Equitable Group delivers 25% increase in net earnings in second quarter, continues to build base for growth

/NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES./

TORONTO, Aug. 10 /CNW/ - Equitable Group Inc. today reported strong growth in earnings for the three months ended June 30, 2004 - and declared its first dividend payment - while announcing plans to utilize its expanded equity base and mortgage lending resources.

Second Quarter Highlights

  • Net earnings grew 25% to $3.72 million from $2.98 million in the second quarter of 2003.
  • Basic earnings per share increased 10% to $0.33 from $0.30 in the same period last year, with diluted earnings per share also up 10% to $0.32 from $0.29.
  • Total assets expanded 28% to $1.3 billion from $1.0 billion at June 30, 2003 - representing a 21% rate of growth since December 31, 2003 (when assets were $1.1 billion)
  • Return on weighted average shareholders' equity for the quarter was 15.3%.
  • Mortgage production increased 35% to $305 million from $226 million in the same period of 2003.
  • There were no loan losses in the second quarter, consistent with the Company's long-term record of conservative credit risk management.

Six Month Highlights

  • Net earnings grew 24% in the first six months of 2004 to $6.74 million from $5.45 million during the same period in 2003.
  • Basic earnings per share increased 13% to $0.62 from $0.55 and 9% on a fully diluted basis to $0.59 from $0.54.
  • Return on weighted average shareholders' equity was 15.2%.

Growth Acceleration Plans

As part of the Company's objective to accelerate growth, Equitable is seeking to raise up to $40 million in non-dilutive subordinated debt - eligible as tier 2 regulatory capital - over the course of the next three months and has retained a financial advisor to aid in this process. This subordinated debt is intended to provide capital for further asset growth and will also be used to retire $15 million of existing debt.

"As our second quarter performance demonstrated, demand for Equitable financing in our niches is extremely robust," said Geoffrey Bledin, President and Chief Executive Officer. "Internally, we geared up to take advantage of this ongoing demand through our IPO and the build out of our mortgage origination team this spring. Now, we're taking the next logical step by raising subordinated debt, which will allow us to seize more lending opportunities, while maintaining our very solid financial foundation."

Management Commentary

"Equitable delivered an excellent performance in its first full quarter as a public company," said Mr. Bledin. "As expected, mortgage production accelerated and this allowed us to begin to utilize more capital. Notably, we expanded our mortgage portfolio in each of our target lending niches. Single family dwelling mortgages increased by $117 million or 38% over the second quarter of 2003 and multi-unit residential increased 17% or $58 million over last year. We also selectively expanded our commercial lending portfolio to take advantage of solid opportunities in that niche.

"Clearly, our foundation for future growth is taking shape and by all important financial measures, we are on track with our plans as we enter the second half of 2004. As a result of Equitable's progress, the Board was able to introduce quarterly dividend payments, on schedule, as another means of delivering value to our shareholders."

As a result of growth in each of its lending niches, the Company's mortgage portfolio remained well balanced at June 30, 2004 - 38.9% in single family dwelling, 36.3% in multi-unit residential and 20.1% in commercial with the remaining 4.7% split between CMHC-insured and construction loans.

"A key consideration for Equitable at all times is to maintain strict lending criteria while we grow," said Stephen Coffey, Senior Vice President and Chief Financial Officer. "Although we've significantly accelerated our mortgage production in 2004, the credit quality of these new mortgages has not been sacrificed. We have continued our disciplined lending practices, which have allowed us to keep aggregate loan losses to 0.01% of our average outstanding mortgage portfolio over the past five and a half years. Part of this disciplined approach also involves utilizing capital efficiently and maintaining our low cost business model. We did both in the quarter."

Customer deposits increased 28% to $1.2 billion in the second quarter from $939 million a year ago, as the Company increased its deposit liabilities to fund growth in assets. The Company's total capital ratio at June 30, 2004 was 11.1%.

Looking Forward

"Market conditions remain favourable for us and expectations for gradual, measured increases in interest rates - expectations which continue to be fed by both the Bank of Canada and the US Federal Reserve - will only help our earnings as they are introduced," said Mr. Bledin. "Overall, we are bullish about demand for financing in our niches, which is driven by sustainable factors such as population growth, and we are confident that we can expand investment returns through disciplined utilization of capital."

"Despite Equitable's excellent performance this quarter," added Mr. Coffey, "we still believe the impact of our recent equity injection and expansion initiatives have not been fully realized - and as a result, we expect momentum to continue to build as we move through the second half of 2004."

Second Quarter Webcast

Equitable Group will host a webcast at 10 am Eastern Time today to discuss its first quarter performance. To participate, please log on to www.equitablegroupinc.com.

About Equitable Group

Equitable Group Inc. (www.equitablegroupinc.com) provides residential first mortgage financing through its wholly-owned subsidiary, The Equitable Trust Company, on properties principally located in and around the Greater Toronto Area.

Notice to Readers

Certain forward looking statements are made in this news release and Management Discussion and Analysis, 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 Group Inc. does not undertake to update any forward-looking statements, oral or written, made by itself or on its behalf.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(for the period ended June 30, 2004)

The following discussion should be read in conjunction with the unaudited financial statements and accompanying notes for the period ended June 30, 2004. Equitable Group Inc. ("Equitable" or the "Company") completed an initial public offering on March 18, 2004. Accordingly, the comparative results for 2003 are those of The Equitable Trust Company ("Equitable Trust"), the operating subsidiary of Equitable. Unless otherwise indicated, references to Equitable or the Company include Equitable Trust. All amounts are in millions of Canadian dollars unless otherwise indicated.

Notice to Readers

Certain forward looking statements are made in this Management Discussion and Analysis, 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.

Overview

Equitable provides residential first mortgage financing through its wholly-owned subsidiary, Equitable Trust, on properties located primarily in and around the Greater Toronto Area (the "GTA"), a geographic territory that encompasses a population of more than five million. Equitable Trust was founded in 1970 and is now a leading lender in its niches: multi-unit residential and alternative single family dwelling mortgage financing. .

Equitable seeks to achieve a strategic balance in the composition of its mortgage portfolio in an effort to generate high returns consistent with disciplined risk management. Therefore, the composition of its mortgage portfolio may change modestly from quarter-to-quarter but will always be more heavily weighted toward multi-unit residential and alternative single family dwelling mortgage financing, with some participation in commercial mortgage lending - not to exceed 25% of the mortgage portfolio as stipulated by the Company's lending policies. Residential construction mortgage lending has been and will remain a small proportion of the Company's mortgage portfolio.

The composition of the principal outstanding of the Company's mortgage portfolio as at June 30, 2004 reflects management's asset weighting strategy and is shown in the table below together with comparisons for prior periods:


(1) Canada Mortgage and Housing Corporation (“CMHC”)

The single family dwelling component of the portfolio increased $117 million or 38% on a year-over-year basis to represent 38.9% of the total outstanding principal at June 30, 2004 compared to 35.7% a year ago. Absolute and relative growth in this portion of the portfolio reflects the Company's initiatives in expanding its single family mortgage origination and servicing team earlier in the year to capitalize on demand in this niche. The commercial component of the Company's mortgage portfolio increased $70 million to 20.1% of the total portfolio, compared to 17.3% of the portfolio a year ago as the Company took advantage of growth opportunities in this segment. Of the $70 million increase in commercial mortgages, $36 million were "warehoused loans" funded for a third party. Warehoused loans are short-term investments in commercial first mortgages by the Company. These loans will be assigned to a third party and fully repaid within a relatively short time frame. It is expected that these warehoused loans will largely be discharged by the fourth quarter of 2004. The balance of $34 million of commercial mortgages was funded using Equitable's traditional lending criteria and include mortgages on properties located primarily in the GTA.

To fund its asset acquisitions, the Company sells guaranteed investment certificates ("GICs") as a nationally approved deposit-taking institution. At June 30, 2004, the Company had $1.2 billion of customer GIC deposits, up 28% from $939 million a year earlier.

Equitable was formed January 1, 2004 to serve as the holding company for Equitable Trust, its wholly-owned subsidiary. Equitable completed an initial public offering ("IPO") March 18, 2004 with a treasury offering of 1,027,113 common shares and a secondary offering of 2,072,887 common shares. The comparative results for 2003 are those of Equitable Trust.

Earnings Review

Net earnings for the three months ended June 30, 2004 increased 25% to $3.72 million from $2.98 million in the same period in 2003. Earnings per share (basic) increased 10% to $ 0.33 per share in the second quarter of 2004 compared to $0.30 per share in the same period in 2003, while earnings per share (diluted) also grew 10% to $0.32 from $0.29 in the same period in 2003. The weighted number of diluted shares outstanding grew 15% to 11.7 million from 10.2 million on a year over year basis due to the completion of the Company's IPO on March 18, 2004.

Higher quarterly earnings reflect:

  • Growth in interest-earning assets compared to the same period in 2003.
  • A significant decrease in effective tax rates, which stood at 28% in the second quarter of 2004 versus 37% in the second quarter of 2003.

The increase in interest-earning assets produced an additional $0.64 million in net interest income on a tax equivalent basis in the second quarter, representing an 12% year-over-year increase. Net interest income on a tax equivalent basis for the second quarter was $6.14 million compared to $5.50 million in the second quarter a year ago.

Lower tax rates during the period are largely due to adjustments made to the Chief Executive's compensation package that became effective on January 1, 2004 and the Company's decision to increase the size of its securities portfolio comprised primarily of high-quality preferred shares yielding non-taxable dividends.

Return on weighted average equity for the second quarter of 2004 was 15.3% compared to 17.4% during the same period in 2003. Return on equity is less than in the prior period primarily because of the increase in the equity base as a result of the Company's IPO. The Company is targeting an improvement in ROE through the remainder of 2004 and expects to benefit from greater mortgage production created by its recently expanded mortgage team.

For the first six months of 2004, net earnings increased 24% to $6.74 million from $5.45 million in 2003, while earnings per share basic increased 13% to $0.62 from $0.55. Diluted earnings per share increased 9% to $0.59 from $0.54. These increases reflect the same drivers as outlined for the second quarter of 2004, including effective tax rates which were significantly lower, at 30% for the six months ended June 30, 2004, compared to 39% a year ago. Interest-earning assets also produced an additional $1.30 million in net interest income on a tax equivalent basis in the six months ended June 30, 2004, representing a 13% year-over-year increase. Net interest income on a tax equivalent basis for the first six months of 2004 was $11.30 million compared to $10.00 million during the same period in 2003. Return on weighted average equity for the first six months of 2004 was 15.2% compared to 16.5% for 2003.

Net Interest Income

Net interest income includes earnings from assets, such as interest and dividend income from liquidity investments, portfolio securities and mortgage loans, less interest expense paid on liabilities, such as deposits and subordinated debt.

Interest revenues on a tax equivalent basis increased 11% to $16.71 million during the quarter ended June 30, 2004, from $15.05 million during the same period in 2003. Three separate decreases of 25 basis points in prime rate were implemented during the first six months of 2004. Despite these decreases in interest rates, mortgage revenue increased to $14.64 million during the quarter from $13.33 in 2003 while investments revenue on a tax equivalent basis increased to $1.71 million from $0.98 million. These increases were a result of growth in the mortgage portfolio and in the dividend-yielding securities portfolio. Other interest income fell to $0.35 million from $0.73 million in 2003. In 2003 the Company received non-recurring interest income of $0.27 million related to a tax refund.

Dividend income has been presented on a tax equivalent basis for the purpose of analyzing revenues and calculating the net interest margin. The tax equivalent basis increases dividend income by an amount that makes the income comparable to ordinary taxable interest income. This gross-up amount for dividend income in the second quarter of 2004 was $0.68 million compared to $0.19 million during the same period in 2003 and $1.05 million for the six months ended June 30, 2004 compared to $0.27 million for the comparable period in 2003. These increases reflect substantial growth in the Company's dividend-yielding securities portfolio. This portfolio increased to $86.0 million as at June 30, 2004 from $25.0 million as at June 30, 2003.

Interest on GIC deposits increased 10% to $10.27 million during the quarter ended June 30, 2004, from $9.32 million during the same period in 2003, reflecting an increase in customer deposits of 28% on a year-over-year basis. The Company incorporates commissions on deposits raised through agents into its interest paid on deposits and into its calculation of interest rates related to customer deposits.

Net interest margin on a tax equivalent basis was 2.0% for the three months ended June 30, 2004 compared to 2.2% during the same period in 2003. For the six months ended June 30, 2004, net interest margin on a tax equivalent basis was 1.9% compared to 2.1% during the same period in 2003. The decrease in net interest margin is a function of a decrease in the bank rate and prime rate during the period. Management expects this trend to be reversed in coming months based on indications from the Bank of Canada that interest rates may increase in the near term.

It is noteworthy that, unlike some of its comparators, the Company includes interest penalties on the early discharge of mortgages in other income and not in interest income. As well, the Company incorporates commissions on deposits raised through agents into its interest paid on deposits and into its calculation of interest rates related to customer deposits and not in non-interest expenses. If interest penalties on the early discharge of mortgages were included in interest income, and if commissions paid to deposit agents was included in non-interest expenses, net interest margin (tax equivalent basis) on this alternative basis for the three months ended June 30, 2004 would be reported as 2.3% compared to 2.5% on the same alternative basis in 2003. Year to date net interest margin (tax equivalent basis) on this alternative basis would be 2.2% in 2004 compared to 2.4% in 2003.

Other Income

Other Income includes ancillary fees related to the mortgage portfolio, interest penalties on the early discharge of mortgages, gains on the securitization of mortgages and excess interest net of servicing fee earned on mortgages issued through the Company's CMHC Mortgage Backed Securities ("MBS") program. Sundry income, gains on the sale of investments and other non-mortgage related fees, are also included in other income. Other income amounted to $1.96 million during the second quarter of 2004, compared to $1.59 million in 2003 and totaled $3.66 million for the six months ended June 30, 2004 compared to $3.25 million in the same period in 2003.

The Company securitized, through the CMHC MBS program, $131 million of mortgages during the second quarter of 2004 compared to $106 million during the second quarter of 2003 and on a year to date basis has securitized $222 million of mortgages in 2004 versus $269 million in 2003. The reduction in securitization on a year to date basis reflects higher than usual securitization activity levels in 2003.

MBS income related to excess interest, net of servicing fee, continued to increase as total securitized assets increased. Over the past 10 years, the Company has securitized more than $2.5 billion of mortgages through the CMHC-MBS program. Excess interest, net of servicing fee, amounted to $0.67 million during the second quarter of 2004 compared to $0.57 million during the same period in 2003 and was $1.28 million during the six months ended June 30, 2004 compared to $1.08 million during the same period in 2003.

Non-Interest Expenses

Non-interest expenses include all of the expenses not related to interest or credit provisions required to operate Equitable's business. The major elements of non-interest expenses consist primarily of salaries, premises and equipment, capital taxes, insurance and other general administrative expenses. Non-interest expenses totaled $2.08 million for the second quarter of 2004 compared to $1.98 million during the same period in 2003 and were $3.97 million for the six months ended June 30, 2004 compared to $3.70 million in 2003. The increase in both periods in 2004 was primarily due to an increase in mortgage origination and servicing staff to support growth. Total staff complement at June 30, 2004, was 50, including 34 staff in the mortgage origination and servicing department. At June 30, 2003 staff totaled 38 including 25 in the mortgage origination and servicing department. Management believes the Company can continue to grow rapidly, profitably and on a disciplined, low-risk basis from its single head office location without resorting to a branch network.

Included in non-interest expenses during the second quarter of 2004 was a charge for compensation expense in the amount of $0.11 million ($0.19 million for the six months ended June 30, 2004) related to stock options issued in February 2004. The offset to this expense was an increase to contributed surplus in the same amount. There was no compensation charge related to the issue of stock options in the period ended June 30, 2003.

The Company's productivity ratio (non-interest expense as a ratio of net interest income and other income before provision for credit losses) was 28.0% in the second quarter of 2004, compared to 28.8% during the same period in 2003. This improvement is due to higher revenues related to increased mortgage production resulting from the Company's decision to expand its mortgage origination and servicing team. The productivity ratio for the six month period ended June 30, 2004 was 28.6%, relatively unchanged from 28.5% during the same period in 2003. Management believes the Company's productivity ratio remains one of the best in the mortgage lending business and management is committed to maintaining this distinction.

Credit Risk Management and Provision for Credit Losses

Over the five years ended December 31, 2003, the Company has not experienced a single loss in either of its multi-unit residential or commercial portfolios while total aggregate loan losses amounted to just 0.01% of its average mortgage portfolio outstanding over the period. Management believes this strong record of credit risk management reflects the Company's highly selective and disciplined approach to mortgage financing. During the six months ended June 30, 2004, the Company had no credit losses.

In order to be prudent in view of the increase in its mortgage portfolio, the Company set aside $0.18 million during the second quarter for possible future credit losses on existing loans. This compares with a provision of $0.17 million during the second quarter in 2003. Provisions for possible future credit losses totaled $0.35 million for the six months ended June 30, 2004 compared to $0.33 million during the same period in 2003.

Total allowance for credit losses was $6.09 million or 56 basis points of mortgage principal outstanding as at June 30, 2004 compared to $5.40 million (63 basis points) as at June 30, 2003. As a percentage of risk-weighted mortgages, total allowance for credit losses was 72 basis points as at June 30, 2004 compared to 83 basis points as at June 30, 2003.

Mortgages in arrears 30 days or more amounted to $1.24 million as at June 30, 2004 representing 0.11% of total loans outstanding, compared to $1.49 million in arrears over 30 days as at June 30, 2003 (0.17% of total loans outstanding). Mortgages in arrears over 90 days at June 30, 2004 totaled $0.36 million (0.03% of total loans outstanding), also a significant improvement over the same period in 2003 when mortgages in arrears over 90 days were $0.62 million (0.07% of loans outstanding). At June 30, 2004 gross loans on which specific reserves have been allocated amounted to $6.0 million compared to $5.3 million at June 30, 2003. The Company does not wait for a loan to go into arrears over 90 days before examining it for the purposes of evaluating impairment. In certain instances, a loan may be identified by the Company - using its conservative standards - as being impaired due to reasons other than non-payment of the loan. Such reasons might include delays in a construction project or legal issues ancillary to a loan. Such identification occurred in both reporting periods of 2004 and 2003.

Balance Sheet Review

Total assets as at June 30, 2004 were $1.33 billion compared to $1.04 billion as at June 30, 2003, representing growth of 28% on a year-over-year basis.

The increase in assets is primarily due to increases in the Company's mortgage and investment portfolios. Mortgage assets increased 27% to $1.09 billion from $857 million at June 30, 2003. The increase in mortgages was a result of efforts made by the Company's recently enlarged mortgage origination and servicing department to deploy additional capital to meet growth objectives.

Conventional mortgage production (i.e. not-CMHC-insured) during the quarter ended June 30, 2004 was $201 million compared to $116 million in the second quarter of 2003. For the first six months, conventional mortgage production amounted to $336 million in 2004 compared to $190 million in 2003. Production of CMHC-insured mortgages for securitization in the Company's MBS program was $104 million in the second quarter of 2004 compared to $110 million in the same period in 2003. On a year to date basis, production of CMHC-insured mortgages for securitization purposes amounted to $228 million in 2004 compared to $288 million in 2003.

Total assets as at June 30, 2004 increased $231 million or 21% from $1.10 billion at December 31, 2003, while mortgage assets increased $198 million or 22% from December 31, 2003.

The Company's investment portfolio increased $48 million or 126% to $86 million at June 30, 2004, compared to $38 million as at June 30, 2003. The Company's investment portfolio increased $28 million or 49% from December 31, 2003.

Cash and cash equivalents increased marginally to $96 million from $91 million as at June 30, 2003 but were down slightly from the December 31, 2003 balance of $97 million. Cash and cash equivalents are held for liquidity purposes and will fluctuate based upon mortgage funding activity. It is current Company policy to maintain in excess of 6% of total assets in liquidity investments on a continuous basis. At June 30, 2004, such holdings amounted to 7.2% of total assets.

The Company's investment in retained interests in CMHC-insured loan securitization activities increased to $56 million from $52 million as at December 31, 2003, and from $48 million as at June 30, 2003. These increases reflect additional securitization activity carried out by the Company during the applicable periods.

Total mortgages securitized through the CMHC-MBS program and outstanding as at June 30, 2004 were $1.8 billion compared to $ 1.7 billion as at December 31, 2003 and $1.5 billion as at June 30, 2003.

Equitable's assets are categorized in five groups as set out in the table below as at June 30, 2004, December 31, 2003 and at June 30, 2003:

GIC deposits were $1.2 billion as at June 30, 2004, compared to $992 million as at December 31, 2003 and $939 million as at June 30, 2003. Deposits as at June 30, 2004 increased 28% compared to June 30, 2003 and 21% since December 31, 2003.

Equitable Trust did not redeem any subordinated debt during the second quarters of 2004 or 2003. No subordinated debt was issued during the second quarter of 2004 whereas $9 million of debt was issued during the second quarter of 2003. For the six months ended June 30, 2004, net subordinated debt redemptions amounted to $2 million compared to net issuances of $6 million in 2003. Subordinated debt represents eligible tier 2 capital for Equitable Trust. The Company intends to issue further subordinated debt to support future growth - see "Capital Management" below for further details.

As the Company came into existence January 1, 2004, the comparative figures for 2003 are those of Equitable Trust. The number of shares and the weighted average number of shares of Equitable Trust have been restated for comparison purposes.

In the second quarter of 2004, the Company received cash proceeds of $0.2 million related to the exercise of employee stock options. The Company issued 1,027,113 common shares in connection with its IPO during the first quarter of 2004, raising net proceeds of $16 million after $2 million costs of issue, net of taxes. Equitable Trust issued 383,254 common shares in the first quarter of 2003 for net cash proceeds of $0.2 million related to the exercise of stock options and to the settlement of accrued Chief Executive Officer compensation in the amount of $2.7 million. No shares were issued in the second quarter of 2003.

No dividends were declared or paid during the second quarter. The Company's Board of Directors has declared a quarterly dividend payable October 1, 2004 to shareholders of record as of close of business September 16, 2004 in the amount of $0.06 per share. The quarterly dividend amount was calculated based upon 25% of trailing net earnings. Dividends are declared at the discretion of the Board of Directors based on their assessment of the Company's financial position and outlook.

Shareholders' equity increased to $100 million as at June 30, 2004 from $70 million as at June 30, 2003 and $77 million at December 31, 2003, representing an increase of 43% from June 30, 2003 and 30% from December 31, 2003. An aggregate of 11,425,771 common shares of the Company were issued and outstanding as at August 10, 2004.

Management Practices

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. Mitigating this risk requires the Company to match its asset and liability maturities and to keep sufficient liquid assets on hand at all times to meet mortgage funding and investment purchase commitments, mortgage renewals or extensions and any GIC redemptions. Eligible liquid assets consist of cash and cash equivalents and debt instruments guaranteed by governments. The Company has consistently maintained appropriate liquid asset levels to meet its requirements. Assets eligible for liquidity purposes were $96 million as at June 30, 2004, $110 million as at December 31, 2003 and $104 million as at June 30, 2003.

Interest Rate Risk Management

Interest rate risk involves the Company's sensitivity of earnings to sudden changes in interest rates. The Company's primary method of mitigating this risk is its matching of asset and liability maturities, closely monitoring the interest rates and acting upon any mismatch in a timely fashion, to ensure that any sudden or prolonged change in interest rates does not significantly affect the Company's net interest earnings.

The Company manages its asset liability maturity profile by adjusting GIC interest rates on a daily basis to raise GICs with the appropriate maturities to match the maturity profile of assets being funded. It is Company policy to actively manage asset liability maturity matching on a monthly and cumulative annual basis using various measurement methodologies under stringently prescribed Company board of directors approved tolerances. One methodology measures the impact of a specified change in interest rates on the present value of the Company's net assets. Under the scenario of an immediate and sustained 100 basis point decrease in rates, the Company's present value of net assets as at June 30, 2004 would be negatively affected by $0.6 million on a pre-tax basis.

The Company has also adopted a consistent and disciplined approach to hedging the interest rate risk attached to its MBS activities. MBS interest rate risk refers to the risk that interest rates will vary between the time a mortgage interest rate is committed to and the time it is securitized and that the change in rates will reduce the value of the mortgage being sold. The Company hedges the interest rate risk for all mortgages that are targeted to be sold through the CMHC-MBS program. Hedging protects the Company from losses due to changes in interest rates during the relevant period. The hedge is initiated on the date that the mortgage is priced and committed to and terminated on the date that the pool is sold. Changes in interest rates affect the price at which the mortgage pool is sold and inversely affects the value of the hedge. All costs related to hedging activities are matched to mortgages and are accounted for when the mortgage is securitized under the CMHC-MBS program.

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. Under the Company's lending criteria, all mortgages are individually evaluated under a risk rating system to determine the level of risk to be attributed to each loan.

In accordance with CDIC Standards of Sound Business and Financial Practices, Equitable Trust's credit risk policies include the annual review of all commercial loans and mortgages. In addition, all loans that are in arrears are reviewed to determine whether any should be classified as doubtful or as a loss. Generally, a loan is classified as impaired when management is of the opinion that there is no longer reasonable assurance of full and timely collection of principal and interest. On a regular basis, management reviews all loans in these categories in order to determine the appropriate loan loss reserves required. Reviews of credit policies and lending practices are regularly undertaken by senior management and approved by Equitable Trust's investment committee.

Capital Management

The Company maintains a capital management policy for its operating subsidiary, Equitable Trust, which governs the quality and the quantity of capital held. The objective of the policy is to ensure that applicable regulatory capital requirements are met while providing sufficient returns to investors. Equitable Trust's capital requirements are determined in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada ("OSFI"). OSFI regulations require that total tier 1 capital be maintained at a minimum level of 7% of total risk weighted assets and that tier 2 capital does not exceed 50% of tier 1 capital at any time. Equitable Trust actively monitors its capital ratios and ensures they are above minimum regulatory requirements at all times. Equitable Trust's total capital ratio was 11.1% as at June 30, 2004 consisting of a tier one capital ratio of 9.6% and a tier 2 capital ratio of 1.5%, at December 31, 2003 total capital ratio was 11.3% and at June 30, 2003 it was 11.5%. The Company has retained a financial advisor in connection with a proposed issuance of up to $40 million of non-dilutive subordinated debt which shall be eligible as tier 2 regulatory capital. The Company plans to redeem its existing subordinated debt using a portion of the proceeds of such new subordinated debt issue which, at current interest rates, is expected to bear interest at lower rates than on the Company's existing subordinated debt. The balance of such proceeds will be used to provide capital for further asset growth.

Outlook

Management's outlook has not changed materially since the Company's management's discussion and analysis for the three months ended March 31, 2004.

The outlook for the Company's markets remains strong at the date hereof, with demand for mortgage financing in and around the GTA continuing to be driven by a number of factors including population growth and low interest rates. While there is no assurance that these favourable factors will continue, the mortgage lending niches in which the Company operates have historically been stable and attractive to lenders. At June 30, 2004, the prime rate was 3.75% and the consensus among economists appears to suggest measured and modest future rate increases. Such rises would benefit the Company's earnings as they occur due to spread management and, in management's opinion, to the extent that such rises occur in a measured and modest manner, will not significantly affect mortgage growth patterns or borrower ability to service debt.

In order to take advantage of anticipated growth in its niches and its geographic territory, the Company has recently expanded its mortgage origination operation. This is expected to sustain and expand growth in mortgage production.

Despite its strong growth orientation, management intends to continue to follow its disciplined approach to mortgage financing, which has resulted in a track record of conservative credit risk management. For that reason, the Company does not intend to substantially alter its mortgage portfolio composition in the near term or vary, materially, from its strict credit management policies.

The Company is also committed to growing while maintaining its highly successful, non-branch business model, which is based on strategic outsourcing of mortgage originations to independent mortgage brokers and of deposit-gathering to independent deposit agents.

August 10, 2004

EQUITABLE GROUP INC.

SELECTED FINANCIAL INFORMATION



Notes:
Figures for the periods ended June 30, 2003 relate solely to The Equitable Trust Company
Capital measures for all periods presented relate solely to The Equitable Trust Company
Share capital of The Equitable Trust Company for the period ended June 30, 2003 has been restated to conform with and be comparable to Company presentation

The interim unaudited consolidated financial statements and notes have not been reviewed by the Company's auditors but have been reviewed and approved by the Company's Audit Committee and Board of Directors.

EQUITABLE GROUP INC.

Consolidated Balance Sheet as at June 30, 2004 - Unaudited
With comparative figures as at December 31, 2003 and June 30, 2003

See accompanying notes to interim unaudited consolidated financial statements.

 

EQUITABLE GROUP INC.
Consolidated Statement of Earnings for the three month and six month periods ended June 30, 2004 - Unaudited
With comparative figures for the three month and six month periods ended June 30, 2003

See accompanying notes to interim unaudited consolidated financial statements.

 

EQUITABLE GROUP INC.
Consolidated Statement of Changes in Shareholders' Equity for the three month and six month periods ended June 30, 2004 - Unaudited
With comparative figures for the three month and six month periods ended June 30, 2003

See accompanying notes to interim unaudited consolidated financial statements.

 

EQUITABLE GROUP INC.
Consolidated Statement of Cash Flows for the three month and six month periods ended June 30, 2004 - Unaudited
With comparative figures for the three month and six month periods ended June 30, 2003


See accompanying notes to interim unaudited consolidated financial statements.

EQUITABLE GROUP INC.
Notes to Interim Unaudited Consolidated Financial Statements
Six month period ended June 30, 2004

1. Basis of preparation:

These interim unaudited consolidated financial statements should be read in conjunction with the financial statements of The Equitable Trust Company for the year ended December 31, 2003 as set out on pages F-3 to F-16 of Equitable Group Inc.'s prospectus dated March 10, 2004. These interim unaudited 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 financial statements of The Equitable Trust Company for the year ended December 31, 2003. As explained in Note 7, the Company was formed on January 1, 2004 and therefore comparative figures for December 31, 2003 and June 30, 2003 are those of The Equitable Trust Company.

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.

2. Investments:

The Company has a bank line of credit facility. Under this facility the Company may borrow up to $10 million for short-term liquidity purposes. The facility is secured by the Company's investments in common and preferred shares. There was no outstanding balance on the line as at June 30, 2004 or June 30, 2003.

3. Loan securitizations - retained interests:

The Company securitizes Canadian Government guaranteed residential mortgage loans through the creation of mortgage-backed securities and removes the mortgages from the balance sheet. As at June 30, 2004, outstanding securitized mortgages totaled $1,803,398,000 (December 31, 2003 - $1,653,972,000, June 30, 2003 - $1,488,441,000).

During the period, the Company securitized Canadian Government guaranteed residential mortgage loans and received net cash proceeds of $217,525,000 (June 30, 2003 - $265,414,000). The Company retained the rights to future excess interest on the residential mortgages valued at $9,550,000 (June 30, 2003 - $11,230,000) and received net cash flows on interests retained of $5,291,000 (June 30, 2003 - $3,858,000). The Company retained the responsibility for servicing the mortgages and enjoys the right to receive the future excess interest spread. The Company has outsourced the servicing of the transferred loans to an unrelated third party and has recorded a servicing liability of $5,968,000 (December 31, 2003 - $5,114,000, June 30, 2003 - $4,092,000) which is included in other liabilities.

The components of income from loan securitizations - retained interests are as follows:

The key assumptions used to value the future excess interest spread include an excess spread of 0.86% (December 31, 2003 - 0.86%, June 30, 2003 - 0.88%), a prepayment rate of 18.7% (December 31, 2003 - 15.9%, June 30, 2003 - 11.7%) for single family residential loans, 0% (December 31, 2003 - 0%, June 30, 2003 - 0%) for multi- family residential loans and a discount rate of 5.39% (December 31, 2003 - 5.54%, June 30, 2003 - 5.73%). There are no expected credit losses, as the mortgages are government guaranteed.

The Company enters into hedging transactions to manage market interest rate exposures on mortgages held for securitization and commitments for mortgages to be securitized, typically for periods of up to 90 days. Hedging gains and losses are recognized at the time the related mortgages are securitized. Hedge instruments outstanding at June 30, 2004, December 31, 2003 and June 30, 2003 relating to forward contracts on Government of Canada bonds, the counterparties for which are chartered banks, are as follows:

4. Mortgages receivable:

(a) Mortgages receivable and impaired mortgages:

Included in gross residential mortgages are Canadian Government insured mortgages of $21,455,000 as at June 30, 2004 (December 31, 2003 - $15,520,000, June 30, 2003 - $47,620,000), of which $15,725,000 (December 31, 2003 - $10,214,000, June 30, 2003 - $40,105,000) are held for securitization. These loans held for securitization, together with the related interest rate hedges, are carried at the lower of cost or fair value. There are no foreclosed assets held for sale at June 30, 2004, December 31, 2003 and June 30, 2003.

The principal outstanding and net carrying amount of mortgages receivable classified as impaired as at June 30, 2004 aggregated $5,977,000 (December 31, 2003 - $4,115,000, June 30, 2003 - $5,269,000) and $3,187,000 (December 31, 2003 - $1,078,000, June 30, 2003 - $2,396,000), respectively.

(b) Allowance for credit losses:

5. Other assets:

6. Other liabilities:

7. Income taxes:

The provision for income taxes shown in the statement of earnings differs from that obtained by applying statutory income tax rates to the earnings before the provision for income taxes for the following reasons:

8. Shareholders' equity:

(a) Capital stock:

Authorized:
   Unlimited number of common shares
   Unlimited number of preferred shares

Issued:
   Common shares:

Effective January 1, 2004, all of the direct and indirect shareholders of The Equitable Trust Company ("Operating Company") approved a series of transactions whereby all such shareholders became shareholders of the Company. The Operating Company became a wholly owned subsidiary of the Company. The Company issued 10,364,435 common shares representing 4.741 times the number of common shares issued by the Operating Company. Each of the previous direct and indirect shareholders of the Operating Company received common shares of the Company in the same proportions as their prior direct or indirect holdings in the Operating Company. As there was no substantial change in the ultimate ownership interests in the Operating Company, the Company has carried forward the basis of measurement of the assets and liabilities as reflected in the Operating Company's financial statements.

The number of shares and the weighted average number of shares of The Equitable Trust Company and the stock options related thereto, have been restated on a retroactive basis to reflect the transaction described above.

The Company filed a prospectus dated March 10, 2004 to qualify the initial public offering of 1,027,113 common shares of the Company to the public.

(b) Stock-based compensation plans:

Stock option plan:

Under the Company's stock option plan, options on common shares are periodically granted to eligible employees and directors for terms of five years and vesting over a four-year or five year period. Up to 10% of the issued and outstanding common shares of the Company may be reserved for issue under the plan. The outstanding options expire on various dates to February 2009. A summary of the Company's stock option activity and related information for the periods ended June 30, 2004 and June 30, 2003 is as follows:

Under the fair value method of accounting for stock options, the Company has recorded compensation expense in the amount of $185,000 (June 30, 2003 - $Nil) related to 600,000 (June 30, 2003 - Nil) options issued during the period under the Company's stock option plan. This amount has been credited to contributed surplus. The fair value of options granted during the period is estimated at the date of grant using the Black-Scholes valuation model, with the following assumptions: (i) risk-free rate of 3.13%; (ii) expected option life of 4.04 years; (iii) expected volatility of 13.5%; (iv) expected dividends of 2.0%; and (v) an exercise price of $17.50. The weighted average fair value of each option granted was $1.66.

For further information:

Geoffrey Bledin,
President and Chief Executive Officer,
(416) 515-7000;

Stephen Coffey,
Senior Vice-President and Chief Financial Officer,
(416) 515-7000