Equitable Group reports second quarter 2010 results

Single Family Originations up 372%

TSX Symbols: ETC and ETC.PR.A

TORONTO, Aug. 4 /CNW/ - Equitable Group Inc. ("Equitable" or the "Company") today reported solid financial results for the three and six months ended June 30, 2010 as it continued to show strong growth in its on-balance sheet mortgage assets.

SECOND QUARTER RESULTS

    
    -   Net interest income expanded by 29.3% to $22.6 million from $17.5
        million in 2009, reflecting an improvement in net interest margin
        ("NIM") to 2.4% from 1.9% in the second quarter of 2009 and an
        increase in the size of the Company's mortgage portfolio;
    -   Mortgage assets expanded by 14.2% or $403.4 million over the quarter
        primarily driven by the strong growth in the single family business;
    -   Net income increased 6.0% to $12.6 million from $11.9 million as a
        result of the increase in net interest margin year over year more
        than offsetting a decline in earnings from securitization activities;
    -   Diluted earnings were $0.78 per share compared to $0.80 per share a
        year ago and return on equity was 13.6% compared to 16.5% for the
        second quarter of 2009, reflecting the impact of dividend payments on
        preferred shares issued in the third quarter of 2009;
    -   Book value per share increased 17.3% to $23.38 from $19.94 a year
        ago;
    -   Return on average assets was 1.3%, equal to the return generated in
        2009;
    -   Productivity ratio on a taxable equivalent basis ("TEB") - a measure
        of efficiency - was 29.2% compared to 24.4% in the second quarter of
        2009 reflecting on-going investment in growing mortgage originations;
    -   Total capital ratio including general allowance was 16.6% compared to
        15.3% a year ago;
    -   Tier 1 capital ratio improved to 13.9% from 11.8% a year ago; and
    -   Tangible common equity ratio, a key measure of capital strength,
        improved to 12.1% from 11.8% a year ago.
    

DIVIDEND DECLARATIONS

The Company's Board of Directors declared a dividend of $0.10 per share on the Company's common shares, payable on October 4, 2010, to shareholders of record at the close of business on September 15, 2010. The Board also declared a preferred share dividend of $0.453125 per share, payable September 30, 2010, to preferred shareholders of record on September 15, 2010.

SIX MONTH RESULTS

    
    -   NIM expanded to 2.4% from 1.8% a year ago;
    -   Net income increased 3.0% to $24.5 million ($1.52 per diluted share)
        from $23.8 million ($1.60 per diluted share) in the first six months
        of 2009, while return on equity was 13.6% compared to 17.1% in the
        same period of 2009;
    -   Return on average assets was 1.3%, compared to 1.2% a year earlier;
        and
    -   Productivity ratio on a TEB was 27.7% compared to 24.4% in the same
        period of 2009.
    

MANAGEMENT COMMENTARY

"Equitable made excellent progress with our growth strategy in the second quarter," said Andrew Moor, President and CEO. "This strategy involves a focus on traditional on-balance sheet mortgage lending and an ongoing emphasis on higher ROE and prudent risk management. The highlights of the quarter were growth in Single Family Lending production, up 371.5% year over year and Commercial Mortgage - Broker Services production, up 234.7% over the corresponding quarter of the prior year. These gains reflect a relentless focus on offering superior service and successful sales efforts made by our origination teams in the context of a real estate market that was supportive to growth through much of the second quarter. As expected, NIM performance has remained strong and more than offset a decline in securitization income. While we have more work to do to achieve our objectives for 2010, the pace of improvements, including our key credit metrics, and substantial gains made in originating on-balance sheet mortgage assets puts Equitable right on schedule."

John Ayanoglou, Chief Financial Officer commented: "Despite the growth in on-balance sheet mortgage assets, Equitable Trust maintained the strength of its capital position, which we bolstered significantly in recent periods through a combination of raising non-dilutive capital, retaining earnings and by carefully managing the capital deployed in the business. As a result, we have the capacity we need for more growth. As well, recent additions to our team, which are reflected in our productivity ratio, and planned geographic expansions, give us the means to secure the type of diversified, high quality mortgages that have been the hallmark of Equitable's approach for many years."

MORTGAGE PORTFOLIO HIGHLIGHTS

    
    -   Single Family Lending Services funded $315.7 million of single family
        mortgages in the second quarter of 2010, up 371.5% from $67.0 million
        in the same period of 2009;
    -   Commercial Mortgage - Broker Services funded $105.0 million of
        mortgages in the second quarter of 2010 compared to $31.4 million in
        the comparable period of 2009;
    -   Commercial Lending Services funded $97.1 million of conventional
        mortgages in the second quarter compared to $41.2 million a year ago
        and $145.9 million of CMHC-insured multi-unit residential mortgages
        compared to $505.8 million a year ago;
    -   At June 30, 2010, fixed-rate mortgages represented 72.8% of the
        mortgage portfolio compared to 60.5% a year earlier, while floating
        rate mortgages with no interest rate floors amounted to 13.3%
        compared to 24.2% a year earlier; and
    -   Total mortgage fundings in the second quarter increased 2.9% to
        $663.7 million from $645.3 million in the same period of 2009 -
        showing that Equitable has successfully been able to replace the
        securitization business volumes of last year's quarter with on-
        balance sheet lending originations this year.
    

Equitable also earns interest from the recurring cash flows it receives on its securitized loan portfolio. The Company securitized and sold $372.5 million of CMHC-insured mortgages in the first six months of 2010 compared to $761.5 million in the same period of 2009, reflecting lower volumes and a reduction in available gross margins. The total securitized portfolio amounted to $4.3 billion at June 30, 2010 compared to $3.5 billion at June 30, 2009.

CREDIT QUALITY

Mortgages in arrears 90 days or more (excluding CMHC-insured mortgages that are less than 365 days in arrears) were 0.92% of total principal outstanding compared to 1.34% at June 30, 2009 as the Company benefitted from the relative health of its mortgage portfolio and ongoing success in managing defaults. Mortgages in early stage delinquency - a leading indicator of credit quality in future periods - decreased to 0.32% of total outstanding principal from 0.68% at year end 2009 and 1.07% a year ago. In order to prudently provide for mortgages that were considered to be impaired, the Company recorded $1.4 million in provision for credit losses during the quarter. At June 30, 2010, allowance for credit losses as a percentage of total mortgage principal outstanding was 0.48% compared to 0.56% reported at March 31, 2010. This reduction primarily relates to the Company's successful workout of previously impaired loans which were restructured during the quarter. The Company recognized $1.4 million of realized loan losses during the second quarter of 2010, charging these against specific allowances that had been recorded in prior quarters. Net impaired mortgages were 0.74% of total mortgage principal outstanding, compared to 1.20% at year end 2009 and 0.79% a year ago.

LOOKING AHEAD

"We're very confident that we can continue to expand our mortgage portfolio and that the solid asset growth recently achieved will translate into strong earnings performance in future quarters," said Mr. Moor. "Our objective of adding to our portfolio of single family mortgages should be assisted by additions we made to our sales team, and the broader geographic reach of our mortgage lending operations. Our Commercial Mortgage - Broker Services lending business has also been strengthened and has recently opened an office in Montreal. At the same time, we are cognizant that the recent strong activity levels in residential real estate, which have been in response to improving economic conditions and historically low interest rates, will not be sustained, and we appear to be entering a somewhat slower period. Taking a longer term view, this more subdued activity level is beneficial and reduces risk being taken in the portfolio, but it may slow down portfolio growth in the short term."

Also factored into the Company's outlook is the prospect for an additional increase in the Bank of Canada's benchmark rate later this year. There are a number of ways that higher interest rates could impact the Company's net interest margin and while this combination of factors may result in some contraction in spread from the strong levels achieved to date in 2010, the impact is not expected to be significant. As well, the Company continues to expect securitization volumes and spreads to be lower than a year ago.

SECOND QUARTER WEBCAST

Management will discuss Equitable's results during a conference call beginning at 2 p.m. ET on Thursday, August 5, 2010. To listen to the audio webcast, log on to www.equitablegroupinc.com. To participate in the call, please dial 416-644-3422.

MD&A

The Company will post its second quarter 2010 MD&A on its website www.equitablegroupinc.com. This document will also be archived on the site.

ABOUT EQUITABLE GROUP INC.

Equitable Group Inc. is a niche mortgage lender. Our core business is first charge mortgage financing, which we offer through our wholly owned subsidiary, The Equitable Trust Company. Founded in 1970, Equitable Trust is a federally incorporated trust company, serving single family, small and large commercial borrowers and their mortgage advisors. We actively originate mortgages in Ontario, Alberta, Manitoba, British Columbia and Quebec. We also serve the investing public as a provider of Guaranteed Investment Certificates and provide GICs across all Canadian provinces and territories. Equitable Group's common and preferred shares are traded on the Toronto Stock Exchange under the symbols ETC and ETC.PR.A, respectively. Visit the Company on line at www.equitablegroupinc.com or www.equitabletrust.com.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

    
    CONSOLIDATED BALANCE SHEETS (unaudited)
    AS AT JUNE 30, 2010
    With comparative figures as at December 31, 2009 and June 30, 2009
    ($ THOUSANDS)

    -------------------------------------------------------------------------
                                           June 30, December 31,     June 30,
                                              2010         2009         2009
    -------------------------------------------------------------------------
    Assets
    Cash and cash equivalents          $   160,356  $   395,835  $   273,422
    Restricted cash                          5,000        5,000        5,000
    Investments purchased under
     reverse repurchase agreements          69,543      129,721      145,037
    Investments                            403,105      388,037      292,598
    Securitization retained interests      147,495      147,195      124,072
    Mortgages receivable                 3,243,655    2,763,020    2,857,378
    Other assets                            13,794       17,266       21,981
    -------------------------------------------------------------------------
                                       $ 4,042,948  $ 3,846,074  $ 3,719,488
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders'
     Equity
    Liabilities:
      Customer deposits                $ 3,460,584  $ 3,332,319  $ 3,280,565
      Obligations under repurchase
       agreements                           37,558            -            -
      Future income taxes                   20,957       19,999       19,071
      Other liabilities                     61,374       54,724       47,864
      Bank term loans                       27,500       27,500       43,250
      Subordinated debentures               37,671       37,671       31,969
    -------------------------------------------------------------------------
                                         3,645,644    3,472,213    3,422,719

    Shareholders' equity:
      Preferred shares                      48,523       48,523            -
      Common shares                        127,719      127,424      127,029
      Contributed surplus                    3,613        3,267        2,984
      Retained earnings                    213,385      193,635      170,209
      Accumulated other comprehensive
       income (loss)                         4,064        1,012       (3,453)
    -------------------------------------------------------------------------
                                           397,304      373,861      296,769

    -------------------------------------------------------------------------
                                       $ 4,042,948  $ 3,846,074  $ 3,719,488
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF INCOME (unaudited)
    FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010
    With comparative figures for the three and six month periods ended June
    30, 2009
    ($ THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    -------------------------------------------------------------------------
                               Three months ended         Six months ended
                              June 30,     June 30,     June 30,     June 30,
                                 2010         2009         2010         2009
    -------------------------------------------------------------------------
    Interest income:
      Mortgages           $    42,034  $    40,005  $    83,340  $    81,019
      Investments               4,106        3,293        7,599        5,758
      Other                       575          664        1,177        2,489
    -------------------------------------------------------------------------
                               46,715       43,962       92,116       89,266

    Interest expense:
      Customer deposits        20,940       23,432       40,747       50,729
      Deposit agent
       commissions              2,018        1,683        3,983        3,367
      Bank term loans             430          758          894        1,496
      Subordinated debentures     649          586        1,276        1,165
      Other                        44            -           53            -
    -------------------------------------------------------------------------
                               24,081       26,459       46,953       56,757
    -------------------------------------------------------------------------
    Net interest income        22,634       17,503       45,163       32,509
    Provision for credit
     losses                     1,375        1,250        3,750        3,100
    -------------------------------------------------------------------------
    Net interest income after
     provision for credit
     losses                    21,259       16,253       41,413       29,409
    Other income:
      Fees and other income       824          998        1,566        1,751
      Net (loss) gain on
       investments                (68)           -         (124)          36
      Gains on securitization
       activities and income
       from retained interests  2,152        5,798        4,805       15,132
    -------------------------------------------------------------------------
                                2,908        6,796        6,247       16,919
    -------------------------------------------------------------------------
    Net interest income and
     other income              24,167       23,049       47,660       46,328
    Non-interest expenses:
      Compensation and
       benefits                 4,923        3,481        9,305        7,445
      Other                     2,828        2,627        5,424        4,934
    -------------------------------------------------------------------------
                                7,751        6,108       14,729       12,379
    -------------------------------------------------------------------------
    Income before income
     taxes                     16,416       16,941       32,931       33,949
    Income taxes:
      Current                   3,942        6,189        8,879        8,896
      Future                     (114)      (1,125)        (494)       1,232
    -------------------------------------------------------------------------
                                3,828        5,064        8,385       10,128
    -------------------------------------------------------------------------
    Net income                 12,588       11,877       24,546       23,821
    Dividends on preferred
     shares                       906            -        1,812            -
    -------------------------------------------------------------------------
    Net income available to
     common shareholders  $    11,682  $    11,877  $    22,734  $    23,821
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number
     of common shares
     outstanding:
      Basic                14,920,467   14,886,063   14,916,184   14,884,396
      Diluted              14,997,402   14,914,954   14,991,731   14,898,921

    Earnings per share:
      Basic               $      0.78  $      0.80  $      1.52  $      1.60
      Diluted             $      0.78  $      0.80  $      1.52  $      1.60
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
    FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010
    With comparative figures for the three and six month periods ended June
    30, 2009
    ($ THOUSANDS)

    -------------------------------------------------------------------------
                               Three months ended         Six months ended
                              June 30,     June 30,     June 30,     June 30,
                                 2010         2009         2010         2009
    -------------------------------------------------------------------------
    Preferred shares:
      Balance, beginning
       of period          $    48,523  $         -  $    48,523  $         -
      Issued                        -            -            -            -
    -------------------------------------------------------------------------
      Balance, end of
       period                  48,523            -       48,523            -

    Common shares:
      Balance, beginning
       of period              127,656      126,993      127,424      126,993
      Proceeds from
       reinvestment of
       dividends                   59           36          171           36
      Proceeds from
       exercise of stock
       options                      3            -          106            -
      Transfer from
       contributed surplus
       relating to the
       exercise of stock
       options                      1            -           18            -
    -------------------------------------------------------------------------
      Balance, end of
       period                 127,719      127,029      127,719      127,029

    Contributed surplus:
      Balance, beginning
       of period                3,457        2,872        3,267        2,553
      Stock-based
       compensation               157          112          364          431
      Transfer to common
       shares relating to
       the exercise of
       stock options               (1)           -          (18)           -
    -------------------------------------------------------------------------
      Balance, end of period    3,613        2,984        3,613        2,984

    Retained earnings:
      Balance, beginning of
       period                 203,195      159,821      193,635      149,365
      Net income               12,588       11,877       24,546       23,821
      Dividends
        Preferred shares         (906)           -       (1,812)           -
        Common shares          (1,492)      (1,489)      (2,984)      (2,977)
    -------------------------------------------------------------------------
      Balance, end of
       period                 213,385      170,209      213,385      170,209

    Accumulated other
     comprehensive income
     (loss):
      Balance, beginning
       of period                3,449       (8,431)       1,012      (14,765)
      Other comprehensive
       income                     615        4,978        3,052       11,312
    -------------------------------------------------------------------------
      Balance, end of period    4,064       (3,453)       4,064       (3,453)
    -------------------------------------------------------------------------
    Total retained earnings
     and accumulated other
     comprehensive income     217,449      166,756      217,449      166,756
    -------------------------------------------------------------------------
    Total shareholders'
     equity               $   397,304  $   296,769  $   397,304  $   296,769
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
    FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010
    With comparative figures for the three and six month periods ended June
    30, 2009
    ($ THOUSANDS)

    -------------------------------------------------------------------------
                               Three months ended         Six months ended
                              June 30,     June 30,     June 30,     June 30,
                                 2010         2009         2010         2009
    -------------------------------------------------------------------------
    Net income            $    12,588  $    11,877  $    24,546  $    23,821
    Other comprehensive
     income (loss), net
     of tax:
      Available for sale
       investments:
        Net unrealized
         gains from
         change in
         fair value             1,706        7,832        5,496       15,272
        Reclassification
         of net gains to
         income                (1,091)      (2,854)      (2,444)      (3,960)
    -------------------------------------------------------------------------
    Other comprehensive
     income                       615        4,978        3,052       11,312
    -------------------------------------------------------------------------
     Comprehensive income $    13,203  $    16,855  $    27,598  $    35,133
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
    FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010
    With comparative figures for the three and six month periods ended June
    30, 2009
    ($ THOUSANDS)

    -------------------------------------------------------------------------
                               Three months ended         Six months ended
                              June 30,     June 30,     June 30,     June 30,
                                 2010         2009         2010         2009
    -------------------------------------------------------------------------
    Cash provided by
     (used in):
    Operating activities:
      Net income          $    12,588  $    11,877  $    24,546  $    23,821
      Non-cash items:
        Financial
         instruments -
         fair value
         adjustments             (615)       2,595       (1,286)      (2,999)
        Securitization
         gains                   (999)      (4,940)      (2,570)     (12,559)
        Amortization of
         capital assets           157          150          294          291
        Provision for
         credit losses          1,375        1,250        3,750        3,100
        Net loss (gain)
         on investments           732            4           56          (80)
        Future income taxes      (113)      (1,125)         958        1,232
        Stock-based
         compensation             157          112          364          431
        Amortization of
         premiums on
         investments, net         457          166          869          370
    -------------------------------------------------------------------------
                               13,739       10,089       26,981       13,607

    Changes in operating
     assets and liabilities:
      Other assets             (1,498)       8,438        1,116        8,650
      Other liabilities           714        4,134       (1,891)        (559)
    -------------------------------------------------------------------------
                               12,955       22,661       26,206       21,698

    Financing activities:
      Increase (decrease)
       in customer deposits,
       net                    177,858     (188,919)     128,429     (408,076)
      Change in obligations
       related to investments
       sold under repurchase
       agreements               7,640            -       37,558            -
      Repayment of bank term
       loan                         -       (1,345)           -       (1,345)
      Dividends paid on
       preferred shares          (906)           -       (1,812)           -
      Dividends paid on
       common shares           (1,433)      (1,489)      (2,812)      (2,977)
      Issuance of common
       shares                       3           36          106           36
    -------------------------------------------------------------------------
                              183,162     (191,717)     161,469     (412,362)

    Investing activities:
      Purchase of
       investments            (67,559)      (9,318)    (197,116)      (9,318)
      Proceeds on sale or
       redemption of
       investments             74,060       26,065      211,863       30,524
      Change in investments
       purchased under
       reverse repurchase
       agreements              80,333      395,656       60,178      553,239
      Change in restricted
       cash                         -        1,300            -        3,422
      Increase in mortgages
       receivable            (785,321)    (724,099)   (1,354,834) (1,535,815)
      Mortgage principal
       repayments             237,129      379,005       464,871     798,297
      Proceeds from loan
       securitizations        141,761      350,672       374,117     761,851
      Securitization
       retained interests       9,065        5,973        18,142      11,892
      Purchase of capital
       assets                    (282)         (12)         (375)       (127)
    -------------------------------------------------------------------------
                             (310,814)     425,242      (423,154)    613,965
    -------------------------------------------------------------------------
    (Decrease) increase in
     cash and cash
     equivalents             (114,697)     256,186      (235,479)    223,301
    Cash and cash
     equivalents, beginning
     of period                275,053       17,236       395,835      50,121
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end
     of period            $   160,356  $   273,422  $    160,356 $   273,422
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Certain forward-looking statements are made in this news release, including statements found in the Management Commentary and Looking Ahead sections, above, 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. Certain material assumptions are applied by the Company in making forward-looking statements, including without limitation, assumptions regarding its continued ability to fund its mortgage business at current levels, 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. 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 these assumptions and the related forward-looking statements. Equitable does not undertake to update any forward-looking statements, oral or written, made by itself or on its behalf except in accordance with applicable securities laws. See the MD&A for further information on forward-looking statements.

SOURCE Equitable Group Inc.

For further information: For further information: John Ayanoglou, Senior Vice-President, Finance and Chief Financial Officer, 416-515-7000


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