Home Capital Reports Record Second Quarter Results: Net Income Increased 29.4%; Return on Equity was 27.9%; Basic Earnings per Share Reach $1.00
TORONTO, Aug. 6 /CNW/ - Home Capital Group Inc. (TSX: HCG) today
announced solid financial results for the second quarter and first six months
of 2009. Home Capital's continued focus on its core business activities,
enhanced by historically low mortgage rates and resilience in the Canadian
housing market, has resulted in record profitability and increased asset
growth during the second quarter.
Key results from the second quarter included:
- Net income for the quarter was $34.4 million, an increase of 29.4%
over $26.6 million recorded in the same period last year. Earnings
for the first six months of 2009 reached $65.8 million, a rise of
27.2% over the comparable period in 2008.
- Basic earnings per share were $1.00, 29.9% above the $0.77 for the
second quarter of 2008, and $1.91 for the six-month period, 27.3%
higher than the $1.50 recorded last year. Diluted earnings per share
were $0.99, an increase of 30.3% from the $0.76 recorded in the
second quarter of 2008; results for the six months were $1.90, 28.4%
higher than the same period last year.
- Return on equity for the second quarter and first six months of 2009
was 27.9% and 27.7%, respectively, compared to 27.7% and 27.8%,
repsectively, for the comparable periods in 2008.
- Total assets at June 30, 2009 reached $6.15 billion, 14.8% higher
than the $5.36 billion reported one year earlier. Total assets,
together with Mortgage-Backed Securities (MBS) and Canada Mortgage
Bonds (CMB) originated and administered by the Company, grew to
$9.44 billion, a rise of 34.1% from $7.04 billion at June 2008, and
12.1% from the $8.42 billion at December 31, 2008.
- Total mortgage originations were $1.28 billion during the second
quarter, an increase of 76.4% over the $725.9 million advanced in the
first quarter of 2009, and up 44.4% over the $886.9 million advanced
during the same period in 2008. The Company advanced $1.26 billion in
residential mortgages during the second quarter, up 82.2% over the
$690.2 million advanced in the first quarter of 2009 and up 64.4%
from the $764.6 advanced in the second quarter of 2008. Non-
residential mortgages advanced during the second quarter of 2009 were
$23.3 million, down 34.5% from the $35.7 million advanced in the
first quarter of 2009 and down 80.9% from the $122.3 million advanced
in the same period in 2008. The overall decline in the non-
residential mortgage originations is pursuant to the Company's stated
strategy to mitigate risk in light of current economic conditions.
- Mortgage securitization activity continued to produce good results as
the Company securitized and sold $655.1 million in CMHC-insured
securities during the second quarter, up from the $460.6 million
securitized and sold in the first quarter of 2009 and up from the
$250.6 million securitized and sold for the same period last year.
The net gains on securitization during the quarter were
$22.8 million, compared to $8.8 million of the same period last year
and $24.3 million during the first quarter of 2009.
- Outstanding balances on the Equityline Visa portfolio reached
$320.9 million, a decline of 5.4% from the $339.1 million recorded in
the same period last year. The Company's recent tightening of credit
lending on its Equityline Visa product has been a prudent measure in
the current economic environment. Net income from consumer lending
reached $5.8 million for the second quarter, 20.8% over the
$4.8 million recorded last year. The Company's retail loan portfolio
experienced positive growth through the first half of 2009 supporting
the quarter-over-quarter growth in net income.
- Home Trust continues to remain well capitalized with Tier 1 and total
capital ratios of 15.2% and 16.7% respectively at the end of the
quarter, up from ratios of 13.8% and 15.2% at March 31, 2009 and up
from ratios of 12.5% and 13.8% one year ago.
- The efficiency ratio (TEB) improved to 25.1% in the second quarter
compared to 30.2% during the same period one year earlier.
- Net impaired loans represented 1.3% of the total loans portfolio at
June 30, 2009, an increase from 0.9% in net impaired loans at the end
of 2008 and 0.7% at June 30, 2008. Due to the weakened economy and
rising unemployment, the Company believes that impaired loans may
continue to increase over the next one or two quarters. The Company
has been proactive in this area and has increased staffing in the
mortgage servicing department including a team dedicated to focusing
on early arrears and assisting homeowners in managing their payments.
This strategy translated into manageable write-off levels and the
Company believes that future potential losses will be in line with
our stated objectives for 2009.
Residential mortgages that are retained on the Company's balance sheet
and not securitized and sold increased by 10.8% from $3.29 billion at March
31, 2009 to $3.64 billion at June 30, 2009. Net interest income from mortgage
lending increased during the quarter from $20.5 million at March 31, 2009 to
$24.7 million. The net interest margin between the Company's assets and
liabilities for the second quarter of 2009 was 2.9% compared to 2.6% in the
first quarter of 2009.
During the second quarter, Home Trust Company was appointed by the
Government of Canda Department of Finance as the trustee for the General
Motors Corporation Warranty Assurance Program. This trustee appointment is
related to the Government of Canada's $10 billion participation in the
restructuring of General Motors Corporation.
The Board of Directors has approved a Normal Course Issuer Bid,
commencing on August 1, 2009. The Company believes that, from time to time,
the market price of Home Capital's Common Shares does not fully reflect the
value of its business. In these situations, the purchase of outstanding shares
may represent an appropriate use of the Company's available funds.
Subsequent to the end of the quarter, and in light of the Company's
increasing profitability and strong financial performance, the Board of
Directors declared an increased quarterly cash dividend of $0.15 per Common
Share payable on September 1, 2009 to shareholders of record at the close of
business on August 14, 2009. This increase reflects the Company's long-term
commitment to enhance value for all shareholders.
Management believes that housing markets in certain regions across Canada
are forming a bottom, as reflected in strengthening home sales through the
first half of 2009. Low mortgage rates and affordability have attracted new
home buyers and the Company is encouraged by this recovery in the real estate
market.
Home Capital continued to deliver a strong financial performance in the
second quarter and first six months of 2009. Based on these results and
management's positive outlook for the balance of the year, we believe Home
Capital will meet or exceed its financial targets for 2009. The Company
continues to focus on its core residential first mortgage businesses, both
on-balance sheet and securitization, while remaining committed to continued
profitability and enhancing long-term shareholder value. The Board of
Directors and management are confident that Home Capital will continue to
deliver increased growth and strong financial results through the remainder of
the year.
(signed) (signed)
GERALD M. SOLOWAY NORMAN F. ANGUS
Chief Executive Officer Chairman of the Board
August 5, 2009
Additional information concerning the Company's targets and related
expectations for 2009, including the risks and assumptions underlying these
expectations, may be found in Management's Discussion and Analysis for the
Second Quarter 2009.
Second Quarter Results Conference Call
The conference call will take place on Thursday, August 6, 2009 at 10:30
a.m. Participants are asked to call 5 to 15 minutes in advance, 416-644-3420
in Toronto or toll-free 1-800-731-6941 throughout North America. The call will
be accessible in listen-only mode via the Internet at www.homecapital.com.
Conference Call Archive
A telephone replay of the call will be available between 12:30 p.m.
Thursday, August 6, 2009 and midnight Thursday, August 13, 2009 by calling
416-640-1917 or 1-877-289-8525 (enter passcode 21310479 followed by the number
sign). The archive audio web cast will be available for 90 days on CNW Group's
website at www.newswire.ca and Home Capital's website at www.homecapital.com
FINANCIAL HIGHLIGHTS
For the Period Ended
June 30 (Unaudited) Three Months Ended Six Months Ended
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In Thousands of Dollars
(Except Per Share and
Percentage Amounts) 2009 2008 2009 2008
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OPERATING RESULTS
Net Income $ 34,351 $ 26,550 $ 65,769 $ 51,709
Total Revenue 121,778 112,953 242,499 219,749
Earnings per Share -
Basic $ 1.00 $ 0.77 $ 1.91 $ 1.50
Earnings per Share -
Diluted 0.99 0.76 1.90 1.48
Return on Shareholders'
Equity 27.9% 27.7% 27.7% 27.8%
Return on Average Assets 2.3% 2.0% 2.2% 2.0%
Efficiency Ratio 25.7% 30.8% 26.6% 29.6%
Efficiency Ratio (TEB(2)) 25.1% 30.2% 26.1% 29.1%
(Non-interest Expense/Net
Interest Income Plus Fee Income)
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BALANCE SHEET HIGHLIGHTS
Total Assets $6,152,730 $5,361,771
Loans 4,801,321 4,526,761
Deposits 5,241,377 4,716,571
Shareholders' Equity 515,740 394,999
Mortgage-Backed Security Assets
Under Administration 3,289,231 1,679,822
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FINANCIAL STRENGTH
Capital Measures(1)
Risk Weighted Assets(1) $3,053,453 $2,847,655
Tier 1 Capital Ratio(1) 15.2% 12.5%
Total Capital Ratio(1) 16.7% 13.8%
Credit Quality
Net Impaired Loans as a Percentage of Gross Loans 1.3% 0.7%
Allowance as a Percentage of Gross Impaired Loans 47.1% 74.2%
Annualized Provision as a Percentage of Gross Loans 0.3% 0.1%
Share Information
Book Value per Common Share $ 14.99 $ 11.44
Common Share Price - Close $ 30.21 $ 39.50
Market Capitalization 1,039,164 1,364,409
Number of Common Shares Outstanding 34,398 34,542
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(1) These figures relate to the Company's operating subsidiary, Home
Trust Company.
(2) See definition of Taxable Equivalent Basis (TEB) under Non-GAAP
Measures of this unaudited interim consolidated financial report.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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Caution Regarding Forward-Looking Statements
From time to time Home Capital Group Inc. (the "Company" or "Home
Capital") makes written and verbal forward-looking statements. These are
included in the Annual Report, periodic reports to shareholders, regulatory
filings, press releases, Company presentations and other Company
communications. Forward-looking statements are made in connection with
business objectives and targets, Company strategies, operations, anticipated
financial results and the outlook for the Company, its industry, and the
Canadian economy. These statements regarding expected future performance are
"financial outlooks" within the meaning of National Instrument 51-102. Please
see the risk factors, which are set forth in detail on pages 28 through 38 of
the Company's 2008 Annual Report, as well as its other publicly filed
information, which may be located at www.sedar.com, for the material factors
that could cause the Company's actual results to differ materially from these
statements. Forward-looking statements can be found in the Message to the
Shareholders and the Outlook Section in this quarterly report. Forward-looking
statements are typically identified by words such as "will," "believe,"
"expect," "anticipate," "estimate," "plan," "may," and "could" or other
similar expressions.
By their very nature, these statements require us to make assumptions and
are subject to inherent risks and uncertainties, general and specific, which
may cause actual results to differ materially from the expectations expressed
in the forward-looking statements. These risks and uncertainties include, but
are not limited to, global capital market activity, changes in government
monetary and economic policies, changes in interest rates, inflation levels
and general economic conditions, legislative and regulatory developments,
competition and technological change. The preceding list is not exhaustive of
possible factors.
These and other factors should be considered carefully and readers are
cautioned not to place undue reliance on these forward-looking statements. The
Company does not undertake to update any forward-looking statements, whether
written or verbal, that may be made from time to time by it or on its behalf,
except as required by securities laws.
Assumptions about the performance of the Canadian economy in 2009 and how
it will affect Home Capital's business are material factors the Company
considers when setting its objectives. In determining our expectations for
economic growth, both broadly and in the financial services sector, we
primarily consider historical economic data provided by the Canadian
government and its agencies. In setting performance target ranges for 2009,
management's expectations assume:
- The Canadian economy will contract in 2009, with fragmented growth
prospects across the country, and interest rates and inflation will
remain low;
- Canadian capital markets will improve somewhat in the second half of
2009;
- A declining interest rate environment supported by stable inflation,
driven by lower demand for commodity and energy goods;
- Sound credit quality with actual losses within Home Capital's
historic range of acceptable levels; and
- A compressed net interest margin, reduced prime lending rates,
comparatively lower investment returns, reflecting the Company's
shift to high quality assets held in the security and liquidity
portfolio and prudent levels of liquidity in response to uncertainty
in the capital markets.
Non-GAAP Measures
The Company uses a number of financial measures to assess its
performance. Some of these measures are not calculated in accordance with
Generally Accepted Accounting Principles (GAAP), are not defined by GAAP and
do not have standardized meanings that would ensure consistency and
comparability between companies using these measures. The non-GAAP measures
used in this Management's Discussion and Analysis (MD & A) are defined as
follows:
Return on Shareholders' Equity
Return on equity is a profitability measure that presents the net income
available to common shareholders' equity as a percentage of the capital
deployed to earn the income. The Company calculates its return on equity using
average common shareholders' equity, including all components of shareholders'
equity.
Return on Assets
Return on assets is a profitability measure that presents the net income
as a percentage of the average total assets deployed to earn the income.
Efficiency Ratio
Management uses the efficiency ratio as a measure of the Company's
efficiency. This ratio represents non-interest expenses as a percentage of
total revenue, less interest expense. The Company also looks at the same ratio
on a taxable equivalent basis and will include the adjustment for non-taxable
dividends in arriving at the efficiency ratio, on a taxable equivalent basis.
Net Interest Margin
Net interest margin is calculated by taking net interest income, on a
taxable equivalent basis, divided by average total assets.
Tier 1 and Total Capital Ratios
The capital ratios provided in this MD & A are those of the Company's
wholly owned subsidiary Home Trust Company. The calculations are in accordance
with guidelines issued by Office of the Superintendent of Financial
Institutions Canada (OSFI). Refer to Note 8 of the unaudited interim
consolidated financial statements.
Taxable Equivalent Basis (TEB)
Most banks and trust companies analyze and report their financial results
on a TEB to provide uniform measurement and comparison of net interest income.
Net interest income (as presented in the consolidated statements of income)
includes tax-exempt income from certain securities. The adjustment to TEB
increases income and the provision for income taxes to what they would have
been had the income from tax-exempt securities been taxed at the statutory tax
rate. The TEB adjustments of $1.5 million for the second quarter and $2.8
million first six months ($1.0 million - Q2 2008 and $2.0 million - six months
2008) increased reported interest income. TEB does not have a standard meaning
prescribed by Canadian GAAP and therefore may not be comparable to similar
measures used by other companies. Net interest income and income taxes are
discussed on a TEB basis throughout this MD & A.
Regulatory Filings
The Company's continuous disclosure materials, including interim filings,
annual Management's Discussion and Analysis and audited consolidated financial
statements, Annual Information Form, Notice of Annual Meeting of Shareholders
and Proxy Circular are available on the Company's web site at
www.homecapital.com, and on the Canadian Securities Administrators' website at
www.sedar.com.
Management's Discussion and Analysis of Operating Performance
This MD & A should be read in conjunction with the unaudited interim
consolidated financial statements for the period ended June 30, 2009 included
herein, and the audited consolidated financial statements and MD & A for the
year ended December 31, 2008. These are available on the Canadian Securities
Administrators' website at www.sedar.com and on pages 8 through 72 of the
Company's 2008 Annual Report. Except as described in these unaudited interim
consolidated financial statements and MD & A, all other factors discussed and
referred to in the MD & A for fiscal 2008 remain substantially unchanged.
These unaudited interim consolidated financial statements and MD & A have been
prepared based on information available as at August 4, 2009. As in prior
quarters, the Company's Audit Committee reviewed this document, and prior to
its release the Company's Board of Directors approved it on the Audit
Committee's recommendation.
2009 Objectives and Performance
Home Capital published its financial objectives for 2009 on page 11 of
the Company's 2008 Annual Report. The following table compares actual
performance to date against each of these objectives.
Table 1: 2009 Objectives and Performance
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Six-Month Period Ended
June 30, 2008
2009 Objectives(1) Actual Results(1)
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Net Income 10%-15% $65.8 million, or
($56.9 million - 27.2% increase over the
$59.5 million) same period last year
Diluted Earnings per 10%-15% $1.90 per share, or
Share ($1.63 per share - 28.4% increase over the
$1.70 per share) same period last year
Total Assets and Assets 10%-15% $9.44 billion, or
Under Administration ($7.75 billion - 34.1% increase over the
$8.10 billion) same period last year
Return on Shareholders' 20.0% 27.7%
Equity
Efficiency Ratio (TEB) 28.0% to 34.0% 26.1%
Capital Ratios(2)
Tier 1 Minimum of 10% 15.2%
Total Minimum of 12% 16.7%
Provision for Loan Losses 0.2% to 0.5% 0.3%
as a Percentage of Total
Loans
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(1) Objectives and results for net income and diluted earnings per share
are for the current period relative to the same period in the prior
year; asset growth is the change from twelve months prior; and ratios
are based on the current period, annualized.
(2) Based on the Company's wholly owned subsidiary, Home Trust Company.
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FINANCIAL HIGHLIGHTS
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Income Statement Highlights
The Company achieved positive results across all lines of business during
the second quarter and first half of 2009. The Company continues to operate
from a strong capital base and maintains prudent liquidity levels, providing
the necessary financial resources and flexibility to navigate the current
volatility in the global capital markets. The Company's key financial
highlights for the second quarter and year-to-date are summarized below.
- Net income rose 29.4% in the second quarter of 2009 over the
comparable quarter of 2008 and up 27.2% year-over-year.
- Net interest income for the quarter was $40.5 million, compared to
$36.2 million for the first quarter of 2009 and $39.4 million for the
comparable quarter in 2008. The Company's strategy to stabilize and
improve margins is evident with improved net interest income over the
past several quarters.
- Non-interest income was up 75.8% in the quarter over the second
quarter of 2008 and up 97.3% over the comparable six months of 2008,
driven by robust growth in securitization income offset by mark-to-
market losses on derivative positions entered into for the CMB
program.
- The efficiency ratio (TEB) (the lower the better) remained low, and
marginally better than the Company's objective, at 25.1% for the
quarter and 26.1% for the first six months, compared to 30.2% in the
same quarter of 2008 and 29.1% for the first six months of 2008.
- Diluted earnings per share for the quarter increased 30.3% to $0.99
compared to $0.76 in the second quarter of 2008. For the first six
months of 2009, diluted earnings per share increased 28.4% to $1.90
from the $1.48 earned during the first six months of 2008.
- Return on average shareholders' equity for the three and six months
ended June 30, 2009 were 27.9% and 27.7%, respectively, compared to
27.7% and 27.8% for the same periods in 2008.
Balance Sheet Highlights
- Total assets at June 30, 2009 rose 9.3% from the first quarter of
2009 and 14.8% year-over-year, to reach $6.15 billion from
$5.36 billion reported at June 30, 2008. This asset growth was
experienced across the Company's core asset base including the
Company's loans and securities portfolio. Further, the Company has
been able to grow both its on- and off-balance sheet mortgage loan
portfolio. Although global markets continue to experience significant
difficulties, the Company believes it is well positioned by remaining
well capitalized with access to liquidity through term deposits and
the securitization market.
- Total residential mortgages increased $354.0 million, or 10.8% over
the first quarter of 2009, up $376.8 million, or 11.5% over December
31, 2008 and up $237.4 million, or 7.0% from one year ago. The
increase reflects the Company's effort to continue to grow its on-
balance sheet loans portfolio as interest spreads continue a trend to
more historic norms.
- The Company continues to have access to funds to accommodate the
growth of the Company's loans portfolio. Liquid assets at June 30,
2009 were $777.7 million, compared to $610.7 million at March 31,
2009, $880.7 million at December 31, 2008 and up from $480.5 million
at June 30, 2008.
- The Company continues to strengthen its capital position with Tier 1
and total capital climbing to 15.2% and 16.7%, respectively at the
end of the quarter up from 12.5% and 13.8% at June 30, 2008.
- Deposit liabilities as at June 30, 2009 were $5.24 billion, an
increase of $138.6 million from December 31, 2008 and an increase of
$524.8 million from $4.72 billion recorded at June 30, 2008.
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EARNINGS REVIEW
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Net Interest Income
Table 2: Net Interest Income
For the three months ended
-------------------------------------------------------------------------
June 30, 2009 June 30, 2008
In Thousands of Dollars Income/ Average Income/ Average
(Except Percentage Amounts) Expense Rate(1) Expense Rate(1)
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Assets
Cash and cash resources $ 365 0.3% $ 2,673 3.5%
Securities 6,690 5.4% 5,887 4.7%
Loans 84,286 7.2% 87,075 7.9%
Taxable equilvalent
adjustment 1,535 - 1,056 -
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Total interest earning
assets 92,876 6.6% 96,691 7.4%
Other assets - - - -
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Total Assets $ 92,876 6.3% $ 96,691 7.2%
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Liabilities and
Shareholders' Equity
Deposits $ 50,852 4.0% $ 56,273 4.7%
Other liabilities - - - -
Shareholders' equity - - - -
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Total Liabililities and
Shareholders' Equity $ 50,852 3.5% $ 56,273 4.2%
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Net Interest Income $ 42,024 $ 40,148
Tax Equivalent Adjustment (1,534) (1,056)
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Net Interest Income per
Financial Statements $ 40,489 $ 39,362
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Net Interest Margin(2) 2.9% 3.0%
Spread of Loans over
Deposits Only 3.2% 3.2%
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For the six months ended
-------------------------------------------------------------------------
June 30, 2009 June 30, 2008
In Thousands of Dollars Income/ Average Income/ Average
(Except Percentage Amounts) Expense Rate(1) Expense Rate(1)
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Assets
Cash and cash resources $ 1,631 0.6% $ 6,825 5.1%
Securities 12,784 5.3% 11,222 4.7%
Loans 165,613 7.1% 170,046 8.0%
Taxable equilvalent
adjustment 2,808 - 2,018 -
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Total interest earning
assets 182,836 6.4% 190,111 7.6%
Other assets - - - -
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Total Assets $ 182,836 6.1% $ 190,111 7.4%
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Liabilities and
Shareholders' Equity
Deposits $ 103,307 4.0% $ 111,103 4.9%
Other liabilities - - - -
Shareholders' equity - - - -
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Total Liabililities and
Shareholders' Equity $ 103,307 3.5% $ 111,103 4.3%
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Net Interest Income $ 79,529 $ 79,008
Tax Equivalent Adjustment (2,808) (2,018)
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Net Interest Income per
Financial Statements $ 76,721 $ 76,990
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Net Interest Margin(2) 2.7% 3.1%
Spread of Loans over
Deposits Only 3.1% 3.1%
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(1) The average rate is a simple average calculated with reference to
opening and closing period balances and as such may not be as precise
if daily balances were used.
(2) Net interest margin is calculated on a tax equivalent basis.
As illustrated in the previous table, net interest income was $40.5
million in the second quarter and $76.7 million year-to-date compared to $39.4
million for the second quarter of 2008 and $77.0 million for the first six
months of 2008. Net interest income continues to experience positive signs of
growth as net interest income in the second quarter of 2009 surpassed net
interest income in the first quarter of 2009 of $36.2 million and net interest
income in the fourth quarter of 2008 of $35.2 million. The improvement from
the prior quarters was the result of lower overall funding costs as the
Company began to see an improvement in the average cost of funds during the
first half of 2009 as new deposit pricing reflected the significant prime-rate
cuts in the second half of 2008. Further, the Company's non-residential
mortgage portfolio which was substantially comprised of floating rate loans
based off of prime rate began to reset at higher fixed rate terms. During the
second quarter of 2009, approximately $150 million of the non-residential
portfolio reset at higher fixed rate terms or was paid-out improving overall
spreads.
The net interest margin (TEB) between all of the Company's assets and
liabilities for the second quarter of 2009 was 2.9%, a significant improvement
over the first quarter of 2009 at 2.6%, and down marginally from the same
period in 2008. Year-to-date, net interest margin (TEB) was 2.7%, down from
the comparable six month period in 2008. The improving margins
quarter-over-quarter are the result of the factors described in the preceding
paragraph as the benefits of a lower average cost of funds and a continued
shift in the non-residential mortgage portfolio from floating rate to higher
fixed rates begins to take hold.
The interest spread between the loans portfolio and deposits at the end
of the second quarter of 2009 was 3.2%, up from 3.0% for the first quarter of
2009 and consistent with the second quarter in 2008. Year-to-date the spread
between the loans portfolio and deposits was 3.1%, consistent with the
comparable six month period in 2008.
The Company continues to benefit from the lower repricing of new
deposits, repricing of non-residential mortgage loans at higher fixed rates
and positive measures taken to bring liquidity back in line with the Company's
historical levels.
Non-Interest Income
Total non-interest income was $30.4 million for the second quarter and
$62.5 million for the first six months of 2009, a 75.8% increase over the
second quarter of 2008 and a 97.3% increase over the comparable six month
period in 2008. The substantial growth over the comparable periods in 2008 was
largely driven by strong net growth in securitization gains through the
Company's participation in the Canada Mortgage Bond (CMB) program and
additional short-term Mortgage-Backed Securities (MBS) securitizations.
Offsetting the strong growth in securitization income were higher unrealized
losses on the seller and hedge swaps. Recognized impairment losses of $4.8
million incurred on the Company's security portfolio where management deemed
there was an other than temporary loss were offset by realized gains on
certain debt securities, resulting in a net gain during the quarter of $2.3
million recorded on the consolidated statement of income.
The fees and other income components of non-interest income for the
quarter were $7.5 million and $14.8 million for the first six months of 2009,
an increase 5.2% over the comparable quarter of 2008 and 3.3% over the first
six months of 2008. The slight increase over the comparable periods is
reflective of the overall on- and off-balance sheet growth.
Table 3: Securitization Activity
The following table summarizes the securitization activities during the
second quarter of 2009 compared to the same period in 2008:
Three months ended
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June 30, 2009
Single Single
Family Family
Residential Residential Multi-Unit
In Thousands of Dollars, MBS Under MBS Over Residential
except % 1 year 1 year MBS Total
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Highlights of
Securitization
Activity
Book value of mortgages
securitized $ 47,263 $ 324,019 $ 283,812 $ 655,094
Net gain on sale of
mortgages $ 1,884 $ 12,173 $ 8,790 $ 22,847
Prepayment rate 4.0% 12.8% 0.0% 6.6%
Excess spread 5.7% 1.1% 1.2% 1.5%
Discount rate 1.0% 2.9% 2.7% 2.7%
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Three months ended
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June 30, 2008
Single Single
Family Family
Residential Residential
In Thousands of Dollars, MBS Under 1 MBS Over
except % year 1 year Total
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Highlights of
Securitization
Activity
Book value of mortgages
securitized $ 71,736 $ 178,894 $ 250,630
Net gain on sale of
mortgages $ 1,632 $ 7,166 $ 8,798
Prepayment rate 4.3% 13.2% 10.7%
Excess spread 3.8% 2.6% 2.9%
Discount rate 3.7% 4.0% 3.9%
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The Company issued MBS pools during the second quarter of 2009,
consisting of $655.1 million of Canada Mortgage and Housing Corporation (CMHC)
insured residential mortgages for a year-to-date total of $1.12 billion. This
represents an increase of $404.5 million from the $250.6 million in MBS pools
issued in the second quarter of 2008 and an increase of $719.3 million over
the $396.4 million for the six months ended June 30, 2008. The securitization
gains were $22.8 million during the quarter and $47.1 million for the first
six months of 2009, compared to $8.8 million for the second quarter of 2008
and $16.7 million for the first six months of 2008 (for additional information
refer to Note 5 of these unaudited interim consolidated financial statements).
The Company continues to enter into bond forward contracts to hedge commitment
risk on the loans securitized into the CMB program. The unwinding of the bond
forward contracts during the second quarter of 2009 resulted in a $13.5
million realized gain recorded in the consolidated statement of income through
securitization income. In 2008, the Company began diversifying the MBS pools
issued to include MBS pools with a maturity under one year and multi-unit
residential pools. The one year and multi-unit residential pool assumptions
are outlined in Table 3.
The increase in securitization gains over the respective periods in 2008
was due to significant volume increases in the underwriting of insured
residential mortgages which resulted in increased securitization activity as
the Company continues to realize strong returns from funding its residential
loan portfolio through the securitization market. The spread earned on the
pools declined over the comparable quarters, as bond yields increased causing
spreads to narrow. For the quarter ended June 30, 2009 the excess spread on
the securitization gains was 1.5% and 2.2% for the first six months of 2009,
compared to 2.9% for the comparable quarter of 2008 and 3.2% for the first six
months of 2008. The unscheduled prepayment rate was lower during the quarter
as the Company issued short-term MBS pools where the mortgages in the MBS pool
were late in their term, and where the Company therefore expects less
prepayment. Further, the Company issued multi-unit residential MBS pools
during the quarter where unscheduled prepayments are not permitted under the
program. Of the $655.1 million MBS pools issued during the quarter, $331.1
million, or 50.5% were pools containing lower or prohibited unscheduled
prepayments and the remaining pools had unscheduled prepayment rates in line
with historic levels.
During the quarter, the Company participated in CMHC's CMB program,
administered through Canada Housing Trust. This program provides the Company
with an alternative channel to diversify its funding stream for MBS pools. Of
the total MBS pools issued during the second quarter and first six months of
2009, MBS pools with a book value of $607.8 million for a year-to-date total
of $938.5 million were securitized through the CMB program resulting in gains
of $21.0 million and $37.9 million, respectively. This compares to MBS pools
with a book value of $122.6 million for a total of $206.9 million in 2008
resulting in gains of $5.4 million and $9.4 million, respectively.
Table 4: Reconciliation of Securitization Activity
The table below provides a summary reconciling the gains recorded during
the respective quarter and the excess spread earned from the Company's
continuing servicing of these portfolios.
For the three For the six
months ended months ended
June 30, June 30, June 30, June 30,
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Securitization gains $ 9,314 $ 8,506 $ 34,936 $ 17,389
Securitization hedging
activity 13,533 292 12,173 (704)
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Securitization gains, net
of hedge costs 22,847 8,798 47,109 16,685
Recurring securitization
income 3,896 2,532 7,289 3,747
-------------------------------------------------------------------------
Net securitization income $ 26,743 $ 11,330 $ 54,398 $ 20,432
-------------------------------------------------------------------------
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Recurring securitization income earned from excess spreads, net of
servicing fees, was $3.9 million for the second quarter of 2009, an increase
of $1.4 million or 53.9% over the $2.5 million earned in the second quarter of
2008. For the first six months of 2009, $7.3 million in recurring
securitization income was earned, up $3.5 million or 94.5% over the $3.7
million earned in the same six month period of 2008. This increase reflected
higher average principal securitization balances outstanding during the second
quarter and first half of 2009 from the previous periods in 2008.
As described in the Derivatives and Off-Balance Sheet Arrangements
section of this MD & A, the Company utilizes swaps and/or forward contracts to
manage exposure to movements in interest rates. During the second quarter of
2009, the Canadian capital markets experienced a strong upward movement in
bond yields such that if the Company had not economically hedged its mortgage
originations that were to be securitized, the Company's spread and
securization gains would have been reduced. As such, by effectively managing
this risk, the Company realized $13.5 million in gains in the second quarter
of 2009 on the unwinding of forward bond contracts when the Company
securitized its MBS pools through the CMB program.
Non-Interest Expenses
Total non-interest expenses for the quarter were $18.2 million and $37.1
million for the first six months of 2009. This compares to $17.4 million for
the second quarter of 2008 and $32.2 million for the first six months of 2008.
The increases over the comparable periods of 2008 were primarily due to
higher salary and benefit expenses as the Company has continued to hire
additional staff to manage the continued growth of the Company's core
businesses as well as increased computer operating expenditures for upgrading
the Company's disaster recovery site and the transition to a new core banking
operating system.
Salaries and staff benefits for the quarter increased by $0.5 million, or
5.5% over the second quarter of 2008 and up $2.0 million, or 10.9% over the
same six month period in 2008. The Company ended the quarter with 446
employees, up from 395 employees at the end of 2008 and up from 429 employees
one year ago. The increased staffing levels reflect the hiring of 28 summer
students to assist the Company during higher employee vacation periods and
additional personnel to manage the Company's growth initiatives.
Premises expenses increased from the prior year as the Company entered
into a new lease arrangement effective June 2008, expanding the head office
space with 50% more square footage to enable continued future growth,
including the accommodation of additional staff from the relocation of the St.
Catharines branch to the Toronto head office.
General and administration expenses decreased by $0.1 million, or 1.8%
compared to the second quarter of 2008 and up $2.1 million, or 17.9% from the
same six-month period in 2008. The marginal decrease quarter-over-quarter is
the result of cost containment on discretionary expenditures. The
year-over-year increase is primarily the result of increased computer related
costs incurred in the first half of 2009 as the Company has begun the
transition to a new core banking system.
The efficiency ratio (TEB) for the quarter was 25.1% and 26.1% for the
first six months of 2009, compared to 30.2% in the comparable quarter and
29.1% for the first six months of 2008. The ratio is slightly better than the
Company's stated objective for the year as stronger securitization activity is
outpacing growth in non-interest expenses.
Provision for Credit Losses
The Company expensed $3.1 million during the quarter and $6.4 million for
the first six months of 2009, compared to $0.6 million in the comparable
quarter of 2008 and $1.2 million for the first six months of 2008, through the
provision for credit losses. This expense represented 0.3% (0.1% - 2008) of
total gross loans, on an annualized basis. The general provision for credit
losses increased by $0.6 million over the fourth quarter of 2008 and $0.4
million over the second quarter of 2008, and up $0.8 million over the
comparable six month period ended June 30, 2008. The specific provision at
June 30, 2009 increased $0.5 million from the fourth quarter of 2008 and $2.0
million over the second quarter of 2008, and is up $4.4 million for the
comparable six month period ended June 30, 2008. The relative shift between
the general provision and the specific provision, quarter over quarter,
reflects management's assessment that certain loans required specific
provisioning which removes the credit risk of these loans from the computation
of the general provision.
The total general allowance amounted to $26.5 million at June 30, 2009,
an increase of $1.3 million over the $25.2 million recorded at December 31,
2008 and an increase of $2.6 million over the $23.9 million recorded at June
30, 2008. The total general allowance was 86.7 basis points of the Company's
risk-weighted assets at June 30, 2009 compared to 84.0 basis points at both
December 31, 2008 and June 30, 2008. The increase over the comparable periods
of 2008 reflects the overall increase in new impaired loans during the second
quarter of 2009.
At June 30, 2009 net impaired loans amounted to $61.1 million (1.3% of
gross loans), compared to $39.2 million (0.9% of gross loans) at December 31,
2008 and $32.4 million (0.7% of gross loans) at June 30, 2008 (refer to Note 4
of these unaudited interim consolidated financial statements). Total loans
written-off during the quarter were $2.2 million and $3.7 million for the
first six months of 2009, compared to $0.6 million in the second quarter of
2008 and $1.2 million during the first six months of 2008. Write-offs were
experienced across the majority of the Company's loan product offerings and
reflect the continued recession in Canada. The Company continues to closely
monitor non-performing loans and takes proactive measures to minimize losses,
as described under the Credit Risk section of this MD & A and in the 2008
Annual Report under the heading Risk Management.
Income Taxes
The income tax expense amounted to $15.3 million (effective tax rate of
30.8%) for the second quarter and $30.0 million (effective tax rate of 31.3%)
for the first six months of 2009, compared to $12.1 million (effective tax
rate of 31.2%) for the second quarter and $23.5 million (effective tax rate of
31.3%) for the first six months of 2008. Canadian dividend income is
non-taxable to financial institutions, which resulted in a lower income tax
rate. In the absence of tax-free dividends, the tax rates would have been
32.8% for the second quarter and 33.3% for the first six months of 2009,
compared to 33.0% for the second quarter and first six months of 2008.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income (OCI) and totaled $52.2 million for the second quarter of 2009 and
$93.2 million year-to-date, increases of $26.1 million over the second quarter
of 2008 and $38.7 million over the same six month period in 2008. As
previously noted net income for the second quarter of 2009 increased $7.8
million, or 29.4% over the second quarter of 2008 and increased $14.1 million,
or 27.2% over the comparable six month period of 2008. The Company's OCI
includes changes in unrealized gains and losses on available for sale
securities, and securitization receivables from market revaluations at the end
of the quarter. OCI for the three month period ended June 30, 2009 was an
income position of $17.8 million for a year-to-date total of $27.5 million
compared to a loss position of $0.5 million for the second quarter of 2008 and
an income position of $2.9 million for the six month period ended June 30,
2008. The change in OCI compared to the comparable periods for available for
sale securities and securitization receivables primarily reflects recent
favourable capital markets in respect to changes in interest rates and the
improving markets affecting the sectors in which the Company holds equity
positions. For the first six months of 2009, the Company determined that
certain equity holdings had impairment that was other than temporary and
recognized a writedown of $9.6 million in losses from accumulated other
comprehensive income in the consolidated statements of income. The writedowns
and realized losses were offset by realized gains on the sale of certain debt
holdings. The Company believes the remaining unrealized losses represent
temporary declines in value due to the current securities market conditions.
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BALANCE SHEET REVIEW
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Assets
Total assets at June 30, 2009 were $6.15 billion, an increase of $343.0
million, or 5.9% over the $5.81 billion reported at December 31, 2008 and up
by $791.0 million, or 14.8% over the June 30, 2008 asset balance of $5.36
billion.
The increase in total assets over December 31, 2008 was primarily driven
by strong on-balance sheet growth in the Company's core residential mortgages
which increased $376.8 million or 11.5% over the six month period. This growth
does not factor in the $655.1 million the Company securitized during the
quarter. As such, securitization receivables increased significantly from
December 31, 2008, growing by $50.1 million or 35.8% due to continued robust
securitization activity over the first half of 2009. The non-residential loans
portfolio decreased by $52.8 million, or 6.4% as the Company continues to
focus on core residential mortgage lending. As well, the Equityline Visa
portfolio declined marginally from December 2008 as the Company continues to
tighten lending standards in response to the existing economic climate.
The growth in total assets over June 30, 2008 was primarily generated
from growth in the loans portfolio, cash resources and securitization
receivables offset by a reduction in the Company's securities portfolio. The
loans portfolio increased by $274.6 million with positive growth experienced
in residential and non-residential mortgages offset by declines in personal
and credit card loans and secured loans. Other assets increased by $126.7
million, primarily resulting from robust growth in the Company's
securitization activities resulting in an increase of $102.0 million in
securitization receivables.
Liabilities
Liabilities at June 30, 2009 were $5.64 billion, an increase of $260.0
million, or 4.8% over the $5.38 billion reported at December 31, 2008 and up
by $670.2 million, or 13.5% over the $4.97 billion recorded at June 30, 2008.
Much of the increase from December 2008 resulted from an increase in
deposit liabilities of $138.6 million. The growth in the deposit liabilities
funded a significant portion of the loans portfolio growth, with additional
funds drawn from excess liquidity reserves for the remaining loans portfolio
growth. Other liabilities (refer to Note 7 of these unaudited interim
consolidated financial statements) increased by $121.4 million, or 44.3% over
the $274.2 million reported at December 31, 2008. This growth was principally
the result of an increase of $94.6 million in other liabilities resulting from
the timing of payments due to MBS investors, an increase of $10.1 million in
the servicing liability related to the Company's ongoing administration of the
off-balance sheet residential mortgage loans and a net increase of $13.6
million in the Company's deferred corporate tax liabilities.
The rise in liabilities from June 30, 2008 resulted primarily from an
increase in deposit liabilities and other liabilities as deposit liabilities
funded the on-balance sheet growth in the Company's loans portfolios with
excess funds invested in the Company's liquidity portfolio. Other liabilities
increased by $145.4 million, or 58.1% over June 30, 2008 primarily due to
increases of $101.2 million in other liabilities resulting from the timing of
payments due to MBS investors, an increase of $18.3 million in the servicing
liability relating to Company's ongoing administration of the off-balance
sheet residential mortgage loans, and a net increase of $26.6 million in the
Company's deferred corporate tax liabilities.
Shareholders' Equity
Total shareholders' equity at June 30, 2009 increased by $83.0 million,
or 19.2% over the $432.8 million reported at December 31, 2008. The increase
since December 2008 was internally generated from net income over the six
months of $65.8 million, less $9.6 million for dividends payable to
shareholders and a significant movement in accumulated other comprehensive
income of $27.5 million from the Company's available for sale financial
assets. The remaining changes were principally driven by the amortization of
stock based compensation offset by net changes in the Company's common shares
through the Normal Course Issuer Bid. Total shareholders' equity at June 30,
2009 rose by $120.7 million, or 30.6% to $515.7 million from the $395.0
million reported at June 30, 2008. This growth was driven by internally
generated earnings and positive movements in accumulated other comprehensive
income offset by dividends and reduction of capital stock through the
Company's Normal Course Issuer Bid. At June 30, 2009 the book value per common
share was $14.99, compared to $12.57 at December 31, 2008 and $11.44 at June
30, 2008.
Derivatives and Off-Balance Sheet Arrangements
From time to time, the Company may enter into hedging transactions to
mitigate the interest exposure on outstanding loan and deposit commitments.
For example, the Company can utilize interest rate swaps or forward contracts
to sell Government of Canada bonds to hedge the economic exposure to movements
in interest rates between the time that mortgages are committed to being
funded under asset securitization, and the time those mortgages are actually
sold. The intent of the swap or forward bond contracts is to have the fair
value movements of these instruments be effective in offsetting the fair value
movements within a pool of mortgages over the period in which the fixed rate
pool may be exposed to movements in interest rates, generally 60 to 150 days.
During the second quarter of 2009, the Company entered into $488.5 million
forward bond contracts to hedge the commitment risk on the Company
securitization activities for the CMB program. The forward bond contracts were
unwound at the time of securitization through the CMB program. The realized
gain of $13.5 million was recorded with the gain on securitization.
At June 30, 2009 the Company continued to hold notional forward bond
contracts of $310.4 million in anticipation of the CMB issuance in the third
quarter of 2009. The bond forward contracts were marked-to-market at June 30,
2009 for an unrealized loss of $1.4 million. No similar contracts were
outstanding at June 30, 2008.
The Company participates in the CMB program sponsored by CMHC, and
administered by Canada Housing Trust. Through this program, the Company must
manage the mismatch and reinvestment risk between the amortizing MBS pool and
the CMB. As part of this arrangement, the Company enters into a seller swap
which has the effect of paying the fixed interest payments on the CMB and
receiving the total return on the MBS pool. As well, the Company entered into
a hedge swap to manage the reinvestment risk between the amortizing MBS pool
and the CMB. The notional values of the swaps, including both seller and hedge
swaps at June 30, 2009 were $2.25 billion ($1.21 billion - Q4 2008; $338.6
million - Q2 2008). These swaps were marked-to-market at June 30, 2009 for an
unrealized loss of $7.8 million (unrealized gain of $0.4 million - Q4 2008;
unrealized gain of $0.2 million - Q2 2008), recorded in the consolidated
statements of income. For additional information refer to Note 12 of these
unaudited interim consolidated financial statements.
The Company originates and securitizes insured residential mortgage loans
into special purpose entities for liquidity funding. When these assets are
sold, the Company retains rights to certain excess interest spreads less
servicing liabilities, which constitute retained interests. The Company
periodically reviews the value of retained interests, and any other than
temporary impairment in value is charged to income. The Company continues to
administer all securitized assets that the Company originates after the sale
and, upon maturity of the mortgage, will renew or refinance these mortgage
loans whenever possible. As at June 30, 2009 outstanding securitized mortgage
loans under administration amounted to $3.29 billion ($2.61 billion - Q4 2008
and $1.68 billion - Q2 2008) with retained interest of $189.9 million ($139.9
million - Q4 2008 and $87.9 million - Q2 2008). The off-balance sheet
portfolio continues to perform well, with 97.2% of the portfolio current and
1.0% greater than 60 days in arrears. For additional information, refer to
Note 6 in the consolidated financial statements of the 2008 Annual Report, and
Note 5 of these unaudited interim consolidated financial statements.
In the normal course of its business, the Company offers credit products
to meet the financial needs of its customers. Outstanding commitments for
future advances on mortgage loans amounted to $384.8 million at June 30, 2009
compared to $242.4 million at December 31, 2008 and $516.2 million at June 30,
2008. Included within the outstanding commitments are unutilized commercial
advances of $99.2 million at June 30, 2009 compared to $89.6 million at
December 31, 2008 and $202.6 million at June 30, 2008. Commitments for the
loans remain open for various dates through July 2010. As at June 30, 2009
unutilized credit card balances amounted to $49.6 million, compared to $62.9
million at December 31, 2008 and $72.4 million at June 30, 2008. Outstanding
commitments for future advances for the Equityline Visa portfolio were $2.4
million at June 30, 2009 compared to $2.4 million at December 31, 2008 and
$5.4 million at June 30, 2008.
Contractual Arrangements
On March 25, 2008 Home Trust announced that it had entered into an
agreement with Fidelity National Information Services, Inc. (FIS) relating to
its merchant credit card services activities. FIS, a global leader in the
payment processing industry, will provide Home Trust with comprehensive
back-office merchant processing services, including settlement, charge-back
processing, retrieval services and customer support.
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CAPITAL MANAGEMENT
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Home Trust's capital ratios are calculated using the guidance of the
OSFI. Effective January 1, 2008, Home Trust began calculating its regulatory
capital under the new capital adequacy rules issued by OSFI, which are based
under the "International Convergence on Capital Management and Capital
Standard - A Revised Framework" (Basel II).
Under Basel II for Home Trust, risk-weighted assets are calculated for
each of credit and operational risk. Home Trust's risk-weighted assets were as
follows:
Table 5: Risk-weighted assets
As at As at As at
June 30, December June 30,
In Thousands of Dollars 2009 31, 2008 2008
-------------------------------------------------------------------------
Risk-weighted assets for:
Credit risk $2,740,828 $2,711,583 $2,580,584
Operational risk 312,625 274,167 266,887
-------------------------------------------------------------------------
Total Risk-weighted Assets(1) $3,053,453 $2,985,750 $2,847,471
-------------------------------------------------------------------------
(1) Based on the Company's wholly owned subsidiary, Home Trust Company.
The capital base of Home Trust continues to be strong. The Tier 1 capital
ratio ended the quarter at 15.2%, up from 13.8% recorded in the first quarter
of 2009 and up from the 12.5% reported at June 30, 2008. The total capital
ratio was 16.7% at June 30, 2009, up from the 15.2% reported in the first
quarter of 2009 and up from the 13.8% reported at June 30, 2008.
The Company continues to build its capital base during a period of
depressed global capital markets. The Company's strong capital position
affords the Company the flexibility to maintain and grow operations, both
organically and, if the opportunity arose, through strategic acquisitions.
These ratios both continue to exceed OSFI's well capitalized targets of 7.0%
for Tier 1 and 10.0% for total capital as well as Home Trust's internal
capital targets.
For further information on the Company's regulatory capital see Note 8 to
these unaudited interim consolidated financial statements.
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RISK MANAGEMENT
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The Company is exposed to various types of risks owing to the nature of
the business activities it conducts. The types of risk to which the Company is
subject include credit, liquidity and interest rate risks. The Company has
adopted Enterprise Risk Management (ERM) as a discipline for managing risks.
The Company's ERM structure is supported by a governance framework which
includes Board of Director and Senior Management oversight, policies,
management standards, guidelines and procedures appropriate to each business
activity. The policies are reviewed and approved annually by the Board of
Directors. The Company's key risk management practices remain in place and
continue to be reviewed and enhanced from those outlined on pages 28 through
38 in the MD & A section of the Company's 2008 Annual Report.
Credit Risk
Credit risk management is the oversight of credit risk associated with
the total loans portfolio. This is the risk of the loss of principal and/or
interest from the failure of debtors, for any reason, to honour their
financial or contractual obligations to the Company. The Company's exposure to
credit risk is mitigated by senior management, the Audit Committee and the
Risk and Capital Committee of the Board of Directors who undertake reviews of
credit policies and lending practices. The Company's policy is that credit is
approved by different levels of senior management, based upon the amount of
the loan. The Risk and Capital Committee and the Board of Directors review
compliance with credit risk requirements on a quarterly basis.
At June 30, 2009 the composition of the total mortgage portfolio was
82.5% residential and 17.5% non-residential, compared to a composition of
79.8% residential and 20.2% non-residential at December 31, 2008 and a
composition of 83.0% residential and 17.0% non-residential one year ago. The
composition is well within the internal policy limits the Company's Risk and
Capital Committee and the Board of Directors have approved. Within the
Company's residential mortgage portfolio, 21.8% of the loans were insured by
CMHC at the end of the quarter, compared to 14.6% at December 31, 2008 and
6.8% one year ago reflecting the Company's strategic shift to reduce credit
exposure. First mortgages represented 99.6% of the total mortgage portfolio at
June 30, 2009, consistent with comparable periods. Further, with the launch of
the Accelerator Program in the second quarter of 2008, the Company continues a
trend of originating higher volumes of government-insured mortgages. Of all
residential mortgage originations and renewals in the second quarter of 2009,
67.7% were insured for a year-to-date total of 68.8%. This is up from the
comparable three month period of 2008 where 41.5% of all residential mortgage
originations and renewals were insured and up from 36.2% for the first six
months of 2008. At June 30, 2009 the average loan to value on origination of
the Company's non-insured residential mortgage loans portfolio was 67.7%,
compared to 67.8% at December 31, 2008 and 68.6% one year ago. Refer to Note 4
of these unaudited interim consolidated financial statements for a further
breakdown by geographic region. The mortgage loans portfolio continued to
perform well with 94.2% of the portfolio current and 1.8% of the portfolio
over 60 days in arrears at the end of June 2009. This is down slightly from
December 31, 2008 at which point 94.5% of the portfolio was current and 0.9%
of the portfolio was over 60 days in arrears and down from June 30, 2008 at
which point 95.5% of the portfolio was current while 0.8% of the portfolio was
over 60 days in arrears.
As at June 30, 2009 the gross credit card receivable balance totaled
$329.0 million, of which $328.5 million, or 99.9% of the portfolio was secured
either by cash deposits or residential property, and $0.5 million, or 0.1% was
unsecured. The total credit approved included $378.0 million in secured and
$0.6 million in unsecured credit, compared to $414.3 million in secured, and
$0.7 million in unsecured credit at December 31, 2008 and $420.5 million in
secured, and $1.0 million of unsecured credit at June 30, 2008. Within the
secured credit card portfolio Equityline Visa credit cards represent the
principal driver of receivable balances. Equityline Visa credit cards are
secured by collateral residential mortgages, and this portfolio segment
amounted to $320.9 million of the total credit card receivable balance as at
June 30, 2009 compared to $342.9 million at December 31, 2008 and $339.1
million at June 30, 2008. Cash deposits securing credit card accounts amounted
to $13.1 million, and are included in the Company's deposits. Further, the
Equityline Visa portfolio has a loan to value of 69.3% at June 30, 2009, down
from a loan to value of 69.5% and 69.6% at December 31, 2008 and June 30,
2008, respectively. At June 30, 2009, $11.0 million or 3.3% of the credit card
portfolio was over 60 days in arrears compared to $10.6 million, or 3.0% at
December 31, 2008 and $6.6 million, or 1.9% at June 30, 2008.
The secured loan portfolio of $63.2 million decreased by $9.3 million
from the December 31, 2008 balance of $72.5 million, and decreased $23.0
million from the June 30, 2008 balance of $86.2 million. These loans are
secured by second mortgages on residential properties. At June 30, 2009, 95.5%
of the secured loan portfolio was current while $1.4 million or 2.1% was over
60 days in arrears. This compares to 97.3% of the secured loan portfolio being
current while $1.0 million or 1.3% was over 60 days in arrears at December 31,
2008. As at June 30, 2008, 97.8% of the secured loan portfolio was current
while $1.0 million or 1.1% was over 60 days in arrears.
The Company experienced a rise in net impaired loans, to $61.1 million at
June 30, 2009 compared to $39.2 million at December 31, 2008 and $32.4 million
at June 30, 2008 driven by the deterioration in the overall economy. Although
the Company continues to experience a rise in impaired loans, at 1.3% of the
total loans portfolio the rates are within historic Company ranges. Further,
due to strong underwriting and credit standards, the Company is not
experiencing a correlated increase in write-offs. The Company tightened its
underwriting criteria, taking into account local market conditions in order to
minimize potential loss exposure. Experienced employees of the Company
undertake reviews of all non-performing loans greater than 60 days to analyze
patterns and drivers, and then reflect emerging drivers in the Company's
lending criteria going forward. This analytical approach and attention to
emerging trends has resulted in continued low write-offs relative to the gross
loans portfolio. Write-offs applied against the accumulated allowance for
credit losses realized on loans during the three-month period ended June 30,
2009 totaled $2.2 million for a year-to-date total of $3.7 million, up from
the write-offs incurred in the second quarter of 2008 of $0.6 million and $1.2
million for the first six months of 2008. The Company continues to monitor
this area, and is dealing prudently and effectively with impaired loans.
Additional experienced personnel have been hired to manage the increased
workload and the Company is working with clients to manage their payments
through the challenging economic conditions.
The Company continues to be well positioned to absorb all probable losses
in its loans portfolio holding general allowances of $26.5 million at June 30,
2009 as compared to $25.2 million at December 31, 2008 and $23.9 million at
June 30, 2008. The Company routinely monitors the adequacy of the general
allowance. The Company has security in the form of real property or cash
deposits against loans totaling 99.5% of the total loans portfolio. A
methodology has been implemented by the Company to test the adequacy of the
general allowance that takes into account asset quality, borrowers'
creditworthiness, property location and past loss experience. The Company
periodically reviews this general allowance methodology giving due
consideration to changes in economic conditions, interest rates and local
housing market conditions.
The total general allowance was 86.7 basis points of the Company's
risk-weighted assets at June 30, 2009 compared to 84.0 basis points at
December 31, 2008 and June 30, 2008. The increase over the fourth quarter of
2008 reflects the overall increase in new impaired loans during the first six
months of 2009.
Liquidity Risk
The objective of liquidity management is to ensure the Company has the
ability to generate or obtain cash or equivalents in a timely manner and at a
reasonable cost to meet its commitments (both on- and off-balance sheet) as
they become due.
The Company's liquidity management framework includes a policy relating
to several key elements, such as the minimum levels of liquid assets to be
held at all times, the composition of types of liquid assets to be maintained,
the daily monitoring of the liquidity position by senior management, and
quarterly reporting to the Risk and Capital Committee of the Board of
Directors. The Company manages liquidity using a model which considers two
stress scenarios. In the "immediate" scenario, the Company experiences a
decline in new deposits over a one-month period. In the "ongoing" scenario,
the situation is similarly stressed but is spread out over the course of one
year. In each scenario, the Company must hold sufficient liquid assets to meet
the potential and certain obligations for a period of one year beyond the time
frame of the scenario. These scenarios require the Company to make assumptions
regarding the probable behaviour and timing of cash flows for each type of
asset and liability. The Company's liquidity ratio is the total of liquid
assets, adjusted by the estimates in each scenario, divided by the adjusted
liabilities. At June 30, 2009 liquid assets amounted to 168% under the
immediate scenario and 143% under the ongoing scenario. The Company continues
to monitor these scenarios and will take appropriate actions should the need
arise.
The Company holds liquid assets in the form of cash and bank deposits,
treasury bills, banker's acceptances, government bonds and debentures to
comply with its liquidity policy. At June 30, 2009 liquid assets amounted to
$777.7 million, compared to $880.7 million recorded at December 31, 2008 and
$480.5 million at June 30, 2008. The higher liquidity levels year-over-year
reflect the increased activity in the securitization program as a significant
portion of the activity occurs in the last month of the quarter before the
funds can be deployed to fund future balance sheet growth. The Company's
policy is to maintain a minimum 20% of 100-day obligations in liquid assets.
For the twelve months ended June 30, 2009 the Company maintained a monthly
average of $603.5 million, or 44.0% of 100-day obligations in liquid assets
compared to $598.2 million, or 46.2% for the twelve months ended December 31,
2008 and $567.1 million, or 50.5% for the twelve months ended June 30, 2008.
Structural Interest Rate Risk
Interest rate risk is the sensitivity of earnings to sudden changes in
interest rates. The objective of interest rate risk management is to ensure
that the Company is able to realize stable and predictable earnings over
specific time periods despite interest rate fluctuations. The Company has
adopted an approach to the management of its asset and liability positions to
prevent interest rate fluctuations from materially impacting future earnings,
and to the best of its abilities matches liabilities to assets through its
actions in the deposit market in priority to accessing off-balance sheet
solutions. The Company's Asset Liability Management Committee manages exposure
arising from interest rate and liquidity risk, and reports quarterly to the
Board of Directors.
The interest rate sensitivity position as at June 30, 2009 is presented
under Note 13 in these unaudited interim consolidated financial statements.
The table provided there represents the Company's position at a point in time,
and the gap represents the difference between assets and liabilities in each
maturity category. Note 13 summarizes both on- and off-balance sheet assets
and liabilities, in terms of their contractual amounts. Over the lifetime of
certain assets, some contractual obligations such as residential mortgages
will be terminated prior to their stated maturity at the election of the
borrower, by way of prepayments. Similarly, some contractual off-balance sheet
mortgage commitments may be extended but not materialize. In measuring its
interest rate risk exposure, the Company will make assumptions about these
factors, taking into account aspects such as past borrower history.
To assist in matching assets and liabilities, the Company utilizes an
interest rate risk sensitivity model that measures the relationship between
changes in interest rates and the resulting impact on both future net interest
income and the economic value of shareholders' equity. The following table
provides the potential after tax impact of an immediate and sustained 100
basis point, and 200 basis point increases and decreases in interest rates on
net interest income and on the economic value of shareholders' equity.
Table 6: Impact of Interest Rate Shifts
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Increase in Decrease in
interest rate interest rates
-------------------------------------------------------------------------
100 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 3,798 $ 1,857 $ (3,798) $ (1,857)
Impact on net present
value of shareholders'
equity (6,478) (7,601) 6,830 7,912
200 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 7,596 $ 3,713 $ (7,596) $ (3,713)
Impact on net present
value of shareholders'
equity (12,626) (14,907) 14,036 16,153
-------------------------------------------------------------------------
The Company may enter into derivative transactions for the purpose of
hedging commitment risk. The purpose is to manage interest rate exposures
during the period between when a mortgage commitment is made and when this
mortgage loan is securitized into an MBS pool. The Company held notional
$310.4 million in forward bond contracts specifically to hedge commitment risk
at June 30, 2009 in anticipation of the CMB issuance in the third quarter of
2009. No such outstanding positions were present in the comparative period.
Through the Company's participation in CMHC's CMB program, the Company was
required to enter into specific swap agreements to hedge interest rate risk
and the reinvestment risk between the amortizing MBS pool and the CMB. Refer
to Note 12 of these unaudited interim consolidated financial statements for
additional information.
-------------------------------------------------------------------------
RESULTS BY BUSINESS SEGMENT
-------------------------------------------------------------------------
The following section discusses the mortgage lending, consumer lending
and other business segments for the three and six-month period ended June 30,
2009 (refer to Note 14 of these unaudited interim consolidated financial
statements). The mortgage lending segment continues to be the primary driver
of the Company's overall growth while the consumer lending segment continues
to provide a diversified income source.
Mortgage Lending
The Company's principal line of business contributed $25.4 million to net
income during the second quarter of 2009 and $50.0 million for the first six
months of 2009, as compared to $18.2 million and $36.1 million, respectively,
for the comparable periods in 2008. The increase over the prior periods was
primarily driven by loan originations which increased fee income and
significant increases in income realized on securitization activities. During
the second quarter of 2009, the Company experienced an improvement in net
interest income as the Company's cost of funding eased, substantial variable
rate non-residential mortgage loans were reset or paid off and the Company
reduced excess liquidity levels. Net interest income for the quarter was $24.7
million, an improvement from $20.5 million for the three-month period ended
March 31, 2009 and up from $24.1 million for the three-month period ended June
30, 2008.
The table below provides a breakdown of specific residential and
non-residential advances made during the quarter compared to the previous
quarter.
Table 7 - Mortgage Production
-------------------------------------------------------------------------
For the three For the six
months ended months ended
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Residential mortgages $1,257,427 $ 764,589 $1,947,604 $1,366,452
Non-residential mortgages 16,316 89,140 38,615 314,781
Store and apartments 4,014 19,626 14,389 39,084
Warehouse commercial
mortgages 3,000 13,500 6,000 33,773
-------------------------------------------------------------------------
Total Mortgage Advances $1,280,757 $ 886,885 $2,006,608 $1,754,090
-------------------------------------------------------------------------
The total value of new mortgages advanced in the quarter was $1.28
billion, an increase of 44.4% over the $886.9 million advanced for the same
quarter in 2008. Total value of new mortgages advanced for the first six
months of 2009 was $2.01 billion, an increase of 14.4% over the $1.75 billion
advanced for the first six months of 2008. During the second quarter of 2009
the Company experienced strong growth in residential mortgage advances which
were up $492.8 million or 64.5% over the second quarter of 2008 and up $581.2
million, or 42.5% over the same six month period in 2008. The total of all
non-residential product advances declined from $122.3 million in the second
quarter of 2008 to $23.3 million in the second quarter of 2009 and from $387.6
million in the first six months of 2008 to $59.0 million in the first six
months of 2009. This is consistent with the Company's planned strategy of
reducing its exposure to non-residential mortgages. Residential Mortgages
include the advances from loans originated under the Accelerator Program and
Multi-unit Residential loans. All of the loans advanced under the Accelerator
Program and those classified as Multi-unit Residential Mortgages are insured
products and were subsequently securitized through the Company's MBS and CMB
program.
The Company securitized $655.1 million of government-guaranteed CMHC
residential mortgage loans through the creation of MBS securities during the
quarter for a year-to-date total of $1.12 billion, realizing total gains from
securitization of $22.8 million for the quarter and $47.1 million for the
first six months of 2009. This compares to $250.6 million securitized for the
second quarter of 2008 and $396.4 million for the first six months of 2008,
resulting in gains of $8.8 million and $16.7 million, respectively. During the
quarter, the Company participated in CMHC's CMB program. Of the $655.1 million
securitized during the quarter, $607.8 million relates to the securitization
of government-guaranteed residential mortgage loans through the creation of
MBS securities sold through Canada Housing Trust. The sale of these
residential mortgages realized $21.0 million in gains during the quarter. The
rise in utilizing the securitization stream to funding loan originations in
the latter half of 2008 and into the first half of 2009 was primarily due to
the increase in core funding costs experienced through the Company's regular
term deposit channel leaving the spreads on securitization activities
attractive. As funding costs begin to ease as more liquidity and capital
continue to be injected into the global economies, the Company has begun to
shift funding back to a traditional deposit base increasing on-balance sheet
assets. Securitization will continue to contribute to the Company's income;
however, core mortgage lending utilizing funding from deposits is expected to
remain the main driver of the Company's financial results going forward. For
additional information refer to Note 5 of these unaudited interim consolidated
financial statements.
During the fourth quarter of 2008, the Company entered into an amended
agreement with a Trustee for the Company's second mortgage program (recorded
as Secured Loans) operating as Regency Finance Corp. (Regency), whereby the
Company acts as Regency's agent in offering residential second mortgage loans.
These mortgage loans are securitized and the investments are purchased by the
Company. At the end of the second quarter of 2009 the Company held $63.2
million in Secured Loans as Notes Receivable issued by Regency, compared to
$72.5 million at December 31, 2008 and $86.2 million at June 30, 2008. These
Notes yield 6.0% with an average duration of 2.0 years. The Company also
receives fee income for servicing and administering these mortgages for
Regency. This income amounted to 0.4% of the portfolio value, on an annualized
basis. The underlying credit quality of the mortgage loans securing the Notes
Receivable remains high, with 2.1% of the portfolio in arrears over 60 days.
This program has experienced minimal losses since inception. The Company has
decided to discontinue advancing funds under this program and will redirect
clients into the Company's Accelerator Program, on a go-forward basis.
Consumer Lending - Credit Cards and Retail Services
Consumer lending continued to generate positive results in the first half
of 2009. Net income for the quarter was $5.8 million for a year-to-date total
of $10.6 million, compared to $4.8 million for the second quarter of 2008 and
$9.1 million for the first half of 2008. The Company's retail loan portfolio
has experienced positive growth through the first half of 2009 offsetting
declines experienced in the Equityline Visa portfolio. The Company has
tightened lending standards over the past year and as such the growth in the
Equtyline Visa receivable balances has moderated resulting in lower fees
earned on this portfolio. Included in the operating results of the consumer
lending segment are the operations of PSiGate. PSiGate contributed $0.4
million in net income during the second quarter of 2009.
The Equityline Visa loans portfolio amounted to $320.9 million at June
30, 2009 ($342.9 million - Q4 2008, and $339.1 million - Q2 2008) comprising
97.5% (97.4% - Q4 2008, and 97.1% - Q2 2008) of the total gross credit card
receivable balance of $329.0 million, and bearing an average interest rate of
10.8% (10.3% - Q4 2008, and 10.6% - Q2 2008) on outstanding balances. During
the second quarter of 2009, 617 Equityline Visa accounts with $23.2 million in
authorized credit limits were issued for a year-to-date issuance of 997
Equityline Visa accounts with $39.4 million in authorized credit limits. Both
the current and year-to-date totals in 2009 are down from 1,148 Equityline
Visa accounts with $51.8 million in authorized credit limits issued in the
second quarter of 2008 and down from 2,206 Equityline Visa accounts with
$101.5 million in authorized credit limits issued for the six months ended
June 30, 2008. The decrease in new accounts from the comparable periods is due
to ongoing efforts by the Company to tighten credit in certain geographical
locations in response to the current economic environment.
Other
The Other segment is comprised of the operating results from the
Company's securities portfolio and corporate activities. Net income for the
quarter was $3.2 million for a year-to-date total of $5.1 million. This is
down from $3.5 million for the three months ended June 30, 2008 and $6.5
million for the first six months of 2008. The decrease from the prior periods
was driven by lower yields earned on the Company's securities portfolio.
-------------------------------------------------------------------------
ACCOUNTING STANDARDS AND POLICIES
-------------------------------------------------------------------------
Critical Accounting Estimates
Critical accounting estimates which require management to make
significant judgements, some of which are inherently uncertain, are outlined
on pages 40 through 42 of the 2008 Annual Report. These estimates are critical
since they involve material amounts and require management to make estimates
that, by their very nature, include uncertainties. The preparation of
unaudited interim consolidated financial statements in accordance with GAAP
requires management to make estimates and assumptions, mainly concerning the
valuation of items, which affect the amounts reported. Actual results could
differ from those estimates.
Accounting policies requiring critical accounting estimates include the
allowance for credit losses, securitization of residential mortgages,
financial instruments measured at fair value, other than temporary impairment
of available for sale securities, goodwill and future income tax liabilities.
Further information can be found under Notes 3, 4, 5, 11, and 12 of these
unaudited interim consolidated financial statements. There have been no
subsequent changes to the critical accounting estimates disclosed on pages 40
through 42 of the 2008 Annual Report.
Change in Accounting Policy
The significant accounting policies the Company follows are detailed in
Note 1 to the Company's December 31, 2008 consolidated financial statements.
Effective January 1, 2009 the Company adopted the new accounting standard
issued by the Canadian Institute of Chartered Accountants (CICA), Section
3064, Goodwill and Intangible Assets. The implementation of this standard did
not have a material impact on the Company's consolidated financial position
and results of operations. For further details, see Note 2 to these unaudited
interim consolidated financial statements. Effective January 1, 2009, the
Company adopted CICA Emerging issues Committee Abstract EIC-173, Credit Risk
and the Fair Value of Financial Assets and Financial Liabilities. The abstract
clarifi es how the Company's own credit risk and the credit risk of the
counterparty should be taken into account in determining the fair value of
financial assets and financial liabilities, including derivatives. The new
guidance did not have a material effect on the financial position or earnings
of the Company.
International Financial Reporting Standards
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly affect financial reporting requirements
for Canadian companies. The AcSB strategic plan outlines the convergence of
Canadian GAAP with International Financial Reporting Standards (IFRS) over an
expected five-year transition period. In February 2008, the AcSB announced
that 2011 is the changeover date for publicly accountable companies to use
IFRS, replacing Canadian GAAP. IFRS uses a conceptual framework similar to
Canadian GAAP, but there are significant differences in recognition,
measurement and disclosures. In the period leading up to the changeover, the
AcSB will continue to issue accounting standards that converge with IFRS, thus
mitigating the impact of adopting IFRS on the changeover date.
The Company will change over to IFRS starting with interim and annual
financial statements relating to fiscal periods beginning on or after January
1, 2011. The transition date will require the restatement for comparative
purposes of amounts reported by the Company for the interim periods and the
year-ended December 31, 2010. The Company has commenced the process of
transition from current Canadian GAAP to IFRS. It has established a project
team and includes representatives from various areas of the organization as
necessary to plan for and achieve a smooth transition to IFRS. Regular
progress reporting to the Audit Committee of the Board of Directors on the
status of the IFRS implementation project has been instituted.
The implementation project consists of three primary phases, which will
in many instances occur concurrently as the IFRS standards are applied to
specific areas from start to finish:
- Research, diagnostic and planning phase - This phase includes
performing a high-level assessment to identify key implications of
the transition to IFRS. As a result of these procedures the potential
issues and implications are ranked as high, medium or low priority
and assigned to the relevant teams. The core IFRS team has undergone
training to effectively carry out the remaining phases of the
project.
- Impact analysis, evaluation and design phase - In this phase, each
area identified from the research, diagnostic and planning phase will
be addressed in order of priority with project team members assigned
accordingly. This phase includes specification of changes required to
existing accounting policies, information systems, internal controls
over financial reporting and other operations business processes.
Following an analysis of policy alternatives allowed under IFRS,
preliminary IFRS financial statement content will be drafted.
- Implementation and review phase - This phase includes execution of
changes to information systems and business process, completing
formal authorization processes to approve recommended accounting
policy choices and training programs across the Company's finance
group and other staff, as necessary. The resulting efforts from the
other phases of the project will culminate with the collection of
financial information necessary to compile IFRS-compliant financial
statements, embedding IFRS standards in business process and related
controls for certi-fication of internal controls over financial
reporting and Audit Committee approval of IFRS financial statements.
The Company completed the research, diagnostic and planning phase and
started working on the impact analysis, evaluation and design phase during the
fourth quarter of 2008. The impact analysis, evaluation and design phase is
expected to be completed by the end of Q3 2009. The Company's analysis of IFRS
and comparison with currently applied accounting principles has identified a
number of differences. Many of the differences identified are not expected to
have a material impact on the reporting results and financial positions.
However, there may be significant changes following from the IFRS accounting
principles and provisions for first-time adoption of IFRS standards on certain
areas.
Most adjustments required on transition to IFRS will be made
retrospectively, against opening retained earnings as of the date of the first
comparative balance sheet presentation based on standards applicable at that
time. Transitional adjustments relating to those standards where comparative
figures are not required to be restated will only be made as of the first day
of the year of adoption.
IFRS 1 "First-Time Adoption of International Financial Reporting
Standards", provides entities adopting IFRS for the first time with a number
of optional exemptions and mandatory exceptions, in certain areas, to the
general requirement for full retrospective application of IFRS. The Company is
analyzing the various accounting policy choices available and will implement
those determined to be most appropriate for the Company's specific
circumstances. The Company expects to complete and make preliminary
conclusions on these choices by the end of the third quarter of 2009 but will
be subject to ongoing assessment should circumstances change.
Set out below are the key areas where changes in accounting policies are
expected and may impact the Company's consolidated financial statements. The
list and comments should not be regarded as a complete list of changes that
will result from the transition to IFRS. The commentary is intended to
highlight those areas the Company believes to be the most significant;
however, analysis of changes is still in progress and not all decisions have
been made where choices of accounting policy are available. The Company notes
that the standard-setting bodies that shape Canadian GAAP and IFRS have
significant ongoing projects that could affect the ultimate differences
between Canadian GAAP and IFRS and their impact on the Company's consolidated
financial statements in future years. The future impact of IFRS will also
depend on the particular circumstances prevailing in those years. The
differences described below are those existing based on Canadian GAAP and IFRS
standards at June 30, 2009. At this stage, the Company is not able to quantify
the impact expected on the consolidated financial statements.
The initial impact assessment identified the following areas as having
the greatest potential impact to the Company:
- Financial Instruments - Classification & Recognition, Derecognition,
Derivatives and Hedging
- Financial Instruments - Measurement and Impairment
- Financial Instruments - Disclosures
In April 2009 the International Accounting Standards Board (IASB) issued
an exposure draft on amendments to the derecognition principals within
International Accounting Standard 39 - Financial Instruments: Recognition and
Measurement. The proposals are aimed at improving the current requirement for
the derecognition of financial assets and financial liabilities. The current
approach is based on both risk and rewards and control. The amendments in the
exposure draft focus the assessment on whether a financial asset or financial
liability are derecognized from the balance sheet based on control. Further,
the IASB has put forth a proposed approach and an alternative approach to
derecognition which could potentially have significantly different conclusions
on whether the Company's securitization program remains off- or on-balance
sheet. Lastly, the transition rules currently proposed in the exposure draft
provide for a grandfathering provision such that the new standard will only
apply to transactions entered into or after January 1, 2010. Management is
currently assessing the impact on the Company's consolidated financial
position and, at this stage, it is too early to determine the significance of
the impact this may have.
Controls over Financial Reporting
No changes were made in the Company's internal controls over financial
reporting during the interim period ended June 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal controls over financial reporting.
-------------------------------------------------------------------------
UPDATED SHARE INFORMATION
-------------------------------------------------------------------------
As at June 30, 2009 the Company had issued 34,397,890 Common Shares. In
addition, outstanding director and employee stock options amounted to
1,374,250 (1,406,750 - Q4 2008, and 1,226,750 - Q2 2008) of which 653,000 were
exercisable as of the quarter-end (661,125 - Q4 2008, and 540,500 - Q2 2008)
for proceeds to the Company upon exercise of $13.9 million ($12.4 million - Q4
2008, and $8.4 million - Q2 2008).
Subsequent to the end of the second quarter, the Board of Directors
declared a quarterly cash dividend of $0.15 per common share payable on
September 1, 2009 to shareholders of record at the close of business on August
14, 2009.
QUARTERLY FINANCIAL HIGHLIGHTS
Table 8: Summary of Quarterly Results
-------------------------------------------------------------------------
In Thousands of Dollars 2009 2008
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q2 Ql Q4 Q3
Net interest income
(TEB)(1) $ 42,023 $ 37,505 $ 36,399 $ 39,478
Less TEB adjustment 1,535 1,273 1,162 1,130
-------------------------------------------------------------------------
Net interest income per
financial statements 40,489 36,232 35,237 38,348
Non-interest income 30,437 32,034 26,023 23,013
Non-interest expense 18,222 18,848 16,852 16,953
Total revenues 121,778 120,721 117,996 116,950
Net income 34,351 31,418 29,039 27,939
Return on common
shareholders' equity 27.9% 27.9% 27.4% 27.6%
Return on average total
assets 2.3% 2.2% 2.0% 2.0%
Earnings per common share
Basic $ 1.00 $ 0.91 $ 0.84 $ 0.81
Diluted $ 0.99 $ 0.91 $ 0.84 $ 0.81
Book value per common
share $ 14.99 $ 13.61 $ 12.57 $ 12.08
Efficency ratio (TEB)(1) 25.1% 27.1% 27.0% 27.1%
Efficency ratio 25.7% 27.6% 27.5% 27.6%
Tier 1 capital ratio(2) 15.2% 13.8% 12.9% 12.7%
Total capital ratio(2) 16.7% 15.2% 14.2% 14.0%
Net impaired loans as a %
of gross loans 1.3% 1.2% 0.9% 0.7%
Annualized provision as a
% of gross loans 0.3% 0.3% 0.2% 0.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In Thousands of Dollars 2008 2007
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q2 Q1 Q4 Q3
Net interest income
(TEB)(1) $ 40,418 $ 38,590 $ 40,394 $ 39,396
Less TEB adjustment 1,056 962 2,311 1,084
-------------------------------------------------------------------------
Net interest income per
financial statements 39,362 37,628 38,083 38,312
Non-interest income 17,318 14,338 14,561 11,964
Non-interest expense 17,443 14,763 15,687 13,289
Total revenues 112,953 106,796 105,081 94,345
Net income 26,550 25,159 24,228 22,837
Return on common
shareholders' equity 27.7% 27.9% 28.9% 28.9%
Return on average total
assets 2.0% 1.9% 2.0% 2.0%
Earnings per common share
Basic $ 0.77 $ 0.73 $ 0.70 $ 0.66
Diluted $ 0.76 $ 0.72 $ 0.70 $ 0.65
Book value per common
share $ 11.44 $ 10.79 $ 10.08 $ 9.38
Efficency ratio (TEB)(1) 30.2% 27.9% 28.5% 25.9%
Efficency ratio 30.8% 28.4% 29.8% 26.4%
Tier 1 capital ratio(2) 12.5% 12.0% 11.1% 11.7%
Total capital ratio(2) 13.8% 13.4% 12.5% 13.1%
Net impaired loans as a %
of gross loans 0.7% 0.7% 0.7% 0.6%
Annualized provision as a
% of gross loans 0.1% 0.1% 0.2% 0.2%
-------------------------------------------------------------------------
(1) TEB - Taxable Equivalent Basis, see definition on page 5
(2) These figures relate to the Company's operating subsidiary, Home
Trust Company
The Company's key financial measures for each of the last eight quarters
are summarized in the table above. These highlights illustrate the Company's
profitability, return on equity, as well as efficiency measures and capital
ratios. The quarterly results are modestly affected by seasonal factors, with
first quarter mortgage advances typically impacted by winter weather
conditions, and the fourth quarter normally experiencing increased credit card
activity over the holiday period. The Company continues to achieve positive
financial results driven by revenue growth in all business segments, and
continued low efficiency ratios (the lower the ratio the better). The increase
in Tier 1 and total capital ratios throughout 2008 and into 2009 reflect the
Company's continuing efforts to preserve its capital base during uncertain
capital markets as well as changes required to calculate capital requirements
under Basel II which came into effect January 1, 2008, resulting in modest
positive results due to a shift into lower risk-weighted categories for
residential mortgages offset by new capital requirements related to
operational risk. The increase in net impaired loans as a percentage of gross
loans has trended upwards over the last half of 2008 and into 2009. The
increases are due to the effects of the sustained recession in Canada driving
higher unemployment levels. Although net impaired loans as a percentage of
gross loans has increased, the Company has not experienced the same
proportionate share of losses. The Company has taken proactive steps in
managing the increased impaired loans by strengthening its mortgage servicing
department to provide support to clients in payment management.
Outlook
Home Capital remains committed to serving selected segments of the
Canadian financial services marketplace that are not the focus of the major
financial institutions. The Company continues to manage from a strong capital
and liquidity position with no external debt, and is well positioned to
capitalize on market opportunities in the current economic recession.
There are signs that the monetary and fiscal stimulus plans that were
launched over the past several quarters by various global governments have
started to have a positive impact. Recent studies are showing that both
consumer and business confidence is improving and that capital and commodity
markets are strengthening although there remains weakness in a number of
sectors most notably in manufacturing as evidenced by a continued upward trend
in unemployment. With a continuing low interest rate environment the Canadian
housing market has shown positive signs of stabilizing both in terms of
pricing and volume growth in certain geographic markets. The Company remains
cautiously optimistic for the second half of the year in meeting or exceeding
its stated objectives for 2009.
The Company continues to manage its business with prudence and a strong
commitment to measured growth, continued profitability and creating long-term
shareholder value. The Company has a proven corporate strategy and proprietary
risk management framework to manage the business through uncertain economic
conditions while positioning the Company for future opportunities.
This Outlook section contains forward-looking statements. (Please see the
Caution Regarding Forward-Looking Statements on page 5 of these unaudited
interim consolidated financial statements).
Consolidated Statements of Income
Three Months Ended Six Months Ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except per Share Amounts June 30 June 30 June 30 June 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Income
Interest from loans $ 84,286 $ 87,075 $ 165,613 $ 170,046
Dividends from equity
securities 3,427 2,262 6,267 4,415
Other interest 3,628 6,298 8,148 13,632
-------------------------------------------------------------------------
91,341 95,635 180,028 188,093
Interest Expense
Interest on deposits 50,852 56,273 103,307 111,103
-------------------------------------------------------------------------
Net interest income 40,489 39,362 76,721 76,990
Provision for credit losses
(note 4(d)) 3,099 630 6,382 1,230
-------------------------------------------------------------------------
37,390 38,732 70,339 75,760
-------------------------------------------------------------------------
Non-interest Income
Fees and other income 7,462 7,092 14,784 14,315
Securitization income on
mortgage-backed securities 26,743 11,038 54,398 21,135
Loss on derivatives (6,093) (391) (8,093) (1,817)
Net gain (loss) realized and
unrealized on securities 2,325 (421) 1,382 (2,046)
Net gain on disposition of
subsidiary - - - 69
-------------------------------------------------------------------------
30,437 17,318 62,471 31,656
-------------------------------------------------------------------------
67,827 56,050 132,810 107,416
-------------------------------------------------------------------------
Non-interest Expenses
Salaries and staff benefits 10,096 9,574 20,180 18,192
Premises 1,449 1,072 2,805 2,063
General and administration 6,677 6,797 14,086 11,951
-------------------------------------------------------------------------
18,222 17,443 37,071 32,206
-------------------------------------------------------------------------
Income Before Income Taxes 49,605 38,607 95,739 75,210
Provision for income taxes
(note 11(a)) $ 15,254 $ 12,057 $ 29,970 $ 23,501
-------------------------------------------------------------------------
NET INCOME 34,351 26,550 65,769 51,709
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 1.00 $ 0.77 $ 1.91 $ 1.50
Diluted $ 0.99 $ 0.76 $ 1.90 $ 1.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(thousands)
Basic 34,459 34,535 34,501 34,534
Diluted 34,662 34,855 34,724 34,859
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total number of outstanding
common shares (thousands) 34,398 34,542 34,398 34,542
Book value per common
share $ 14.99 $ 11.44 $ 14.99 $ 11.44
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the three For the six
months ended months ended
-------------------------------------------------------------------------
In Thousands of Dollars June 30 June 30 June 30 June 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
NET INCOME $ 34,351 $ 26,550 $ 65,769 $ 51,709
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX
Unrealized income on
available for sale
securities
Net unrealized income on
securities available for
sale, net of $4,753 tax
(($443) - three months
ended June 30, 2008; $7,185
- six months ended June
30, 2009; $1,230 - six
months ended June 30,
2008) 10,702 (727) 14,355 1,040
Reclassification of
earnings in respect of
available for sale
securities, net of
$1,538 tax; ($120 -
three months ended
June 30, 2008; $1,716 -
six months ended June
30, 2009; $849 - six
months ended June 30,
2008) 7,129 242 13,115 1,815
-------------------------------------------------------------------------
Total other comprehensive
income (loss) 17,831 (485) 27,470 2,855
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 52,182 $ 26,065 $ 93,239 $ 54,564
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In Thousands of Dollars June 30 December 31 June 30
(Unaudited) 2009 2008 2008
-------------------------------------------------------------------------
ASSETS
Cash Resources
Deposits with regulated financial
institutions $ 412,186 $ 554,422 $ 184,688
-------------------------------------------------------------------------
Securities (note 3)
Held for trading 199,817 - 301
Available for sale 450,993 519,477 488,323
-------------------------------------------------------------------------
650,810 519,477 488,624
-------------------------------------------------------------------------
Loans (note 4)
Residential mortgages 3,639,986 3,263,206 3,402,556
Non-residential mortgages 774,077 826,882 699,043
Personal and credit card loans 350,550 368,962 362,861
Secured loans 63,191 72,518 86,227
General allowance for credit losses (26,483) (25,177) (23,926)
-------------------------------------------------------------------------
4,801,321 4,506,391 4,526,761
-------------------------------------------------------------------------
Other
Securitization receivable (note 5) 189,936 139,870 87,888
Capital assets 5,396 5,325 5,583
Other assets (note 6) 93,081 84,228 68,227
-------------------------------------------------------------------------
288,413 229,423 161,698
-------------------------------------------------------------------------
$6,152,730 $5,809,713 $5,361,771
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Payable on demand $ 20,920 $ 34,808 $ 20,217
Payable on a fixed date 5,220,457 5,067,973 4,696,354
-------------------------------------------------------------------------
5,241,377 5,102,781 4,716,571
-------------------------------------------------------------------------
Other
Cheques and other items in transit 5,637 4,811 6,338
Other liabilities (note 7) 389,976 269,368 243,863
-------------------------------------------------------------------------
395,613 274,179 250,201
-------------------------------------------------------------------------
5,636,990 5,376,960 4,966,772
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 8) 39,757 39,094 39,217
Contributed surplus 3,941 3,283 2,531
Retained earnings 455,625 401,429 356,693
Accumulated other comprehensive
income (loss) (note 10) 16,417 (11,053) (3,442)
-------------------------------------------------------------------------
515,740 432,753 394,999
-------------------------------------------------------------------------
$6,152,730 $5,809,713 $5,361,771
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
For the three For the six
months ended months ended
-------------------------------------------------------------------------
In Thousands of Dollars June 30 June 30 June 30 June 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
CAPITAL STOCK (note 8)
Balance at beginning of
the period $ 39,006 $ 38,899 $ 39,094 $ 38,899
Proceeds of options
exercised 774 318 774 318
Normal course issuer bid (23) - (111) -
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 39,757 $ 39,217 $ 39,757 $ 39,217
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS
Balance at beginning of
the period $ 3,670 $ 2,225 $ 3,283 $ 1,818
Amortization of fair value
of employee stock options
(note 9) 385 357 772 764
Employee stock options
exercised (114) (51) (114) (51)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 3,941 $ 2,531 $ 3,941 $ 2,531
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
the period (note 8) $ 426,677 $ 334,289 $ 401,429 $ 313,620
Normal course issuer bid (580) - (1,941) -
Net income for the period 34,351 26,550 65,769 51,709
Dividends paid or declared
during the period (4,823) (4,146) (9,632) (8,636)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 455,625 $ 356,693 $ 455,625 $ 356,693
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance at beginning of
the period $ (1,414) $ (2,957) $ (11,053) $ (6,297)
Other comprehensive
income (loss), net of
$6,291 tax; (($323) -
three months ended
June 30, 2008; $8,901
- six months ended
June 30, 2009; $2,079 -
six months ended June
30, 2008) 17,831 (485) 27,470 2,855
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 16,417 $ (3,442) $ 16,417 $ (3,442)
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Cash Flows
For the three For the six
months ended months ended
-------------------------------------------------------------------------
In Thousands of Dollars June 30 June 30 June 30 June 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period $ 34,351 $ 26,550 $ 65,769 $ 51,709
Adjustments to determine
cash flows relating to
operating activities:
Future income taxes 3,390 2,187 12,968 4,214
Amortization (24,611) 4,534 (32,311) 5,772
Provision for credit
losses (note 4(d)) 3,099 630 6,382 1,230
Change in accrued
interest payable 4,286 5,495 1,911 26,569
Change in accrued
interest receivable 438 (1,001) 1,580 (1,999)
Net loss (gain) realized
and unrealized on
investment securities (2,325) 421 (1,382) 2,046
Loss on derivatives 6,093 391 8,093 1,817
Securitization income on
mortgage-backed
securities (26,743) (11,038) (54,398) (21,135)
Amortization of fair
value of employee stock
options (note 9) 385 357 772 764
Change in payments
received for securitized
pools 36,225 43,075 79,299 4,468
Change in other assets 5,544 (30,798) 21,032 (9,889)
-------------------------------------------------------------------------
Cash flows from operating
activities 40,132 40,803 109,715 65,566
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase (decrease) in
deposits 417,745 (110,633) 138,596 302,587
Issuance of capital stock 774 318 774 318
Normal course issuer bid (603) - (2,052) -
Exercise of stock options (114) (51) (114) (51)
Dividends paid (4,816) (4,143) (9,292) (8,288)
-------------------------------------------------------------------------
Cash flows from (used in)
financing activities 412,986 (114,509) 127,912 294,566
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Activity in available for
sale and held for trading
securities
Purchases (289,652) (46,088) (536,133) (263,555)
Proceeds from sales 216,948 35,133 452,284 203,587
Proceeds from maturities 7,917 18,913 13,261 32,952
Activity in mortgages
Net increase (968,757) (417,929) (1,442,834) (860,388)
Proceeds from
securitization of
mortgage-backed
securities 641,140 246,285 1,091,973 388,984
Change in mortgage-backed
securities receivable 25,646 8,302 29,680 12,318
Net increase (decrease) in
personal and credit card
loans 9,637 (15,737) 16,708 (37,661)
Net increase (decrease) in
secured loans 6,284 (1,426) 9,097 (4,172)
Purchases of capital assets (788) (1,236) (1,116) (1,845)
Purchase of intangible assets (3,859) - (12,783) -
-------------------------------------------------------------------------
Cash flows used in investing
activities (355,484) (173,783) (379,863) (529,780)
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents
during the period 97,634 (247,489) (142,236) (169,648)
Cash and cash equivalents at
beginning of the period 314,552 432,177 554,422 354,336
-------------------------------------------------------------------------
Cash and cash equivalents at
end of the period $ 412,186 $ 184,688 $ 412,186 $ 184,688
-------------------------------------------------------------------------
Supplementary Disclosure of
Cash Flow Information
Interest paid $ 46,562 $ 50,778 $ 101,396 $ 84,535
Income taxes paid 8,547 13,595 20,393 27,417
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Notes to the Unaudited Interim Consolidated Financial Statements
1. ACCOUNTING POLICIES USED TO PREPARE THE UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
These unaudited interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements for the
year ended December 31, 2008 as set out in the 2008 Annual Report, on
pages 46 through 72. These unaudited interim consolidated financial
statements have been prepared in accordance with Canadian generally
accepted accounting principles. Except as disclosed in Note 2, the
accounting policies and methods of application used in the preparation of
these unaudited interim consolidated financial statements are consistent
with the accounting policies used in Home Capital Group Inc.'s (the
"Company") most recent annual audited financial statements. These
unaudited interim consolidated financial statements reflect amounts which
must, of necessity, be based on the best estimates and judgement of
management with appropriate consideration as to materiality. Actual
results may differ from these estimates.
2. CHANGES IN ACCOUNTING POLICIES
Goodwill and Intangible Assets
Effective January 1, 2009 the Company adopted Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3064, Goodwill and
Intangibles Assets (Section 3064). Section 3064 replaces Section 3062,
Goodwill and Other Intangible Assets, and Section 3450, Research and
Development Costs, provides clarifying guidance on the criteria that must
be satisfied in order for an intangible asset to be recognized,
including internally developed intangible assets. The new guidance did
not have a material effect on the financial position or earnings of the
Company.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
Effective January 1, 2009, the Company adopted CICA Emerging issues
Committee Abstract EIC-173, Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities. The abstract clarifies how the
Company's own credit risk and the credit risk of the counterparty should
be taken into account in determining the fair value of financial assets
and financial liabilities, including derivatives. The new guidance did
not have a material effect on the Company's financial position or
earnings.
3. SECURITIES
Available for Sale Securities - Net Unrealized Gains and Losses
Net unrealized gains and losses are included in accumulated other
comprehensive income except unrealized losses which are other than
temporary in nature which are transferred to net income. Accumulated
other comprehensive income is disclosed in Note 10.
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Securities issued or guaranteed by:
Canada $ (3) $ 1,546 $ 282
Corporations (84) 2,345 (1,746)
Equity securities
Common (164) (2,106) (1,322)
Fixed rate preferred 146 (29,918) (5,372)
Floating rate preferred 360 (2,370) (668)
Income trusts 520 (2,745) (3,590)
Mutual funds (246) (367) 19
-------------------------------------------------------------------------
$ 529 $ (33,615) $ (12,397)
-------------------------------------------------------------------------
The above unrealized gains and (losses) represent differences between the
carrying value of a security and its current fair value. The Company does
not consider these losses to be other than temporary based on market
conditions at the reporting date, and continues to regularly monitor
these investments and market conditions.
As at June 30, 2009, the Company had $9.0 million of unrealized losses on
available for sale securities which are other than temporary in nature,
and have been transferred into net income. These unrealized losses are
not included in the table above.
4. LOANS
(A) Loans by Geographic Region and Type
As at June 30, 2009
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
British
Columbia $ 364,955 $ 9,796 $ 28,870 $ 11 $ 403,632
Alberta 374,253 105,240 68,366 6,990 554,849
Ontario 2,595,703 593,005 245,077 54,172 3,487,957
Quebec 154,293 39,213 1,786 - 195,292
Maritimes 83,200 11,961 4,927 2,018 102,106
Manitoba and
Saskatchewan 67,582 14,862 1,524 - 83,968
-------------------------------------------------------------------------
$3,639,986 $ 774,077 $ 350,550 $ 63,191 $4,827,804
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
British
Columbia $ 333,668 $ 8,998 $ 31,118 $ 9 $ 373,793
Alberta 398,939 115,336 78,157 8,319 600,751
Ontario 2,267,199 630,953 250,611 61,929 3,210,692
Quebec 105,236 48,701 1,477 - 155,414
Maritimes 90,167 12,408 6,002 2,261 110,838
Manitoba and
Saskatchewan 67,997 10,486 1,597 - 80,080
-------------------------------------------------------------------------
$3,263,206 $ 826,882 $ 368,962 $ 72,518 $4,531,568
-------------------------------------------------------------------------
As at June 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
British
Columbia $ 338,534 $ 8,149 $ 28,792 $ 150 $ 375,625
Alberta 431,362 112,538 81,979 9,607 635,486
Ontario 2,387,750 503,417 242,307 73,466 3,206,940
Quebec 81,658 48,768 746 - 131,172
Maritimes 109,241 18,863 7,360 3,004 138,468
Manitoba and
Saskatchewan 54,011 7,308 1,677 - 62,996
-------------------------------------------------------------------------
$3,402,556 $ 699,043 $ 362,861 $ 86,227 $4,550,687
-------------------------------------------------------------------------
(B) Past Due Loans that are not Impaired
A loan is recognized as being impaired when the Company is no longer
reasonably assured of the timely collection of the full amount of
principal and interest. As a matter of practice, a loan is deemed to be
impaired at the earlier of the date it has been specifically provided for
or when it has been in arrears for 90 days. Residential mortgages
guaranteed by the government of Canada where payment is contractually
past due 365 days are automatically placed on a non-accrual basis.
Secured and unsecured credit card balances that have a payment that is
contractually 180 days in arrears are written off. Equityline Visa credit
card balances are measured on a basis consistent with mortgage loans.
As at June 30, 2009
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 124,353 $ 3,263 $ 4,498 $ 1,020 $ 133,134
31 - 60 days 49,528 385 1,971 449 52,333
61 - 90 days 6,447 88 2,803 53 9,391
91 - 120 days 14,841 - 508 - 15,349
-------------------------------------------------------------------------
$ 195,169 $ 3,736 $ 9,780 $ 1,522 $ 210,207
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 142,287 $ 4,406 $ 3,365 $ 973 $ 151,031
31 - 60 days 38,139 2,407 1,896 98 42,540
61 - 90 days 2,938 647 2,527 - 6,112
91 - 120 days - - 1,887 - 1,887
-------------------------------------------------------------------------
$ 183,364 $ 7,460 $ 9,675 $ 1,071 $ 201,570
-------------------------------------------------------------------------
As at June 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 117,293 $ 1,866 $ 2,209 $ 910 $ 122,278
31 - 60 days 29,530 971 1,357 142 32,000
61 - 90 days 1,862 462 723 - 3,047
91 - 120 days - - 1,647 - 1,647
-------------------------------------------------------------------------
$ 148,685 $ 3,299 $ 5,936 $ 1,052 $ 158,972
-------------------------------------------------------------------------
(C) Impaired Loans and specific Allowances for Credit Losses
As at June 30, 2009
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 50,272 $ 6,073 $ 7,754 $ 1,302 $ 65,401
Specific
allowances (2,139) (475) (1,328) (397) (4,339)
-------------------------------------------------------------------------
$ 48,133 $ 5,598 $ 6,426 $ 905 $ 61,062
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 34,643 $ 164 $ 6,309 $ 1,007 $ 42,123
Specific
allowances (1,680) - (547) (699) (2,926)
-------------------------------------------------------------------------
$ 32,963 $ 164 $ 5,762 $ 308 $ 39,197
-------------------------------------------------------------------------
As at June 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 26,913 $ 873 $ 4,186 $ 979 $ 32,951
Specific
allowances (242) (5) (108) (172) (527)
-------------------------------------------------------------------------
$ 26,671 $ 868 $ 4,078 $ 807 $ 32,424
-------------------------------------------------------------------------
(D) Allowance for Credit Losses
For the three months ended June 30, 2009
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance
at the
beginning
of the
period $ 2,439 $ 430 $ 776 $ 487 $ 4,132
Provisions
for credit
losses 1,063 45 1,161 149 2,418
Write-offs (1,453) - (673) (274) (2,400)
Recoveries 90 - 64 35 189
-------------------------------------------------------------------------
2,139 475 1,328 397 4,339
-------------------------------------------------------------------------
General
allowance
Balance
at the
beginning
of the
period 16,816 4,654 3,625 707 25,802
Provisions
for credit
losses 1,001 (138) (99) (83) 681
-------------------------------------------------------------------------
17,817 4,516 3,526 624 26,483
-------------------------------------------------------------------------
Total
allowance $ 19,956 $ 4,991 $ 4,854 $ 1,021 $ 30,822
-------------------------------------------------------------------------
For the three months ended December 31, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance
at the
beginning
of the
period $ 1,950 $ 5 $ 349 $ 67 $ 2,371
Provisions
for credit
losses 838 (5) 438 617 1,888
Write-offs (1,135) - (277) (3) (1,415)
Recoveries 27 - 37 18 82
-------------------------------------------------------------------------
1,680 - 547 699 2,926
-------------------------------------------------------------------------
General
allowance
Balance
at the
beginning
of the
period 16,694 3,907 3,651 825 25,077
Provisions
for credit
losses (558) 673 49 (64) 100
-------------------------------------------------------------------------
16,136 4,580 3,700 761 25,177
-------------------------------------------------------------------------
$ 17,816 $ 4,580 $ 4,247 $ 1,460 $ 28,103
-------------------------------------------------------------------------
For the three months ended June 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance
at the
beginning
of the
period $ 457 $ - $ 72 $ 187 $ 716
Provisions
for credit
losses 130 5 122 123 380
Write-offs (420) - (102) (141) (663)
Recoveries 75 - 16 3 94
-------------------------------------------------------------------------
242 5 108 172 527
-------------------------------------------------------------------------
General
allowance
Balance
at the
beginning
of the
period 16,181 3,142 3,477 876 23,676
Provisions
for credit
losses (209) 291 151 17 250
-------------------------------------------------------------------------
15,972 3,433 3,628 893 23,926
-------------------------------------------------------------------------
Total
allowance $ 16,214 $ 3,438 $ 3,736 $ 1,065 $ 24,453
-------------------------------------------------------------------------
For the six months ended June 30, 2009
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance
at the
beginning
of the
period $ 1,680 $ - $ 547 $ 699 $ 2,926
Provisions
for credit
losses 2,667 475 1,704 230 5,076
Write-offs (2,298) (1,008) (567) (3,873)
Recoveries 90 85 35 210
-------------------------------------------------------------------------
2,139 475 1,328 397 4,339
-------------------------------------------------------------------------
General
allowance
Balance
at the
beginning
of the
period 16,136 4,580 3,700 761 25,177
Provisions
for credit
losses 1,681 (64) (174) (137) 1,306
-------------------------------------------------------------------------
17,817 4,516 3,526 624 26,483
-------------------------------------------------------------------------
Total
allowance $ 19,956 $ 4,991 $ 4,854 $ 1,021 $ 30,822
-------------------------------------------------------------------------
For the six months ended June Secured 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance
at the
beginning
of the
period $ 634 $ - $ 128 $ 231 $ 993
Provisions
for credit
losses 256 5 193 250 704
Write-offs (823) - (261) (341) (1,425)
Recoveries 175 - 48 32 255
-------------------------------------------------------------------------
242 5 108 172 527
-------------------------------------------------------------------------
General
allowance
Balance
at the
beginning
of the
period 17,127 2,216 3,201 856 23,400
Provisions
for credit
losses (1,155) 1,217 427 37 526
-------------------------------------------------------------------------
15,972 3,433 3,628 893 23,926
-------------------------------------------------------------------------
Total
allowance $ 16,214 $ 3,438 $ 3,736 $ 1,065 $ 24,453
-------------------------------------------------------------------------
(E) Collateral
The fair value of collateral held against mortgages is based on
appraisals at the time a loan is originated. Appraisals are only updated
should circumstances warrant it or if a mortgage becomes impaired. At
June 30, 2009, the total appraised value of the collateral for mortgages
past due that are not impaired, as determined when the mortgages were
originated, was $395.6 million. For impaired mortgages, the total
appraised value of collateral at June 30, 2009 was $99.1 million.
5. LOAN SECURITIZATION
The following table summarizes the Company's new securitization
activities.
For the three For the six
months ended months ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except Percentages and June 30 June 30 June 30 June 30
Number of Years 2009 2008 2009 2008
-------------------------------------------------------------------------
Book value of mortgages
securitized $ 655,094 $ 250,630 $1,115,718 $ 396,401
Securitization receivable $ 31,240 $ 13,755 $ 74,150 $ 26,809
Servicing liability $ 6,756 $ 377 $ 11,322 $ 642
Net proceeds received on
securitized mortgages $ 641,141 $ 246,285 $1,091,973 $ 388,984
Net gain on sale of
mortgages(1) $ 22,847 $ 8,798 $ 47,109 $ 16,685
Prepayment rate 6.6% 10.7% 7.2% 11.7%
Excess spread 1.5% 2.9% 2.2% 3.2%
Weighted average life in
years 5.2 3.4 5.1 3.7
Discount rate 2.7% 3.9% 2.5% 3.8%
-------------------------------------------------------------------------
(1) The gain on sale of mortgages is net of hedging activities, see Table
4 in this MD&A
During the second quarter of 2009, the Company securitized insured
residential mortgages through CMHC's Canada Mortgage Bond Program with a
book value of $607.8 million for a total of $938.5 million in 2009
($122.6 million in Q2 2008 and $206.9 million for the six months ended
June 30, 2008). The gain on sale was $20.3 million during the second
quarter and $37.4 million for the six months ended June 30, 2009
($4.9 million in Q2 2008 and $9.4 million for the six months ended June
30, 2008). These figures are included in the table above.
6. OTHER ASSETS
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Accrued interest receivable $ 26,281 $ 27,861 $ 27,307
Income taxes receivable 4,432 10,472 8,474
Goodwill 15,752 15,752 15,028
Intangible assets(1) 14,170 558 858
Other prepaid assets and deferred
items 32,446 29,585 16,560
-------------------------------------------------------------------------
$ 93,081 $ 84,228 $ 68,227
-------------------------------------------------------------------------
(1) Intangible assets are comprised of deferred costs capitalized for the
development of the Company's new core banking system. These costs
will commence amortization in the first quarter of 2010.
7. OTHER LIABILITIES
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Accrued interest payable $ 161,526 $ 159,615 $ 162,219
Dividends payable 4,816 4,476 4,146
Future income tax liability (Note 11) 50,564 36,974 23,956
Securitization servicing liability 20,414 10,288 2,127
Payable to MBS and CMB holders 121,312 42,013 40,282
Other, including accounts payable and
accrued liabilities 31,344 16,002 11,133
-------------------------------------------------------------------------
$ 389,976 $ 269,368 $ 243,863
-------------------------------------------------------------------------
8. CAPITAL
(A) Common Shares Issued and Outstanding
For the three months ended
-------------------------------------------------------------------------
June 30, 2009 June 30, 2008
-------------------------------------------------------------------------
Number of Number of
In Thousands Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,355 $ 39,006 34,532 $ 38,899
Options exercised 63 774 10 318
Normal course issuer bid (20) (23) - -
-------------------------------------------------------------------------
Outstanding at end of
period 34,398 $ 39,757 34,542 $ 39,217
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
June 30, 2009 June 30, 2008
-------------------------------------------------------------------------
Number of Number of
In Thousands Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,434 $ 39,094 34,532 $ 38,899
Options exercised 63 774 10 318
Normal course issuer bid (99) (111) - -
-------------------------------------------------------------------------
Outstanding at end of
period 34,398 $ 39,757 34,542 $ 39,217
-------------------------------------------------------------------------
The purchase price of shares acquired through the Normal Course Issuer
Bid is allocated between capital stock and retained earnings.
(B) Share Purchase Options
For the three months ended
-------------------------------------------------------------------------
June 30, 2009 June 30, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
average average
In Thousands Except Number of Exercise Number of Exercise
Per Share Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,447 $ 24.60 1,289 $ 27.12
Granted 40 31.87 - -
Exercised (63) 10.56 (10) 28.12
Forfeited (50) 23.71 (52) 35.98
-------------------------------------------------------------------------
Outstanding at end of
period 1,374 $ 25.47 1,227 $ 26.73
-------------------------------------------------------------------------
Exercisable, end of
period 653 $ 21.32 541 $ 15.60
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
June 30, 2009 June 30, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
average average
In Thousands Except Number of Exercise Number of Exercise
Per Share Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,407 $ 25.08 1,294 $ 27.15
Granted 100 23.41 - -
Exercised (63) 10.56 (10) 28.12
Forfeited (70) 28.08 (57) $ 35.92
-------------------------------------------------------------------------
Outstanding at end of
period 1,374 $ 25.47 1,227 26.73
-------------------------------------------------------------------------
Exercisable, end of
period 653 $ 21.32 541 $ 15.60
-------------------------------------------------------------------------
(C) Capital Management
The Company has a Capital Management Policy which governs the quantity
and quality of capital held. The objective of the policy is to ensure
that regulatory capital requirements are met, while also providing a
sufficient return to investors. The Risk and Capital Committee and the
Board of Directors annually review the policy and monitor compliance with
the policy on a quarterly basis.
The Company's subsidiary Home Trust Company is subject to the regulatory
capital requirements governed by the Office of the Superintendent of
Financial Institutions (OSFI).
-------------------------------------------------------------------------
In Thousands of Dollars, Except June 30 December 31 June 30
Ratios and Multiple 2009 2008 2008
-------------------------------------------------------------------------
Regulatory capital
Tier 1 $ 464,380 $ 384,025 $ 354,653
Total 508,651 424,202 393,579
Regulatory ratios
Tier 1 15.2% 12.9% 12.5%
Total 16.7% 14.2% 13.8%
Assets to capital multiple 12.1 13.7 13.6
-------------------------------------------------------------------------
Under Basel II, OSFI considers a financial institution to be well-
capitalized if it maintains a Tier 1 capital ratio of 7% and a total
capital ratio of 10%. Home Trust Company is in compliance with the OSFI
capital guidelines.
9. STOCK BASED COMPENSATION
(A) Common Shares Issued and Outstanding
During the second quarter of 2009, $385,000 was recorded as an expense
for a year-to-date total of $772,000 ($357,000 - Q2 2008 and $764,000 -
six months of 2008) for stock option awards in the consolidated
statements of income, with an off-setting credit to contributed surplus.
During the second quarter of 2009, 40,000 options were granted for a
year-to-date total of 100,000. There were no new options granted for the
second quarter or first six months of 2008.
(B) Deferred Share Unit Plan
Effective January 1, 2009 the Board of Directors approved a deferred
share unit plan (DSU). The plan is open to Directors of the Company who
elect to accept renumeration in the form of cash, cash and DSU's or
DSU's. At June 30, 2009 there were 3,624 deferred share units issues with
the associated liability of $0.1 million recorded in other liabilities on
the consolidated balance sheet.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Available for sale securities $ 529 $ (33,615) $ (12,397)
Income taxes recovery (expenses) 2,194 10,473 3,070
-------------------------------------------------------------------------
2,723 (23,142) (9,327)
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Securitization receivables 20,307 18,080 8,806
Income taxes recovery (expenses) (6,613) $ (5,991) (2,921)
-------------------------------------------------------------------------
13,694 12,089 5,885
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) $ 16,417 $ (11,053) $ (3,442)
-------------------------------------------------------------------------
11. INCOME TAXES
(A) Reconciliation of income taxes
For the three For the six
months ended months ended
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Income before income
taxes $ 49,605 $ 38,607 $ 95,739 $ 75,210
Income taxes at statutory
combined federal and
provincial income tax
rates 16,162 12,628 31,195 24,944
Increase (decrease) in
income taxes at statutory
income tax rates
resulting from
Tax-exempt income (1,035) (716) (1,891) (1,356)
Non-deductible expenses 1,380 124 2,592 632
Future tax rate changes (648) (177) (2,132) (397)
Other (605) 198 206 (322)
-------------------------------------------------------------------------
Income tax $ 15,254 $ 12,057 $ 29,970 $ 23,501
-------------------------------------------------------------------------
(B) Sources of Future Income Tax Balances
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Future income tax liabilities
Deferred agent commissions and
other charges $ 12,149 $ 7,761 $ 7,661
Mortgage-backed securities
receivable 52,302 40,828 28,667
-------------------------------------------------------------------------
64,451 48,589 36,328
-------------------------------------------------------------------------
Future income tax assets
Allowance for credit losses 8,347 7,776 6,771
Future tax recoverable acquired - - 860
Deferred commitment fees and other
charges 5,540 3,839 4,741
-------------------------------------------------------------------------
13,887 11,615 12,372
-------------------------------------------------------------------------
$ 50,564 $ 36,974 $ 23,956
-------------------------------------------------------------------------
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilized off-balance sheet financial instruments during 2009.
In this period the Company entered into economic hedge swap transactions
with major financial institutions. The Company may utilize interest rate
swaps or forward contracts to hedge the economic value exposure of
movements in interest rates between the time that the mortgages are
committed to be funded under asset securitization, and the time the
mortgages are actually sold (these mortgages qualify for government
insurance). The intent of the swap or forward contract is to have fair
value movements offset the fair value movements in the pool of mortgages
over the period in which the fixed rate pool may be exposed to movements
in interest rates, generally 60 to 150 days. The interest rate swaps
referred to as "pay-fixed interest rate swaps" are structured such that
the Company agrees to pay a fixed rate (as designated in the swap) and
receives the floating rate (as designated in the swap). The Company
enters into off-balance sheet financial transactions to hedge commitment
risk. During the quarter, the Company unwound $488.5 million in bond
forward contracts realizing a gain of $13.5 million.
The Company participates in the Canada Mortgage Bond program sponsored by
CMHC. Under this program, the Company sells MBS pools to Canada Housing
Trust which finances the purchase by issuing a bullet Canada Mortgage
Bond. Under this program, the Company must manage the mismatch and
reinvestment risk between the amortizing MBS pool and the bullet Canada
Mortgage Bond. As part of this arrangement, the Company entered into
seller swaps which have the effect of paying the fixed interest payments
on the Canada Mortgage Bond, and receiving the total return on the MBS
pool. As well, the Company entered into accreting hedge swaps to manage
the reinvestment risk between the amortizing MBS pool and the Canada
Mortgage Bond.
As at June 30, 2009 and 2008, the outstanding seller and hedge swaps
(swaps) and forward bond (bonds) positions were as follows:
-------------------------------------------------------------------------
In Thousands of Dollars June 30, 2009 June 30, 2008
-------------------------------------------------------------------------
Notional Fair Notional Fair
Term (years) Amount Amount Value Amount Value
-------------------------------------------------------------------------
Swaps
1 to 5 $2,020,032 $ (9,337) $ 338,653 $ 182
6 to 10 233,239 1,568 - -
-------------------------------------------------------------------------
$2,253,271 $ (7,769) $ 338,653 $ 182
-------------------------------------------------------------------------
Bonds
1 to 5 $ 265,900 $ (1,687) $ - $ -
6 to 10 44,500 325 - -
-------------------------------------------------------------------------
$ 310,400 $ (1,362) $ - $ -
-------------------------------------------------------------------------
The fair value of the swap and bond contracts are included in other
assets or other liabilities with changes in fair value included in loss
on derivatives in the consolidated statement of income.
13. INTEREST RATE SENSITIVITY
The Company's exposure to interest rate risk results from the difference,
or gap between the maturity or repricing dates of interest sensitive
assets and liabilities, including off-balance sheet items. The following
table shows the gap positions at June 30, 2009, December 31, 2008 and
June 30, 2008 for selected period intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap
position.
As at June 30, 2009
-------------------------------------------------------------------------
In Thousands of
Dollars, Except Floating 0 to 3 3 Months 1 to 3
Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 30,511 $1,363,432 $1,526,937 $1,429,029
Total liabilities and
equity 6 902,074 2,081,439 1,773,658
Off-balance sheet items - (299,180) 53,717 228,781
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 30,505 $ 162,178 $ (500,785) $ (115,848)
-------------------------------------------------------------------------
Cumulative gap $ 30,505 $ 192,683 $ (308,102) $ (423,950)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.5% 3.1% (5.0%) (6.9%)
-------------------------------------------------------------------------
As at June 30, 2009
-------------------------------------------------------------
In Thousands of Non-
Dollars, Except Over interest
Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $1,442,452 $ 360,369 $6,152,730
Total liabilities and
equity 450,149 945,404 6,152,730
Off-balance sheet items 16,682 - -
-------------------------------------------------------------
Interest rate sensitive
gap $1,008,985 $ (585,035) $ -
-------------------------------------------------------------
Cumulative gap $ 585,035 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 9.5% - -
-------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
In Thousands of
Dollars, Except Floating 0 to 3 3 Months 1 to 3
Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 29,006 $1,442,867 $1,506,606 $1,601,438
Total liabilities and
equity 6 923,590 2,359,833 1,318,924
Off-balance sheet items - (145,838) 64,955 80,837
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 29,000 $ 373,439 $ (788,272) $ 363,351
-------------------------------------------------------------------------
Cumulative gap $ 29,000 $ 402,439 $ (385,833) $ (22,482)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.5% 6.9% (6.6%) (0.4%)
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------
In Thousands of Non-
Dollars, Except Over interest
Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $ 965,500 $ 264,296 $5,809,713
Total liabilities and
equity 451,102 756,258 5,809,713
Off-balance sheet items 46 - -
-------------------------------------------------------------
Interest rate sensitive
gap $ 514,444 $ (491,962) -
-------------------------------------------------------------
Cumulative gap $ 491,962 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.5% - -
-------------------------------------------------------------
As at June 30, 2008
-------------------------------------------------------------------------
In Thousands of
Dollars, Except Floating 0 to 3 3 Months 1 to 3
Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 35,129 $1,198,334 $1,549,664 $1,645,896
Total liabilities and
equity - 778,744 2,210,891 1,246,131
Off-balance sheet items - (372,279) 43,618 101,918
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 35,129 $ 47,311 $ (617,609) $ 501,683
-------------------------------------------------------------------------
Cumulative gap $ 35,129 $ 82,440 $ (535,169) $ (33,486)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.7% 1.5% (10.0%) (0.6%)
-------------------------------------------------------------------------
As at June 30, 2008
-------------------------------------------------------------
In Thousands of Non-
Dollars, Except Over interest
Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $ 738,087 $ 194,661 $5,361,771
Total liabilities and
equity 444,549 681,454 5,361,771
Off-balance sheet items 226,743 - -
-------------------------------------------------------------
Interest rate sensitive
gap $ 520,281 $ (486,795) $ -
-------------------------------------------------------------
Cumulative gap $ 486,795 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 9.1% - -
-------------------------------------------------------------
Based on the current interest rate gap position at June 30, 2009, the
Company estimates that a 100 basis point decrease in interest rates would
decrease net interest income and other comprehensive income after tax
over the next twelve months by $3.8 million and $1.7 million,
respectively. A 100 basis point increase in interest rates would increase
net income and other comprehensive income after tax over the next twelve
months by a similar amount.
14. EARNINGS BY BUSINESS SEGMENT
The Company operates principally through two business segments - mortgage
lending and consumer lending. The mortgage lending operation consists of
core residential mortgage lending, securitization of government-insured
mortgage loans, commercial real estate lending, and the administration of
Regency Finance Corp. second mortgage loans (secured loans). The consumer
lending operation consists of credit card services, installment lending
to customers of retail businesses and PSiGate operations. The Other
category includes the Company's treasury and securities investment
activities.
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income $ 24,669 $ 24,127 $ 9,642 $ 6,505
Provision for credit
losses (2,037) (357) (1,062) (273)
Fees and other income 4,452 3,707 2,692 3,288
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 20,650 10,647 - -
Non-interest expenses (11,502) (11,168) (2,554) (2,198)
-------------------------------------------------------------------------
Income before income taxes 36,232 26,956 8,718 7,322
Income taxes $ (10,865) $ (8,752) $ (2,921) $ (2,522)
-------------------------------------------------------------------------
Net income $ 25,367 $ 18,204 $ 5,797 $ 4,800
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 12,704
-------------------------------------------------------------------------
Total assets $4,865,588 $4,400,471 $ 388,463 $ 392,083
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income $ 6,178 $ 8,730 $ 40,489 $ 39,362
Provision for credit
losses - - (3,099) (630)
Fees and other income 318 97 7,462 7,092
Net gain on securities,
mortgage-backed
securities and
disposition of - -
subsidiary 2,325 (421) 22,975 10,226
Non-interest expenses (4,166) (4,077) (18,222) (17,443)
-------------------------------------------------------------------------
Income before income taxes 4,655 4,329 49,605 38,607
Income taxes $ (1,468) $ (783) (15,254) $ (12,057)
-------------------------------------------------------------------------
Net income 3,187 3,546 $ 34,351 26,550
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,028
-------------------------------------------------------------------------
Total assets $ 898,679 $ 569,217 $ 6,152,730 $5,361,771
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income $ 45,126 $ 46,584 $ 18,066 $ 12,228
Provision for credit
losses (4,852) (610) (1,530) (620)
Fees and other income 9,202 7,414 5,154 6,680
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 46,305 19,318 - -
Non-interest expenses $ (23,177) (19,317) (5,711) (4,443)
-------------------------------------------------------------------------
Income before income
taxes 72,604 53,389 15,979 13,845
Income taxes (22,569) (17,304) (5,365) (4,721)
-------------------------------------------------------------------------
Net income $ 50,035 $ 36,085 $ 10,614 $ 9,124
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 12,704
-------------------------------------------------------------------------
Total assets $4,865,588 $4,400,471 $ 388,463 $ 392,083
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income $ 13,529 $ 18,178 $ 76,721 $ 76,990
Provision for credit
losses - - (6,382) (1,230)
Fees and other income 428 221 14,784 14,315
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 1,382 (1,977) 47,687 17,341
Non-interest expenses (8,183) (8,446) (37,071) (32,206)
-------------------------------------------------------------------------
Income before income
taxes 7,156 7,976 95,739 75,210
Income taxes (2,036) (1,476) (29,970) $ (23,501)
-------------------------------------------------------------------------
Net income $ 5,120 $ 6,500 $ 65,769 $ 51,709
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,028
-------------------------------------------------------------------------
Total assets $ 898,679 $ 569,217 $6,152,730 $5,361,771
-------------------------------------------------------------------------
15. FUTURE ACCOUNTING CHANGES
International Financial Reporting Standards
The CICA will transition financial reporting for Canadian public
entities to International Financial Reporting Standards (IFRS) effective
for fiscal years beginning on or after January 1, 2011. The Company is
currently in phase two of the project which includes a detailed analysis
and evaluation of the impact of the relevant standards expected to impact
the Company's consolidated fi nancial statements. It is currently too
early to quantify the potential impact on the Company's consolidated
financial statements.
16. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative interim unaudited consolidated financial statements have
been reclassified from statements previously presented to conform to the
presentation of the 2009 interim unaudited consolidated financial
statements.
Home Capital Group Inc. is a public company, traded on the Toronto Stock
Exchange (HCG), operating through its principal subsidiary, Home Trust
Company. Home Trust is a federally regulated trust company offering deposit,
mortgage lending, retail credit and payment card services. Licensed to conduct
business across Canada, Home Trust has branch offices in Ontario, Alberta,
British Columbia, Nova Scotia and Quebec.
For further information: Gerald M. Soloway, CEO, or Nick Kyprianou,
President, (416) 360-4663, www.homecapital.com
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