Equity Financial Holdings Inc.

TSX : EQI


Equity Financial Holdings Inc.

November 09, 2012 17:00 ET

EQI Reports Third Quarter 2012 Results

Mortgage loans outstanding over $165 million; total assets over $229 million

Quarter's results reflect declining trend in non-mortgage business units, variations in large-volume transactions

TORONTO, ONTARIO--(Marketwire - Nov. 9, 2012) - Equity Financial Holdings Inc. (TSX:EQI) ("EQI" or "the Corporation"), a Canadian financial services company serving the corporate and institutional markets and the retail mortgage market, reported today its financial results for the three and nine months ended September 30, 2012.

Financial Highlights (all dollar amounts, except per-share, are in $000s unless otherwise stated)1

(Unaudited) Three months ended $ % Nine months ended $ %
Sep. 30,
2012
Sep. 30,
2011
Change Change Sep. 30,
2012
Sep. 30,
2011
Change Change
Operating Results
Fees and margin revenue 4,411 5,250 (839 ) (16 %) 14,786 29,860 (15,074 ) (50 %)
Net interest income 1,244 416 828 199 % 3,240 648 2,592 400 %
Fees, margin revenue and net interest income 5,655 5,666 (11 ) 0 % 18,026 30,508 (12,482 ) (41 %)
EBTDA 398 299 99 33 % 1,427 12,933 (11,506 ) (89 %)
Net earnings and comprehensive income 90 60 30 50 % 410 8,640 (8,230 ) (95 %)
Earnings per share, basic $ 0.01 $ 0.01 $ - 0 % $ 0.04 $ 1.01 $ (0.97 ) (96 %)
Earnings per share, diluted $ 0.01 $ 0.01 $ - 0 % $ 0.04 $ 1.00 $ (0.96 ) (96 %)
Return on equity (annualized) 1 % 0 % 1 % NA 1 % 30 % (29 %) (97 %)
Balance Sheet Highlights
Cash and cash equivalents 44,382 35,536 8,846 25 % 44,382 35,536 8,846 25 %
Assets 229,418 111,958 117,460 105 % 229,418 111,958 117,460 105 %
Liabilities 177,385 62,685 114,700 183 % 177,385 62,685 114,700 183 %
1 EBTDA (Earnings Before Taxes, Depreciation and Amortization,) and annualized return on equity (net earnings divided by the simple average of reported shareholders' equity at the beginning and end of the period, multiplied by the appropriate factor to arrive at an annualized figure) do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other issuers. However, we believe financial analysts and investors view these as key measures of certain aspects of our performance. They use EBTDA as an indication of our ability to invest in property, plant and equipment, and to raise and service debt; and they use return on equity as a key indicator of whether we use our capital resources efficiently. These measures should not be considered as an alternative to cash flows from operating activities nor to any other measures of performance presented in accordance with IFRS.

Our mortgage unit continued to grow during the quarter and is the primary driver of the increase of $828 or 199% in net interest income year-over-year. Net interest income generated for the year-to-date has increased by $2,592 or 400% as our mortgage loan portfolio is expanding and the revenue and net earnings contributed by this business unit has increased each quarter in 2012. Overall revenue for the third quarter, however, was flat year over year, with the increased contribution from our mortgage unit offset by a decrease of $839 or 16% in fees and margin revenues from our other business units, reflecting the persistently difficult capital market conditions that started in the second half of last year. Revenue for the year-to-date has decreased $12,482 or 41%, reflecting the absence of the large-volume foreign exchange transactions comparable to those which occurred in 2011. Earnings per share was flat for the third quarter at $0.01 but down by 96% to $0.04 for the year-to-date, again reflecting the significant drop in revenues from our non-mortgage business units. The infrastructure costs for our non-mortgage business units were established during prior years when average revenues per client were significantly higher. Management is currently reviewing this cost infrastructure and made headcount reductions in the third quarter in response to the decline in revenues.

The key elements by operating segment of our performance for the quarter were as follows:

Mortgage

The rapid year-over-year growth in third quarter fees ($93 or 443%) and net interest income ($779 or 187%) led to the most profitable quarter to date from our mortgage business with segment earnings of $305 ($631 for the year-to-date). Net interest margins remain in line with our expectation of 3% and our mortgage loan portfolio has provided a growing source of recurring revenue since we commenced mortgage lending in the second quarter of 2011.

We originated $42.0 million of new mortgage loans during the third quarter (an increase of 21% from 2011), establishing a new high for quarterly originations. We now have mortgage loans outstanding of $166.0 million as at September 30, 2012 (compared to $53.3 million at September 30, 2011), and we have estimated commitments to make future advances on mortgage loans of $16.2 million. During the quarter we increased EFT's regulatory capital through an injection of $5 million funded with existing cash. Based on our capacity and current pace of originations we expect our loan book by year end 2012 will be approaching $200.0 million. We believe we have built a robust and scalable infrastructure which has allowed us to proactively respond to the new lending guidelines issued by the financial services supervisory authorities, and we are confident in our ability to meet these regulatory requirements.

Transfer Agent & Trust

Our average revenue per transfer agent client has declined in 2012 as a result of difficult market conditions. Our transfer agent and corporate trust revenue streams have both been constrained by depressed market stock market activity: trading volumes and financing volumes have both been significantly lower in 2012 than in 2011. The effect of these depressed volumes was particularly strong over the summer months and in response to these unfavourable results management made tactical headcount reductions during the third quarter and is evaluating options for further cost reductions. Our transfer and trust segment incurred a loss for the quarter of $168 (earnings of $422 for the year-to-date).

Foreign Exchange

Third quarter results for our foreign exchange segment were lower than those for the same period in the previous year due to the decline in our core revenues, whereas the decline in year-to-date results primarily reflects the absence of the large-volume transactions which occurred in the second quarter of 2011. In response, we have been refocusing our sales efforts and have also reduced segment operating costs, primarily through headcount reductions. We will, however, retain the capacity to earn significant additional profits from large-volume transactions when market conditions allow. This segment incurred a loss of $101 for the quarter ($612 for the year-to-date).

EQI President & CEO Paul G. Smith said,

"Our mortgage unit continued to grow during the quarter and we expect this segment to continue to be our fastest growing income stream through the remainder of 2012. The earnings from this segment, and the positive growth in our balance sheet, contrast with otherwise subdued results, reflecting persistent difficult market conditions and the absence of large-volume foreign exchange transactions comparable to those which occurred in 2011. The infrastructure costs for our non-mortgage business units were established during prior years when average revenues per client were significantly higher but the recent period of challenging market conditions has led to management's decision to make headcount reductions. We will, however, retain the capacity to earn significant additional profits when market conditions allow, as we demonstrated in the second quarter last year. As our mortgage portfolio expands, we expect the impact of large-volume transactions on our operating results to gradually decline over time."

Our Interim Consolidated Financial Statements and Management's Discussion and Analysis for the third quarter ended September 30, 2012 can be found in our filings on SEDAR at www.sedar.com and on our website at www.equityfinancialholdings.com

Quarterly Conference Call

EQI will hold a conference call on November 12, 2012 at 10:00 AM Eastern Time to discuss its operating results and to answer questions. Participants can dial 416-340-2216 or toll free 866-226-1792.

About Equity Financial Holdings Inc.

Through its wholly owned subsidiaries, EQI provides transfer agent, corporate trust, foreign exchange and retail mortgage services to the corporate and institutional markets, and the retail mortgage market. Learn more at www.equityfinancialholdings.com.

Advisory notes:

Certain portions of this press release as well as other public statements by Equity Financial Holdings Inc. (the "Corporation") contain "forward-looking information" within the meaning of applicable Canadian securities legislation, which is also referred to as "forward-looking statements", which may not be based on historical fact. Wherever possible, words such as "will", "plans," "expects," "targets," "continue", "estimates," "scheduled," "anticipates," "believes," "intends," "may," and similar expressions or statements that certain actions, events or results "may," "could," "would," "might" or "will" be taken, occur or be achieved, have been used to identify forward-looking information. Such forward-looking statements include, without limitation, the Corporation's earnings expectations, fee income, expense levels, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets activities, business competition, technological change, changes in government regulations and regulatory guidelines, unexpected judicial or regulatory proceedings, catastrophic events, and the Corporation's ability to complete strategic transactions and integrate acquisitions and other factors.

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 the Corporation and the Canadian economy and equity and capital markets. Certain material factors or assumptions are applied by the Corporation in making forward-looking statements, including without limitation, factors and assumptions regarding interest and foreign exchange rates, availability of key personnel, the effect of competition, government regulation of its business, computer failure or security breaches, future capital requirements, its ability to fund its mortgage business, the value of mortgage originations, the competitive nature of the alternative mortgage market, the expected margin between the interest earned on its mortgage portfolio and the interest to be paid on its deposits, the relative continued health of real estate markets, acceptance of its products in the marketplace, as well as its operating cost structure and the current tax regime.

Forward-looking statements reflect the Corporation's current views with respect to future events and are subject to a number of risks and uncertainties. Actual results may differ materially from results contemplated by the forward-looking statements. Readers should not place undue reliance on such forward-looking statements, as they reflect the Corporation's current views with respect to future events and are subject to risks and uncertainties and are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Corporation, are inherently subject to significant business, economic, regulatory, competitive, political and social uncertainties and contingencies.
Many factors could cause the Corporation's 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, including among others a significant downturn in capital markets or the economy as a whole, reduced large-volume foreign exchange revenue which could lead to an impairment of goodwill in our foreign exchange unit, errors or omissions by the Corporation in providing services to its customers, significant changes in foreign currency exchange rates, extreme price and volume fluctuations in the stock markets, significant increases in the cost of complying with applicable regulatory requirements, civil unrest, economic recession, pandemics, war and acts of terrorism which may adversely impact the North American and global economic and financial markets, inability to raise funds through public or private financing in the event that the Corporation incurs operating losses or requires substantial capital investment in order to respond to unexpected competitive pressures, significant changes in interest rates, failure by Equity Financial Trust Company ("EFT") to meet ongoing regulatory requirements, the failure of borrowers or counterparties to honour their financial or contractual obligations to EFT, failure by the Corporation to generate or obtain sufficient cash or cash equivalents in a timely manner and at a reasonable price or to meet its commitments as they become due, failure by EFT to adequately monitor and/or adjust its mortgage portfolio management practices for changing circumstances, failure by the Corporation to attract and to retain the necessary employees to meet its needs, failure by EFT to adequately monitor the services provided by third party service providers or to establish alternative arrangements if required, failure by EFT to secure sufficient deposits from securities dealers or a sufficient level of mortgage origination from its mortgage broker network, a failure of the computer systems of the Corporation or one or more of its service providers or the risks detailed from time-to-time in the Corporation's quarterly filings, annual information forms, annual reports and annual filings with securities regulators. The Corporation disclaims any intent or obligation to update or revise publicly any forward-looking statements whether as a result of new information, estimates, future events or results, or otherwise, unless required to do so by applicable laws.

The Toronto Stock Exchange has neither approved nor disapproved the contents of this press release.

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