News

Initial 2023 guidance shows ROE performance to continue including the benefit of Concentra Bank

TORONTO, Nov. 8, 2022 /CNW/ - EQB Inc. (TSX: EQB) (TSX: EQB.PR.C) ("EQB") today reported its financial results for the three and nine months ended September 30, 2022, that were driven by strong conventional lending, customer account and core earnings growth with rigorous margin management. It also issued preliminary guidance for 2023 that incorporates the initial contributions of its Concentra Bank acquisition that closed on November 1, 2022.

Record Q3 results reflected growth in core businesses aligned to 2022 guidance across Personal and Commercial Banking portfolios, stable provisions for credit losses, resilient capital, and the margin benefit of funding diversification including EQ Bank deposits and covered bonds. Compared to Q2 2022, non-interest revenue increased particularly due to growth in the Bank's core revenue from insured multi-family securitization, outpacing the impacts of headwinds that led to non-core mark-to-market adjustments in strategic investments and fair value adjustments.

Year-to-date, EQB set an all-time record for earnings, adjusted pre-provision, pre-tax earnings¹ and book value per share. These results are tracking ahead of annual guidance and supported today's announcement of a sequential common share dividend increase of 7%.

"On November 1^st, we became the 7^th largest independent bank in Canada by assets with the successful closing of our Concentra acquisition, now taking us to a pro forma $100 billion in combined assets under management and assets under administration.  I can't think of a better way to begin this exciting next chapter than with the momentum generated on an organic basis in the third quarter. We grew conventional loans 29% year-over-year or $5.6 billion without deviating from our proven methods of assessing credit worthiness and contribution to ROE. With interest rates rising, our high standards for loan quality have never been more necessary or appropriate. This performance, bolstered by our focus on margin management, will propel future earnings. Most important, growth in our customer base presents additional opportunities to live up to our Challenger Bank purpose of driving change in banking to enrich people's lives," said Andrew Moor, President and CEO. "Now, as we integrate Concentra, and pursue our 2023 performance targets, this purpose takes on additional meaning as we welcome new employees, customers and credit union partners and work to realize the substantial benefits of the transaction."

Record YTD performance puts full-year organic growth guidance in range

• Although the fourth quarter will include various impacts of the Concentra acquisition, EQB today expressed confidence that it will achieve existing adjusted guidance for the full-year 2022 (pre‑Concentra) of 12-15% in total lending portfolio growth on an organic basis (YTD 17%), +8‑10% adjusted EPS¹ growth (YTD +11%), adjusted ROE¹ of 15%+ (YTD 15.6%), adjusted pre-provision, pre-tax income¹ 12%+ (YTD +16%), book value per share 12%+ (YTD +16%) and CET1 of 13%+ (September 20, 2022, 13.3%)
• EQB's risk mitigation strategies continue to deliver leading credit performance and protect the business as markets adjust to higher interest rates
• See "Preliminary 2023 guidance" in the EQB Q3 2022 MD&A for additional information on performance expectations inclusive of the impact of the Concentra acquisition

Net interest income increases to all-time record on growth in portfolio and NIM

• Q3 adjusted¹ net interest income +24% y/y to $187.3 million (+23% to $186.3 million reported) driven by growth across conventional loans and expanding margins
• Q3 adjusted net interest margin¹ (NIM) of 1.94% (1.93% reported) was higher than any quarter in history, 13bps higher than last quarter, and well-ahead of 2022 guidance (flat to moderate expansion from 2021) due to growth of conventional lending asset mix and benefits of funding diversification. EQB is confident around holding strong margins, especially considering the growing benefits of EQB's growing deposit franchise and covered bond programs

Non-interest revenue improves from a loss in Q2 2022 to net revenue of $9.5 million  

• Core non-interest revenue was $17.0 million in Q3, an increase of $6.9 million, with fee-based revenue of $6.7 million and growing contributions from EQB's insured multi-family lending business, delivering $10.3 million in Q3 alone
• Strategic investment market-to-market revenue contributed a decline of -$7.4 million in Q3 reflecting equity market conditions. Strategic investments, while non-core to earnings, are expected to continue to yield overall positive returns and ROE well-above internal hurdle rates during the investment period

Personal Banking conventional lending +27% y/y with reverse mortgages +194% y/y  

• Single-family alternative portfolio +24% y/y to $16.5 billion (2022 annual guidance +12-15%) led by first half originations and a 0.3% decline in the loan attrition rate. Despite slowing demand for housing in the third quarter on higher interest rates, the portfolio grew 1% from Q2 2022
• Reverse mortgage assets grew +194% y/y to $514 million (2022 annual guidance +150%) and +22% q/q. Growth reflected expanded distribution, increasing brand awareness among those Canadians nearing or in retirement, and market growth
• Insurance lending +91% y/y to $80 million (2022 annual guidance +100%) and +9% q/q as EQB's solutions including the Immediate Financing Arrangement begin to gain broader distribution with nine of Canada's leading insurance companies

Commercial Banking assets +24% y/y to $12.5 billion, well-ahead of target

• Commercial Finance Group loan portfolio +33% y/y to $5.0 billion (2022 annual guidance +10-15%) and +10% q/q with Business Enterprise Solutions +26% y/y to $1.3 billion (2022 annual guidance +10-15%) and +7% q/q. EQB's Specialized Finance business +48% y/y to $750 million (2022 annual guidance +20-30%)
• Bennington equipment leasing portfolio +42% y/y to $965 million (2022 annual guidance +10-15%) and +7% q/q
• EQB continues to grow its insured multi-family residential loans under management by $527 million in Q3 (+4.7% q/q and +17.9% y/y). Gains on securitization in this portfolio contributed $10.3 million in Q3 due to derecognition activity

Credit quality indicators reflect prudence in a higher interest rate environment 

• EQB provisioned $5.4 million for credit losses (PCL) in Q3 to account for continued portfolio growth, evolving macroeconomic forecasts and loss modelling that contemplates further increases in interest rates plus various scenarios for economic performance
• Net impaired loans were 0.23% of total assets at September 30, 2022, up from 0.18% at June 30, 2022, but still lower than the prior eight quarters
• Realized losses for Q3 were less than 1 basis point of total loan assets ($1.8 million), better than its industry-leading 10-year credit history, compared to 1 basis points a year ago ($1.2 million)
• EQB remains well reserved for credit losses with allowances as a percentage of total loan assets of 15 bps at September 30, 2022. PCL in Q4 is expected to be in a similar range sequentially, assuming no significant deterioration to the macroeconomic environment beyond expectations

EQ Bank customers +23% y/y, deposits consistent at $7.6 billion  

• EQ Bank expanded its customer base by +23% y/y to over 290,000 and during October, further increased its customer base to over 295,000. EQ Bank will soon launch in Quebec, offering its Make Bank value proposition across all-digital deposit and savings products
• EQ Bank total deposits are expected to end 2022 below guidance, due to the bank's focus on margin management. EQ Bank consistently offers everyday great rates to all customers, it focuses on building and expanding value to Canadians, and does not aim to match high-rate short term competitive campaigns and gimmicks
• EQ Bank customer engagement remained high in Q3 (digital transactions +63% y/y and products held +15% y/y) and recent enhancements to its artificial intelligence enabled "selfie-ID" account opening process improved onboarding for new customers
• In October, EQ Bank introduced its first payment card in Beta with an initial group of customers with strong positive early feedback. EQB generated its first payments-as-a-service revenue (BIN-Banking Identification Number sponsorship) revenue through a white-label agreement with an innovative global payments fintech. As a regulated financial institution, Equitable Bank can now issue payment cards on behalf of fintechs and in turn participate in payments revenue

Equitable Bank continues to diversify funding sources, optimize cost of funds

• Subsequent to Q3, on October 5, 2022, Equitable Bank announced that its offering of €250 million 3­year covered bonds was oversubscribed at an attractive spread of 37 basis points over the Euro mid-swap rate. This brings the total issuance for 2022 to €550 million, well ahead of management's goal. Inclusive of all costs, covered bonds remain the lowest cost of wholesale funding available to the Bank. With the completion of the Concentra acquisition, the Bank now has additional covered bond issuance capacity
• Equitable Bank's other deposit principal (excluding EQ Bank deposits) +27% y/y and +2% q/q to $16.3 billion at September 30, 2022, including its Deposit Note program of $1.7 billion

Strong capital and liquidity positions

• Equitable Bank's Common Equity Tier 1 ratio was 13.3% at September 30, 2022 (compared to 13.5% at June 30, 2022 and 13.7% a year ago), reflecting success in deploying capital organically, at total risk-weighted assets +24% y/y and +5% q/q to $15.5 billion
• Liquid assets¹ were $3.2 billion or 8.0% of total assets at September 30, 2022 reflecting anticipated cash needs for upcoming quarters, compared to $3.1 billion or 7.8% of total assets at June 30, 2022 and $3.2 billion (9.3% of assets a year ago)
• Retail and securitization funding markets remain liquid and efficient and with rising interest rates deposit markets are expected to continue to see positive inflows

EQB announces +7% q/q increase in common share dividend for the quarter, +78% y/y

• EQB's Board of Directors declared a common share dividend of $0.33 per common share or $1.32 annualized, payable on December 30, 2022 to shareholders of record December 15, 2022. The four dividend increases announced in 2022 reflect EQB's philosophy of growing the dividend while maintaining a payout ratio that is much lower than other Canadian banks and using retained capital to fuel growth with high ROE
• EQB's Board also declared a quarterly dividend of $0.373063 per preferred share, payable on December 30, 2022 to shareholders of record at the close of business December 15, 2022

Concentra Bank integration underway following November 1, 2022 closing

• On February 7, 2022, Equitable Bank entered into a definitive agreement, as well as supporting agreements, to acquire Concentra Bank, Canada's 13th largest Schedule I bank by assets. During the third quarter, the federal Minister of Finance approved the acquisition and on November 1, the remaining conditions were successfully met as described in a news release issued that day
• Using the detailed plans formulated by a Transformation Management Office over the past nine months, management is now engaged in integration activities aligned to the full achievement of previously announced synergy objectives, earnings accretion, customer service and joint value creation with credit unions and new partners
• EQB's Q4 2022 results will include two months of contribution from Concentra, which are expected to include one-time financial impacts associated with the purchase transaction and integration. Going forward, EQB will provide consolidated results for Equitable Bank that will include the contributions of Concentra Bank and Concentra Trust

EQB publishes preliminary 2023 adjusted guidance including Concentra Bank

• With the introduction of the Concentra integration during 2023, currently the bank expects to be able to deliver ROE in the range of 15%+, diluted EPS growth 10-15%+, pre-provision pre-tax earnings of 25-35%, BVPS growth of 12-15% and consistent stable CET1 of 13%+
• Please refer to the Q3 EQB MD&A for preliminary balance sheet growth ranges. Note, guidance includes contributions from Concentra. Per share amounts also include the increase in the count of common shares and associated book value of contributed equity related to the acquisition.

"We've reinforced that EQB's operating model is designed to perform across economic cycles, and this resilience translated again in Q3. The balance sheet, credit and capital are well positioned, diversified and performing to plan. Combined with our team's exceptional focus on ROE and margin management, we believe 2022 will close out on track or ahead of guidance, and we will enter 2023 from a point of strength, including with the addition of Concentra Bank.  We will refine our 2023 guidance with Q4 results in February 2023 after operating Concentra Bank for a few months and managing through continued macroeconomic developments. That said, achieving 2023 guidance will be tremendously rewarding to all stakeholders as Canada's Challenger Bank takes its place among the country's largest financial institutions," said Chadwick Westlake, EQB's Chief Financial Officer.

Equitable Bank announces appointment of three deeply experienced, independent directors, effective immediately taking the Board to 12 independent directors

• Carolyn Schuetz is an accomplished executive with more than 30 years of global experience in financial services. Having spent 16 years at HSBC, most recently as the Chief Operating Officer for Group Retail Banking and Wealth Management, she brings deep operational expertise and a proven track record of delivering large-scale transformational change in complex, highly regulated industries. She serves on the board of OakNorth Bank plc, a UK-regulated private FinTech bank and Altus Group Limited, which provides the global corporate real estate industry with intelligence-as-a-service solutions to maximize returns and reduce risk. Ms. Schuetz holds a Bachelor of Mathematics from the University of Waterloo, is a Chartered Professional Accountant and has an MBA from Stanford
• Marcos Lopez is the former CEO of Solium Capital Inc. (now Shareworks by Morgan Stanley). His long stewardship of Solium culminated in its acquisition by Morgan Stanley for $1.1 billion. Under his leadership, Solium's Shareworks platform evolved into a world-class suite of products and services used by more than 3,000 companies worldwide. After Solium was acquired by Morgan Stanley, he became Co-Head of Morgan Stanley at Work, ensuring a successful integration of the business and ultimately helping create the largest employee share plan administration business globally. Before becoming Solium's CEO, he was the co-founder of Bitonic Solutions Inc. Mr. Lopez holds a Bachelor's Degree in Computer Science from the University of Calgary, and was the 2012 recipient of the Ernst & Young Entrepreneur of the Year award for the technology sector, Western Canada
• Michael Hanley is a Corporate Director with over 25 years of experience in leadership roles and corporate governance. He serves on the Board of Directors and acts as chair of the audit committee of LyondellBasell Industries N.V., where he is also a member of the Compensation and Talent Development Committee. In addition, he is the Lead Director of Nuvei Corporation and a member of the Board of Directors of ExCellThera Inc. Previously, Mr. Hanley served as a member of the Board of Directors, the audit committee and the human resources and compensation committee of Industrial Alliance Insurance and Financial Services Inc. and the Board of Directors and the audit committee of Le Groupe Jean Coutu (PJC) Inc. Earlier in his career, Mr. Hanley was Senior Vice-President Operations and Strategic Initiatives at National Bank of Canada and held a number of positions at Alcan Inc., including Executive Vice-President and Chief Financial Officer, and President and CEO of the Global Bauxite and Alumina business group. He also served as Chief Financial Officer of two other Canadian public companies, Gaz Métro (now Energir) and St-Laurent Paperboard Inc. Mr. Hanley is a Chartered Professional Accountant and member of the Ordre des comptables professionnels agrees du Québec (CPA) since 1987
• Today's announcement also reflects the Board's focus on preparing for future retirements. Having reached the 12-year term limit set out in our policies, David LeGresley and Lynn McDonald will not stand for re-election as Directors at the 2023 AGM. Accordingly, Mr. Lopez and Mr. Hanley were also appointed to the EQB Inc. Board of Directors immediately and Ms. Schuetz will stand for election to the EQB Inc. Board at the 2023 AGM.

"As Canada's 7^th largest independent Canadian bank by assets, Equitable Bank's scope and scale dictate that we enhance our governance, which is exactly what the appointments of these accomplished leaders achieves," said David LeGresley, Chair of the Board of Equitable Bank. "Their presence will be accretive to our deliberations as Canada's Challenger Bank embarks on its next chapter of growth, service and performance. I welcome Carolyn, Marcos and Michael and look forward to the contributions they will make to our Bank's broader purpose of enriching people's lives."

Analyst conference call and webcast: 8:30 a.m. ET Eastern November 9, 2022 
EQB will host its third quarter conference call and webcast on Wednesday November 9, 2022.  To access the call live, please dial (416) 764-8609 five minutes prior to the start time. The listen-only webcast with accompanying slides will be available at eqbank.investorroom.com/events-webcasts.

Call archive 
A replay of the call will be available until November 23, 2022 at midnight at (416) 764-8677 (passcode 753301 followed by the number sign). Alternatively, the webcast will be archived on the Bank's Investor Relations website.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance sheets (unaudited)

Consolidated statements of income (unaudited)

Consolidated statements of comprehensive income (unaudited)

Consolidated statements of changes in shareholders' equity (unaudited)

Consolidated statements of changes in shareholders' equity (unaudited)

Consolidated statements of cash flows (unaudited)

About EQB Inc.

EQB trades on the Toronto Stock Exchange (TSX: EQB and EQB.PR.C) and serves more than 370,000 Canadians through its wholly owned subsidiary Equitable Bank, Canada's Challenger Bank™. Equitable Banks wholly owned subsidiary Concentra Bank supports credit unions across Canada that serve more than 5 million members. Equitable Bank has over $100 billion in combined assets under management and administration, with a clear mandate to drive change in Canadian banking to enrich people's lives.  Founded over 50 years ago, Canada's Challenger Bank™ provides diversified personal and commercial banking and through its EQ Bank platform (eqbank.ca) has been named the top Schedule I Bank in Canada on the Forbes World's Best Banks 2022 and 2021 lists.  Please visit equitablebank.ca for details.

Cautionary Note Regarding Forward-Looking Statements

Statements made by EQB in the sections of this news release, in other filings with Canadian securities regulators and in other communications include forward-looking statements within the meaning of applicable securities laws (forward-looking statements).  These statements include, but are not limited to, statements about EQB's objectives, strategies and initiatives, financial performance expectations and other statements made herein, whether with respect to EQB's businesses or the Canadian economy.  Generally, forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "planned", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases which state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved", or other similar expressions of future or conditional verbs.  Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, closing of transactions, performance or achievements of EQB to be materially different from those expressed or implied by such forward-looking statements, including but not limited to risks related to capital markets and additional funding requirements, fluctuating interest rates and general economic conditions, legislative and regulatory developments, changes in accounting standards, the nature of our customers and rates of default, and competition as well as those factors discussed under the heading "Risk Management" in the MD&A and in EQB's documents filed on SEDAR at www.sedar.com.  All material assumptions used in making forward-looking statements are based on management's knowledge of current business conditions and expectations of future business conditions and trends, including their knowledge of the current credit, interest rate and liquidity conditions affecting EQB and the Canadian economy.  Although EQB believes the assumptions used to make such statements are reasonable at this time and has attempted to identify in its continuous disclosure documents important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended.  Certain material assumptions are applied by EQB in making forward-looking statements, including without limitation, assumptions regarding its continued ability to fund its mortgage business, a continuation of the current level of economic uncertainty that affects real estate market conditions, continued acceptance of its products in the marketplace, as well as no material changes in its operating cost structure and the current tax regime.  There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.  Accordingly, readers should not place undue reliance on forward-looking statements.  EQB does not undertake to update any forward-looking statements that are contained herein, except in accordance with applicable securities laws.

Non-Generally Accepted Accounting Principles (GAAP) Financial Measures and Ratios 
In addition to GAAP prescribed measures, this news release references certain non-GAAP measures, including adjusted financial results, that we believe provide useful information to investors regarding EQB's financial condition and results of operations. Readers are cautioned that non-GAAP measures often do not have any standardized meaning, and therefore, are unlikely to be comparable to similar measures presented by other companies.

Adjusted financial results

On February 7, 2022, Equitable Bank announced a definitive agreement to acquire a majority interest in Concentra Bank (Concentra), subject to customary closing conditions and regulatory approvals. On September 28, 2022, the Bank received approval from the Ministry of Finance to acquire Concentra and subsequently closed the transaction on November 1, 2022. The EQB.R subscription receipts were converted to common shares and proceeds were used to fund the transaction. Beginning in Q4 2021, Equitable Bank incurred certain acquisition costs. To enhance comparability between reporting periods, increase consistency with other financial institutions, and provide the reader with a better understanding of EQB's performance, adjusted results were introduced starting in Q1 2022. Adjusted results are non-GAAP financial measures.

Adjustments impacting current and prior periods:

Concentra acquisition/integration costs, pre-tax:

• Q3 2022 – $5.2 million of acquisition and integration related costs and $1.0 million of interest expense paid to subscription receipt holders⁽¹⁾, and
• Q2 2022 – $2.7 million of acquisition and integration related costs and $0.9 million of interest expenses paid to subscription receipt holders.

The following table presents a reconciliation of GAAP reported financial results to non-GAAP adjusted financial results.

In addition to the adjusted results that are presented above, additional adjusted financial measures and ratios are disclosed as follows:

Reconciliation of adjusted efficiency ratio

Reconciliation of adjusted return on equity (ROE)

Other non-GAAP financial measures and ratios 

Assets under management (AUM): is the sum of total assets reported on the consolidated balance sheet  and loan principal derecognized but still managed by EQB.

Conventional loans: are the total on-balance sheet loan principal excluding prime single family and insured multi-unit residential mortgages.

Liquid assets: is a measure of EQB's cash or assets that can be readily converted into cash, which are held for the purposes of funding loans, deposit maturities, and the ability to collect other receivables and settle other obligations.

Loans under management (LUM): is the sum of loan principal reported on the consolidated balance sheet and loan principal derecognized but still managed by EQB.

Net interest margin (NIM): this profitability measure is calculated on an annualized basis by dividing net interest income by the average total interest earning assets for the period.

Pre-provision pre-tax income: is the difference between revenue and non-interest expenses.

SOURCE EQB Inc.