 350,886
Net increase in principal balance 21,121 82,490
-------------------------------------------------------------------------
-------------------------------------------------------------------------
No credit losses were realized during the most recent quarter. Mortgages
in arrears 90 days or more amounted to 0.30% of total principal outstanding,
the same as at December 31, 2007. Management believes that significant equity
is available on these properties and only nominal losses will be realized.
Table 8: Mortgage credit quality
March 31, December 31, March 31,
($ thousands) 2008 2007 2007
-------------------------------------------------------------------------
Realized loan losses - net of
recoveries for the three month
period ended - - 29
Gross impaired mortgage principal 8,397 8,617 3,272
Allowance for credit losses 9,225 8,925 8,242
Allowance for credit losses as a
% of gross impaired mortgage
principal 109.9% 103.6% 251.9%
Allowance for credit losses as a
% of total mortgage principal 0.33% 0.31% 0.36%
Mortgage principal in arrears
90 days or more 8,397 8,617 3,057
Mortgage principal in arrears
90 days or more as a % of total
mortgage principal 0.30% 0.30% 0.13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity Investments, Equity Securities and Other Assets
Table 9: Asset categories
March 31, 2008 December 31, 2007 March 31, 2007
Asset % of Asset % of Asset % of
($ thousands) Amount total Amount total Amount total
-------------------------------------------------------------------------
Liquidity
investments 336,602(1) 10% 317,962(1) 9% 315,244 11%
Equity
securities 151,553 4% 155,782 4% 193,326 6%
Mortgage loans 2,810,856 83% 2,874,241 84% 2,299,043 80%
Loan
securitizations
- retained
interests 57,046 2% 51,214 2% 48,224 2%
Other assets 12,314 1% 10,427 1% 10,556 1%
-------------------------------------------------------------------------
Total 3,368,371 100% 3,409,626 100% 2,866,393 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes $5.0 million of restricted cash held as collateral by a
third party for the Company's interest rate swap transactions.Liquidity investments at the end of the quarter consisted of
$304.2 million of promissory notes issued by the Government of Canada as well
as promissory notes and bonds issued by certain provinces of Canada;
$14.8 million of third-party NHA-mortgage backed securities; and,
$17.6 million of cash held with major Canadian banks. The Company has no
investments in commercial paper.
Equity securities are comprised of preferred shares. At March 31, 2008
equity securities were $4.2 million or 3% lower than at December 31, 2007 and
$41.8 million or 22% lower compared to March 31, 2007. The majority of the
decrease from December 31, 2007 was due to the redemption of certain preferred
shares. Tax exempt dividend income from equity securities assists in lowering
the effective tax rate. The Company's effective tax rate was 27.6% for the
three months ended March 31, 2008 compared to 27.5% for the period ended
March 31, 2007.
Loan securitizations - retained interests increased $5.8 million to
$57.0 million at March 31, 2008 from $51.2 million at December 31, 2007 and
were $8.8 million or 18% higher than a year ago. Total mortgages in the CMHC-
MBS program outstanding at March 31, 2008 were $1.97 billion, a $153.8 million
increase from $1.82 billion at March 31, 2007 and an $81.4 million increase
from $1.89 billion outstanding at December 31, 2007.
Other assets at March 31, 2008 increased $1.9 million from December 31,
2007 and $1.8 million from a year earlier. The increase from December 31, 2007
was primarily due to the change in fair value of interest rate swaps as well
as increases in accrued interest and dividends on non-mortgage assets.
Liabilities
Customer deposits are utilized to fund most of the Company's asset
acquisitions and consist of GIC deposits sourced primarily through a national
distribution network of deposit agents. Total deposit principal at March 31,
2008 decreased $53.5 million or 2% from December 31, 2007 and increased
$429.8 million or 17% from March 31, 2007.
Other liabilities include the future servicing liability of securitized
mortgages, realty taxes collected from borrowers, and accounts payable.
Contractual obligations by year of maturity were outlined in Table 19 on
page 32 of the Company's 2007 Annual Report. There have been no material
changes to contractual obligations that are outside the ordinary course of the
Company's business.
Shareholders' Equity
Total shareholders' equity increased $8.8 million or 4% to $211.9 million
at March 31, 2008 from $203.2 million at December 31, 2007 and grew 34%
compared to March 31, 2007. As a result of the exercise of stock options,
10,000 common shares were issued for cash proceeds of $0.2 million, which
contributed to common share capital during the first quarter of 2008 -
compared to 113,000 common shares issued and $2.0 million cash proceeds
contributed to common share capital in the first quarter of 2007. At March 31,
2008, the Company had 12,962,710 common shares issued and outstanding, up
925,242 shares or 8% from 12,037,468 common shares issued and outstanding at
March 31, 2007.
At April 30, 2008, the Company had 12,962,710 common shares issued and
outstanding. There are unexercised stock options, which are or will be
exercisable, to purchase 667,500 common shares for maximum proceeds of
$17.4 million.
Capital Management
Equitable Trust maintains a capital management policy to govern the
quality and quantity of capital utilized by the Company's wholly-owned
subsidiary, Equitable Trust. The Office of the Superintendent of Financial
Institutions Canada ("OSFI") has issued guidance on new capital requirements
in accordance with the Bank for International Settlements, Basel II
pronouncements, effective January 1, 2008. These pronouncements changed
Equitable Trust's capital requirements. As a result, current capital ratios
are not directly comparable to those previously calculated under the Basel I
approach that prevailed prior to January 1, 2008.
Effective January 1, 2008, Equitable Trust reports its capital ratio
under the Basel II requirements. Equitable Trust developed and implemented an
Internal Capital Adequacy Assessment Process ("ICAAP") to determine prudent
capital levels to maintain in the business based on its risks. As a result of
this process, Equitable Trust intends to build its total capital ratio to
13.0% during 2008 by adopting a number of measures including slowing growth in
risk-weighted assets and examining different approaches to raising Tier 2
capital. Equitable Trust's total capital ratio (when general allowance is
included in capital) increased by 0.4% to 11.4% at quarter end from 11.0% at
January 1, 2008. This result was achieved through a combination of reducing
total risk-weighted assets by $25.7 million and increasing capital by the
retention of earnings.Table 10: Capital measures (relating solely to Equitable Trust)
Basel II Basel I Basel I
-------------------------------------------------------------------------
As at As at As at
March 31, December 31, March 31,
($ thousands) 2008 2007 2007
-------------------------------------------------------------------------
Risk-weighted assets:(1)
Credit risk 2,479,317 2,423,118 2,113,935
Operational risk(2) 106,708 N/A N/A
-------------------------------------------------------------------------
Total risk-weighted assets 2,586,025 2,423,118 2,113,935
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Tier 1 capital:(1)
Capital stock 88,465 87,621 60,835
Contributed surplus 1,546 1,363 1,070
Retained earnings 122,897 114,645 96,053
Accumulated other comprehensive
loss(3) (3,953) (2,982) -
-------------------------------------------------------------------------
Total 208,955 200,647 157,958
-------------------------------------------------------------------------
Tier 2 capital:(1)
Accumulated other comprehensive
income (Tier 2A)(3) - - 334
Subordinated debentures
(Tier 2B)(4) 76,564 76,564 78,979
-------------------------------------------------------------------------
Total 76,564 76,564 79,313
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total regulatory capital(1) 285,519 277,211 237,271
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Regulatory capital to risk-weighted
assets(1)
Tier 1 capital 8.1% 8.3% 7.5%
Tier 2 capital 2.9% 3.1% 3.7%
-------------------------------------------------------------------------
Total regulatory capital as a % of
total risk-weighted assets 11.0% 11.4% 11.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assets to capital multiple(5) 12.2x 12.9x 12.1x
Authorized assets to capital multiple 17.5x 17.5x 17.5x
Total capital calculated as defined
under ICAAP
Total regulatory capital 285,519 N/A N/A
General allowance(6) 9,055 N/A N/A
-------------------------------------------------------------------------
Total capital as defined under ICAAP 294,574 N/A N/A
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capital ratio for ICAAP
purposes 11.4% N/A N/A
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As defined in the guidelines issued by OSFI, Basel I and Basel II
calculations are not directly comparable.
(2) For operational risk, Equitable Trust uses the Basic Indicator
Approach - calculated as 15% of the previous three year average of
net interest income and other income, excluding gain or loss on
investments. The risk-weighted equivalent is determined by
multiplying the capital requirement for operational risk by 12.5.
(3) As prescribed by OSFI, certain components of Accumulated other
comprehensive income are included in the determination of regulatory
capital. Net unrealized fair value losses on available-for-sale
equities are deducted in the determination of Tier 1 capital while
net unrealized fair value gains on available-for-sale equities are
included in Tier 2A capital.
(4) Tier 2B capital may be included in Tier 2 capital to a maximum of 50%
of net Tier 1 capital.
(5) Total assets plus off-balance sheet instruments such as sale and
repurchase agreements divided by regulatory capital.
(6) Equitable Trust includes its general allowance in capital when
assessing its capital requirements under its ICAAP.
Eight Quarter Summary
Table 11 summarizes the Company's performance over the last eight
quarters. Equitable does not expect its earnings to be seasonal, but changes
in short-term interest rates and volumes of mortgages securitized may cause
some volatility in earnings from quarter to quarter as described elsewhere in
this MD&A.
Table 11: Summary of quarterly results
-------------------------------------------------------------------------
($ thousands, except
balance sheet and
off-balance sheet
items and per share
amounts) 2008 2007
-------------------------------------------------------------------------
Q1 Q4(4) Q3 Q2 Q1
-------------------------------------------------------------------------
OPERATIONS
Net income 9,685 6,911 8,788 7,480 7,992
Basic EPS $ 0.75 $ 0.53 $ 0.68 $ 0.59 $ 0.67
Diluted EPS $ 0.74 $ 0.53 $ 0.67 $ 0.59 $ 0.66
Net interest income 17,610 17,353 15,658 14,467 14,101
Net interest margin
- TEB(1) 2.2% 2.3% 2.2% 2.2% 2.3%
Total revenues 52,813 48,981 49,556 44,728 42,668
Return on equity
- annualized(2) 18.8% 13.7% 18.2% 17.0% 21.1%
Return on average
assets - annualized 1.1% 0.8% 1.1% 1.0% 1.2%
Productivity ratio
- TEB(1) 26.0% 33.9% 27.4% 29.6% 26.5%
BALANCE SHEET AND
OFF-BALANCE SHEET
($ millions)
Total assets at
quarter end 3,368 3,410 3,333 2,901 2,866
Mortgages receivable
at quarter end 2,811 2,874 2,699 2,313 2,299
Shareholders' equity
at quarter end 212 203 198 186 158
Book value per share
at quarter end 16.35 15.69 15.29 14.43 13.17
Mortgage-backed
security assets
under administration
at quarter end 1,970 1,888 1,849 1,785 1,816
MORTGAGE PRODUCTION
Conventional
mortgages other
than warehoused
mortgages 197,176 347,711 450,264 406,625 270,978
Warehoused
mortgages 70,458 63,449 216,699 249,643 294,865
CMHC-insured
mortgages 102,644 171,582 112,410 45,652 98,359
-------------------------------------------------------------------------
Total 370,278 582,742 779,373 701,920 664,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------
($ thousands, except
balance sheet and
off-balance sheet
items and per share
amounts) 2006
---------------------------------------------------
Q4 Q3 Q2
---------------------------------------------------
OPERATIONS
Net income 7,752 7,144 6,609
Basic EPS $ 0.65 $ 0.60 $ 0.56
Diluted EPS $ 0.64 $ 0.59 $ 0.55
Net interest income 13,573 12,952 11,997
Net interest margin
- TEB(1) 2.3% 2.4% 2.4%
Total revenues 40,819 37,572 34,008
Return on equity
- annualized(2) 21.0% 20.3% 19.8%
Return on average
assets - annualized 1.2% 1.2% 1.2%
Productivity ratio
- TEB(1) 25.0% 27.5% 27.8%
BALANCE SHEET AND
OFF-BALANCE SHEET
($ millions)
Total assets at
quarter end 2,626 2,414 2,244
Mortgages receivable
at quarter end 2,136 1,982 1,832
Shareholders' equity
at quarter end 150 143 137
Book value per share
at quarter end 12.56 12.00 11.49
Mortgage-backed
security assets
under administration
at quarter end 1,807 1,863 1,914
MORTGAGE PRODUCTION
Conventional
mortgages other
than warehoused
mortgages 334,518 196,708 159,355(3)
Warehoused
mortgages 276,934 249,279 186,398(3)
CMHC-insured
mortgages 49,897 43,711 69,884
---------------------------------------------------
Total 661,349 489,698 415,637
---------------------------------------------------
---------------------------------------------------
(1) See explanation of TEB in the Non-GAAP Financial Measures section of
this MD&A.
(2) Return on equity is calculated based on the weighted average equity
outstanding during the period.
(3) Amounts have been adjusted by $19.6 million to correct a
misclassification in the prior year. Warehoused mortgage production
was understated and conventional mortgages other than warehoused
mortgages was overstated by $19.6 million in 2006.
(4) Includes an after-tax impairment write-down of $3.4 million for
Quebecor World Inc. preferred shares held in the investment portfolio
at year end.OFF-BALANCE SHEET ACTIVITIES
The Company's off-balance sheet activities include securitization,
interest rate hedging derivative financial instruments and its commitments to
fund mortgages (see Notes 4, 5 and 17 to the interim unaudited consolidated
financial statements for the period ended March 31, 2008). For additional
information regarding these and other off-balance sheet items, please also
refer to pages 31 to 32 in the Company's 2007 Annual Report.
RISKS AND UNCERTAINTIES
Overview
The Company faces a number of risks. The discussion set out below is
intended to highlight certain differences in risks since the publication of
the Company's 2007 Annual Report, but, it may not include all risks that may
influence an investor to buy, sell or hold shares in the Company. Many of
these risk factors are beyond the Company's direct control. Please refer to
pages 32 to 34 in the Company's 2007 Annual Report which is available at
www.sedar.com for further information on the risks of the business.
Credit Risk Management
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. The Company's approach to credit risk is more fully described in
the 2007 Annual Report. Securities rated P-2 and higher comprised 80% of the
preferred share equity securities portfolio at March 31, 2008, compared to 78%
a year ago.
Interest Rate Risk Management
Interest rate risk involves the sensitivity of the Company's earnings to
sudden changes in interest rates. The Company's approach to measuring and
managing interest rate risk is described in the 2007 Annual Report.
Management's sensitivity modeling indicates that in the event of an immediate
and sustained 1% interest rate increase, net interest income would increase
$3.4 million before any tax effect for the 12 month period following March 31,
2008. Conversely, if interest rates were to decrease by 1% management
estimates that net interest income before any tax effect for the following
12 month period would decrease by $6.5 million. The Company's earnings are
affected by changes in interest rates. The estimate of sensitivity to interest
rate changes is dependent on a number of assumptions that could result in a
difference in actual outcomes in the event of an actual interest rate change.
Liquidity Risk Management
Liquidity risk relates to the Company's ability to redeem its deposit
obligations as they come due or otherwise arise, and to fund asset commitments
as scheduled. Managing liquidity risk requires the Company to keep sufficient
liquid assets on hand at all times to meet mortgage funding needs, investment
purchase commitments and to fund GIC redemptions and maturities. 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 $331.6 million as at March 31, 2008 compared to
$313.0 million at December 31, 2007 and $315.2 million at March 31, 2007.
It is the Company's policy to maintain, at all times, regulatory liquid
assets at levels equivalent to, or greater than 20% of GICs maturing in the
next 100 days and all cashable GICs ("100 Day Maturities"). At March 31, 2008,
these maturities amounted to $1.50 billion compared to $1.58 billion as at
December 31, 2007 and $1.42 billion at March 31, 2007. The corresponding
liquidity ratios for the respective periods were 32.2%, 29.7%, and 35.8%. The
liquidity ratio is calculated as the sum of cash, cash equivalents,
investments purchased under reverse repurchase agreements and other
investments divided by total 100 Day Maturities. As part of liquidity
contingency planning, the Company has a line of credit with its bank in the
amount of $35.0 million, which is secured by shares in the equity securities
portfolio.
CHANGES IN ACCOUNTING POLICIES
Significant accounting policies are detailed on pages 43 to 45 of the
Company's 2007 Annual Report. Effective January 1, 2008, the Company adopted
new accounting standards issued by the Canadian Institute of Chartered
Accountants: Section 1535, Capital Disclosures, Section 3862, Financial
Instruments - Disclosures, and Section 3863 Financial Instruments -
Presentation. Please refer to Note 2 of the interim unaudited consolidated
financial statements for further details.
Please also see Note 18 of the interim unaudited consolidated financial
statements for the period ended March 31, 2008 for information on future
accounting changes.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As previously announced, Equitable appointed a Chief Financial Officer on
December 5, 2007 who subsequently resigned from the Company on February 12,
2008. There were no other changes in the Company's internal control over
financial reporting that occurred during the first quarter ended March 31,
2008 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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 three months ended March 31,
2008, this gross-up amounted to $1.0 million as compared to $1.2 million
during the comparable period in 2007.
FORWARD-LOOKING STATEMENTS
From time to time the Company makes written or oral forward-looking
statements within the meaning of applicable securities laws ("forward-looking
statements"), including in this report, in the Annual Report, in other filings
with Canadian securities regulators and in other communications. These
statements include, but are not limited to, statements about the Company's
objectives and initiatives, expected financial results, and other statements
made in the "Outlook" section in this MD&A. Forward-looking statements include
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 are typically identified by the use of
words or phrases such as "plans", "expects" or "does not expect", "is
expected", "budget", "scheduled", "estimates" or "forecasts". Other phrases or
words may include "intends", "anticipates", or "does not anticipate",
"believes", or statements that certain actions, events or results "may",
"could", "would", "might", or "will" be taken, occur or be achieved. A variety
of factors, many of which are beyond the Company's control, affect its
operations, performance and results, and could cause actual results to differ
materially from the anticipated results, performance, achievements or
developments expressed or implied in these forward-looking statements. These
factors include, among others: information provided to the Company by clients
and counterparties; interest rate and currency value fluctuations; general
economic conditions; changes in market rates and prices; the demand for
deposit products; legislative and regulatory developments; amendments to, and
interpretations of, risk-based capital guidelines and reporting
interpretations; the nature of the Company's customers; the ability to attract
and retain key personnel; expansion into new geographic territories; the level
of competition; success in introducing new loan products; realizing the value
of the Company's assets; and the Company's ability to capitalize on increasing
market demand for mortgage products. The preceding list is not exhaustive of
possible factors. These and other factors should be considered carefully and
readers should not place undue reliance on these forward-looking statements.
The Company does not undertake any obligation to update forward-looking
statements, whether written or oral, made by itself or on its behalf, except
as required by law.
April 30, 2008CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2008 - UNAUDITED
With comparative figures as at December 31, 2007 and March 31, 2007
(In thousands of dollars)
-------------------------------------------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $17,582 $20,927 $165,219
Investments purchased under
reverse repurchase agreements
(note 3) 275,074 232,120 -
Investments (note 3) 195,499 220,697 343,351
Loan securitizations - retained
interests (note 4) 57,046 51,214 48,224
Mortgages receivable (note 6) 2,810,856 2,874,241 2,299,043
Other assets (note 7) 12,314 10,427 10,556
-------------------------------------------------------------------------
$3,368,371 $3,409,626 $2,866,393
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Liabilities:
Customer deposits (note 8) $3,057,746 $3,104,524 $2,604,530
Future income taxes 9,157 7,945 5,679
Other liabilities (note 9) 12,968 17,423 15,737
Bank term loans (note 11) 44,595 44,595 47,250
Subordinated debentures
(note 12) 31,969 31,969 34,700
-------------------------------------------------------------------------
3,156,435 3,206,456 2,707,896
Shareholders' equity:
Capital stock (note 13) 87,257 87,062 60,050
Contributed surplus (note 13) 1,961 1,778 1,485
Retained earnings 124,714 116,325 97,025
Accumulated other comprehensive
loss (note 15) (1,996) (1,995) (63)
-------------------------------------------------------------------------
211,936 203,170 158,497
-------------------------------------------------------------------------
$3,368,371 $3,409,626 $2,866,393
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2008 - UNAUDITED
With comparative figures for the three month period ended March 31, 2007
(In thousands of dollars, except per share amounts)
-------------------------------------------------------------------------
Three Months ended
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Interest income:
Mortgages $45,692 $36,395
Investments 2,176 3,154
Other 3,723 1,476
-------------------------------------------------------------------------
51,591 41,025
Interest expense:
Customer deposits 30,709 24,354
Deposit agent commissions 1,942 1,398
Bank term loans 746 615
Subordinated debentures 584 557
-------------------------------------------------------------------------
33,981 26,924
-------------------------------------------------------------------------
Net interest income 17,610 14,101
Provision for credit losses (note 6) 300 225
-------------------------------------------------------------------------
Net interest income after provision for credit
losses 17,310 13,876
Other income:
Fees and other income 360 288
Net gain (loss) on investments 181 (15)
Loan securitizations - retained interests
(note 4) 681 1,370
-------------------------------------------------------------------------
1,222 1,643
-------------------------------------------------------------------------
Net interest income and other income 18,532 15,519
Non-interest expenses:
Compensation and benefits 3,027 2,581
Other 2,121 1,912
-------------------------------------------------------------------------
5,148 4,493
-------------------------------------------------------------------------
Income before income taxes 13,384 11,026
Income taxes (note 10):
Current 3,604 2,055
Future 95 979
-------------------------------------------------------------------------
3,699 3,034
-------------------------------------------------------------------------
Net income $9,685 $7,992
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share:
Basic $0.75 $0.67
Diluted $0.74 $0.66
Weighted average number of shares outstanding:
Basic 12,955,897 11,953,318
Diluted 13,018,567 12,191,258
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2008 - UNAUDITED
With comparative figures for the three month period ended March 31, 2007
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Capital stock:
Balance, beginning of period $87,062 $57,849
Common shares issued (note 13)
Proceeds from exercise of stock options 175 1,999
Transfer from contributed surplus relating
to the exercise of stock options 20 202
-------------------------------------------------------------------------
Balance, end of period 87,257 60,050
Contributed surplus:
Balance, beginning of period 1,778 1,539
Stock-based compensation (note 13) 203 148
Transfer to common shares relating to the
exercise of stock options (20) (202)
-------------------------------------------------------------------------
Balance, end of period 1,961 1,485
Retained earnings:
Balance, beginning of period 116,325 90,348
Transition adjustment - Financial instruments - (113)
Net income 9,685 7,992
Dividends (1,296) (1,202)
-------------------------------------------------------------------------
Balance, end of period 124,714 97,025
Accumulated other comprehensive loss:
Balance, beginning of period (1,995) -
Transition adjustment - Financial instruments - 302
Other comprehensive loss (note 15) (1) (365)
-------------------------------------------------------------------------
Balance, end of period (1,996) (63)
-------------------------------------------------------------------------
Total retained earnings and accumulated other
comprehensive loss 122,718 96,962
-------------------------------------------------------------------------
Total shareholders' equity $211,936 $158,497
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2008 - UNAUDITED
With comparative figures for the three month period ended March 31, 2007
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Net income $9,685 $7,992
Other comprehensive loss:
Available-for-sale assets, change in unrealized
gains (losses) (note 15) (87) 9
Reclassification to income for realization of
available-for-sale assets fair value changes
(note 15) 86 (374)
-------------------------------------------------------------------------
Other comprehensive loss (1) (365)
-------------------------------------------------------------------------
Comprehensive income $9,684 $7,627
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to interim unaudited consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2008 - UNAUDITED
With comparative figures for the three month period ended March 31, 2007
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income $9,685 $7,992
Non-cash items:
Financial instruments - fair value adjustments (1,132) 98
Loan securitizations - loss (gain) on
securitization activities 42 (703)
Amortization of capital assets 185 200
Provision for credit losses 300 225
Net (gain) loss on investments (179) 15
Future income taxes 95 979
Stock-based compensation 203 148
Amortization of premiums on investments, net 549 1,071
-------------------------------------------------------------------------
9,748 10,025
Changes in operating assets and liabilities:
Other assets 982 4,346
Other liabilities (3,770) (5,830)
-------------------------------------------------------------------------
6,960 8,541
Financing activities:
(Decrease) increase in customer deposits (47,679) 214,775
Issuance of bank term loan - 12,500
Issuance of subordinated debentures - 9,450
Dividends paid on common shares (1,296) (1,202)
Issuance of common shares 175 1,999
-------------------------------------------------------------------------
(48,800) 237,522
Investing activities:
Purchase of investments - (61,282)
Proceeds on sale or redemption of investments 23,750 36,569
Purchase of investments purchased under reverse
repurchase agreements (275,074) -
Proceed on sale or redemption of investments
purchased under reverse repurchase agreements 232,120 -
Increase in mortgages receivable (376,012) (665,855)
Mortgage principal repayments 267,478 400,411
Proceeds from loan securitizations 163,091 98,536
Loan securitizations - retained interests 3,204 3,293
Purchase of capital assets (62) (358)
-------------------------------------------------------------------------
38,495 (188,686)
-------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,345) 57,377
Cash and cash equivalents, beginning of period 15,927(1) 107,842
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $12,582(1) $165,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $27,221 $24,346
Income taxes paid 1,724 7,046
-------------------------------------------------------------------------
(1) Excludes $5.0 million of restricted cash held as collateral by a
third party for the Company's interest rate swap transactions.
See accompanying notes to interim unaudited consolidated financial
statements.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2008
(In thousands of dollars, except per share amounts)
-------------------------------------------------------------------------
1. Basis of preparation:
Equitable Group Inc. (the "Company") was formed on January 1, 2004 as the
parent company of its wholly owned subsidiary, The Equitable Trust
Company ("Equitable Trust"). Equitable Trust is federally regulated under
the Trust and Loan Companies Act (Canada) by the Office of the
Superintendent of Financial Institutions Canada ("OSFI"). The interim
unaudited consolidated financial statements include the assets,
liabilities and results of operations of the Company and Equitable Trust
after the elimination of intercompany transactions and balances.
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, 2007 as set out on pages 43 to 60 of the
2007 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,
2007 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, 2008, the Company adopted new accounting standards
issued by the Canadian Institute of Chartered Accountants ("CICA"):
- Section 1535, Capital Disclosures specifies the disclosure of
(i) objectives, policies and processes for managing capital;
(ii) quantitative data about what is regarded as capital; and
(iii) compliance or non-compliance with capital requirements and
effect thereof.
- Section 3862, Financial Instruments - Disclosures and
Section 3863, Financial Instruments - Presentation which set
revised and enhanced disclosure and presentation requirements. An
increased emphasis is placed on disclosures regarding risks
arising from financial instruments and the management thereof.
As a result of adopting these standards, new or enhanced disclosure is
provided in the notes to the financial statements.
3. Investments:
(a) Carrying value:
-------------------------------------------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Debt securities issued or guaranteed
by:
Canada $14,823 $26,064 $63,195
Provinces 29,123 38,851 86,830
Equity securities:
Preferred shares 151,553 155,782 193,326
-------------------------------------------------------------------------
$195,499 $220,697 $343,351
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investments are accounted for at settlement date. Net unrealized (losses)
gains included in carrying value on the balance sheet as at March 31,
2008 are as follows:
-------------------------------------------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Debt securities issued or guaranteed
by:
Canada $84 $(25) $(44)
Provinces 104 19 (73)
Equity securities:
Preferred shares (5,925) (4,653) 523
-------------------------------------------------------------------------
$(5,737) $(4,659) $406
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Reverse repurchase agreements:
The Company purchased investments under reverse repurchase agreements in
the amount of $275,074 (December 31, 2007 - $232,120, March 31, 2007 -
nil). Investments purchased under reverse repurchase agreements represent
a purchase of Government of Canada securities by the Company effected
with a simultaneous agreement to sell the assets back at a specified
price on a specified future date, which is generally short-term.
(c) Credit facility:
The Company has a credit facility in place with a major Canadian
chartered bank. Under this facility, the Company may borrow up to $35,000
for short-term liquidity purposes. The facility is secured by the
Company's investments in equity securities. There was no outstanding
balance as at March 31, 2008 (December 31, 2007 - nil, March 31, 2007 -
nil).
4. Loan securitizations:
(a) Retained interests:
The Company securitizes Government of Canada guaranteed residential
mortgage loans through the creation of mortgage-backed securities and
removes the mortgages from the balance sheet. The Company retains 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.
As at March 31, 2008, outstanding securitized mortgages totaled
$1,969,620 (December 31, 2007 - $1,888,250, March 31, 2007 - $1,815,824).
Securitization activities for the three month period ended are as
follows:
-------------------------------------------------------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Mortgages securitized $165,013 $100,121
Net cash proceeds received 163,091 98,536
Retained rights to future excess interest 7,663 4,498
Servicing liability recorded 134 729
(Loss) gain on securitization activities (42) 703
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company received net cash flows on interests retained of $3,927
(March 31, 2007 - $3,960).
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. A net unrealized gain of $2,745 (December 31, 2007 -
$1,545, March 31, 2007 - $(504)) is included in the carrying value on the
consolidated balance sheet as required by the accounting policy for
Financial instruments as described in note 16.
The components of income from loan securitizations - retained interests
are as follows:
-------------------------------------------------------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Excess interest spread, net of servicing fee $723 $667
(Loss) gain on securitization activities (42) 703
-------------------------------------------------------------------------
$681 $1,370
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There are no expected credit losses, as the mortgages underlying the
retained interests are government guaranteed.
(b) 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 that have occurred since the mortgage interest rate was committed
to. The period end fair value of mortgage commitments of $27 is disclosed
in note 7, other assets.
5. Derivative financial instruments:
(a) Hedge instruments:
The Company's securitization activities are subject to interest rate
risk, which represents the potential for changes in the value of assets
and liabilities due to fluctuations in interest rates. The Company enters
into hedging transactions to manage interest rate exposures on mortgages
held for securitization and commitments for mortgages to be securitized,
typically for periods of up to 90 days.
Hedge instruments outstanding at March 31, 2008, December 31, 2007, and
March 31, 2007, relating to forward contracts on Government of Canada
bonds, where the counter parties are chartered banks, are as follows:
-------------------------------------------------------------------------
March 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Unreal- Unreal-
ized ized
Bond term Notional Fair loss Notional Fair loss
(years) amount value (gain)(1) amount value (gain)(1)
-------------------------------------------------------------------------
1 to 5 $108,200 $113,080 $856 $94,300 $96,685 $863
5 to 10 5,800 6,059 147 74,500 74,589 1,133
-------------------------------------------------------------------------
$114,000 $119,139 $1,003 $168,800 $171,274 $1,996
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------
March 31, 2007
-------------------------------------------
Unreal-
ized
Bond term Notional Fair loss
(years) amount value (gain)(1)
-------------------------------------------
1 to 5 $11,400 $11,284 $(54)
5 to 10 17,000 17,389 (27)
-------------------------------------------
$28,400 $28,673 $(81)
-------------------------------------------
-------------------------------------------
(1) The hedge instruments are fair value hedges and are held-for-trading
and carried at fair value with changes in fair value included in
other income - loan securitizations - retained interests. The fair
values of the hedge instruments are determined by reference to the
ask side of the related Government of Canada bonds at the reporting
date. The period end fair value of hedges is included in other
liabilities (note 9).
(b) Interest rate swaps:
The Company enters into interest rate swaps to manage interest rate
exposures on term guaranteed investment certificates ("GICs") used to
fund floating rate mortgages. The credit risk is limited to the amount of
any adverse change in interest rates applied on the notional contract
amount should the counterparty default. Approved counterparties are
limited to Schedule A Banks and their subsidiaries.
-------------------------------------------------------------------------
March 31, 2008 December 31, 2007 March 31, 2007
-------------------------------------------------------------------------
Swap term Notional Fair Notional Fair Notional Fair
(years) amount value amount value amount value
-------------------------------------------------------------------------
1 - 5 $302,000 $2,572 $185,000 $539 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of these interest rate swap agreements is included in
other assets (note 7) and the change in fair value is included in
interest expense.
(c) Embedded derivatives:
The Company's equity securities contain embedded derivatives which are
required to be bifurcated from the underlying investment and valued
separately. These bifurcated derivatives do not currently have
significant value and, therefore, are not reported separately.
6. Mortgages receivable:
(a) Mortgages receivable:
-------------------------------------------------------------------------
March 31, 2008 Allowance for credit losses
----------------------------------
Gross Net
amount Specific General Total amount
-------------------------------------------------------------------------
Residential
mortgages $1,721,084 $170 $6,396 $6,566 $1,714,518
Other mortgages 696,890 - 1,927 1,927 694,963
Mortgages held for
securitization or
for sale 388,711 - 732 732 387,979
Accrued interest 13,396 - - - 13,396
-------------------------------------------------------------------------
$2,820,081 $170 $9,055 $9,225 $2,810,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007 Allowance for credit losses
----------------------------------
Gross Net
amount Specific General Total amount
-------------------------------------------------------------------------
Residential
mortgages $1,737,437 $150 $6,074 $6,224 $1,731,213
Other mortgages 693,372 - 2,020 2,020 691,352
Mortgages held for
securitization or
for sale 437,842 - 681 681 437,161
Accrued interest 14,515 - - - 14,515
-------------------------------------------------------------------------
$2,883,166 $150 $8,775 $8,925 $2,874,241
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, 2007 Allowance for credit losses
----------------------------------
Gross Net
amount Specific General Total amount
-------------------------------------------------------------------------
Residential
mortgages $1,411,618 $360 $5,519 $5,879 $1,405,739
Other mortgages 517,317 - 1,798 1,798 515,519
Mortgages held for
securitization or
for sale 367,479 - 565 565 366,914
Accrued interest 10,871 - - - 10,871
-------------------------------------------------------------------------
$2,307,285 $360 $7,882 $8,242 $2,299,043
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in mortgages held for securitization or for sale are Government
of Canada insured mortgages of $95,284, as at March 31, 2008
(December 31, 2007 - $165,527, March 31, 2007 - $16,409). These
Government of Canada guaranteed mortgages 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 that have
occurred since commitment to the mortgage interest rate. The period end
fair value adjustment of Government of Canada guaranteed loans held for
securitization is $942 (December 31, 2007 - $1,814, March 31, 2007 -
$(64)). Mortgages held for sale include mortgages which are to be pooled
and discharged subsequent to the consolidated balance sheet date at their
investment cost. These mortgages are carried at amortized cost. There are
no foreclosed assets held for sale at March 31, 2008, December 31, 2007
and March 31, 2007.
Concentration of credit exposure may arise when a group of counterparties
have similar economic characteristics or are located in the same
geographical region. The ability of these counterparties to meet
contractual obligations may be affected by changing economic or other
conditions. The Company's mortgage portfolio consists of $2,016,238
(December 31, 2007- $1,999,362, March 31, 2007 - $1,735,154) of mortgages
secured by properties located in the Province of Ontario and $495,719
(December 31, 2007- $495,195, March 31, 2007 - $288,781) of mortgages
secured by properties located in the Province of Alberta.
The Company has commitments to fund a total of $175,587 (December 31,
2007 - $290,212, March 31, 2007 - $314,526) of mortgages as at the end of
the period.
(b) Impaired and past due mortgages:
The Company classifies a mortgage receivable as impaired when, in the
opinion of management, there is reasonable doubt as to the
collectability, either in whole or in part, of principal or interest.
Mortgages where payment is contractually past due 90 days are
automatically placed on a non-accrual basis, unless management is
reasonably assured as to the recoverability of principal and interest.
Outstanding impaired mortgages, net of allowance for credit losses are as
follows:
-------------------------------------------------------------------------
March December March
31, 2008 31, 2007 31, 2007
-------------------------------------------------------------------------
Specific
Gross Allowance Net Net Net
-------------------------------------------------------------------------
Residential
mortgages $7,758 ($170) $7,588 $8,467 $2,912
Other mortgages 639 - 639 - -
Mortgages held for
securitization or
for sale - - - - -
-------------------------------------------------------------------------
$8,397 ($170) $8,227 $8,467 $2,912
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding mortgages that are past due but not classified as impaired
are as follows:
-------------------------------------------------------------------------
March 31, 2008
-------------------------------------------------------------------------
30-59 days 60-89 days Total
-------------------------------------------------------------------------
Residential mortgages $9,696 $2,534 $12,230
Other mortgages - - -
Mortgages held for securitization
or for sale - - -
-------------------------------------------------------------------------
$9,696 $2,534 $12,230
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007
-------------------------------------------------------------------------
30-59 days 60-89 days Total
-------------------------------------------------------------------------
Residential mortgages $5,026 $744 $5,770
Other mortgages 639 796 1,435
Mortgages held for securitization
or for sale - - -
-------------------------------------------------------------------------
$5,665 $1,540 $7,205
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Allowance for credit losses:
-------------------------------------------------------------------------
March 31, 2008
-------------------------------------------------------------------------
Specific General
allowance allowance Total
-------------------------------------------------------------------------
Balance, beginning of period $150 $8,775 $8,925
Provision for credit losses 20 280 300
Recoveries - - -
Realized losses - - -
-------------------------------------------------------------------------
Balance, end of period $170 $9,055 $9,225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, 2007
-------------------------------------------------------------------------
Specific General
allowance allowance Total
-------------------------------------------------------------------------
Balance, beginning of period $160 $7,886 $8,046
Provision for credit losses 229 (4) 225
Recoveries 21 - 21
Realized losses (50) - (50)
-------------------------------------------------------------------------
Balance, end of period $360 $7,882 $8,242
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Other assets:
-------------------------------------------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Capital assets $2,734 $2,857 $2,421
Derivative financial instruments
- interest rate swaps (note 17) 2,572 539 -
Income taxes recoverable 2,147 3,382 1,420
Accrued interest and dividends on
non-mortgage assets 1,951 849 2,139
Prepaid expenses and other 1,733 1,614 3,009
Receivable relating to securitization
activities 1,150 1,123 1,486
Mortgage commitments 27 63 -
Derivative financial instruments
- securitization activities (note 5) - - 81
-------------------------------------------------------------------------
$12,314 $10,427 $10,556
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Customer deposits:
-------------------------------------------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Cashable GICs, payable on demand $793,623 $710,194 $697,544
GICs with fixed maturity dates 2,193,159 2,330,040 1,859,436
Accrued interest 78,813 72,507 54,436
Deferred deposit agent commissions (7,849) (8,217) (6,886)
-------------------------------------------------------------------------
$3,057,746 $3,104,524 $2,604,530
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in GICs with fixed maturity dates are $301,950 (December 31,
2007 - $185,000, March 31, 2007 - nil) 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 $(681) (December 31, 2007 - $220, March 31, 2007 - nil)
and is included in interest expense.
9. Other liabilities:
-------------------------------------------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Securitized mortgage servicing
liability $ 5,719 $ 5,953 $ 6,367
Mortgagor realty taxes 3,378 6,616 2,833
Accounts payable and accrued
liabilities 2,868 2,858 6,515
Derivative financial instruments -
securitization activities (note 5) 1,003 1,996 -
Mortgage commitments - - 22
-------------------------------------------------------------------------
$ 12,968 $ 17,423 $ 15,737
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. 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 the provision for income taxes for the following reasons:
-------------------------------------------------------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Canadian statutory income tax rate 33.3% 36.1%
Increase (decrease) resulting from:
Tax-exempt income (4.9%) (7.2%)
Future tax rate decreases (1.4%) (1.3%)
Non-deductible expenses and other 0.6% (0.1%)
-------------------------------------------------------------------------
Effective income tax rate 27.6% 27.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Bank term loans:
The Company has non-revolving term loans totaling $44,595. 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, Equitable Trust. The loans are
repayable in full at the option of the Company at any time during their
term. As collateral for the loans, the Company has provided a promissory
note, a general security agreement, a pledge of all the issued and
outstanding shares in the capital of Equitable Trust and an assignment of
the subordinated debentures purchased from Equitable Trust using the
proceeds of the loans. Interest is paid monthly.
-------------------------------------------------------------------------
Received Repaid
Date Outstanding during During Outstanding
Interest loan Maturity December 31, the the March 31,
rate received date 2007 period period 2008
-------------------------------------------------------------------------
6.37% March 2005 March 2010 $ 17,095 $ - $ - $ 17,095
6.82% April 2006 April 2011 15,000 - - 15,000
6.41% March 2007 March 2012 12,500 - - 12,500
-------------------------------------------------------------------------
$ 44,595 $ - $ - $ 44,595
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Received Repaid
Date Outstanding during During Outstanding
Interest loan Maturity December 31, the the March 31,
rate received date 2006 period period 2007
-------------------------------------------------------------------------
6.37% March 2005 March 2010 $ 19,750 $ - $ - $ 19,750
6.82% April 2006 April 2011 15,000 - - 15,000
6.41% March 2007 March 2012 - 12,500 - 12,500
-------------------------------------------------------------------------
$ 34,750 $ 12,500 $ - $ 47,250
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Subordinated debentures:
The Company has issued debentures which are unsecured obligations and are
subordinated in right of payment to the claims of depositors and other
liabilities of the Company. All subordinated debentures are redeemable at
the Company's option. Any redemption of this debt, contractual or
earlier, is subject to regulatory approval. Interest is paid quarterly.
-------------------------------------------------------------------------
Out- Issued Redeemed Out-
2008 standing during during standing
Deben- Interest Issue Maturity December the the March
ture(1) Rate date date 31, 2007 period period 31, 2008
-------------------------------------------------------------------------
Series 5 7.31%- 2004 January $ 17,519 $ - $ - $ 17,519
7.58% /05 2015
Series 6 7.27% 2006 January 5,000 - - 5,000
2016
Series 7 7.10% 2007 January 9,450 - - 9,450
2017
-------------------------------------------------------------------------
$ 31,969 $ - $ - $ 31,969
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Out- Issued Redeemed Out-
2007 standing during during standing
Deben- Interest Issue Maturity December the the March
ture(1) Rate date date 31, 2006 period period 31, 2007
-------------------------------------------------------------------------
Series 5 7.31%- 2004 January $ 20,250 $ - $ - $ 20,250
7.58% /05 2015
Series 6 7.27% 2006 January 5,000 - - 5,000
2016
Series 7 7.10% 2007 January - 9,450 - 9,450
2017
-------------------------------------------------------------------------
$ 25,250 $ 9,450 $ - $ 34,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The redemption of any series of subordinated debentures commences
only after the redemption of all outstanding preceding series. The
redemption amount is equal to 20% of Equitable Trust's previous
year's net income.
13. Shareholders' equity:
(a) Capital stock:
Authorized:
Unlimited preferred shares
Unlimited common shares
Issued:
-------------------------------------------------------------------------
March 31, 2008 March 31, 2007
-------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount
-------------------------------------------------------------------------
Common shares:
Balance, beginning of
period 12,952,710 $ 87,062 11,924,468 $ 57,849
Issued on exercise of
stock options 10,000 175 113,000 1,999
Transfer from
contributed surplus
relating to the
exercise of stock
options - 20 - 202
-------------------------------------------------------------------------
Balance, end of period 12,962,710 $ 87,257 12,037,468 $ 60,050
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Stock-based compensation plan:
Under the Company's stock option plan, options on common shares are
periodically granted to eligible participants for terms of five years and
vest over a four or five-year period. The maximum number of common shares
available for issuance under the plan is 10% of the Company's issued and
outstanding common shares. The outstanding options expire on various
dates to February 2013. A summary of the Company's stock option activity
and related information for the periods ended March 31, 2008 and
March 31, 2007 is as follows:
-------------------------------------------------------------------------
March 31, 2008 March 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Number average Number average
of stock exercise of stock exercise
options price options price
-------------------------------------------------------------------------
Outstanding, beginning
of period 692,500 $ 26.14 749,011 $ 20.54
Granted 27,500 24.10 150,000 34.49
Exercised (10,000) 17.50 (113,000) 17.69
Forfeited/cancelled (42,500) 28.58 (24,000) 19.98
-------------------------------------------------------------------------
Outstanding, end of period 667,500 $ 26.03 762,011 $ 23.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end of period 221,500 $ 21.90 150,900 $ 18.34
-------------------------------------------------------------------------
Under the fair value-based method of accounting for stock options, the
Company has recorded compensation expense in the amount of $203
(March 31, 2007 - $148) related to grants of options under the stock
option plan. This amount has been credited to contributed surplus. During
the period ended March 31, 2008, a total of 27,500 stock options were
granted (2007 - 150,000). The fair value of options granted in 2008 is
estimated at the date of grant using the Black-Scholes valuation model,
with the following assumptions: (i) risk-free rate of 3.4% (2007 - 4.0%);
(ii) expected option life of 4.0 years (2007 - 4.0 years); (iii) expected
volatility of 25.0% (2007 - 23.0%); and (iv) expected dividends of 1.7%
(2007 - 1.2%). The weighted average fair value of each option granted was
$3.88 (2007 - $6.71).
14. Capital management:
Effective January 1, 2008, OSFI adopted Basel II, a new capital
management framework for Canadian financial institutions. Equitable Trust
now manages and reports its capital in accordance with those
requirements. To conform to the new framework, Equitable Trust has
implemented new procedures and system enhancements including the
development and implementation of Equitable Trust's Internal Capital
Adequacy Assessment Process ("ICAAP") which is approved by the Board of
Directors. Equitable Trust has implemented the Standardized Approach to
allocate capital for credit risk and the Basic Indicator Approach for
operational risk. Under Basel II, certain asset classes attract different
risk weightings than under Basel I and additional capital is required to
support operational risk. As a result, the capital ratios are not
directly comparable to those previously calculated under Basel I.
Regulatory guidelines require deposit-taking financial institutions to
maintain a minimum ratio of capital to risk-weighted assets and off-
balance sheet items of 8%, of which 4% must be Tier 1 capital (Tier 1)
and the remainder supplementary capital (Tier 2). However, OSFI has
established that deposit-taking institutions need to maintain a minimum
total capital ratio of 10% with a Tier 1 ratio of not less than 7%.
Equitable Trust's Tier 1 capital is primarily comprised of common
shareholders' equity while Tier 2 capital is comprised of subordinated
debentures. In addition to Tier 1 and total capital ratios, Canadian
deposit-taking institutions are required to ensure that their assets-to-
capital multiple, which is calculated by dividing gross adjusted assets
by total capital, does not exceed the maximum level prescribed by OSFI.
Equitable Trust maintains capital management policies to govern the
quality and quantity of capital utilized in its operations. The objective
of these policies is to ensure that adequate capital requirements are
met, while providing sufficient return to investors.
During the quarter, Equitable Trust complied with all internal and
external capital requirements.
Regulatory capital (relating solely to Equitable Trust) is as follows:(1)
Basel II Basel I Basel I
-------------------------------------------------------------------------
As at As at As at
March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
Tier 1 capital:(1)
Capital stock 88,465 87,621 60,835
Contributed surplus 1,546 1,363 1,070
Retained earnings 122,897 114,645 96,053
Accumulated other
comprehensive loss(2) (3,953) (2,982) -
-------------------------------------------------------------------------
Total 208,955 200,647 157,958
-------------------------------------------------------------------------
Tier 2 capital:(1)
Accumulated other comprehensive
income (Tier 2A)(2) - - 334
Subordinated debentures (Tier 2B)(3) 76,564 76,564 78,979
-------------------------------------------------------------------------
Total 76,564 76,564 79,313
-------------------------------------------------------------------------
Total regulatory capital(1) 285,519 277,211 237,271
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Basel I and Basel II calculations are not directly comparable.
(2) As prescribed by OSFI, certain components of Accumulated other
comprehensive income are included in the determination of regulatory
capital. Net unrealized fair value losses on available-for-sale
equities are deducted in the determination of Tier 1 capital while
net unrealized fair value gains on available-for-sale equities are
included in Tier 2A capital.
(3) Tier 2B capital may be included in Tier 2 capital to a maximum of
50% of net Tier 1 capital.
15. Other comprehensive loss:
Other comprehensive loss includes the after tax change in unrealized
gains and losses on available-for-sale investments and retained interests
- loan securitizations.
-------------------------------------------------------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Available-for-sale investments:
Losses from changes in fair value, net of
income taxes of ($511),
(March 31, 2007 - $(150)) $ (1,024) $ (266)
Reclassification to earnings for loss on sale
or redemption of investments, net of income
taxes paid of $91 (March 31, 2007 - $(10)) 182 (18)
-------------------------------------------------------------------------
(842) (284)
Available-for-sale loan securitizations -
retained interests:
Gains from changes in fair value, net of
income taxes of $468 (March 31, 2007 - $156) 937 275
Reclassification to earnings for loan
securitizations - retained interests, net of
income taxes of $(48) (March 31, 2007 - $(201)) (96) (356)
-------------------------------------------------------------------------
841 (81)
-------------------------------------------------------------------------
Total other comprehensive loss $ (1) $ (365)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
16. Financial instruments:
The Company's business activities result in a balance sheet that consists
primarily of financial instruments and the majority of net income results
from gains, losses, income and expenses related to the same.
Financial instrument assets include cash and cash equivalents,
investments, mortgages receivable, loan securitizations- retained
interests and derivative financial instruments. Financial instrument
liabilities include customer deposits, derivative financial instruments,
bank term loans and subordinated debentures.
The use of financial instruments exposes the Company to credit and
liquidity risk. A discussion on how these and other risks are managed can
be found in the Risks and Uncertainties section of the March 31, 2008
MD&A and the Risk Management section of the 2007 Annual Report.
For financial instruments measured at fair value where active market
prices are available, bid prices are used for financial assets and ask
prices 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 includes discounted cash flow analysis and
other commonly used valuation techniques. Further information on how the
fair value of financial instruments is determined is included in the
significant accounting policies section of the 2007 Annual Report.
17. 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 March 31, 2008,
December 31, 2007 and March 31, 2007:
-------------------------------------------------------------------------
March 31, 2008
-------------------------------------------------------------------------
Floating
rate Total
or within 1 to 3 3 months within
1 month months to 1 year 1 year
-------------------------------------------------------------------------
Total assets $1,886,639 $162,078 $294,020 $2,342,737
Total liabilities
and equity 1,468,648 296,853 330,777 2,096,278
-------------------------------------------------------------------------
Interest rate
sensitive gap $417,991 $(134,775) $(36,757) $246,459
-------------------------------------------------------------------------
Cumulative gap $417,991 $283,216 $246,459 $246,459
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 12.41% 8.41% 7.32% 7.32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, 2008
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest Total
5 years years sensitive (a)(b)(c)
-------------------------------------------------------------------------
Total assets $973,222 $30,471 $21,941 $3,368,371
Total liabilities
and equity 934,041 32,347 305,705 3,368,371
-------------------------------------------------------------------------
Interest rate
sensitive gap $39,181 $(1,876) $(283,764) $ -
-------------------------------------------------------------------------
Cumulative gap $285,640 $283,764 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 8.48% 8.42% 0.00% 0.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007
-------------------------------------------------------------------------
Floating
rate Total
or within 1 to 3 3 months within
1 month months to 1 year 1 year
-------------------------------------------------------------------------
Cumulative gap $539,754 $305,099 $228,340 $228,340
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 15.83% 8.95% 6.70% 6.70%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest Total
5 years years sensitive (a)(b)(c)
-------------------------------------------------------------------------
Cumulative gap $268,582 $269,268 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 7.88% 7.90% 0.00% 0.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, 2007
-------------------------------------------------------------------------
Floating
rate Total
or within 1 to 3 3 months within
1 month months to 1 year 1 year
-------------------------------------------------------------------------
Cumulative gap $341,139 $135,786 $136,876 $136,876
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 11.90% 4.74% 4.78% 4.78%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, 2007
-------------------------------------------------------------------------
Non-
1 year to Over 5 interest Total
5 years years sensitive (b)(c)
-------------------------------------------------------------------------
Cumulative gap $207,422 $211,270 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 7.24% 7.37% 0.00% 0.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Totals include interest sensitive interest rate hedges at the
notional amount.
(b) Accrued interest is excluded in calculating interest sensitive assets
and liabilities.
(c) Potential prepayments of fixed rate loans have not been estimated.
Cashable GICs are included with floating rate liabilities as these
are cashable by the depositor upon demand. Any prepayments of
subordinated debt, contractual or otherwise, have not been estimated
as these would require pre-approval by OSFI.
The Company has interest rate hedging facilities available at chartered
banks secured by investments in preferred shares and cash equivalents.
Interest rate swaps are classified as held-for-trading and are carried at
fair market value with changes in fair value included in interest
expense. The period end fair value of these hedges of $2,572 is disclosed
in note 7, other assets.
18. Future accounting changes:
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, President & CEO, (416) 513-3519
™ Trademark of Equitable Bank, All Rights Reserved
EQ Bank is a trade name of Equitable Bank.
