Fourth Quarter Results Propel Home Capital to Record Performance in 2008: Earnings per Share Rise by 20% for the Year; Return on Equity was 27.8%
TORONTO, Feb. 17 /CNW/ - Home Capital Group Inc. (TSX: HCG) today
announced solid financial performance for the three months and year ended
December 31, 2008. Despite a weakening Canadian market, the Company's core
business activities, including residential and commercial mortgage lending,
CMHC-insured mortgage securitization and Visa operations, all delivered strong
earnings growth and returns on equity. We were pleased to have met our goal of
maintaining strong financial results in 2008.
Key results from the fourth quarter included:
- Net income for the fourth quarter of 2008 was $29.0 million, an
increase of 19.9% over the $24.2 million recorded in the same period
last year. Earnings for the year reached $108.7 million, up 20.4% over
2007.
- Basic earnings per share for the fourth quarter of 2008 were $0.84, up
20.0% from $0.70 reported in the fourth quarter of 2007. Diluted
earnings per share were $0.84 in the fourth quarter of 2008, an
increase of 20.0% from the $0.70 recorded in the fourth quarter of
2007. For the year ended December 31, 2008, basic earnings per share
were $3.15, 20.2% higher than the $2.62 recorded last year. Diluted
earnings per share in 2008 were $3.13, 20.9% above 2007.
- Return on equity was 27.4% for the fourth quarter of 2008 compared to
28.9% for the quarter ended December 31, 2007, and 27.8% for 2008,
compared to 28.9% in the prior year.
- Total assets at December 31, 2008 reached $5.81 billion, 16.8% higher
than the $4.98 billion reported one year earlier. Total assets,
together with Mortgage-Backed Securities (MBS) originated and
administered by the Company, grew to $8.42 billion, a rise of 30.9%
from $6.43 billion at December 31, 2007.
- Total mortgage originations were $999.1 million during the fourth
quarter of 2008, an increase of 11.0% over the $899.8 million advanced
during the same quarter in 2007. During the fourth quarter of 2008 the
Company advanced $894.0 million in residential mortgages,
$48.9 million in non-residential and construction mortgages,
$21.2 million in store and apartment properties and $35.0 million
warehouse commercial mortgages. For the year ended December 31, 2008,
total mortgage originations were $3.86 billion, an increase of 35.0%
over the $2.86 billion advanced during 2007.
- The Company experienced strong growth in mortgage securitization as
the Company securitized $557.7 million in CMHC-insured mortgages
during the fourth quarter of 2008 compared to $198.9 million for the
same period last year.
- Outstanding balances on the Equityline Visa portfolio reached
$342.9 million at December 31, 2008, up 13.3% from the $302.7 million
recorded last year. Net income from consumer lending reached
$4.8 million for the fourth quarter, 17.4% over the $4.1 million
recorded in the same quarter last year.
- The efficiency ratio (TEB) was 27.0% in the fourth quarter compared to
28.5% during the same period one year earlier.
- Net impaired loans represented 0.86% of the total loans portfolio at
December 31, 2008, an increase from 0.72% in net impaired loans at the
end of 2007. Non-performing mortgages continue to be professionally
managed on a loan-by-loan basis by the Company, and losses and
specific reserves continue to be modest.
In addition to meeting our financial targets, the Company strengthened
its risk management practices with the addition of key personnel dedicated to
enhanced risk measurement and analysis. The Company has also invested
significant time and resources in risk reporting, stress testing and internal
credit scoring and risk rating systems. Risk management is an essential
component of the Company's strategic focus and contributes directly to its
profitability and consistently strong returns.
During the year we enhanced the quality and strength of our capital,
thereby reducing the risk profile of the Company. Home Trust continues to
remain well capitalized with Tier 1 and total capital ratios of 12.9% and
14.2% respectively at the end of 2008 compared with ratios of 11.1% and 12.5%
respectively in the prior year, with both ratios steadily increasing through
2008. The increase in capital ratios was achieved without incurring any equity
dilution, external debt, or preferred share issuance. With a capital base
comprised almost entirely of common equity, increased liquidity and no
external debt, the Company remains well positioned to weather the current
economic downturn.
During the fourth quarter, Standard & Poor's (S&P) affirmed its long-term
and short-term counterparty ratings issued to Home Trust (BBB/A-2) and Home
Capital (BBB-/A-3), with a stable outlook for both companies. The ratings and
outlook have remained the same since S&P's initial rating assignments in 2005.
Subsequent to the end of the year, Fitch Ratings (Fitch) affirmed its Positive
Rating Outlook (BBB-/F-3) for both Home Capital and Home Trust. The ratings
and outlook remain unchanged from the initial ratings issued by Fitch in 2004.
These ratings reflect the Company's consistently robust earnings, strong
capital and liquidity positions, and ability to generate positive results
while maintaining a tradition of prudent risk management. Home Trust is the
only trust company in Canada, not a subsidiary of a major bank, which has
maintained investment grade ratings from S&P and Fitch at December 31, 2008.
Through the year the Company successfully focused on increasing the
number of mortgages in its insured mortgage programs and subsequently selling
these mortgages through CMHC-insured MBS or the Canada Mortgage Bond program.
During the fourth quarter we advanced $894.0 million in residential mortgages,
compared to $722.4 million in the same quarter last year. However, we
securitized and sold approximately $557.7 million of CMHC-insured mortgages in
the quarter, up significantly from $198.9 million in the same quarter last
year. These efforts resulted in the removal of any associated credit risk on
the securitized mortgages from the Company's balance sheet. The insured
mortgage program will continue to be a significant factor in the Company's
profitability over the near term.
Through the first month of the new year we have experienced a more stable
housing market in certain regions across Canada, and we are more confident
lending on current house valuations that are 10% to 15% lower than their
recent historic highs. As a result, we are cautiously returning to lending at
our traditional lending criteria and over time a larger portion of our
mortgage originations will remain on our balance sheet.
The Company continued to strengthen its Board of Directors with the
appointment of Ms. Bonita Then as a director in December 2008. Ms. Then has an
MBA in finance and is an accomplished executive with extensive strategic,
financial and operational expertise, having served as the CFO at Altamira
Investment Services Inc., National Trustco Inc., Central Guaranty Trustco Inc.
and other private and public companies. She is currently the President and CEO
of Specialty Foods Group, a US food company. We are confident that, with her
broad experience and keen insight, she will make a valuable contribution to
the Board and to the Company.
Subsequent to the end of the year, and in light of the Company's capital
strength and positive financial performance in 2008, the Board of Directors
declared a quarterly cash dividend of $0.13 per common share payable on March
1, 2009 to shareholders of record at the close of business on February 20,
2009.
Looking ahead, we believe we will generate another year of solid growth
in 2009, and the Board of Directors and Management have established the
following objectives for 2009: 10 to 15% growth in each of total earnings,
diluted earnings per share, and total assets (including assets under
administration), as well as a 20% return on equity.
Home Capital delivered positive financial results in 2008, exceeding all
of its stated targets for the year. The Company continued to focus on
sustainability and accountability, while maintaining its profitable business
strategy. The Board of Directors and Management are confident that the Company
is not only able to withstand the current challenging economy but will
continue to thrive and emerge strong and well positioned to generate
additional growth as the economy recovers.
(signed) (signed)
GERALD M. SOLOWAY NORMAN F. ANGUS
Chief Executive Officer Chairman of the Board
February 17, 2009
Additional information concerning the Company's targets and related
expectations for 2008, including the risks and assumptions underlying these
expectations, may be found in Management's Discussion and Analysis for the
Fourth Quarter 2008.
Fourth Quarter Results Conference Call
The conference call will take place on Tuesday, February 17, 2009 at
10:30 a.m. Participants are asked to call 5 to 15 minutes in advance,
416-644-3414 in Toronto or toll-free 1-800-733-7571 throughout North America.
The call will also 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.
Tuesday, February 17, 2009 and midnight Tuesday, February 24, 2009 by calling
416-640-1917 or 1-877-289-8525 (enter passcode 21295395 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
December 31 (Unaudited) Three Months Ended Year Ended
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In Thousands of Dollars
(Except Per Share and
Percentage Amounts) 2008 2007 2008 2007
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OPERATING RESULTS
Net Income $ 29,039 $ 24,228 $ 108,687 $ 90,241
Total Revenue 117,996 105,082 454,695 368,881
Earnings per Share
- Basic $ 0.84 $ 0.70 $ 3.15 $ 2.62
Earnings per Share
- Diluted 0.84 0.70 3.13 2.59
Return on
Shareholders' Equity 27.4% 28.9% 27.8% 28.9%
Return on Average
Assets 2.0% 2.0% 2.0% 2.0%
Efficiency Ratio 27.5% 29.8% 28.5% 27.9%
Efficiency Ratio
(TEB(2)) 27.0% 28.5% 28.0% 27.1%
(Non-interest Expense/
Net Interest Income
Plus Fee Income)
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BALANCE SHEET HIGHLIGHTS
Total Assets $ 5,809,713 $ 4,975,093
Loans 4,506,392 4,022,171
Deposits 5,102,781 4,413,984
Shareholders' Equity 432,753 348,040
Mortgage-Backed Security
Assets Under
Administration 2,614,258 1,459,455
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FINANCIAL STRENGTH
Capital Measures(1),(3)
Risk Weighted Assets(1),(3) $ 2,985,750 $ 2,802,394
Tier 1 Capital Ratio(1),(3) 12.9% 11.1%
Total Capital Ratio(1),(3) 14.2% 12.5%
Credit Quality
Net Impaired Loans as a
Percentage of Gross Loans 0.9% 0.7%
Allowance as a Percentage
of Gross Impaired Loans 66.7% 81.3%
Annualized Provision as a
Percentage of Gross Loans 0.2% 0.2%
Share Information
Book Value per Common Share $ 12.57 $ 10.08
Common Share Price - Close $ 19.80 $ 41.90
Market Capitalization 681,793 1,446,891
Number of Common Shares
Outstanding 34,434 34,532
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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) in this unaudited
interim consolidated financial report.
(3) Risk Weighted Assets, Tier 1 and Total Capital at December 31, 2008
are calculated under Basel II while the comparative periods are
calculated under Basel I.
See Capital Management section for further details.
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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 24 through 30 of
the Company's 2007 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.
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 $1.2 million for the fourth quarter, and $4.3
million for the year ($2.3 million - Q4 2007 and $5.5 million - twelve months
2007) increased reported interest income. TEB does not have a standard meaning
prescribed by Canadian generally accepted accounting principles (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 Management's Discussion and Analysis (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 December 31, 2008
included herein, and the audited consolidated financial statements and MD & A
for the year ended December 31, 2007. These are available on the Canadian
Securities Administrators' website at www.sedar.com and on pages 8 through 58
of the Company's 2007 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 2007 remain substantially
unchanged. These unaudited interim consolidated financial statements and MD &
A have been prepared based on information available as at February 13, 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.
2008 Objectives and Performance
Home Capital published its financial objectives for 2008 on page 10 of the
Company's 2007 Annual Report. The following table compares actual performance
to date against each of these objectives.
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Year Ended
December 31, 2008
2008 Objectives Actual Results
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Net Income $108.2 million $108.7 million, or 20.4%
increase over the same
period last year
Diluted Earnings per Share $3.11 $3.13 per share, or 20.9%
increase over the same
period last year
Total Assets and Assets $7.72 billion $8.42 billion, or 31.0%
Under Administration increase over the same
period last year
Return on Shareholders' 25.0% 27.8%
Equity
Efficiency Ratio (TEB) 27.0% to 33.0% 28.0%
Capital Ratios(1)
Tier 1 Minimum of 10% 12.9%
Total Minimum of 12% 14.2%
Provision for Loan Losses 0.15% to 0.25% 0.15%
as a Percentage of
Total Loans
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(1) Based on the Company's wholly owned subsidiary, Home Trust Company.
Capital Ratios have been calculated under Basel II requirements.
See Capital Management section for additional details.
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FINANCIAL HIGHLIGHTS
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Income Statement Highlights
The Company finished the year with positive results and achieved all of
its financial objectives for 2008. The Company continues to maintain a strong
capital base and liquidity, 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 fourth quarter of 2008 are
summarized below.
- Net income rose 19.9% over the comparable quarter of 2007.
- Non-interest income was up 78.7% over the fourth quarter of 2007,
driven by robust growth in securitization gains of $20.3 million and
increases in fees for the administration and servicing of the mortgage
and Visa portfolios, offset by losses on the securities portfolio and
losses on derivative mark-to-market values.
- The efficiency ratio (TEB) (the lower the better) remained low, and in
line with the Company's objective, at 27.0%, compared to 28.5% in the
same quarter of 2007.
- Diluted earnings per share for the quarter increased 20.0% to $0.84,
compared to $0.70 in the fourth quarter of 2007.
- Return on average shareholders' equity for the quarter was 27.4%,
compared to 28.9% for the same period last year.
- Net interest income declined from $38.0 million to $35.2 million,
quarter-over-quarter. Successive declines in the prime interest rate
have had a negative impact on net interest margin as interest rates on
the Company's mortgage loans portfolio reset faster than the
corresponding rates on the Company's GIC products.
Balance Sheet Highlights
- Total assets at December 31, 2008 rose 16.8% year-over-year, to reach
$5.81 billion from $4.98 billion reported at December 31, 2007. This
asset growth was experienced across the Company's core asset base
including the Company's loans and securities portfolio and cash
resources. Although global markets continue to experience significant
difficulties, the Company believes it is well positioned by remaining
well capitalized with access to liquidity through the offering of
term deposits. The Company has remained debt free since September
2006.
- The Equityline Visa portfolio reached $342.9 million in receivables,
representing growth of 13.3%, or $40.2 million in the fourth quarter
of 2008 compared to the fourth quarter of 2007.
- The Company continues to have access to funds to accommodate the
growth of the Company's loans portfolio. Liquid assets at December
31, 2008 were $882.4 million, up from $627.1 million at December 31,
2007.
- The Company continues to strengthen its capital position with Tier 1
capital climbing to 12.9% at the end of the quarter from 11.1% at
December 31, 2007.
- Deposit liabilities as at December 31, 2008 grew 15.6% to reach $5.10
billion, as compared to $4.41 billion at December 31, 2007. These
proceeds were used to fund the growth in the Company's loans
portfolio, with excess funds prudently deployed in the Company's
liquidity portfolio as the Company acts to hold greater liquidity
during uncertain economic times.
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EARNINGS REVIEW
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Net Interest Income
Net interest income was $35.2 million in the fourth quarter, and $150.6
million for the year, compared to $38.1 million for the comparable quarter in
2007 and $146.3 million for the year ended December 31, 2007. The
year-over-year increase reflects strong growth in interest-bearing assets,
exceeding the growth in interest-bearing liabilities offset by contracted net
interest margins. Net interest income in the fourth quarter of 2008 declined
from the comparable quarter in 2007. The decrease was mainly due to increased
deposit costs relating to ongoing disruptions in capital markets and
successive reductions in the prime lending rate. Reductions in the prime
interest rate negatively impact net interest margins as the Company's deposits
do not re-price as quickly as the Company's mortgage loans portfolio. The net
interest margin (TEB) between all of the Company's assets and liabilities for
the fourth quarter was 2.6% and 2.9% for the year, down from 3.4% achieved in
each of the comparable periods in 2007.
The interest spread between the loans portfolio and deposits at the end
of the fourth quarter of 2008 was 2.8%, compared to 3.3% for the comparable
quarter in 2007, and 3.3% for the year, compared to 3.4% for the comparable
twelve-month period in 2007. The decrease in interest spread over the prior
year periods was primarily the result of an increase in funding costs
resulting from a tightening in availability of liquidity combined with the
effects of cuts to the prime lending rate on the repricing mismatch on
prime-based loans. In addition, the Company continues to hold higher levels of
liquidity in the form of low rate deposits with other chartered banks which
has the additional affect of reducing the overall spreads. Despite the decline
in overall interest spread, the Company's core residential mortgage portfolio
continued to maintain historic spreads. At December 31, 2008 the spread on the
residential mortgage portfolio was 3.0%, compared to 3.1% in 2007. With
challenging credit market conditions persisting, the Company expects to
continue to maintain somewhat lower spreads into 2009.
Non-Interest Income
Total non-interest income was $26.0 million for the quarter, a 78.7%
increase over the comparable quarter in 2007 and $80.7 million for the
twelve-month period of 2008, or a 67.9% increase over the same twelve-month
period in 2007. Both the quarter-over-quarter and year-over-year increases
were driven largely by the strong 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 securitization gains were the losses incurred on the
forward bond contracts which the Company entered into to economically hedge
the commitment risk on these securitization transactions. The increases in
fees generated from the administration of the loans portfolio were offset by
losses incurred on the securities portfolio.
The fees and other income components of non-interest income ended the
quarter at $7.1 million and $28.5 million for the twelve-month period of 2008,
an increase of 10.2% over the comparable quarter of 2007 and 32.1% for the
year. The increases over the comparable periods were due to growth in the
Company's loans portfolio and the associated fee income generated from the
administration and servicing of these portfolios as well as fee income
generated through Payment Services Interactive Gateway Inc. (PSiGate) which
was acquired in October 2007.
The following table summarizes the securitization activities during the
fourth quarter of 2008 compared to the same period in 2007:
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Three months ended Three months ended
December 31, 2008 December 31, 2007
Single Family Single Family
Residential MBS Residential MBS
Multi-
Under 1 Over Residential
year 1 year MBS Total Over 1 year(1)
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Book value
of mortgages
securitized $ 105,631 $ 182,308 $ 269,781 $ 557,720 $ 198,925
Gain on
sale of
mortgages $ 2,912 $ 11,512 $ 11,275 $ 25,699 $ 8,107
Prepayment
rate 4.2% 12.8% 0.0% 5.0% 13.5%
Excess spread 4.3% 3.1% 1.7% 2.7% 2.9%
Discount rate 2.6% 2.7% 3.0% 2.8% N/A
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(1) In the prior period the Company only sold Residential MBS over 1
year.
The Company issued eleven MBS pools during the fourth quarter of 2008,
consisting of $557.7 million of Canada Mortgage and Housing Corporation (CMHC)
insured residential mortgages for a total issuance of $1.50 billion for the
year. This represents an increase of $358.8 million from the $198.9 million in
MBS pools issued in the comparable quarter of 2007 and an increase of $806.5
million over the $692.3 million in MBS pools that were issued during the
twelve-month period of 2007. The securitization gains were $25.7 million
during the quarter and $61.3 million for the twelve-month period of 2008,
compared to $8.1 million for the fourth quarter of 2007 and $22.8 million for
the comparable twelve-month period of 2007 (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
fourth quarter of 2008 resulted in a $9.3 million realized loss recorded in
the consolidated statement of income under gain (loss) on derivatives. In
2008, the Company began diversifying the MBS pools issued to include MBS pools
with a maturity under one year and multi-residential pools. The one year and
multi-residential pool assumptions are outlined in the table.
The increase in securitization gains during the quarter and twelve-month
period ended December 31, 2008 compared to the prior periods was due to
significant volume increases in securitization activity. The spread earned on
the pools averaged 2.7% in the fourth quarter of 2008 and 2.6% for the year
compared to 2.9% for the comparable quarter and 2.7% for the twelve-month
period in 2007. The unscheduled prepayment rate was lower during the quarter
and year-to-date as the Company issued several 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 two
multi-residential MBS pools during the quarter where unscheduled prepayments
are not permitted under the program. Of the $557.7 million MBS pools issued
during the quarter, $375.4 million, or 67.3% 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 distribution channel to diversify its funding stream for
MBS pools. Of the eleven MBS pools issued during the quarter, three MBS pools
with a book value of $452.1 million were securitized through the CMB program
resulting in gains of $22.8 million. For the year, the Company has securitized
$1.09 billion through the CMB program and recognized gains of $48.9 million.
Non-Interest Expenses
Total non-interest expenses for the quarter were $16.9 million and $66.0
million for the year. This compares to $15.7 million for the fourth quarter of
2007 and $54.2 million for the twelve-month period ended December 30, 2007.
The increases over the comparable periods of 2007 were due to higher salary
and benefit expenses, and the inclusion of the operating expenditures of
PSiGate which was acquired in October 2007. Salaries and staff benefits for
the quarter increased by $0.4 million, or 4.9% over the fourth quarter of 2007
and up $6.0 million, or 19.8% over the comparable twelve-month period of 2007.
The Company ended the quarter with 395 employees, up from 377 employees at
December 31, 2007. Premises expenses increased from the prior year period 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 increased by $0.6 million, or 8.7%
compared to the fourth quarter of 2007 and up $5.2 million, or 25.9% from the
same twelve-month period in 2007. The increase from the comparable periods of
2007 was primarily the result of the inclusion of operating expenditures of
PSiGate and rising general operating costs as the Company continues to grow
across all business lines.
The efficiency ratio (TEB) ended the quarter at 27.0% and 28.0% for the
year, compared to 28.5% in the previous comparable quarter and 27.1% for the
twelve months of 2007. As the Company continues to navigate through the
economic challenges, management remains focused on containing discretionary
spending. This effort once again has enabled the Company to meet its stated
objective for 2008 of maintaining an efficiency ratio between 27% and 33%.
Provision for Credit Losses
The Company expensed $2.0 million during the quarter and $6.6 million for
the year ended December 31, 2008, compared to $2.4 million in the fourth
quarter of 2007 and $6.0 million in the comparable twelve-month period of 2007
through the provision for credit losses. This expense represented 0.2% (0.2% -
2007 annualized) of total gross loans, on an annualized basis. The Company
continues to add to the general allowance for credit losses as a prudent
measure in line with overall asset growth. The total general allowance
amounted to $25.2 million at the end of 2008, an increase of $1.8 million over
the $23.4 million recorded at December 31, 2007.
At December 31, 2008 net impaired loans amounted to $39.2 million (0.86%
of gross loans), compared to $29.0 million (0.72% of gross loans) at December
31, 2007 (refer to Note 4 of these unaudited interim consolidated financial
statements). Total net loans written-off during the quarter were $1.3 million,
compared to $0.8 million in the fourth quarter of 2007. For the year, net
loans written-off were $2.9 million, compared to $1.9 million for the
comparable twelve-month period of 2007. 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 2007
Annual Report under the heading Risk Management.
Income Taxes
The income tax expense amounted to $13.4 million (effective tax rate of
31.5%) for the fourth quarter of 2008 and $49.9 million (effective tax rate of
31.5%) for the year ended December 31, 2008, compared to $10.3 million
(effective tax rate of 29.8%) for the comparable fourth quarter of 2007 and
$43.8 million (effective tax rate of 32.7%) for the twelve-month period of
2007. 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 33.4% for the fourth quarter and 33.3% for the
twelve-month period of 2008, compared to 34.1% for the fourth quarter of 2007
and 35.3% for the comparable twelve-month period in 2007.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income (OCI) and totaled $21.4 million for the fourth quarter and $103.9
million for the year, a decrease of $7.2 million, or 25.3% over the $28.6
million recorded in the same quarter last year while year-over-year OCI
increased $19.4 million, or 22.9% over 2007. As previously noted net income
for the fourth quarter of 2008 increased 19.9%, or $4.8 million over the same
quarter last year and increased 20.4%, or $18.4 million for the year-ended
December 31, 2008 compared to the same twelve-month period in 2007. The
Company's OCI includes unrealized losses on available for sale securities, and
securitization receivables from market revaluations at the end of the quarter.
OCI for the period ended December 31, 2008 was in a loss position of $7.7
million, compared to a gain of $4.4 million in the comparable quarter in 2007.
The change in OCI compared to prior quarters for available for sale securities
and securitization receivables primarily reflects market fluctuations related
to changes in interest rates, and the broader global economic slowdown
affecting the sectors in which the Company holds equity positions. During the
quarter, the Company determined that certain equity holdings were permanently
impaired and recognized a writedown of $1.8 million in losses from accumulated
other comprehensive income in the consolidated statements of income. The
writedowns 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 as at December 31, 2008 were $5.81 billion, an increase of
$834.6 million, or 16.8% over the $4.98 billion reported at December 31, 2007
and up by $187.9 million, or 3.3% over the September 30, 2008 asset balance of
$5.62 billion.
The growth in total assets over December 31, 2007 was primarily generated
from growth in the loans portfolio of $484.2 million. Residential mortgages
contributed $92.3 million to the total loans portfolio growth, other
non-residential mortgages contributed growth of $359.9 million, consumer
lending contributed $43.6 million, offset by a reduction of $9.8 million in
secured loans, while the general allowance for credit losses increased by $1.8
million. The residential mortgage portfolio growth excludes $1.50 billion of
loans securitized during the year. The Company's cash resources increased by
$200.1 million from December 31, 2007 while the securities portfolio increased
by $48.6 million. Securitization receivables increased significantly from
December 2007, growing by $74.1 million due to robust securitization activity
over the twelve-month period of 2008. Other assets increased by $27.1 million
from December 31, 2007, primarily driven by corporate income tax changes
within the Company's tax balances, increased accrued interest earned on the
Company's loans portfolio and payments from securitization activities.
The growth in total assets over the quarter was primarily generated from
growth in cash resources and the Company's securities portfolio. The Company's
cash resources increased by $123.1 million while the securities portfolio rose
by $31.5 million over September 30, 2008. The loans portfolio declined
slightly quarter-over-quarter as the Company capitalized on the strong spreads
in the securitization market and securitized $557.7 million in residential
mortgages during the quarter. As a result of the strong securitization
activity in combination with changes in discount rates and fair value
movements, securitization receivables increased by $32.9 million, or 30.8%
over September 2008. Other assets increased by $9.4 million, primarily
resulting from corporate income tax changes within the Company's tax balances,
accrued interest earned on the loans portfolio and payments to be received
from the Company's securitization activities.
Liabilities
Liabilities at December 31, 2008 rose to $5.38 billion, an increase of
$749.9 million, or 16.2% over the $4.63 billion reported at December 31, 2007
and up by $171.4 million, or 3.3% over the $5.21 billion recorded at September
30, 2008.
Most of the growth from December 2007 resulted from the increase in
deposits of $688.8 million. The growth in the deposit liabilities funded the
loans portfolio growth, with excess funds invested in the Company's cash
resources and securities portfolio. With the current economic downturn, the
Company has acted prudently to raise additional deposits to build the
Company's liquidity position. Other liabilities (refer to Note 7 of these
unaudited interim consolidated financial statements) increased by $60.7
million, or 29.1% over the $208.7 million reported at December 31, 2007. This
growth was principally the result of increases in accrued interest of $24.0
million related to higher deposits, a net increase of $14.6 million in the
Company's current and deferred corporate tax liabilities, an increase of $8.5
million in the servicing liability relating to the Company's ongoing
administration of the off-balance sheet residential mortgage loans portfolio
and an increase of $11.3 million in other liabilities resulting from the
timing of payments due to MBS investors.
The rise in liabilities from September 30, 2008 resulted primarily from
increased deposits of $158.7 million. Excess deposit liabilities were invested
in the Company's cash resources and securities portfolio. Other liabilities
increased by $11.3 million, or 5.4% over September 30, 2008 primarily due to
increases of $6.6 million in the Company's corporate future tax liabilities,
and increases of $6.0 million in the servicing liability relating to Company's
ongoing administration of the off-balance sheet residential mortgage loans
portfolio.
Shareholders' Equity
Total shareholders' equity at December 31, 2008 increased by $84.7
million, or 24.3% over the $348.0 million reported at December 31, 2007. The
increase since December 2007 was internally generated from net income of
$108.7 million in the twelve-month period, less $17.9 million for dividends
paid and payable to shareholders. The remaining changes were principally
driven from the fair value amortization of employee stock options of $1.5
million offset by a $3.1 million buy-back of the Company's common shares
through the Normal Course Issuer Bid and downward movements in accumulated
other comprehensive income of $4.8 million, arising from the Company's
available for sale financial assets.
Total shareholders' equity at December 31, 2008 rose by $16.5 million, or
4.0% over the $416.3 million reported at September 30, 2008. This growth was
internally generated from earnings in the quarter of $29.0 million, less $4.5
million for shareholder dividends. Offsetting the net growth in earnings in
the quarter was a reduction in accumulated other comprehensive income of $7.7
million. Additional movements resulted from amortization of the fair value of
stock options, and the Company's buy-back of capital stock through its Normal
Course Issuer Bid. At December 31, 2008 the book value per common share was
$12.57, compared to $12.07 at September 30, 2008 and $10.08 at December 31,
2007.
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 purchase 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 fourth quarter of 2008, the Company entered into $419.0
million forward bond contracts to hedge the commitment risk on the Company
securitization activities for the CMB program. The gains on securitizations
through the CMB program were $22.8 million offset by a $9.3 million loss
realized on the bond forward contracts hedging the commitment risk. At
December 31, 2008 the Company continued to hold notional forward bond
contracts of $34.0 million in anticipation of the CMB issuance in the first
quarter of 2009. The bond forward contracts were marked-to-market at December
31, 2008 for an unrealized loss of $0.6 million. No such arrangements were
entered into during the comparable prior periods.
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 and the reinvestment assets. As
well, the Company entered into a hedge swap to manage the reinvestment risk
between the amortizing MBS pool and the CMB. These transactions do not qualify
for hedge accounting under Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3865, Hedges and therefore the Company must mark-to-market
the swaps through the consolidated statements of income. The notional values
of the seller swaps and hedge swaps at December 31, 2008 were $1.21 billion
($118.5 million - Q4 2007) and $49.6 million ($2.2 million - Q4 2007),
respectively. These swaps were marked-to-market at December 31, 2008 for an
unrealized gain of $0.4 million (unrealized gain of $1.0 million - Q4 2007),
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 permanent
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 December 31, 2008 outstanding securitized mortgage
loans under administration amounted to $2.61 billion ($2.12 billion - Q3 2008
and $1.46 billion - Q4 2007) with retained interest of $139.9 million ($107.0
million - Q3 2008 and $65.8 million - Q4 2007). The off-balance sheet
portfolio continues to perform well, with 97.3% of the portfolio current and
0.7% greater than 60 days in arrears. For additional information, refer to
Note 6 in the consolidated financial statements of the 2007 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 $242.4 million at December 31,
2008 compared to $424.9 million at September 30, 2008 and $447.3 million at
December 31, 2007. Included within the outstanding commitments are unutilized
commercial advances of $89.6 million at December 31, 2008 compared to $151.3
million at September 30, 2008 and $238.0 million at December 31, 2007.
Commitments for the loans remain open for various dates through January 2010.
As at December 31, 2008 unutilized credit card balances amounted to $62.9
million, compared to $69.0 million at September 30, 2008 and $77.9 million at
December 31, 2007. Outstanding commitments for future advances for the
Equityline Visa portfolio were $2.4 million at December 31, 2008 compared to
$3.0 million at September 30, 2008 and $5.9 million at December 31, 2007.
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, provides Home Trust with comprehensive
back-office merchant processing services, including settlement, charge-back
processing, retrieval services and customer support.
On November 24, 2008 Home Trust announced that it had entered into an
agreement with SAP Canada Inc. to implement SAP solutions to transform its
core banking processes and increase agility to deliver enhanced products and
services on an integrated platform to support Home Trust's growth.
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CAPITAL MANAGEMENT
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Effective January 1, 2008 a new regulatory capital management framework
was implemented in Canada. The International Convergence of Capital
Measurement and Capital Standards: a Revised Framework, commonly known as
Basel II, replaced Basel I, the framework utilized in the past. Basel II
introduced several significant changes to the risk-weighting of assets and the
calculation of regulatory capital. Home Trust subsequently implemented the
standardized approach to calculating risk-weighted assets for credit risk and
the basic indicator approach for operational risk. Changes for Home Trust
under Basel II include a shift into lower risk-weighted categories for
residential mortgages, and a new capital requirement related to operational
risk.
Basel II had a modest, positive impact on the overall level of regulatory
capital for Home Trust. New procedures and system enhancements were developed
to conform to the new framework, including enhancements to Home Trust's
internal capital adequacy assessment process. The Risk and Capital Committee
and the Board of Directors annually review Home Trust's capital adequacy.
The capital base of Home Trust continues to be strong. The Tier 1 capital
ratio ended the quarter at 12.9%, up from the prior quarters reported in 2008
and up from the 11.1% reported at December 31, 2007. The total capital ratio
was 14.2% at December 31, 2008, similarly up from the prior quarters reported
in 2008 and up from the 12.5% reported at December 31, 2007.
The Company continues to build its capital base during a period of
uncertainty in global capital markets. 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.
Further information on Basel II can be found in the Company's 2007 Annual
Report on page 22, and in Note 8 to these unaudited interim consolidated
financial statements.
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 24 through
30 in the MD & A section of the Company's 2007 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 December 31, 2008 the composition of the total mortgage portfolio was
79.8% residential and 20.2% nonresidential, compared to a composition of 80.7%
residential and 19.3% non-residential at September 30, 2008 and a composition
of 87.2% residential and 12.8% non-residential one year ago. The composition
is well within the internal policy limits the Company's Risk and Capital
Committee have approved. Within the Company's residential mortgage portfolio,
14.6% of the loans were insured by CMHC at the end of the quarter, compared to
9.0% at September 30, 2008 and 5.4% one year ago. First mortgages represented
99.7% of the total mortgage portfolio at December 31, 2008, consistent with
the comparable periods. Further, with the launch of the Accelerator Program in
June 2008, the Company continues a trend of originating higher volumes of
government-insured mortgages. Of all residential mortgage originations and
renewals over the twelve months of 2008, 50.9% were insured. This is up from
the comparable period of 2007 where 32.3% of all residential mortgage
originations and renewals were insured. At December 31, 2008 the average loan
to value on origination of the Company's residential mortgage loans portfolio
was 66.6%, compared to 66.4% at September 30, 2008 and 65.7% 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 despite uncertain economic conditions with 94.5% of
the portfolio current and only 1.6% of the portfolio over 60 days in arrears
at the end of December 2008. This is consistent with both September 30, 2008
and December 31, 2007 at which point 1.5% and 1.6% of loans were over 60 days
in arrears, respectively. When the off-balance sheet mortgage portfolio of
$2.61 billion is also factored in, the combined mortgage loans portfolio
continues to show positive performance with 95.6% of the combined portfolio
current, and only 1.3% over 60 days in arrears.
As at December 31, 2008 the gross credit card receivable balance totaled
$352.0 million, of which $351.5 million, or 99.8% of the portfolio was secured
either by cash deposits or residential mortgage collateral, and $0.5 million,
or 0.2% was unsecured. The total credit approved included $414.2 million in
secured and $0.7 million in unsecured credit, compared to $417.0 million in
secured, and $0.8 million in unsecured credit at September 30, 2008 and $391.0
million in secured, and $1.2 million of unsecured credit at December 31, 2007.
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 $342.9 million of the total credit card receivable balance
as at December 31, 2008 compared to $339.3 million at September 30, 2008 and
$302.7 million at December 31, 2007. Cash deposits securing credit card
accounts amounted to $14.5 million, and are included in the Company's
deposits. Further, the Equityline Visa portfolio has a loan to value of 69.%
at December 31, 2008 down from a loan to value of 69.8% and 69.7% at September
30, 2008 and December 31, 2007, respectively. At December 31, 2008 $10.6
million, or 3.0% of the credit card portfolio was over 60 days in arrears
compared to $6.8 million, or 1.9% at September 30, 2008 and $3.8 million, or
1.2% at December 31, 2007.
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RISK MANAGEMENT
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The secured loan portfolio of $72.5 million decreased by $6.5 million
from the September 30, 2008 balance of $79.0 million, and decreased $9.8
million from the December 31, 2007 balance of $82.3 million. These loans are
secured by second mortgages on residential properties. At December 31, 2008,
97.3% of the secured loan portfolio was current while $1.0 million, or 1.3%
was over 60 days in arrears. This compares to 97.6% of the secured loan
portfolio being current while $0.8 million, or 1.0% was over 60 days in
arrears at September 30, 2008. As at December 31, 2007, 97.7% of the secured
loan portfolio was current while $0.6 million, or 0.8% was over 60 days in
arrears.
The Company experienced a rise in net impaired loans, to $39.2 million at
December 31, 2008 compared to $32.8 million at September 30, 2008 and $29.0
million at December 31, 2007 driven by the deterioration in the overall
economy. Although the Company continues to experience a rise in impaired
loans, at 1% of the total loans portfolio the rates are within historic
Company ranges. 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 net of
recoveries applied against the accumulated allowance for credit losses
realized on loans during the twelve-month period ended December 31, 2008
totaled $2.9 million, up from the comparable period in 2007. The Company
continues to monitor this area, and is dealing prudently and effectively with
impaired loans.
The Company continues to be well positioned to absorb all probable losses
in its loans portfolio recording general allowances of $25.2 million at
December 31, 2008 as compared to general allowances of $25.1 million at
September 30, 2008 and $23.4 million at December 31, 2007. The Company
routinely monitors the adequacy of the general allowance. The Company's actual
loss experience on mortgages has amounted to 0.03% per annum over the past 15
years, 0.01% for the past 10 years, and 0.001% for the past 5 years. The
Company has security in the form of real property or cash deposits against
loans totaling 99.9% 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 84.0 basis points of the Company's
risk-weighted assets at December 31, 2008 compared to 84.4 basis points at
September 30, 2008 and 83.5 basis points at December 31, 2007. It should be
noted that the measurement of risk-weighted assets computed for December and
September of 2008 were based on the new Basel II computations. Refer to the
Capital Management section and Note 8 of these unaudited interim consolidated
financial statements for further details.
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 December 31, 2008 liquid assets amounted to 147% under the
immediate scenario, and 134% under the ongoing scenario, in excess of industry
recommended levels of 120%. 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. Due to the continuing liquidity crisis in
Canadian and global credit markets, the Company has maintained more than
sufficient liquidity to meet its obligations. At December 31, 2008 liquid
assets amounted to $880.7 million, compared to $716.9 million recorded at
September 30, 2008 and $627.1 million at December 31, 2007. The Company's
policy is to maintain a minimum 20% of 100-day obligations in liquid assets.
For the twelve months ended December 31, 2008 the Company maintained a monthly
average of $598.2 million, or 46.3% of 100-day obligations in liquid assets
compared to $571.3 million, or 46.9% for the twelve months ended September 30,
2008 and $463.7 million, or 48.9% for the twelve months ended December 31,
2007.
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 December 31, 2008 is
presented under Note 13 in these unaudited interim consolidated financial
statements. The table provided there represents these positions 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 two
interest rate risk sensitivity models which measure 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.
-------------------------------------------------------------------------
December 31 December 31 December 31 December 31
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Increase in Decrease in
interest rates interest rates
-------------------------------------------------------------------------
100 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 3,917 $ 5,282 $ (3,917) $ (5,282)
Impact on net present
value of shareholders'
equity (7,157) 8,909 7,589 (9,750)
200 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 7,835 $ (10,564) $ (7,835) $ 10,564
Impact on net present
value of shareholders'
equity (13,909) 17,052 15,637 (20,424)
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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 $34.3
million in bond forward contracts for the sale of Government of Canada bond
positions specific to hedging commitment risk at December 31, 2008 with no
such positions 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.
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RESULTS BY BUSINESS SEGMENT
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The following section discusses the mortgage lending, consumer lending
and other lines of business for the fourth quarter and the twelve-month period
ended December 31, 2008 (refer to Note 14 of these unaudited interim
consolidated financial statements). The mortgage lending line of business
continues to be the primary driver of the Company's overall growth while the
consumer lending segment continues to provide a diversified income source,
with net income up 26.3% for the twelve months of 2008.
Mortgage Lending
The Company's principal line of business contributed $21.6 million to net
income during the fourth quarter and $79.7 million for the year, compared to
$16.8 million and $62.0 million for the comparable periods in 2007. The
increase over the prior periods was primarily driven through loan originations
which increased fee income and significant increases in gains realized on
securitization activities. These increases were offset by a decline in net
interest income as the market uncertainty over the past several quarters has
tightened spreads across core residential lending, combined with growth in
both the Accelerator Program and commercial mortgage lending which attracts
lower spreads. Net interest income ended the quarter at $18.9 million and
$89.5 million for the year, down from $21.1 million and $93.5 million for the
comparable periods in 2007.
The table below provides a breakdown of specific residential and
non-residential advances made during the year compared to the previous year.
-------------------------------------------------------------------------
Three-month period ended Year ended
-------------------------------------------------------------------------
December 31 December 31 December 31 December 31
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Residential Mortgages $ 893,960 $ 722,353 $ 2,550,105 $ 2,347,943
Commercial Mortgages 48,861 126,907 442,356 313,617
Store and Apartments 21,252 22,087 78,837 109,835
Warehouse Commercial
Mortgages 35,000 28,450 93,273 88,450
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Total Mortgage Advances $ 999,073 $ 899,797 $ 3,858,923 $ 2,859,845
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The total value of new mortgages advanced in the quarter and year-to-date
was $999.1 million and $3.86 billion, respectively, increases of 11.0% and
34.9% over the $899.8 million and $2.86 billion advanced for the comparative
periods in 2007. Residential Mortgages include the advances from loans
originated under the Accelerator Program and Multi-Residential loans. All of
the loans advanced under the Accelerator Program and those classified as
Multi-Residential Mortgages are insured products and were subsequently
securitized through the Company's MBS and CMB program.
The Company securitized $557.7 million of government-guaranteed CMHC
residential mortgage loans through the creation of MBS securities during the
quarter and $1.50 billion for the twelve-month period of 2008, realizing total
gains from securitization of $25.7 million for the quarter and $61.3 million
for the year. This compares to $198.9 million securitized for the fourth
quarter of 2007 and $692.3 million for the twelve months of 2007, resulting in
gains of $8.1 million and $22.8 million, respectively. During the quarter, the
Company participated in CMHC's CMB program. Of the $557.7 million securitized
during the quarter and $1.50 billion securitized for the year, $452.1 million
and $1.1 billion, respectively, 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 $22.8 million in gains during the quarter and $48.9 million
for the year. The rise in utilizing the securitization stream to funding loan
originations in 2008 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. When funding costs begin to
ease as more liquidity and capital continue to be injected into the global
economies, the Company will re-examine its funding mix to optimize overall
returns. 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, 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 quarter the Company held $72.5 million in Secured
Loans as Notes Receivable issued by Regency, compared to $79.0 million at
September 30, 2008 and $82.3 million at December 31, 2007. These Notes yield
6.5% with an average duration of 2.1 years. The Company also receives fee
income for servicing and administering these mortgages for Regency. This
income amounted to 0.3% of the portfolio value, on an annualized basis. The
underlying credit quality of the mortgage loans securing the Notes Receivable
remains high, with 1.3% 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 fourth
quarter and for the year. Net income for the quarter and year were $4.8
million and $19.1 million, up 17.4% over the fourth quarter of 2007 and up
26.3% over the comparable twelve-month period in 2007. The increases over the
prior periods were driven by increases in net interest income from continued
growth in Equityline Visa receivable balances, and fees from the
administration and servicing of the Visa 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 quarter and $1.3 million for
the year.
The Equityline Visa loans portfolio amounted to $342.9 million at
December 31, 2008 ($339.3 million - Q3 2008, and $302.7 million - Q4 2007)
comprising 97.4% (97.3% - Q3 2008, and 96.3% - Q4 2007) of the total gross
credit card receivable balance of $352.0 million, and bearing an average
interest rate of 10.3% (10.5% - Q3 2008, and 10.9% - Q4 2007) on outstanding
balances. During the fourth quarter of 2008, 790 Equityline Visa accounts with
$32.8 million in authorized credit limits were issued, down from 868
Equityline Visa accounts with $37.7 million in authorized credit limits issued
in the third quarter of 2008 and down from 1,079 Equityline Visa accounts with
$54.1 million in authorized credit limits issued for the three months ended
December 31, 2007. 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 and the year were $2.6 million and $9.9 million, down from $3.4
million and $13.1 million for the comparative periods in 2007. The decrease
from the prior periods was driven by losses incurred on the sale of securities
and writedowns on securities that management determined were permanently
impaired and general increase in corporate costs. Offsetting these losses were
an overall growth in net interest income derived from the Company's cash
resources and 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 32 and 33 of the 2007 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 MBS, financial instruments
measured at fair value, other than temporary impairment of available for sale
securities, future income tax liabilities and contingencies for litigation.
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 32
and 33 of the 2007 Annual Report.
Change in Accounting Policy
The significant accounting policies the Company follows are detailed in
Note 1 to the Company's December 31, 2007 consolidated financial statements.
Effective January 1, 2008 the Company adopted new accounting standards issued
by the CICA, Financial Instruments - Disclosure and Presentation and Capital
Disclosures. As a result of adopting these standards, new or enhanced
disclosure has been provided. For further details, see Note 2 to these
unaudited interim consolidated financial statements.
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
year-ended December 31, 2010. The Company has finalized a changeover plan
which includes key elements around accounting policy changes, information and
data systems, education and training, internal controls over financial
reporting, financial reporting implication and other operational business
activities and has begun the transition.
Controls over Financial Reporting
No changes were made in the Company's internal controls over financial
reporting during the interim period ended December 31, 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 December 31, 2008 the Company had issued 34,433,590 Common Shares.
In addition, outstanding director and employee stock options amounted to
1,406,750 (1,226,750 - Q3 2008, and 1,293,750 - Q4 2007) of which 661,125 were
exercisable as of the quarter-end (540,500 - Q3 2008, and 526,250 - Q4 2007)
for proceeds to the Company upon exercise of $12.4 million ($8.4 million - Q3
2008, and $7.9 million - Q4 2007).
Subsequent to the end of the fourth quarter, the Board of Directors
declared a quarterly cash dividend of $0.13 per common share payable on March
1, 2009 to shareholders of record at the close of business on February 20,
2009.
-------------------------------------------------------------------------
QUARTERLY FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In Thousands of Dollars 2008
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net interest income (TEB)(1) $ 36,399 $ 39,478 $ 40,418 $ 38,590
Less TEB adjustment 1,162 1,130 1,056 962
-------------------------------------------------------------------------
Net interest income per financial
statements 35,237 38,348 39,362 37,628
Non-interest income 26,023 23,013 17,318 14,338
Non-interest expense 16,852 16,953 17,443 14,763
Total revenues 117,996 116,950 112,953 106,796
Net income 29,039 27,939 26,550 25,159
Return on common shareholders'
equity 27.4% 27.6% 27.7% 27.9%
Return on average total assets 2.0% 2.0% 2.0% 1.9%
Earnings per common share
Basic $ 0.84 $ 0.81 $ 0.77 $ 0.73
Diluted $ 0.84 $ 0.81 $ 0.76 $ 0.72
Book value per common share $ 12.57 $ 12.08 $ 11.44 $ 10.79
Efficiency ratio (TEB)(1) 27.0% 27.1% 30.2% 27.9%
Efficiency ratio 27.5% 27.6% 30.8% 28.4%
Tier 1 capital ratio(2),(3) 12.9% 12.7% 12.5% 12.0%
Total capital ratio(2),(3) 14.2% 14.0% 13.8% 13.4%
Net impaired loans as a % of
gross loans 0.9% 0.7% 0.7% 0.7%
Annualized provision as a % of
gross loans 0.2% 0.3% 0.1% 0.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In Thousands of Dollars 2007
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net interest income (TEB)(1) $ 40,394 $ 39,396 $ 37,647 $ 34,276
Less TEB adjustment 2,311 1,084 1,118 942
-------------------------------------------------------------------------
Net interest income per financial
statements 38,083 38,312 36,529 33,334
Non-interest income 14,561 11,964 11,467 10,075
Non-interest expense 15,687 13,289 13,382 11,840
Total revenues 105,081 94,346 87,708 81,745
Net income 24,228 22,837 22,018 21,158
Return on common shareholders'
equity 28.9% 28.9% 28.9% 29.3%
Return on average total assets 2.0% 2.0% 2.1% 2.1%
Earnings per common share
Basic $ 0.70 $ 0.66 $ 0.64 $ 0.62
Diluted $ 0.70 $ 0.65 $ 0.63 $ 0.61
Book value per common share $ 10.08 $ 9.38 $ 8.98 $ 8.70
Efficiency ratio (TEB)(1) 28.5% 25.9% 27.3% 26.7%
Efficiency ratio 29.8% 26.4% 27.9% 27.3%
Tier 1 capital ratio(2),(3) 11.1% 11.7% 12.9% 12.7%
Total capital ratio(2),(3) 12.5% 13.1% 14.4% 14.3%
Net impaired loans as a % of
gross loans 0.7% 0.6% 0.7% 0.7%
Annualized provision as a % of
gross loans 0.2% 0.2% 0.1% 0.1%
-------------------------------------------------------------------------
(1) TEB - Taxable Equivalent Basis, see definition on page 5
(2) These figures relate to the Company's operating subsidiary, Home
Trust Company
(3) The Tier 1 and Total capital ratios for 2008 are calculated under
Basel II requirements. See Capital Management section for additional
details.
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 (where the lower the ratio the better). The
increase in Tier 1 and total capital ratios throughout 2008 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 during the last quarter of 2008 relate to a general increase in impaired
loans across all of the Company's lending categories.
Outlook
This Outlook section contains forward-looking statements. (Please see the
Caution Regarding Forward-Looking Statements on page 6 of these unaudited
interim consolidated financial statements).
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 environment.
The Canadian and global financial markets and economies have experienced
unprecedented volatility over the past year pushing all major economies into a
global recession. The Company expects these challenging market conditions to
persist into 2009 with the Canadian economy experiencing retraction over the
first half of 2009 before beginning a slow recovery towards the end of 2009 as
the influence of global economic stimulus packages begins to be felt in the
Canadian economy. The Canadian housing market is expected to moderate in 2009
as most of the pent-up demand that built up during the 1990's has been
substantially filled and will move back to more traditional volumes in line
with Canadian demographic fundamentals. Despite these challenges, 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.
Consolidated Statements of Income
For the three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except per Share December 31 December 31 December 31 December 31
Amounts (Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income
Interest from loans $ 82,672 $ 79,101 $ 339,242 $ 288,924
Dividends from equity
securities 2,491 4,608 9,237 10,877
Other interest 6,810 6,812 25,524 21,013
-------------------------------------------------------------------------
91,973 90,521 374,003 320,814
Interest Expense
Interest on deposits 56,736 52,438 223,428 174,556
-------------------------------------------------------------------------
Net interest income 35,237 38,083 150,575 146,258
Provision for credit
losses (note 4(d)) 1,988 2,449 6,638 6,042
-------------------------------------------------------------------------
33,249 35,634 143,937 140,216
-------------------------------------------------------------------------
Non-interest Income
Fees and other income 7,104 6,444 28,452 21,533
Securitization income on
mortgage-backed securities 30,251 10,004 71,103 27,367
Net loss realized and
unrealized on securities (795) (2,559) (5,365) (1,614)
Net gain on disposition of
subsidiary (note 16) - - 69 -
Gain (loss) on derivatives (10,537) 672 (13,567) 781
-------------------------------------------------------------------------
26,023 14,561 80,692 48,067
-------------------------------------------------------------------------
59,272 50,195 224,629 188,283
-------------------------------------------------------------------------
Non-interest Expenses
Salaries and staff benefits 8,564 8,163 36,182 30,195
Premises 1,192 996 4,439 3,837
General and administration 7,096 6,528 25,390 20,166
-------------------------------------------------------------------------
16,852 15,687 66,011 54,198
-------------------------------------------------------------------------
Income Before Income Taxes 42,420 34,508 158,618 134,085
Provision for income taxes
(note 11(a)) 13,381 10,280 49,931 43,844
-------------------------------------------------------------------------
NET INCOME $ 29,039 $ 24,228 $ 108,687 $ 90,241
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 0.84 $ 0.70 $ 3.15 $ 2.62
Diluted $ 0.84 $ 0.70 $ 3.13 $ 2.59
-------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(thousands)
Basic 34,501 34,482 34,512 34,447
Diluted 34,724 34,851 34,669 34,857
-------------------------------------------------------------------------
Total number of outstanding
common shares (thousands) 34,434 34,532 34,434 34,532
Book value per common
share $ 12.57 $ 10.08 $ 12.57 $ 10.08
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars (Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
NET INCOME $ 29,039 $ 24,228 $ 108,687 $ 90,241
-------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX
Unrealized income on
available for sale securities
Net unrealized income on
securities available for
sale, net of ($4,395)
tax ($3,304 - three months
ended December 31, 2007;
($4,049) - year ended
December 31, 2008; ($2,458)
- year ended December 31,
2007) (10,271) 4,083 (10,463) (4,899)
Reclassification of
earnings (losses) in respect
of available for sale
securities, net of $312 tax
($174 - three months ended
December 31, 2007; $1,796 -
year ended December 31, 2008;
($434) - year ended December
31, 2007) 2,613 308 5,707 (768)
-------------------------------------------------------------------------
Total other comprehensive
income (loss) (7,658) 4,391 (4,756) (5,667)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 21,381 $ 28,619 $ 103,931 $ 84,574
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Balance Sheets
-------------------------------------------------------------------------
December 31 September 30 December 31
In Thousands of Dollars (Unaudited) 2008 2008 2007
-------------------------------------------------------------------------
ASSETS
Cash Resources
Deposits with regulated financial
institutions $ 554,422 $ 431,288 $ 344,464
Treasury bills guaranteed by Canada - - 9,872
-------------------------------------------------------------------------
554,422 431,288 354,336
-------------------------------------------------------------------------
Securities (note 3)
Held for trading - 301 114,423
Available for sale 519,477 487,654 356,458
-------------------------------------------------------------------------
519,477 487,955 470,881
-------------------------------------------------------------------------
Loans (note 4)
Residential mortgages 3,263,206 3,307,197 3,169,953
Personal and credit card loans 368,962 364,261 325,393
Other mortgages 826,882 789,611 467,921
Secured loans 72,518 79,025 82,304
General allowance for credit losses (25,177) (25,077) (23,400)
-------------------------------------------------------------------------
4,506,391 4,515,017 4,022,171
-------------------------------------------------------------------------
Other
Securitization receivable (note 5) 139,870 106,969 65,768
Capital assets 5,325 5,725 4,837
Other assets (note 6) 84,228 74,855 57,100
-------------------------------------------------------------------------
229,423 187,549 127,705
-------------------------------------------------------------------------
$ 5,809,713 $ 5,621,809 $ 4,975,093
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Payable on demand $ 34,808 $ 16,457 $ 30,793
Payable on a fixed date 5,067,973 4,927,582 4,383,191
-------------------------------------------------------------------------
5,102,781 4,944,039 4,413,984
-------------------------------------------------------------------------
Other
Cheques and other items in transit 4,811 3,396 4,393
Other liabilities (note 7) 269,368 258,079 208,676
-------------------------------------------------------------------------
274,179 261,475 213,069
-------------------------------------------------------------------------
5,376,960 5,205,514 4,627,053
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 8) 39,094 39,142 38,899
Contributed surplus 3,283 2,910 1,818
Retained earnings 401,429 377,638 313,620
Accumulated other comprehensive
loss (note 10) (11,053) (3,395) (6,297)
-------------------------------------------------------------------------
432,753 416,295 348,040
-------------------------------------------------------------------------
$ 5,809,713 $ 5,621,809 $ 4,975,093
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars (Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
CAPITAL STOCK (note 8)
Balance at beginning
of the period $ 39,142 $ 38,047 $ 38,899 $ 35,436
Proceeds of options
exercised - 890 318 3,585
Normal course issuer bid (48) (38) (123) (122)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 39,094 $ 38,899 $ 39,094 $ 38,899
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS
Balance at beginning
of the period $ 2,910 $ 1,523 $ 1,818 $ 783
Amortization of fair
value of employee stock
options (note 9) 373 321 1,516 1,129
Employee stock options
exercised - (26) (51) (94)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 3,283 $ 1,818 $ 3,283 $ 1,818
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
the period (note 8) $ 377,638 $ 294,423 $ 313,620 $ 240,647
Transitional adjustment
on adoption of new
accounting policies - - - 1,391
Normal course issuer bid (773) (1,222) (2,940) (3,817)
Net income for the period 29,039 24,228 108,687 90,241
Dividends paid during the
period 2 (10) (13,461) (7,253)
Dividends declared, unpaid
during the period (4,477) (3,799) (4,477) (7,589)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 401,429 $ 313,620 $ 401,429 $ 313,620
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE LOSS
Balance at beginning of
the period $ (3,395) $ (10,688) $ (6,297) $ -
Transitional adjustment
on adoption of new
accounting policies - - - (630)
Other comprehensive
income (loss), net of
($4,084) tax; (($3,478)
- three months ended
December 31, 2007;
($2,079) - year ended
December 31, 2008;
($2,892) - year ended
December 31, 2007) (7,658) 4,391 (4,756) (5,667)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ (11,053) $ (6,297) $ (11,053) $ (6,297)
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Cash Flows
For the three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars (Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period $ 29,039 $ 24,228 $ 108,687 $ 90,241
Adjustments to determine
cash flows relating to
operating activities:
Future income taxes 5,170 (996) 14,397 3,312
Amortization 19,042 3,398 29,392 11,691
Provision for credit
losses (note 4(d)) 1,988 2,449 6,638 6,042
Change in accrued
interest payable 431 10,671 23,965 23,730
Change in accrued
interest receivable (958) (2,186) (2,553) (6,262)
Net loss realized and
unrealized on investment
securities 795 2,559 5,365 1,614
Loss (gain) on derivatives 10,537 (672) 13,567 (781)
Securitization income on
mortgage-backed
securities (30,251) (10,004) (71,103) (27,367)
Amortization of fair
value of employee stock
options (note 9) 373 321 1,516 1,129
Other (10,143) 15,530 (14,960) 16,184
-------------------------------------------------------------------------
Cash flows from operating
activities 26,023 45,298 114,911 119,533
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in deposits 158,742 253,488 688,797 972,192
Issuance of capital stock - 890 318 3,585
Normal course issuer bid (821) (1,260) (3,063) (3,939)
Exercise of stock options - (26) (51) (94)
Dividends paid (4,481) (3,800) (17,260) (14,119)
-------------------------------------------------------------------------
Cash flows from financing
activities 153,440 249,292 668,741 957,625
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Activity in available for
sale and held for trading
securities
Purchases (227,538) (127,302) (555,804) (271,256)
Proceeds from sales 151,570 20,138 385,792 48,854
Proceeds from maturities 14,146 16,210 73,313 79,457
Activity in mortgages
Net increase (551,833) (469,229) (1,954,052) (1,309,808)
Proceeds from
securitization of
mortgage-backed
securities 548,807 193,879 1,478,138 673,920
Change in mortgage-backed
securities receivable 8,382 7,875 28,031 32,372
Net increase in personal
and credit card loans (5,139) (13,343) (44,506) (89,084)
Net increase in secured
loans 5,889 (705) 8,833 (12,372)
Business acquisition, net - (16,563) - (16,563)
Purchases of capital assets (613) (610) (3,311) (1,873)
-------------------------------------------------------------------------
Cash flows used in investing
activities (56,329) (389,650) (583,566) (866,353)
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents
during the period 123,134 (95,060) 200,086 210,805
Cash and cash equivalents
at beginning of the period 431,288 449,396 354,336 143,531
-------------------------------------------------------------------------
Cash and cash equivalents
at end of the period $ 554,422 $ 354,336 $ 554,422 $ 354,336
-------------------------------------------------------------------------
Supplementary Disclosure
of Cash Flow Information
Interest paid $ 56,281 $ 41,765 $ 199,440 $ 150,824
Income taxes paid 4,345 11,262 43,055 46,723
-------------------------------------------------------------------------
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, 2007 as set out in the 2007 Annual Report, on
pages 36 through 58. 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
Capital Disclosures
Effective January 1, 2008 the Company adopted the new accounting standard
issued by the Canadian Institute of Chartered Accountants (CICA) Handbook
Section 1535, Capital Disclosures. The new standard requires disclosure
of information about; (i) the Company's objectives, policies and
processes for managing capital (ii) quantitative data about what the
Company regards as capital; and (iii) whether the Company has complied
with any capital requirements and consequences of non-compliance. Note 8
includes information related to this new standard.
Financial Instruments
Effective January 1, 2008 the Company adopted the new accounting
standards issued by the CICA Handbook Section 3862, Financial Instruments
- Disclosures and Section 3863, Financial Instruments - Presentation.
These new standards place increased emphasis on disclosure about the
nature and extent of risks arising from financial instruments and how the
Company manages those risks. As a result of adopting these new standards,
enhanced disclosure is provided in Notes 3, 4, 10, 13 and 15. The new
standards did not affect the financial position of the Company.
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 loss is disclosed in Note 10.
-------------------------------------------------------------------------
December 31 September 30 December 31
In Thousands of Dollars 2008 2008 2007
-------------------------------------------------------------------------
Securities issued or guaranteed by:
Canada $ 1,546 $ 599 $ (111)
Corporations 2,345 (2,507) -
Equity securities
Common (2,106) (1,584) (494)
Fixed rate preferred (29,918) (9,446) (4,753)
Floating rate preferred (2,370) (301) (270)
Income trusts (2,745) (2,714) (2,891)
Mutual funds (367) (80) (5)
-------------------------------------------------------------------------
$ (33,615) $ (16,033) $ (8,524)
-------------------------------------------------------------------------
The above unrealized 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 December 31, 2008, the Company had $1.8 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.
Effective January 1, 2008, all new bond acquisitions were designated as
available for sale securities consistent with the Company's intentions to
hold them.
4. LOANS
(A) Loans by Geographic Region and Type
As at December 31, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
British Columbia $ 333,668 $ 31,118 $ 8,998 $ 9 $ 373,793
Alberta 398,939 78,157 115,336 8,319 600,751
Ontario 2,267,199 250,611 630,953 61,929 3,210,692
Quebec 105,236 1,477 48,701 - 155,414
Maritimes 90,167 6,002 12,408 2,261 110,838
Manitoba and
Saskatchewan 67,997 1,597 10,486 - 80,080
-------------------------------------------------------------------------
$3,263,206 $ 368,962 $ 826,882 $ 72,518 $4,531,568
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
British Columbia $ 337,498 $ 30,909 $ 9,604 $ 8 $ 378,019
Alberta 413,988 80,052 114,952 8,981 617,973
Ontario 2,301,325 244,170 585,772 67,488 3,198,755
Quebec 93,198 1,073 58,313 - 152,584
Maritimes 94,203 6,423 11,974 2,548 115,148
Manitoba and
Saskatchewan 66,985 1,634 8,996 - 77,615
-------------------------------------------------------------------------
$3,307,197 $ 364,261 $ 789,611 $ 79,025 $4,540,094
-------------------------------------------------------------------------
As at December 31, 2007
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
British Columbia $ 303,150 $ 22,828 $ 6,555 $ 213 $ 332,746
Alberta 387,168 70,781 50,210 7,957 516,116
Ontario 2,265,487 222,230 390,661 70,692 2,949,070
Quebec 59,952 24 12,066 - 72,042
Maritimes 118,297 7,661 8,429 3,442 137,829
Manitoba and
Saskatchewan 35,899 1,869 - - 37,768
-------------------------------------------------------------------------
$3,169,953 $ 325,393 $ 467,921 $ 82,304 $4,045,571
-------------------------------------------------------------------------
(B) Past Due Loans that are not Impaired
For the year ended December 31, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 142,287 $ 3,365 $ 4,406 $ 973 $ 151,031
31 - 60 days 9,249 1,896 2,407 98 13,650
61 - 90 days 31,828 2,527 647 - 35,002
91 - 120 days - 1,887 - - 1,887
-------------------------------------------------------------------------
$ 183,364 $ 9,675 $ 7,460 $ 1,071 $ 201,570
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 119,685 $ 2,391 $ 3,185 $ 989 $ 126,250
31 - 60 days 8,433 2,015 332 258 11,038
61 - 90 days 28,163 2,038 - 122 30,323
91 - 120 days - 1,369 - - 1,369
-------------------------------------------------------------------------
$ 156,281 $ 7,813 $ 3,517 $ 1,369 $ 168,980
-------------------------------------------------------------------------
As at December 31, 2007
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 114,316 $ 3,181 $ 2,918 $ 1,314 $ 121,729
31 - 60 days 7,691 1,497 343 63 9,594
61 - 90 days 28,143 1,508 657 241 30,549
91 - 120 days - 785 - - 785
-------------------------------------------------------------------------
$ 150,150 $ 6,971 $ 3,918 $ 1,618 $ 162,657
-------------------------------------------------------------------------
(C) Impaired Loans and Specific Allowances for Credit Losses
As at December 31, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Gross amount of
impaired loans $ 34,643 $ 6,309 $ 164 $ 1,007 $ 42,123
Specific allowances (1,680) (547) - (699) (2,926)
-------------------------------------------------------------------------
$ 32,963 $ 5,762 $ 164 $ 308 $ 39,197
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Gross amount of
impaired loans $ 30,887 $ 3,361 $ 284 $ 662 $ 35,194
Specific allowances (1,950) (349) (5) (67) (2,371)
-------------------------------------------------------------------------
$ 28,937 $ 3,012 $ 279 $ 595 $ 32,823
-------------------------------------------------------------------------
As at December 31, 2007
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Gross amount of
impaired loans $ 27,849 $ 1,521 $ 242 $ 400 $ 30,012
Specific allowances (634) (128) - (231) (993)
-------------------------------------------------------------------------
$ 27,215 $ 1,393 $ 242 $ 169 $ 29,019
-------------------------------------------------------------------------
(D) Allowance for Credit Losses
For the three months ended December 31, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Specific allowances
Balance at the
beginning of the
period $ 1,950 $ 349 $ 5 $ 67 $ 2,371
Provisions for
credit losses 838 438 (5) 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 3,651 3,907 825 25,077
Provisions for
credit losses (558) 49 673 (64) 100
-------------------------------------------------------------------------
16,136 3,700 4,580 761 25,177
-------------------------------------------------------------------------
Total allowance $ 17,816 $ 4,247 $ 4,580 $ 1,460 $ 28,103
-------------------------------------------------------------------------
For the three months ended September 30, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Specific allowances
Balance at the
beginning of the
period $ 242 $ 108 $ 5 $ 172 $ 527
Provisions for
credit losses 1,878 306 - 85 2,269
Write-offs (219) (106) - (196) (521)
Recoveries 49 41 - 6 96
-------------------------------------------------------------------------
1,950 349 5 67 2,371
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of the
period 15,972 3,628 3,433 893 23,926
Provisions for
credit losses 722 23 474 (68) 1,151
-------------------------------------------------------------------------
16,694 3,651 3,907 825 25,077
-------------------------------------------------------------------------
Total allowance $ 18,644 $ 4,000 $ 3,912 $ 892 $ 27,448
-------------------------------------------------------------------------
For the three months ended December 31, 2007
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Specific allowances
Balance at the
beginning of the
period $ 230 $ 208 $ - $ 241 $ 679
Provisions for
credit losses 727 211 - 198 1,136
Write-offs (327) (309) - (208) (844)
Recoveries 4 18 - - 22
-------------------------------------------------------------------------
634 128 - 231 993
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of the
period 16,403 3,127 1,718 839 22,087
Provisions for
credit losses 724 74 498 17 1,313
-------------------------------------------------------------------------
17,127 3,201 2,216 856 23,400
-------------------------------------------------------------------------
Total allowance $ 17,761 $ 3,329 $ 2,216 $ 1,088 $ 24,393
-------------------------------------------------------------------------
For the year ended December 31, 2008
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Specific allowances
Balance at the
beginning of the
period $ 634 $ 128 $ - $ 231 $ 993
Provisions for
credit losses 2,972 937 - 952 4,861
Write-offs (2,177) (644) - (540) (3,361)
Recoveries 251 126 - 56 433
-------------------------------------------------------------------------
1,680 547 - 699 2,926
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of the
period 17,127 3,201 2,216 856 23,400
Provisions for
credit losses (991) 499 2,364 (95) 1,777
-------------------------------------------------------------------------
16,136 3,700 4,580 761 25,177
-------------------------------------------------------------------------
Total allowance $ 17,816 $ 4,247 $ 4,580 $ 1,460 $ 28,103
-------------------------------------------------------------------------
For the year ended December 31, 2007
-------------------------------------------------------------------------
Personal
In Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Specific allowances
Balance at the
beginning of the
period $ 386 $ 148 $ - $ 108 $ 642
Provisions for
credit losses 1,183 728 - 375 2,286
Write-offs (1,001) (918) - (262) (2,181)
Recoveries 66 170 - 10 246
-------------------------------------------------------------------------
634 128 - 231 993
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of the
period 15,886 2,378 659 721 19,644
Provisions for
credit losses 1,241 823 1,557 135 3,756
-------------------------------------------------------------------------
17,127 3,201 2,216 856 23,400
-------------------------------------------------------------------------
Total allowance $ 17,761 $ 3,329 $ 2,216 $ 1,087 $ 24,393
-------------------------------------------------------------------------
(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
December 31, 2008, the total appraised value of the collateral for
mortgages past due that are not impaired, as determined when the
mortgages were originated, is $302.8 million. For impaired mortgages, the
total appraised value of collateral at December 31, 2008 is
$48.4 million.
5. LOAN SECURITIZATION
The following table summarizes the Company's new securitization
activities.
For the three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except Percentages and December 31 December 31 December 31 December 31
Number of Years 2008 2007 2008 2007
-------------------------------------------------------------------------
Book value of mortgages
securitized $ 557,720 $ 198,925 $ 1,498,866 $ 692,338
Securitization
receivable $ 43,573 $ 14,104 $ 96,193 $ 43,907
Servicing liability $ 6,254 $ 350 $ 8,934 $ 1,144
Net proceeds received on
securitized mortgages $ 548,807 $ 193,879 $ 1,478,138 $ 673,920
Gain on sale of
mortgages $ 25,699 $ 8,107 $ 61,314 $ 22,763
Prepayment rate 5.0% 13.5% 7.6% 13.2%
Excess spread 2.7% 2.9% 2.6% 2.7%
Weighted average life
in years 4.8 4.2 4.0 4.0
Discount rate 2.8% 4.3% 3.4% 4.3%
-------------------------------------------------------------------------
During the fourth quarter of 2008, the Company securitized insured
residential mortgages through CMHC's Canada Mortgage Bond Program with a
book value of $452.1 million for a total of $1.09 billion in 2008
($91.5 million in Q4 2007 and $119.5 million for the year ended
December 31, 2007). The gain on sale was $22.8 million during the fourth
quarter and $48.9 million for the year ended December 31, 2008
($4.2 million in Q4 2007 and $5.5 million for the year ended December 31,
2007). These figures are included in the table above.
6. OTHER ASSETS
-------------------------------------------------------------------------
December 31 September 30 December 31
In Thousands of Dollars 2008 2008 2007
-------------------------------------------------------------------------
Accrued interest receivable $ 27,861 $ 26,903 $ 25,308
Income taxes receivable 10,472 12,555 -
Goodwill 15,752 15,028 15,028
Intangible assets 558 708 1,158
Other prepaid assets and
deferred items 29,585 19,661 15,606
-------------------------------------------------------------------------
$ 84,228 $ 74,855 $ 57,100
-------------------------------------------------------------------------
The increase in goodwill reflects adjustments to the purchase price
allocation related to the finalization of the Payment Services
Interactive Gateway Corp. balance sheet as at October 16, 2007, the date
of acquisition.
7. OTHER LIABILITIES
-------------------------------------------------------------------------
December 31 September 30 December 31
In Thousands of Dollars 2008 2008 2007
-------------------------------------------------------------------------
Accrued interest payable $ 159,615 $ 159,184 $ 135,650
Income taxes payable - - 5,795
Dividends payable 4,476 4,482 3,799
Future income tax liability
(Note 11) 36,974 30,391 16,586
Securitization servicing liability 10,288 4,262 1,786
Other, including accounts payable
and accrued liabilities 58,015 59,760 45,060
-------------------------------------------------------------------------
$ 269,368 $ 258,079 $ 208,676
-------------------------------------------------------------------------
8. CAPITAL
(A) Common Shares Issued and Outstanding
For the three months ended
-------------------------------------------------------------------------
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Number of Number of
In Thousands Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,476 $ 39,142 34,455 $ 38,047
Options exercised - - 111 890
Normal course issuer bid (42) (48) (34) (38)
-------------------------------------------------------------------------
Outstanding at end of
period 34,434 $ 39,094 34,532 $ 38,899
-------------------------------------------------------------------------
For the year ended
-------------------------------------------------------------------------
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Number of Number of
In Thousands Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,532 $ 38,899 34,166 $ 35,436
Options exercised 10 318 477 3,585
Normal course issuer bid (108) (123) (111) (122)
-------------------------------------------------------------------------
Outstanding at end of
period 34,434 $ 39,094 34,532 $ 38,899
-------------------------------------------------------------------------
The purchase price of shares acquired through the Normal Course Issuer
Bid is allocated between capital stock and retained earnings. Comparative
figures have been reclassified to conform to this presentation.
(B) Share Purchase Options
For the three months ended
-------------------------------------------------------------------------
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Weighted- Weighted-
average average
In Thousands Number of Exercise Number of Exercise
Except Per Share Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,227 $ 26.73 1,170 $ 22.47
Granted 205 16.27 235 41.29
Exercised - - (111) 7.77
Forfeited (25) 33.95 - -
-------------------------------------------------------------------------
Outstanding at end of
period 1,407 $ 25.08 1,294 $ 27.15
-------------------------------------------------------------------------
Exercisable, end of period 661 $ 18.73 526 $ 15.04
-------------------------------------------------------------------------
For the year ended
-------------------------------------------------------------------------
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Weighted- Weighted-
average average
In Thousands Number of Exercise Number of Exercise
Except Per Share Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,294 $ 27.15 1,266 $ 15.43
Granted 205 16.27 505 37.78
Exercised (10) 28.12 (477) 7.31
Forfeited (82) 35.32 - -
-------------------------------------------------------------------------
Outstanding at end of
period 1,407 $ 25.08 1,294 $ 27.15
-------------------------------------------------------------------------
Exercisable, end of period 661 $ 18.73 526 $ 15.04
-------------------------------------------------------------------------
(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). These requirements are consistent with
international standards set by the Bank for International Settlements
(BIS). Effective January 1, 2008, Home Trust Company adopted the new
capital framework (Basel II) as required by OSFI. Under Basel II, the
computation of risk weighted assets was revised and a new measure for
operational risk was introduced. Home Trust Company follows the Standard
Approach for calculating credit risk and the Basic Indicator Approach for
operational risk.
The regulatory capital position of Home Trust Company was as follows:
-------------------------------------------------------------------------
December September December
In Thousands of Dollars, 31 30 31(1)
Except Ratios and Multiple 2008 2008 2007
-------------------------------------------------------------------------
Regulatory capital
Tier 1 $ 384,025 $ 375,688 $ 311,760
Total 424,202 415,765 350,160
Regulatory ratios
Tier 1 12.9% 12.7% 11.1%
Total 14.2% 14.0% 12.5%
Assets to capital multiple 13.7 13.5 14.2
-------------------------------------------------------------------------
(1) Comparative figures were calculated in accordance with the Basel I
capital rules in effect at the time.
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
During the fourth quarter of 2008, $373,000 was recorded as an expense
for a total of $1,516,000 for 2008 ($321,000 - Q4 2007 and $1,100,000 -
twelve months of 2007) for stock option awards in the consolidated
statements of income, with an off-setting credit to contributed surplus.
During the fourth quarter of 2008, 205,000 options were granted for a
total of 205,000 for 2008 (235,000 - Q4 2007 and 505,000 - twelve months
of 2007).
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
-------------------------------------------------------------------------
December 31 September 30 December 31
In Thousands of Dollars 2008 2008 2007
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Available for sale securities $ (33,615) $ (16,033) $ (8,524)
Income taxes recovery (expenses) 10,473 4,454 2,226
-------------------------------------------------------------------------
(23,142) (11,579) (6,298)
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Securitization receivables 18,080 12,239 2
Income taxes recovery (expenses) (5,991) (4,055) (1)
-------------------------------------------------------------------------
5,885 8,184 1
-------------------------------------------------------------------------
Accumulated other comprehensive loss $ (11,053) $ (3,395) $ (6,297)
-------------------------------------------------------------------------
11. INCOME TAXES
(A) Reconciliation of income taxes
For the three months ended For the year ended
-------------------------------------------------------------------------
December 31 December 31 December 31 December 31
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Income before income
taxes $ 42,420 $ 34,508 $ 158,618 $ 134,085
-------------------------------------------------------------------------
Income taxes at statutory
combined federal and
provincial income tax
rates 14,060 12,408 52,565 48,377
Increase (decrease) in
income taxes at statutory
income tax rates resulting
from
Tax-exempt income (765) (1,476) (2,835) (3,484)
Non-deductible expenses 707 245 1,491 723
Future tax rate changes (502) (1,286) (1,378) (1,503)
Other (119) 389 88 (269)
-------------------------------------------------------------------------
Income tax $ 13,381 $ 10,280 $ 49,931 $ 43,844
-------------------------------------------------------------------------
(B) Sources of future income tax balances
-------------------------------------------------------------------------
December 31 September 30 December 31
In Thousands of Dollars 2008 2008 2007
-------------------------------------------------------------------------
Future income tax liabilities
Deferred agent commissions and
other charges $ 7,761 $ 7,864 $ 7,907
Mortgage-backed securities
receivable 40,828 34,654 21,282
-------------------------------------------------------------------------
48,589 42,518 29,189
-------------------------------------------------------------------------
Future income tax assets
Allowance for credit losses 7,776 7,593 6,767
Future tax recoverable acquired - 530 1,370
Deferred commitment fees and other
charges 3,839 4,004 4,466
-------------------------------------------------------------------------
11,615 12,127 12,603
-------------------------------------------------------------------------
$ 36,974 $ 30,391 $ 16,586
-------------------------------------------------------------------------
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilized off-balance sheet financial instruments during
2008. In this period the Company entered into economic hedge swap
transactions with major financial institutions. The Company may utilize
interest rate swaps 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 is to have fair value movements in the swap 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 the variable interest
rate, 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 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 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 hedge swaps to manage the reinvestment
risk between the amortizing MBS pool and the Canada Mortgage Bond. These
transactions do not qualify for hedge accounting under CICA Handbook
Section 3865, Hedges and therefore the Company must mark-to-market the
swaps, with changes in the fair value of the swaps being recognized in
the consolidated statements of income.
With respect to the Canada Mortgage Bond program, at December 31, 2008
the Company notionally held $1.21 billion of seller swaps, and $49.6
million of accreting hedge swaps. These outstanding swap arrangements
were marked-to-market at December 31, 2008 for an unrealized gain of $0.4
million.
The Company enters into off-balance sheet financial transactions to
hedge commitment risk. As at December 31, 2008, the Company held bond
forward contracts for the sale of $34.3 million of Government of Canada
Bonds. The contracts were marked-to-market at December 31, 2008 for an
unrealized loss of $0.6 million. There were no outstanding interest rate
swaps to hedge commitment risk at December 31, 2008 or December 31, 2007.
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 December 31, 2008, September 30, 2008
and December 31, 2007 for selected period intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap
position.
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
Dollars, Except Over Non-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 September 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 $ 8,687 $ 1,295,361 $ 1,569,166 $ 1,622,285
Total liabilities and
equity 6 869,835 2,290,982 1,312,811
Off-balance sheet
items - (253,617) 81,392 172,200
-------------------------------------------------------------------------
Interest rate
sensitive gap $ 8,681 $ 171,909 $ (640,424) $ 481,674
-------------------------------------------------------------------------
Cumulative gap $ 8,681 $ 180,590 $ (459,834) $ 21,840
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.2% 3.2% (8.2%) 0.4%
-------------------------------------------------------------------------
As at September 30, 2008
------------------------------------------------------------
In Thousands of
Dollars, Except Over Non-interest
Percentages 3 Years Sensitive Total
------------------------------------------------------------
Total assets $ 906,671 $ 219,639 $ 5,621,809
Total liabilities and
equity 438,620 709,555 5,621,809
Off-balance sheet
items 25 - -
------------------------------------------------------------
Interest rate
sensitive gap $ 468,076 $ (489,916) $ -
------------------------------------------------------------
Cumulative gap $ 489,916 $ - $ -
------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.7% - -
------------------------------------------------------------
As at December 31, 2007
-------------------------------------------------------------------------
In Thousands of
Dollars, Except Floating 0 to 3 3 Months 1 to 3
Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 59,161 $ 901,191 $ 1,653,853 $ 1,607,192
Total liabilities and
equity - 446,107 2,136,991 1,330,558
Off-balance sheet
items - (437,032) 193,693 110,534
-------------------------------------------------------------------------
Interest rate
sensitive gap $ 59,161 $ 18,052 $ (289,445) $ 387,168
-------------------------------------------------------------------------
Cumulative gap $ 59,161 $ 77,213 $ (212,232) $ 174,936
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 1.2% 1.6% (4.3%) 3.5%
-------------------------------------------------------------------------
As at December 31, 2007
------------------------------------------------------------
In Thousands of
Dollars, Except Over Non-interest
Percentages 3 Years Sensitive Total
------------------------------------------------------------
Total assets $ 596,124 $ 157,572 $ 4,975,093
Total liabilities and
equity 452,096 609,341 4,975,093
Off-balance sheet
items 132,805 - -
------------------------------------------------------------
Interest rate
sensitive gap $ 276,833 $ (451,769) $ -
------------------------------------------------------------
Cumulative gap $ 451,769 $ - $ -
------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 9.1% - -
------------------------------------------------------------
Based on the current interest rate gap position at December 31, 2008, the
Company estimates that a 100 basis point decrease in interest rates would
decrease net interest income after tax over the next twelve months by
$3.9 million. A 100 basis point increase in interest rates would increase
net 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
residential mortgage lending, securitization of government-insured
mortgage loans, commercial mortgage lending 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 as of October 17, 2007.
For the three months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 18,933 $ 21,083 $ 7,011 $ 5,657
Provision for credit
losses (1,501) (2,164) (487) (285)
Fees and other income 3,899 3,351 3,123 3,017
Net gain on
securities, mortgage-
backed securities and
disposition of
subsidiary 19,714 10,676 - -
Non-interest expenses (9,145) (8,744) (2,406) (2,078)
-------------------------------------------------------------------------
Income before income
taxes 31,900 24,202 7,241 6,311
Income taxes (10,297) (7,422) (2,448) (2,228)
-------------------------------------------------------------------------
Net income $ 21,603 $ 16,780 $ 4,793 $ 4,083
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 12,704
-------------------------------------------------------------------------
Total assets $ 4,709,331 $ 3,867,949 $ 392,458 $ 337,783
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 9,293 $ 11,343 $ 35,237 $ 38,083
Provision for credit
losses - - (1,988) (2,449)
Fees and other income 82 76 7,104 6,444
Net gain on
securities, mortgage-
backed securities and
disposition of
subsidiary (795) (2,559) 18,919 8,117
Non-interest expenses (5,301) (4,865) (16,852) (15,687)
-------------------------------------------------------------------------
Income before income
taxes 3,279 3,995 42,420 34,508
Income taxes (636) (630) (13,381) (10,280)
-------------------------------------------------------------------------
Net income $ 2,643 $ 3,365 $ 29,039 $ 24,228
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,028
-------------------------------------------------------------------------
Total assets $ 707,924 $ 769,361 $ 5,809,713 $ 4,975,093
-------------------------------------------------------------------------
For the year ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 89,505 $ 93,466 $ 26,459 $ 21,005
Provision for credit
losses (5,202) (4,491) (1,436) (1,551)
Fees and other income 15,163 12,050 12,888 9,155
Net gain on
securities, mortgage-
backed securities and
disposition of
subsidiary 57,536 28,148 - -
Non-interest expenses (39,528) (35,050) (9,000) (5,068)
-------------------------------------------------------------------------
Income before income
taxes 117,474 94,123 28,911 23,541
Income taxes (37,749) (32,093) (9,849) (8,451)
-------------------------------------------------------------------------
Net income $ 79,725 $ 62,030 $ 19,062 $ 15,090
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ -
-------------------------------------------------------------------------
Total assets $ 4,709,331 $ 3,867,949 $ 392,458 $ 337,783
-------------------------------------------------------------------------
For the year ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
In Thousands of December 31 December 31 December 31 December 31
Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 34,611 $ 31,787 $ 150,575 $ 146,258
Provision for credit
losses - - (6,638) (6,042)
Fees and other income 401 328 28,452 21,533
Net gain on
securities, mortgage-
backed securities and
disposition of
subsidiary (5,296) (1,614) 52,240 26,534
Non-interest expenses (17,483) (14,080) (66,011) $ (54,198)
-------------------------------------------------------------------------
Income before income
taxes 12,233 16,421 158,618 134,085
Income taxes (2,333) (3,300) (49,931) (43,844)
-------------------------------------------------------------------------
Net income $ 9,900 $ 13,121 $ 108,687 $ 90,241
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,028
-------------------------------------------------------------------------
Total assets $ 707,924 $ 769,361 $ 5,809,713 $ 4,975,093
-------------------------------------------------------------------------
15. RISK MANAGEMENT
The Company is exposed to various types of risks owing to the nature of
the business activities it carries on. 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
risk. The Company's ERM structure is supported by a comprehensive
governance framework which includes policies, management standards,
guidelines and procedures appropriate to each business activity. The
policies are reviewed and approved annually by the Board of Directors.
A description of the Company's risk management policies and procedures is
included in the MD & A on pages 14 to 16 and in the 2007 Annual Report on
pages 24 to 30. Significant exposures to credit, liquidity and interest
rate risks are described in notes 3, 4 and 13.
16. DISPOSITION OF SUBSIDIARY
On January 1, 2008, Home Trust sold all outstanding shares of its wholly
owned subsidiary, Home Trust Asset Management Inc., for proceeds of
$150,000 resulting in a gain on disposition of $69,000.
17. 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 impact of
the transition to IFRS on the Company's consolidated financial
statements is not yet determinable.
18. 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 2008 unaudited interim 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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