Home Capital Reports Solid Third Quarter Results: Net Income of $27.9 Million, up 22.3% for the Quarter; Return on Equity Reaches 27.6%
TORONTO, Nov. 3 /CNW/ - Home Capital Group Inc. (TSX: HCG) today
announced positive financial results for the third quarter of 2008. Despite
continued financial market turmoil, the Company's core business activities
including residential and commercial mortgage lending, CMHC-insured
Mortgage-Backed Securities, and Visa lending all generated solid earnings
growth and returns.
Key results from the third quarter included:
- Net income for the quarter was $27.9 million, an increase of 22.3%
over $22.8 million recorded in the same period last year. Earnings
for the nine months of 2008 reached $79.6 million, a rise of 20.7%
over the comparable period in 2007.
- Basic earnings per share were $0.81, 22.7% above $0.66 for the third
quarter of 2007, and $2.31 for the nine-month period, 20.3% higher
than the $1.92 recorded last year. Diluted earnings per share were
$0.81, an increase of 24.6% from the $0.65 recorded in the third
quarter of 2007; results for the nine months were $2.29, 21.2% above
the same period last year.
- Return on equity was 27.6% for the third quarter compared to 28.9%
for the quarter ended September 30, 2007 and 27.8% for the nine
months of 2008, versus 29.3% for the same period last year.
- Total assets at September 30, 2008 reached $5.62 billion, 20.3%
higher than the $4.67 billion reported one year earlier. Total
assets, together with Mortgage-Backed Securities (MBS) originated and
administered by the Company, grew to $7.74 billion, a rise of 28.5%
from $6.02 billion at September 2007, and 20.3% from the
$6.43 billion at December 31, 2007.
- Total mortgage originations were $1.11 billion during the third
quarter, an increase of 39.8% over the $791.0 million advanced during
the same period in 2007. The Company advanced $816.3 million in
residential mortgages, $175.4 million in CMHC-insured multi-
residential properties, $70.8 million in commercial mortgages,
$18.5 million in store and apartment properties and $24.5 million in
warehouse commercial mortgages. Year-to-date, total mortgage
originations were $2.86 billion, an increase of 45.9% over the
$1.96 billion advanced during the same nine-month period in 2007.
- The Company experienced strong mortgage securitization activity as
the Company securitized and sold $544.7 million in CMHC-insured
securities during the third quarter, compared to $208.4 million for
the same period last year. Government-backed instruments, including
CMHC-insured MBS and the Canada Mortgage Bond program, have been only
modestly affected by current credit market conditions.
- Outstanding balances on the Equityline Visa portfolio reached
$339.3 million, a rise of 16.3% from the $291.8 million recorded in
the same period last year. Net income from consumer lending reached
$5.1 million for the third quarter, 37.8% over the $3.7 million
recorded last year.
- The efficiency ratio (TEB) was 27.1% in the third quarter, compared
to 25.9% during the same period one year earlier.
- Net impaired loans represented 0.72% of the total loans portfolio,
consistent with the percentage of 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 write-offs to date have
been modest.
The Company's Accelerator Program, launched in the second quarter of
2008, experienced significant growth during the period. This program offers a
full range of insured mortgage products to a broad customer base, including
individuals who have customarily been served by traditional financial
institutions. The changing importance of mortgage insurance in our portfolio
is reflected in the fact that as at October 31, 2008, 44% of all residential
mortgage originations in the fiscal year have been insured. With a focus on
enhanced credit quality, the Accelerator program has resulted in diminished
risk on a growing segment of the mortgage portfolio.
Home Trust remains well capitalized with Tier 1 and Total capital ratios
at 12.7% and 14.0% respectively, and has increased its liquidity reserve by
49.2% over the previous quarter to $716.9 million. Home Trust's Tier 1 and
Total capital ratios have steadily increased during the past year. With strong
capital ratios, increased liquid assets and no external debt, Home Trust is
well positioned to withstand the current market turmoil.
Subsequent to the end of the third quarter, and in light of the Company's
consistent growth and financial performance, the Board of Directors declared a
quarterly cash dividend of $0.13 per Common Share payable on December 1, 2008
to shareholders of record at the close of business on November 14, 2008.
Home Capital produced solid third quarter results during a period of
global market turbulence. The Company continues to manage its business with
prudence and a focus on sustainability and accountability. In this time of
economic uncertainty, Home Capital remains committed to measured growth,
continued profitability and long-term shareholder value. Home Capital's Board
of Directors and management remain confident that the Company is well
positioned for the future and will meet or exceed its targets for 2008.
"signed" "signed"
GERALD M. SOLOWAY NORMAN F. ANGUS
Chief Executive Officer Chairman of the Board
November 3, 2008
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
Third Quarter 2008.
Third Quarter Results Conference Call
The conference call will take place on Monday, November 3, 2008 at
10:30 a.m. Participants are asked to call 5 to 15 minutes in advance,
416-644-3416 in Toronto or toll-free 1-800-732-9303 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.
Monday, November 3, 2008 and midnight Monday, November 10, 2008 by calling
416-640-1917 or 1-877-289-8525 (enter passcode 21284997 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
September 30
(Unaudited) Three Months Ended Nine Months 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 $ 27,939 $ 22,837 $ 79,648 $ 66,013
Total Revenue 116,950 94,346 336,699 263,799
Earnings per Share
- Basic $ 0.81 $ 0.66 $ 2.31 $ 1.92
Earnings per Share
- Diluted 0.81 0.65 2.29 1.89
Return on Shareholders'
Equity 27.6% 28.9% 27.8% 29.3%
Return on Average
Assets 2.0% 2.0% 2.0% 2.1%
Efficiency Ratio 27.6% 26.4% 28.9% 27.2%
Efficiency Ratio
(TEB(2)) 27.1% 25.9% 28.4% 26.6%
(Non-interest Expense/
Net Interest Income
Plus Fee Income)
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BALANCE SHEET
HIGHLIGHTS
Total Assets $ 5,621,809 $ 4,674,468
Loans 4,515,017 3,740,268
Deposits 4,944,039 4,160,496
Shareholders' Equity 416,295 323,305
Mortgage-Backed
Security Assets Under
Administration 2,117,231 1,347,029
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FINANCIAL STRENGTH
Capital Measures(1),(3)
Risk Weighted Assets(1),(3) $ 2,970,417 $ 2,534,056
Tier 1 Capital Ratio(1),(3) 12.7% 11.7%
Total Capital Ratio(1),(3) 14.0% 13.1%
Credit Quality
Net Impaired Loans as a
Percentage of Gross Loans 0.7% 0.6%
Allowance as a Percentage
of Gross Impaired Loans 78.0% 93.9%
Annualized Provision as a
Percentage of Gross Loans 0.1% 0.1%
Share Information
Book Value per Common Share $ 12.07 $ 9.38
Common Share Price - Close 31.50 34.50
Market Capitalization 1,085,984 1,188,685
Number of Common Shares
Outstanding 34,476 34,455
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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 September 30, 2008
are calculated under Basel II while the comparative periods are
calculated under Basel I.
See Capital Managment 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 $1.1 million for the third quarter, and
$3.1 million for the nine months of 2008 ($1.1 million - Q3 2007 and
$3.1 million - nine 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 September 30, 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 October 30, 2008. 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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Nine-Month Period Ended
September 30, 2008
2008 Objectives(1) Actual Results(1)
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Net Income $79.2 million $79.6 million, or 20.7%
increase over the same period
last year
Diluted Earnings per Share $2.27 $2.29 per share, or 21.2%
increase over the same period
last year
Total Assets and Assets
Under Administration $7.23 billion $7.74 billion, or 28.5%
increase over the same period
last year
Return on Shareholders'
Equity 25.0% 27.8%
Efficiency Ratio (TEB) 27.0% to 33.0% 28.4%
Capital Ratios(2)
Tier 1 Minimum of 10% 12.7%
Total Minimum of 12% 14.0%
Provision for Loan
Losses as a Percentage
of Total Loans 0.15% to 0.25% 0.14%
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(1) Objectives and results for net income and diluted earnings per share
are for the current period relative to the same period in the prior
year; asset growth is the change from twelve months prior; and ratios
are based on the current period, annualized.
(2) Based on the Company's wholly owned subsidiary, Home Trust Company.
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 continued to achieve positive results notwithstanding
continuing uncertainty in Canadian and global capital markets and the broader
economy. The Company continues to maintain a strong capital base and liquidity
to navigate existing volatility in the global capital markets. The Company's
key financial results are summarized below.
- Net income rose 22.3% over the comparable quarter of 2007.
- Non-interest income was up 92.4% over the third quarter of 2007,
driven by robust growth in securitization gains of $13.1 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 27.1%, compared to 25.9% in
the same quarter of 2007. The increase year-over-year was due to
increased salary and benefit expenses and higher general and
administration costs associated with the growth of the Company's
operations.
- Diluted earnings per share for the quarter increased 24.6% to $0.81,
compared to $0.65 in the third quarter of 2007.
- Return on average shareholders' equity for the quarter was 27.6%,
compared to 28.9% for the same period last year.
- Net interest income remained unchanged from the comparable quarter in
2007. Growth in the Accelerator Program, and to a lesser extent the
growth in the commercial mortgage lending, where both products
attract lower spreads, combined with increases in the Company's
lending costs had the impact of contracting net interest income
overall.
Balance Sheet Highlights
- Total assets rose 20.3% year-over-year to reach $5.62 billion,
compared to the $4.67 billion reported at September 30, 2007. This
asset growth was primarily driven by expansion in the Company's
residential mortgage portfolio which increased by $336.3 million,
other non-residential mortgages which grew by $392.2 million,
securities which were $100.6 million higher, partially offset by a
drop in cash resources of $18.1 million. 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 $339.3 million in receivables,
representing growth of 16.3%, or $47.5 million, over the third
quarter of 2007.
- The Company continues to be able to access funds to accommodate the
growth of the Company's loans portfolio. Liquid assets at
September 30, 2008 were $716.9 million, compared to $627.1 million at
December 31, 2007 and $626.8 million at September 30, 2007.
- The Company continues to strengthen its capital position with Tier 1
capital climbing to 12.7% at the end of the quarter compared to 11.1%
at December 31, 2007 and 11.7% at September 30, 2007.
- Deposit liabilities as at September 30, 2008 grew 18.8% to reach
$4.94 billion, as compared to $4.16 billion at September 30, 2007.
These proceeds were deployed to fund the growth in the Company's
loans portfolio, with excess funds invested in the Company's
securities portfolio and cash resources.
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EARNINGS REVIEW
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Net Interest Income
Net interest income was $38.3 million in the third quarter, and
$115.3 million year-to-date, compared to $38.3 million for the comparable
quarter in 2007 and $108.2 million for the nine-month period ended
September 30, 2007. The increase over the comparable nine-month period
reflects strong growth of interest-bearing assets, exceeding the growth in
interest-bearing liabilities offset by contracted net interest margins. Net
interest income was unchanged from the comparable quarter in 2007 due in part
to the growth of the Accelerator Program and commercial mortgage lending, both
attracting lower spreads and lower yields on the Company's securities
portfolio. The net interest margin (TEB) for the third quarter was 2.9% and
3.0% year-to-date, down from 3.5% achieved in the comparable periods in 2007.
The decrease in net interest margin over the comparable periods was due to a
tightening of spreads that began in the latter half of 2007 as the global
liquidity crisis unfolded and has since intensified in response to greater
market uncertainties.
The interest spread between the loans portfolio and deposits ended the
quarter at 3.1%, compared to 3.6% for the comparable quarter in 2007, and 3.3%
year-to-date, compared to 3.7% for the same nine-month period in 2007. The
decrease in interest spread over the prior periods was primarily the result of
an increase in funding costs resulting from a tightening in availability of
liquidity and broader lending conditions. The Company's average cost of funds
increased 47 basis points year-over-year while the yield on the Company's
loans portfolio remained consistent as the growth in the commercial lending
portfolio and the new Accelerator Program, both of which attract lower
spreads, had a moderating impact on yields. With challenging credit market
conditions persisting, the Company expects to continue to maintain existing
spreads for the remainder of 2008.
While the net interest spread on both the commercial mortgage lending and
Accelerator Program are lower than the core residential mortgage portfolio due
to reduced credit risk, both product offerings provide further diversification
to the core residential lending business and also provide incremental net
interest income and loan origination growth that would otherwise not exist.
Non-Interest Income
Total non-interest income was $23.0 million for the third quarter, a
92.4% increase over the comparable quarter in 2007 and $54.7 million for the
nine-month period of 2008, or a 63.2% increase over the same nine-month period
in 2007. Both the quarter-over-quarter and nine-month period 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 MBS securitizations. The increases in fees generated
from the administration of the loans portfolio were offset by losses incurred
on the securities portfolio, losses on the unwinding of short Government of
Canada bonds and mark-to-market losses on the seller swaps and hedge swaps
entered into through the CMB program.
The fees and other income components of non-interest income ended the
quarter at $7.0 million and $21.3 million for the nine-month period of 2008,
an increase of 29.9% over the comparable quarter of 2007 and 41.5% over the
same nine-month period of 2007. 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 Company issued fifteen MBS pools during the third quarter of 2008,
consisting of $544.7 million of Canada Mortgage and Housing Corporation (CMHC)
insured residential mortgages for a year-to-date total issuance of
$941.1 million. This represents an increase of $336.3 million from the
$208.4 million in MBS pools issued in the comparable quarter of 2007 and an
increase of $447.7 million over the $493.4 million in MBS pools that were
issued during the nine-month period of 2007. Securitization gains were
$18.2 million during the quarter and $35.6 million for the nine-month period
of 2008, compared to $6.0 million for the third quarter of 2007 and
$14.7 million for the comparable nine-month period of 2007 (refer to Note 5 of
these unaudited interim consolidated financial statements). The increase in
securitization gains during the quarter and nine-period ended September 30,
2008 compared to the prior periods was due to significant volume increases in
securitization activity along with lower unscheduled prepayment rates and
lower discount rates. The spread earned on the pools averaged 2.2% in the
third quarter of 2008 and 2.6% for the pools issued year-to-date compared to
2.6% for the comparable quarter and nine-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 a new pool type during the quarter where
unscheduled prepayments are not permitted under the program. Of the
$544.7 million MBS pools issued during the quarter, $268.6 million, or 50.7%
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
five-year MBS pools. Of the fifteen MBS pools issued during the quarter, nine
MBS pool with a book value of $433.0 million were securitized through the CMB
program resulting in gains of $16.0 million. Year-to-date, the Company has
securitized $639.9 million through the CMB program and recognized gains of
$26.1 million.
Non-Interest Expenses
Total non-interest expenses for the quarter were $17.0 million and
$49.2 million for the nine-month period of 2008. This compares to
$13.3 million for the third quarter of 2007 and $38.5 million for the
nine-month period ended September 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 expenses for the quarter increased
by $1.6 million, or 20.6% over the third quarter of 2007 and up $5.6 million,
or 25.4% over the comparable nine-month period of 2007. The Company ended the
quarter with 407 employees, up from 377 employees at December 31, 2007 and 360
employees one year ago. 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 $1.8 million, or 40.7%
compared to the third quarter of 2007 and up $4.7 million, or 34.1% from the
same nine-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 27.1% and 28.4% for the
nine-month period of 2008, compared to 25.9% in the previous comparable
quarter and 26.6% for the nine months of 2007. As the Company continues to
grow, management remains focused on containing discretionary spending as part
of its continuing efforts to achieve the efficiency ratio objectives set out
for 2008.
Provision for Credit Losses
The Company expensed $3.4 million during the quarter and $4.7 million for
the nine-month period of 2008, compared to $2.1 million in the third quarter
of 2007 and $3.6 million in the comparable nine-month period of 2007 through
the provision for credit losses. The quarter-over-quarter increase primarily
relates to an increase in specific provisions identified on an isolated pocket
of the Company's residential mortgage portfolio. This expense represented 0.1%
(0.1% - Q3 2007) of total gross loans, on an annualized basis. The Company
continues to add to the general allowance for credit losses due to relative
shifts in the proportion of risk-weighted assets. The total general allowance
amounted to $25.1 million at the end of the quarter, an increase of
$1.7 million over the $23.4 million recorded at December 31, 2007 and a
$3.0 million increase over the $22.1 million allowance recorded at
September 30, 2007.
At September 30, 2008 net impaired loans amounted to $32.8 million (0.72%
of gross loans), compared to $29.0 million (0.72% of gross loans) at
December 31, 2007 and $23.6 million (0.63% of gross loans) at September 30,
2007 (refer to Note 4 of these unaudited interim consolidated financial
statements). Total net loans written-off during the quarter were $0.4 million,
compared to $0.5 million in the third quarter of 2007. Year-to-date, net loans
written-off were $1.6 million, compared to $1.1 million for the comparable
nine-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 $13.0 million (effective tax rate of
31.8%) for the third quarter and $36.6 million (effective tax rate of 31.5%)
year-to-date, compared to $12.0 million (effective tax rate of 34.5%) for the
comparable quarter of 2007 and $33.6 million (effective tax rate of 33.7%) for
the nine-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 33.6% for the
third quarter and 33.3% for the nine-month period of 2008, compared to 36.5%
for the third quarter of 2007 and 35.7% for the comparable nine-month period
in 2007.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income (OCI) and totaled $28.0 million for the third quarter and $82.6 million
year-to-date, an increase of $8.8 million, or 46.0% over the $19.2 million
recorded in the same quarter last year and a $26.6 million, or 47.5% increase
over the same nine-month period in 2007. As previously noted net income
increased 22.3%, or $5.1 million over the same quarter last year and increased
20.7%, or $13.6 million over the same nine-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 September 30, 2008 was a gain of $0.1 million,
compared to a loss of $3.7 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 general market conditions affecting certain
market 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 $0.2 million in losses from accumulated
other comprehensive income in the consolidated statements of income. Further,
the Company sold certain equity holdings realizing losses of $2.3 million. 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 September 30, 2008 were $5.62 billion, an increase of
$646.7 million, or 13.0% over the $4.98 billion reported at December 31, 2007
and up by $947.3 million, or 20.3% over the September 30, 2007 asset balance
of $4.67 billion.
The growth in total assets over December 31, 2007 was primarily generated
from growth in the loans portfolio of $492.8 million. Residential mortgages
contributed $157.3 million to the total loans portfolio growth, other non-
residential mortgages contributed growth of $301.6 million, consumer lending
contributed $38.9 million, offset by a reduction of $3.3 million in secured
loans, while the general allowance for credit losses increased by
$1.7 million. The residential mortgage portfolio growth excludes
$544.7 million of loans securitized during the quarter. The Company's cash
resources increased by $77.0 million from December 31, 2007 while the
securities portfolio increased by $17.1 million. Other assets increased by
$17.8 million from December 31, 2007, primarily driven by corporate income tax
changes within the Company's tax balances and increased accrued interest
earned on the Company's loans portfolio. Securitization receivables increased
significantly from December 2007, growing by $41.2 million due to robust
securitization activity over the nine-month period of 2008.
The growth in total assets since September 30, 2007 was primarily
generated from growth in the loans portfolio of $774.7 million. The loans
portfolio growth was driven by a $336.3 million increase in residential
mortgages, growth of $392.2 million in other non-residential mortgages, a
$52.0 million rise in consumer lending, offset by a reduction of $2.8 million
in secured loans, while the general allowance for credit losses rose by
$3.0 million. The Company's cash resources decreased by $18.1 million while
the securities portfolio rose by $100.6 million over September 30, 2007. The
decrease in cash resources was due to a shift in funds from cash resources to
the securities portfolio and to support the loans portfolio growth. Other
assets increased by $33.9 million, primarily resulting from the addition of
goodwill and intangible assets acquired through the acquisition of PSiGate,
corporate income tax changes within the Company's tax balances and accrued
interest earned on the loans portfolio. Securitization receivables increased
by $55.2 million over September 2007 resulting from higher securitization
volumes year-over-year.
Liabilities
Liabilities at September 30, 2008 rose to $5.21 billion, an increase of
$578.5 million, or 12.5% over the $4.63 billion reported at December 31, 2007
and up by $854.4 million, or 19.6% over the $4.35 billion recorded at
September 30, 2007.
Most of the growth from December 2007 resulted from increased deposits of
$530.1 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. Other liabilities (refer to Note 7 of these
unaudited interim consolidated financial statements) increased by
$49.4 million, or 23.7% over the $208.7 million reported at December 31, 2007.
This growth was principally the result of increases in accrued interest of
$23.5 million related to higher deposits, a net increase of $8.0 million in
the Company's current and deferred corporate tax liabilities, and an increase
of $14.7 million in other liabilities resulting from the timing of payments
for administration of the off-balance sheet MBS portfolio.
The rise in liabilities from September 30, 2007 resulted primarily from
increased deposits of $783.5 million. Higher deposit liabilities were the
primary funding source for the loans portfolio growth, year-over-year. Other
liabilities increased by $71.4 million, or 38.3% over September 30, 2007
primarily due to increases in accrued interest of $34.2 million, increases of
$15.2 million in the Company's corporate future tax liabilities, and
$18.7 million in other liabilities resulting from the timing of payments for
administration of the MBS portfolio.
Shareholders' Equity
Total shareholders' equity increased by $68.3 million, or 19.6% over the
$348.0 million reported at December 31, 2007. The increase since December 2007
was internally generated from net income $79.6 million over the nine-month
period, less $13.5 million for dividends paid and payable to shareholders. The
remaining increase was principally driven from the fair value amortization of
employee stock options and movements in accumulated other comprehensive income
of $2.9 million, arising from the Company's available for sale financial
assets.
Total shareholders' equity rose by $93.0 million, or 28.8% over the
$323.3 million reported at September 30, 2007. Most of this growth was
internally generated from earnings for the twelve-month period ended
September 30, 2008 of $103.8 million, less $17.3 million for shareholder
dividends. The remaining increase resulted from proceeds received on the
exercise of Company stock options, amortization of the fair value of stock
options, and movements in the accumulated other comprehensive income (loss),
offset by the Company's repurchase of capital stock through the Normal Course
Issuer Bid. At September 30, 2008 the book value per common share was $12.07,
compared to $10.08 at December 31, 2007 and $9.38 at September 30, 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 short sales of
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 short sales of Government of Canada bonds 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 the variable interest rate,
generally 60 to 150 days. The counterparties with which the Company enters
into such arrangements are Canadian chartered banks. During the third quarter
of 2008, the Company entered into a $433.0 million short sale of Government of
Canada bonds which was unwound during the quarter, resulting in a loss of
$2.5 million. At September 30, 2008 the Company held notional short sales of
Government of Canada bonds of $40.0 million and were marked-to-market for an
unrealized gain of $0.1 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 five-year MBS
pool and the five-year 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 five-year 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 statement of
income. The notional values of the seller swaps and hedge swaps at
September 30, 2008 were $760.9 million ($28.0 million - Q3 2007) and
$24.4 million ($0.3 million - Q3 2007), respectively. These swaps were
marked-to-market at September 30, 2008 for an unrealized gain of $1.0 million
(unrealized gain of $0.1 million - Q3 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, and capital management
purposes. 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 after the sale and, upon
maturity of the mortgage, will renew or refinance these mortgage loans
whenever possible. As at September 30, 2008 outstanding securitized mortgage
loans under administration amounted to $2.12 billion ($1.46 billion - Q4 2007
and $1.35 billion - Q3 2007) with retained interest of $107.0 million
($65.8 million - Q4 2007 and $51.8 million - Q3 2007). The off-balance sheet
portfolio continues to perform well, with 97.4% of the portfolio current and
1.2% 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 $424.9 million at September 30,
2008 compared to $447.3 million at December 31, 2007 and $288.0 million at
September 30, 2007. Included within the outstanding commitments are unutilized
commercial and residential mortgage advances of $151.3 million at
September 30, 2008 compared to $238.0 million at December 31, 2007 and
$149.9 million at September 30, 2007. Commitments for the loans remain open
for various dates through October 2009. As at September 30, 2008 unutilized
credit card balances amounted to $69.0 million, compared to $77.9 million at
December 31, 2007 and $69.2 million at September 30, 2007. Outstanding
commitments for the Equityline Visa portfolio were $3.0 million at
September 30, 2008 compared to $5.9 million at December 31, 2007 and
$4.3 million at September 30, 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.
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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 formalization of Home Trust's
internal capital adequacy assessment process. The Risk and Capital Committee
and the Board of Directors annually review the capital management policy, and
monitor compliance with the policy on a quarterly basis.
The capital base of Home Trust continues to be strongly positioned. The
Tier 1 capital ratio ended the quarter at 12.7%, up from the first and second
quarters of 2008 of 12.0% and 12.5%, respectively, and up from 11.7% recorded
at September 30, 2007. The total capital ratio was 14.0% at September 30,
2008, up from the first and second quarters of 2008 of 13.4% and 13.8%,
respectively, and up from 13.1% achieved at September 30, 2007. The Company
continues to build its capital base during a period of uncertainty in global
capital markets. These ratios both continue to exceed Home Trust's minimum
regulatory requirements 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.
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RISK MANAGEMENT
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The Company is exposed to various types of risks owing to the nature of
the business activities it conducts. The types of risk to which the Company is
subject include credit, liquidity and interest rate risks. The Company has
adopted enterprise risk management (ERM) as a discipline for managing risks.
The Company's ERM structure is supported by a governance framework which
includes 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 unchanged 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.
As at September 30, 2008 the composition of the total mortgage portfolio
was 82.4% residential and 17.6% non-residential, compared to a composition of
88.5% residential and 11.5% non-residential at December 31, 2007 and a
composition of 90.1% residential and 9.9% non-residential one year ago. Within
the Company's residential mortgage portfolio, 9.0% of the loans were insured
by CMHC at the end of the quarter, compared to 5.4% at December 31, 2007 and
5.9% one year ago. First mortgages represented 99.7% of the total mortgage
portfolio at September 30, 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 over the nine months of
2008, 43.6% were insured. At September 30, 2008 the average loan to value of
the Company's mortgage loans portfolio was 66.4%, compared to 65.7% at
December 31, 2007 and 65.8% 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 continues to perform well
despite uncertain economic conditions with 95.3% of the portfolio current and
only 1.5% of the portfolio over 60 days in arrears at the end of September
2008. This is consistent with both December 31, 2007 and September 30, 2007 at
which point 1.6% and 1.5% of loans were over 60 days in arrears, respectively.
When the off-balance sheet mortgage portfolio of $2.12 billion is also
factored in, the combined mortgage loans portfolio has shown no signs of
performance deterioration with 95.4% of the combined portfolio current, and
only 1.7% over 60 days in arrears.
As at September 30, 2008 the gross credit card receivable balance totaled
$348.8 million, of which $348.2 million, or 99.8% of the portfolio was secured
either by cash deposits or residential mortgage collateral, and $0.6 million,
or 0.2% was unsecured. The total credit approved included $417.0 million in
secured and $0.8 million in unsecured credit, compared to $391.0 million in
secured, and $1.2 million of unsecured credit at December 31, 2007 and
$371.3 million in secured, and $1.4 million of unsecured credit at
September 30, 2007. Within the secured credit card portfolio Equityline Visa
credit cards represent the principal driver of receivable balance growth.
Equityline Visa credit cards are secured by collateral residential mortgages,
and this portfolio segment amounted to $339.3 million of the total credit card
receivable balance as at September 30, 2008 compared to $302.7 million at
December 31, 2007 and $291.8 million at September 30, 2007. Cash deposits
securing credit card accounts amounted to $15.3 million, and are included in
the Company's deposits. Further, the Equityline Visa portfolio has a loan to
value of 69.8% at September 30, 2008 compared to a loan to value of 69.7% at
December 31, 2007 and 70.0% at September 30, 2007. At September 30, 2008
$6.8 million, or 1.9% of the credit card portfolio was over 60 days in arrears
compared to $3.8 million, or 1.2% at December 31, 2007 and $4.1 million, or
1.4% at September 30, 2007. The Company continues to experience minimal losses
on the credit card portfolio.
The secured loan portfolio of $79.0 million decreased by $3.3 million
from the December 31, 2007 balance of $82.3 million, and decreased
$2.8 million from the September 30, 2007 balance of $81.8 million. These loans
are secured by second mortgages on residential property. Since commencing this
program, the Company has experienced minimal losses on these loans. At
September 30, 2008, 97.6% of the secured loan portfolio was current while
$0.8 million, or 1.0% was over 60 days in arrears. This compares to 97.7% of
the secured loan portfolio being current while $0.6 million, or 0.8% was over
60 days in arrears at December 31, 2007. As at September 30, 2007, 97.1% of
the secured loan portfolio was current while $0.7 million, or 0.8% was over
60 days in arrears.
The Company experienced a small rise in net impaired loans, to
$32.8 million at September 30, 2008 compared to $29.0 million at December 31,
2007 and $23.6 million at September 30, 2007. The loans portfolio continues to
perform well, as net impaired loans at September 30, 2008 represented less
than 1% of the gross loans portfolio. 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 nine-month period
ended September 30, 2008 totaled $1.6 million, up from both the comparable
periods of December 2007 and September 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 by increasing general allowances to $25.1 million at
September 30, 2008 as compared to general allowances of $23.4 million at
December 31, 2007 and $22.1 million at September 30, 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 99.8% 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 84.4 basis points of the Company's
risk-weighted assets as at September 30, 2008 compared to 83.5 basis points at
December 31, 2007 and 87.5 basis points at September 30, 2007. It should be
noted that the measurement of risk-weighted assets for September 30, 2008 was
based on the new Basel II computations. Refer to the Capital Management
section and Note 8 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 September 30, 2008 liquid assets amounted to 150% (165% as at
December 31, 2007 and 175% as at September 30, 2007) under the immediate
scenario, and 136% (146% at December 31, 2007 and 148% as at September 30,
2007) under the ongoing scenario. The Company continues to monitor these
scenarios and will take appropriate actions should the need arise.
The Company holds liquid assets in the form of cash and bank deposits,
treasury bills, banker's acceptances, government bonds and debentures to
comply with its liquidity policy. 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 September 30, 2008 liquid
assets amounted to $716.9 million, compared to $627.1 million recorded at
December 31, 2007 and $626.8 million at September 30, 2007. The Company's
policy is to maintain a minimum 20% of 100-day obligations in liquid assets.
For the twelve months ended September 30, 2008 the Company maintained a
monthly average of $571.3 million, or 46.9% of 100-day obligations in liquid
assets compared to $463.7 million, or 48.9% for the twelve months ended
December 31, 2007 and $401.9 million, or 45.7% for the twelve months ended
September 30, 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 will attempt to match 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 September 30, 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.
-------------------------------------------------------------------------
September September September September
In thousands of 30 30 30 30
dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Increase in interest Decrease in interest
rates rates
-------------------------------------------------------------------------
100 basis point shift
Impact on net
interest income,
after tax (for the
next 12 months) $ 3,096 $ (5,717) $ (3,096) $ 5,717
Impact on net
present value of
shareholders' equity (6,591) 6,514 6,910 (6,830)
200 basis point shift
Impact on net
interest income,
after tax (for the
next 12 months) $ 6,191 $ (11,434) $ (6,191) $ 11,434
Impact on net
present value of
shareholders' equity (12,879) 12,726 14,158 (13,990)
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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 had no open
interest rate swap arrangements at September 30, 2008 or the comparative
period. The Company held notional $40.0 million in short sale Government of
Canada bond positions specific to hedging commitment risk at September 30,
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 third quarter and the nine-month period
ended September 30, 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 29.6% for the nine months of 2008.
Mortgage Lending
The Company's principal line of business contributed $22.0 million to net
income during the third quarter and $58.1 million year-to-date, compared to
$15.1 million and $45.3 million for the comparable periods in 2007. The
increase over the prior periods was primarily driven through loan originations
which increased fee income and increases in gains realized on securitization
activities. These increases were offset by a slight 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 $24.0 million and
$70.6 million for the nine-month period ended September 30, 2008, down from
$24.5 million and $72.4 million for the comparable periods in 2007. The total
value of new mortgages advanced in the quarter and year-to-date was
$1.11 billion and $2.86 billion, respectively, increases of 39.8% and 45.9%
over the $791.0 million and $1.96 billion advanced for the comparative periods
in 2007.
The Company securitized $544.7 million of government-guaranteed CMHC
residential mortgage loans through the creation of MBS securities during the
quarter and $941.1 million for the nine-month period of 2008, realizing total
gains from securitization of $18.2 million for the quarter and $35.6 million
year-to-date. This compares to $208.4 million securitized for the third
quarter of 2007 and $493.4 million for the nine months of 2007, resulting in
gains of $6.0 million and $14.7 million, respectively. During the quarter, the
Company participated in CMHC's CMB program. Of the $544.7 million securitized
during the quarter and $941.1 million securitized year-to-date, $433.0 million
and $639.9 million, 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 $16.0 million in gains during the quarter and $26.1 million
year-to-date. 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.
The Company's second mortgage program (recorded as Secured Loans) is
conducted by way of an agreement with QSPE-HCC Trust 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 $79.0 million in Secured Loans as Notes
Receivable issued by Regency, compared to $82.3 million at December 31, 2007
and $81.8 million at September 30, 2007. These Notes yield 6.3% with an
average duration of 2.2 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
1.0% of the portfolio in arrears over 60 days. This program has experienced
minimal losses since inception and continues to provide the Company with
ancillary marketing opportunities in the residential mortgage marketplace.
Consumer Lending - Credit Cards and Retail Services
Consumer lending continued to generate positive results in the third
quarter and year-to-date. Net income for the quarter and nine-month period of
2008 was $5.1 million and $14.3 million, up 37.8% over the third quarter of
2007 and up 29.6% over the comparable nine-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 $0.3 million in net income during the quarter and $0.9 million
year-to-date.
The Equityline Visa loans portfolio amounted to $339.3 million at
September 30, 2008 ($302.7 million - Q4 2007, and $291.8 million - Q3 2007)
comprising 97.3% (96.3% - Q4 2007, and 96.1% - Q3 2007) of the total gross
credit card receivable balance of $348.8 million, and bearing an average
interest rate of 10.5% (10.9% - Q4 2007, and 10.4% - Q3 2007) on outstanding
balances. During the third quarter of 2008, 868 Equityline Visa accounts with
$37.7 million in authorized credit limits were issued, compared to 1,079
Equityline Visa accounts with $54.1 million in authorized credit limits issued
for the three months ended December 31, 2007 and 973 Visa accounts with
$50.3 million in authorized credit limits issued for the three-month period
ended September 30, 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 as the Canadian economy softens.
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 year-to-date were $0.8 million and $7.3 million, down from
$4.0 million and $9.8 million for the comparative periods in 2007. The
decrease from the prior periods were driven by growth in net interest income
derived from the Company's cash resources and securities portfolio, offset by
losses incurred on the sale of securities and writedowns on securities that
management determined were permanently impaired.
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ACCOUNTING STANDARDS AND POLICIES
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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, 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 is in the process of
finalizing a changeover plan which will include 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.
Controls over Financial Reporting
No changes were made in the Company's internal controls over financial
reporting during the interim period ended September 30, 2008 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
-------------------------------------------------------------------------
UPDATED SHARE INFORMATION
-------------------------------------------------------------------------
As at October 31, 2008 the Company had issued 34,475,690 Common Shares.
In addition, outstanding director and employee stock options amounted to
1,226,750 (1,293,750 - Q4 2007, and 1,170,000 - Q3 2007) of which 540,500 are
exercisable as of the quarter-end (526,250 - Q4 2007, and 596,250 - Q3 2007)
for proceeds to the Company upon exercise of $8.4 million ($7.9 million - Q4
2007, and $7.3 million - Q3 2007).
Subsequent to the end of the third quarter, the Board of Directors
declared a quarterly cash dividend of $0.13 per common share payable on
December 1, 2008 to shareholders of record at the close of business on
November 14, 2008.
-------------------------------------------------------------------------
QUARTERLY FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
The Company's key financial measures for each of the last eight quarters
are summarized in the following table. These highlights illustrate the
Company's profitability, return on equity, as well as efficiency measures and
capital ratios, quarter-over-quarter. 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 annualized
provisions as a percentage of gross loans during the third quarter of 2008
relate to increases in specific provisions in both the residential mortgage
portfolio and the Equityline Visa portfolio.
-------------------------------------------------------------------------
In Thousands of Dollars 2008 2007
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Net interest income (TEB)(1) $ 39,478 $ 40,418 $ 38,590 $ 40,394
Less TEB adjustment 1,130 1,056 962 2,311
-------------------------------------------------------------------------
Net interest income per
financial statements 38,348 39,362 37,628 38,083
Non-interest income 23,013 17,318 14,338 14,561
Non-interest expense 16,953 17,443 14,763 15,687
Total revenues 116,950 112,953 106,796 105,081
Net income 27,939 26,550 25,159 24,228
Return on common
shareholders' equity 27.6% 27.7% 27.9% 28.9%
Return on average total assets 2.0% 2.0% 1.9% 2.0%
Earnings per common share
Basic $ 0.81 $ 0.77 $ 0.73 $ 0.70
Diluted $ 0.81 $ 0.76 $ 0.72 $ 0.70
Book value per common share $ 12.08 $ 11.44 $ 10.79 $ 10.08
Efficency ratio (TEB)(1) 27.1% 30.2% 27.9% 28.5%
Efficency ratio 27.6% 30.8% 28.4% 29.8%
Tier 1 capital ratio(2),(3) 12.7% 12.5% 12.0% 11.1%
Total capital ratio(2),(3) 14.0% 13.8% 13.4% 12.5%
Net impaired loans as a %
of gross loans 0.72% 0.71% 0.71% 0.72%
Annualized provision as a %
of gross loans 0.3% 0.1% 0.1% 0.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In Thousands of Dollars 2007 2006
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Net interest income (TEB)(1) $ 39,396 $ 37,647 $ 34,276 $ 33,040
Less TEB adjustment 1,084 1,118 942 841
-------------------------------------------------------------------------
Net interest income per
financial statements 38,312 36,529 33,334 32,199
Non-interest income 11,964 11,467 10,075 12,744
Non-interest expense 13,289 13,382 11,840 12,276
Total revenues 94,346 87,708 81,745 81,053
Net income 22,837 22,018 21,158 20,518
Return on common
shareholders' equity 28.9% 28.9% 29.3% 30.5%
Return on average total assets 2.0% 2.1% 2.1% 2.2%
Earnings per common share
Basic $ 0.66 $ 0.64 $ 0.62 $ 0.60
Diluted $ 0.65 $ 0.63 $ 0.61 $ 0.59
Book value per common share $ 9.38 $ 8.98 $ 8.70 $ 8.10
Efficency ratio (TEB)(1) 25.9% 27.3% 26.7% 26.8%
Efficency ratio 26.4% 27.9% 27.3% 27.3%
Tier 1 capital ratio(2),(3) 11.7% 12.9% 12.7% 12.7%
Total capital ratio(2),(3) 13.1% 14.4% 14.3% 14.2%
Net impaired loans as a %
of gross loans 0.63% 0.68% 0.74% 0.68%
Annualized provision as a %
of gross loans 0.2% 0.1% 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 details.
Outlook
This Outlook section contains forward-looking statements. (Please see the
Caution Regarding Forward-Looking Statements on page 5 of these unaudited
interim consolidated financial statements).
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 debt, and is well positioned to capitalize on
market opportunities in the current economic environment.
The Canadian and global markets have experienced unprecedented
volatility, and declines over the past several months stemming from the
liquidity and credit crisis starting in 2007. The economic challenges first
seen in the United States have in recent months spread globally culminating in
a coordinated effort by several countries to stabilize the global financial
systems. The Canadian economy has not been immune to these economic
challenges. The Company expects these challenging market conditions to persist
into 2009 with the Canadian economy experiencing slower growth as housing
markets demonstrate modest price declines and higher inventories. 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 through uncertain
economic conditions while positioning the Company for future opportunities.
Consolidated Statements of Income
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income
Interest from loans $ 86,524 $ 73,372 $ 256,570 $ 209,823
Dividends from equity
securities 2,331 2,162 6,746 6,269
Other interest 5,082 6,848 18,714 14,201
-------------------------------------------------------------------------
93,937 82,382 282,030 230,293
Interest Expense
Interest on deposits 55,589 44,070 166,692 122,118
-------------------------------------------------------------------------
Net interest income 38,348 38,312 115,338 108,175
Provision for credit
losses (note 4(d)) 3,420 2,103 4,650 3,593
-------------------------------------------------------------------------
34,928 36,209 110,688 104,582
-------------------------------------------------------------------------
Non-interest Income
Fees and other income 7,033 5,415 21,348 15,089
Securitization income
on mortgage-backed
securities 19,717 6,572 40,852 17,363
Net gain (loss) realized
and unrealized on
securities (2,524) (159) (4,570) 945
Net gain on disposition
of subsidiary (note 16) - - 69 -
Gain (loss) on derivatives (1,213) 136 (3,030) 109
-------------------------------------------------------------------------
23,013 11,964 54,669 33,506
-------------------------------------------------------------------------
57,941 48,173 165,357 138,088
-------------------------------------------------------------------------
Non-interest Expenses
Salaries and staff
benefits 9,426 7,813 27,618 22,032
Premises 1,184 968 3,247 2,841
General and
administration 6,343 4,508 18,294 13,638
-------------------------------------------------------------------------
16,953 13,289 49,159 38,511
-------------------------------------------------------------------------
Income Before Income
Taxes 40,988 34,884 116,198 99,577
Provision for income
taxes (note 11(a)) 13,049 12,047 36,550 33,564
-------------------------------------------------------------------------
NET INCOME $ 27,939 $ 22,837 $ 79,648 $ 66,013
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER
COMMON SHARE
Basic $ 0.81 $ 0.66 $ 2.31 $ 1.92
Diluted $ 0.81 $ 0.65 $ 2.29 $ 1.89
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(thousands)
Basic 34,522 34,413 34,530 34,429
Diluted 34,822 34,873 34,784 34,845
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total number of
outstanding common
shares (thousands) 34,476 34,455 34,476 34,455
Book value per common
share $ 12.07 $ 9.38 $ 12.07 $ 9.38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
NET INCOME $ 27,939 $ 22,837 $ 79,648 $ 66,013
-------------------------------------------------------------------------
OTHER COMPREHENSIVE
INCOME (LOSS), NET OF TAX
Unrealized income on
available for sale
securities
Net unrealized income
on securities available
for sale, net of ($884)
tax (($1,387) - three
months ended
September 30, 2007;
$346 - nine months
ended September 30,
2008; ($5,762) -
nine months ended
September 30, 2007) (1,232) (3,957) (192) (8,982)
Reclassification of
earnings (losses) in
respect of available
for sale securities, net
of $635 tax ($163 -
three months ended
September 30, 2007;
$1,484 - nine months
ended September 30,
2008; ($608) -
nine months ended
September 30, 2007) 1,279 288 3,094 (1,076)
-------------------------------------------------------------------------
Total other comprehensive
income (loss) 47 (3,669) 2,902 (10,058)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 27,986 $ 19,168 $ 82,550 $ 55,955
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Balance Sheets
-------------------------------------------------------------------------
In Thousands of Dollars September 30 December 31 September 30
(Unaudited) 2008 2007 2007
-------------------------------------------------------------------------
ASSETS
Cash Resources
Deposits with regulated
financial institutions $ 431,288 $ 344,464 $ 449,396
Treasury bills guaranteed
by Canada - 9,872 -
-------------------------------------------------------------------------
431,288 354,336 449,396
-------------------------------------------------------------------------
Securities (note 3)
Held for trading 301 114,423 19,965
Available for sale 487,654 356,458 367,411
-------------------------------------------------------------------------
487,955 470,881 387,376
-------------------------------------------------------------------------
Loans (note 4)
Residential mortgages 3,375,767 3,218,474 3,039,459
Personal and credit card loans 364,261 325,393 312,261
Other mortgages 721,041 419,400 328,838
Secured loans 79,025 82,304 81,797
General allowance for credit
losses (25,077) (23,400) (22,087)
-------------------------------------------------------------------------
4,515,017 4,022,171 3,740,268
-------------------------------------------------------------------------
Other
Securitization receivable
(note 5) 106,969 65,768 51,772
Capital assets 5,725 4,837 4,664
Other assets (note 6) 74,855 57,100 40,992
-------------------------------------------------------------------------
187,549 127,705 97,428
-------------------------------------------------------------------------
$ 5,621,809 $ 4,975,093 $ 4,674,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities
Deposits
Payable on demand $ 16,457 $ 30,793 $ 13,608
Payable on a fixed date 4,927,582 4,383,191 4,146,888
-------------------------------------------------------------------------
4,944,039 4,413,984 4,160,496
-------------------------------------------------------------------------
Other
Cheques and other items in
transit 3,396 4,393 3,989
Other liabilities (note 7) 258,079 208,676 186,678
-------------------------------------------------------------------------
261,475 213,069 190,667
-------------------------------------------------------------------------
5,205,514 4,627,053 4,351,163
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 8) 39,142 38,899 38,047
Contributed surplus 2,910 1,818 1,523
Retained earnings 377,638 313,620 294,423
Accumulated other comprehensive
loss (note 10) (3,395) (6,297) (10,688)
-------------------------------------------------------------------------
416,295 348,040 323,305
-------------------------------------------------------------------------
$ 5,621,809 $ 4,975,093 $ 4,674,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
CAPITAL STOCK (note 8)
Balance at beginning of
the period $ 39,217 $ 37,985 $ 38,899 $ 35,436
Proceeds of options
exercised - 124 318 2,695
Normal course issuer bid (75) (62) (75) (84)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 39,142 $ 38,047 $ 39,142 $ 38,047
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS
Balance at beginning of
the period $ 2,531 $ 1,256 $ 1,818 $ 783
Amortization of fair
value of employee stock
options (note 9) 379 285 1,143 808
Employee stock options
exercised - (18) (51) (68)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 2,910 $ 1,523 $ 2,910 $ 1,523
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
the period (note 8) $ 356,693 $ 277,619 $ 313,620 $ 240,647
Transitional adjustment
on adoption of new
accounting polcies - - - 1,391
Normal course issuer bid (2,167) (1,898) (2,167) (2,595)
Net income for the period 27,939 22,837 79,648 66,013
Dividends paid during
the period (345) (345) (8,981) (7,243)
Dividends declared,
unpaid during the period (4,482) (3,790) (4,482) (3,790)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 377,638 $ 294,423 $ 377,638 $ 294,423
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE LOSS
Balance at beginning of
the period $ (3,442) $ (7,019) $ (6,297) $ -
Transitional adjustment
on adoption of new
accounting polcies - - - (630)
Other comprehensive
income, net of ($249) tax
(($1,224) - three months
ended September 30, 2007;
$1,830 - nine months
ended September 30, 2008;
($6,370) - nine months
ended September 30, 2007) 47 (3,669) 2,902 (10,058)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ (3,395) $ (10,688) $ (3,395) $ (10,688)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Cash Flows
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period
Adjustments to determine
cash flows relating to
operating activities: $ 27,939 $ 22,837 $ 79,648 $ 66,013
Future income taxes 5,013 2,091 9,227 4,308
Amortization 4,578 2,089 10,350 8,293
Provision for credit
losses (note 4(d)) 3,420 2,103 4,650 3,593
Change in accrued
interest payable (3,035) 6,069 23,534 13,059
Change in accrued
interest receivable 404 (1,975) (1,595) (4,076)
Net loss (gain) realized
and unrealized on
investment securities 2,524 159 4,570 (945)
Loss (gain) on derivatives 1,213 (136) 3,030 (109)
Securitization income
on mortgage-backed
securities (19,717) (6,572) (40,852) (17,363)
Amortization of fair
value of employee stock
options (note 9) 379 285 1,143 808
Other 604 1,636 (4,817) 654
-------------------------------------------------------------------------
Cash flows from operating
activities 23,322 28,586 88,888 74,235
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in deposits 227,468 352,337 530,055 718,704
Issuance of capital stock - 124 318 2,695
Normal course issuer bid (2,242) (1,960) (2,242) (2,679)
Exercise of stock options - (18) (51) (68)
Dividends paid (4,491) (3,795) (12,779) (10,319)
-------------------------------------------------------------------------
Cash flows from financing
activities 220,735 346,688 515,301 708,333
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Activity in available
for sale and held for
trading securities
Purchases (64,711) (27,883) (328,266) (143,954)
Proceeds from sales 30,635 4,176 234,222 28,716
Proceeds from maturities 26,215 23,127 59,167 63,247
Activity in mortgages
Net increase (541,831) (355,703) (1,402,219) (840,579)
Proceeds from
securitization of
mortgage-backed
securities 540,347 202,536 929,331 480,041
Change in mortgage-
backed securities
receivable 7,331 9,733 19,649 24,497
Net increase in personal
and credit card loans (1,706) (20,875) (39,367) (75,741)
Net increase (decrease)
in secured loans 7,116 (3,748) 2,944 (11,667)
Purchases of capital
assets (853) (286) (2,698) (1,263)
-------------------------------------------------------------------------
Cash flows from (used in)
investing activities 2,543 (168,923) (527,237) (476,703)
-------------------------------------------------------------------------
Net increase in cash and
cash equivalents during
the period 246,600 206,351 76,952 305,865
Cash and cash equivalents
at beginning of the
period 184,688 243,045 354,336 143,531
-------------------------------------------------------------------------
Cash and cash equivalents
at end of the period $ 431,288 $ 449,396 $ 431,288 $ 449,396
-------------------------------------------------------------------------
Supplementary Disclosure
of Cash Flow Information
Interest paid $ 58,624 $ 42,234 $ 143,159 $ 109,059
Income taxes paid 11,293 10,774 38,710 35,461
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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 income is disclosed in Note 10.
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Securities issued or
guaranteed by:
Canada $ 599 $ (111) $ (1,546)
Corporations (2,507) - -
Equity securities
Common (1,584) (494) (1,289)
Fixed rate preferred (9,446) (4,753) (1,301)
Floating rate preferred (301) (270) (106)
Income trusts (2,714) (2,891) (1,730)
Mutual funds 80 (5) 38
-------------------------------------------------------------------------
$ (16,033) $ (8,524) $ (5,934)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September 30, 2008, the Company had $0.2 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 September 30, 2008
-------------------------------------------------------------------------
In Personal
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 2,368,193 244,170 518,904 67,488 3,198,755
Quebec 93,198 1,073 58,313 - 152,584
Maritimes 94,203 6,423 11,974 2,548 155,148
Manitoba and
Saskatchewan 68,687 1,634 7,294 - 77,615
-------------------------------------------------------------------------
$3,375,767 $ 364,261 $ 721,041 $ 79,025 $4,540,094
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2007
-------------------------------------------------------------------------
In Personal
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 2,314,008 222,230 342,140 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
-------------------------------------------------------------------------
$3,218,474 $ 325,393 $ 419,400 $ 82,304 $4,045,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
British
Columbia $ 291,654 $ 22,013 $ 489 $ 221 $ 314,377
Alberta 333,923 63,629 25,026 7,820 430,398
Ontario 2,232,075 216,469 279,728 70,160 2,798,432
Quebec 50,098 30 16,190 - 66,318
Maritimes 124,137 8,048 7,405 3,596 143,186
Manitoba and
Saskatchewan 7,572 2,072 - - 9,644
-------------------------------------------------------------------------
$3,039,459 $ 312,261 $ 328,838 $ 81,797 $3,762,355
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(B) Past Due Loans that are not Impaired
As at September 30, 2008
-------------------------------------------------------------------------
In Personal
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
-------------------------------------------------------------------------
In Personal
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 116,903 $ 3,363 $ 2,087 $ 1,772 $ 124,125
31 - 60 days 7,990 1,852 - 33 9,875
61 - 90 days 24,074 1,024 - 183 25,281
91 - 120 days - 1,217 - - 1,217
-------------------------------------------------------------------------
$ 148,967 $ 7,456 $ 2,087 $ 1,988 $ 160,498
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(C) Impaired Loans and Specific Allowances for Credit Losses
As at September 30, 2008
-------------------------------------------------------------------------
In Personal
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
-------------------------------------------------------------------------
In Personal
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 $ 242 $ 29,019
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 21,260 $ 1,886 $ 610 $ 492 $ 24,248
Specific
allowances (229) (208) - (242) (679)
-------------------------------------------------------------------------
$ 21,031 $ 1,678 $ 610 $ 250 $ 23,569
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(D) Allowance for Credit Losses
For the three months ended September 30, 2008
-------------------------------------------------------------------------
In Personal
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
-------------------------------------------------------------------------
In Personal
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 $ 1,087 $ 24,393
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended September 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at
the
beginning
of the
period $ 316 $ 158 $ - $ 39 $ 513
Provisions
for credit
losses 290 183 - 233 706
Write-offs (414) (185) - (40) (639)
Recoveries 37 52 - 10 99
-------------------------------------------------------------------------
229 208 - 242 679
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 15,958 2,922 1,006 804 20,690
Provisions
for credit
losses 445 205 712 35 1,397
-------------------------------------------------------------------------
16,403 3,127 1,718 839 22,087
-------------------------------------------------------------------------
Total
allowance $ 16,633 $ 3,335 $ 1,718 $ 1,080 $ 22,766
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2008
-------------------------------------------------------------------------
In Personal
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 2,134 499 5 335 2,973
Write-offs (1,042) (367) - (537) (1,946)
Recoveries 224 89 - 38 351
-------------------------------------------------------------------------
1,950 349 5 67 2,371
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 17,127 3,201 2,216 856 23,400
Provisions
for credit
losses (433) 450 1,691 (31) 1,677
-------------------------------------------------------------------------
16,694 3,651 3,907 825 25,077
-------------------------------------------------------------------------
Total
allowance $ 18,644 $ 4,000 $ 3,912 $ 892 $ 27,448
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2007
-------------------------------------------------------------------------
In Personal
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 456 517 - 177 1,150
Write-offs (675) (609) - (53) (1,337)
Recoveries 62 152 - 10 224
-------------------------------------------------------------------------
229 208 - 242 679
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 15,886 2,378 659 721 19,644
Provisions
for credit
losses 517 749 1,059 118 2,443
-------------------------------------------------------------------------
16,403 3,127 1,718 839 22,087
-------------------------------------------------------------------------
Total
allowance $ 16,632 $ 3,335 $ 1,718 $ 1,081 $ 22,766
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
September 30, 2008, the total appraised value of the collateral for
mortgages past due that are not impaired, as determined when the
mortgages were originated, is $251.2 million. For impaired mortgages, the
total appraised value of collateral at September 30, 2008 is
$41.6 million.
5. LOAN SECURITIZATION
The following tables summarize the Company's new securitization
activities.
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
In Thousands of Dollars, September September September September
Except Percentages and 30 30 30 30
Number of Years 2008 2007 2008 2007
-------------------------------------------------------------------------
Book value of mortgages
securitized $ 544,745 $ 208,370 $ 941,146 $ 493,413
Securitization receivable $ 25,811 $ 12,593 $ 52,620 $ 29,803
Servicing liability $ 2,039 $ 343 $ 2,681 $ 794
Net proceeds received on
securitized mortgages $ 540,347 $ 202,536 $ 929,331 $ 480,041
Gain on sale of mortgages $ 18,226 $ 6,005 $ 35,615 $ 14,656
Prepayment rate 7.3% 13.0% 9.2% 13.1%
Excess spread 2.2% 2.6% 2.6% 2.6%
Weighted average life
in years 3.6 3.9 3.6 3.9
Discount rate 3.7% 4.5% 3.7% 4.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the third quarter of 2008, the Company securitized insured
residential mortgages through CMHC's Canada Mortgage Bond Program with a
book value of $433.0 million for a total of $639.9 million in 2008
($28.0 million in Q3 2007 and for the nine months ended September 30,
2007). The gain on sale was $16.0 million during the third quarter and
$26.1 million for the nine months ended September 30, 2008
($1.3 million in Q3 2007 and for the nine months ended September 30,
2007). These figures are included in the table above.
6. OTHER ASSETS
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Accrued interest receivable $ 26,903 $ 25,308 $ 23,122
Income taxes receivable 12,555 - 1,432
Goodwill 15,028 15,028 2,324
Intangible assets 708 1,158 -
Other prepaid assets and
deferred items 19,661 15,606 14,114
-------------------------------------------------------------------------
$ 74,855 $ 57,100 $ 40,992
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. OTHER LIABILITIES
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Accrued interest payable $ 159,184 $ 135,650 $ 124,979
Income taxes payable - 5,795 -
Dividends payable 4,482 3,799 3,790
Future income tax liability
(note 11) 30,391 16,586 15,174
Securitization servicing
liability 4,262 1,786 1,648
Other, including accounts
payable and accrued liabilities 59,760 45,060 41,087
-------------------------------------------------------------------------
$ 258,079 $ 208,676 $ 186,678
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. CAPITAL
(A) Common Shares Issued and Outstanding
For the three months ended
-------------------------------------------------------------------------
September 30, 2008 September 30, 2007
-------------------------------------------------------------------------
In Thousands of
Dollars Except Per Number of Number of
Share Amounts Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at
beginning of period 34,542 $ 39,217 34,502 $ 37,985
Options exercised - - 10 124
Normal course issuer bid (66) (75) (57) (62)
-------------------------------------------------------------------------
Outstanding at end
of period 34,476 $ 39,142 34,455 $ 38,047
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
September 30, 2008 September 30, 2007
-------------------------------------------------------------------------
In Thousands of
Dollars Except Per Number of Number of
Share Amounts Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at
beginning of period 34,532 $ 38,899 34,166 $ 35,436
Options exercised 10 318 366 2,695
Normal course issuer bid (66) (75) (77) (84)
-------------------------------------------------------------------------
Outstanding at end
of period 34,476 $ 39,142 34,455 $ 38,047
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
September 30, 2008 September 30, 2007
-------------------------------------------------------------------------
Weighted- Weighted-
average average
In Thousands Except Number of Exercise Number of Exercise
Per Share Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at
beginning of period 1,227 $ 26.73 1,130 $ 21.76
Granted - - 50 36.02
Exercised - - (10) 10.56
Forfeited - - - -
-------------------------------------------------------------------------
Outstanding at end
of period 1,227 $ 26.73 1,170 $ 22.47
-------------------------------------------------------------------------
Exercisable, end of
period 541 $ 15.60 596 $ 12.31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
September 30, 2008 September 30, 2007
-------------------------------------------------------------------------
Weighted- Weighted-
average average
In Thousands Except Number of Exercise Number of Exercise
Per Share Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at
beginning of period 1,294 $ 27.15 1,266 $ 15.43
Granted - - 270 34.73
Exercised (10) 28.12 (366) 7.18
Forfeited (57) 35.92 - -
-------------------------------------------------------------------------
Outstanding at end
of period 1,227 $ 26.73 1,170 $ 22.47
-------------------------------------------------------------------------
Exercisable, end of
period 541 $ 15.60 596 $ 12.31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
September December September
In Thousands of Dollars, 30 31(1) 30(1)
Except Ratios and Multiple 2008 2007 2007
-------------------------------------------------------------------------
Regulatory capital
Tier 1 $ 375,688 $ 311,760 $ 295,284
Total 415,765 350,160 332,265
Regulatory ratios
Tier 1 12.7% 11.1% 11.7%
Total 14.0% 12.5% 13.1%
Assets to capital multiple 13.5 14.2 14.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 third quarter of 2008, $379,000 was recorded as an expense for
a total of $1,143,000 for the first nine months of 2008 ($285,000 - Q3
2007 and $808,000 - nine months of 2007) for stock option awards in the
consolidated statements of income, with an off-setting credit to
contributed surplus. No new options were granted during 2008 (50,000 - Q3
2007 and 270,000 - nine months of 2007).
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Unrealized gains and
(losses) on $ (16,033) $ (8,524) $ (5,934)
Available for sale securities 4,454 2,226 1,928
-------------------------------------------------------------------------
Income taxes recovery (expenses) (11,579) (6,298) (4,006)
Unrealized gains and (losses) on
Securitization receivables 12,239 2 (10,460)
Income taxes recovery (expenses) (4,055) (1) 3,778
-------------------------------------------------------------------------
8,184 1 (6,682)
-------------------------------------------------------------------------
Accumulated other comprehensive
loss $ (3,395) $ (6,297) $ (10,688)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. INCOME TAXES
(A) Reconciliation of Income Taxes
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
September September September September
30 30 30 30
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Income before income
taxes $ 40,988 $ 34,884 $ 116,198 $ 99,577
-------------------------------------------------------------------------
Income taxes at
statutory combined
federal and provincial
income tax rates 13,561 12,602 38,505 35,969
Increase (decrease) in
income taxes at
statutory income tax
rates resulting from
Tax-exempt income (714) (693) (2,070) (2,008)
Non-deductible expenses 152 270 784 478
Future tax rate changes (479) (139) (876) (217)
Other 529 7 207 (658)
-------------------------------------------------------------------------
Income tax $ 13,049 $ 12,047 $ 36,550 $ 33,564
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(B) Sources of Future Income Tax Balances
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Future income tax liabilities
Deferred agent commissions
and other charges $ 7,864 $ 7,907 $ 8,657
Mortgage-backed securities
receivable 34,654 21,282 17,638
-------------------------------------------------------------------------
42,518 29,189 26,295
-------------------------------------------------------------------------
Future income tax assets
Allowance for credit losses 7,593 6,767 6,757
Future tax recoverable acquired 530 1,370 -
Deferred commitment fees and
other charges 4,004 4,466 4,364
-------------------------------------------------------------------------
12,127 12,603 11,121
-------------------------------------------------------------------------
$ 30,391 $ 16,586 $ 15,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilized off-balance sheet financial instruments during the
first nine months of 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 five-year MBS pools to
Canada Housing Trust which finances the purchase by issuing a five-year
bullet Canada Mortgage Bond. Under this program, the Company must manage
the mismatch and reinvestment risk between the amortizing five-year MBS
pool and the five-year bullet Canada Mortgage Bond. As part of this
arrangement, the Company entered into a seller swap which has 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 a hedge swap to manage the reinvestment risk between the amortizing
MBS pool and the five-year 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.
There were no outstanding interest rate swaps to hedge commitment risk at
September 30, 2008 or September 30, 2007. With respect to the Canada
Mortgage Bond program, at September 30, 2008 the Company notionally held
$760.9 million of seller swaps, and $24.4 million of accreting hedge
swaps. These outstanding swap arrangements were marked-to-market at
September 30, 2008 for an unrealized gain of $1.0 million.
During the quarter, the Company entered into an off-balance sheet
financial transaction for risk management purposes. The Company entered
into a bond forward contract for the sale of $40 million of Government of
Canada Bonds. The contract was marked-to-market at September 30, 2008
for an unrealized gain of $0.1 million.
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 September 30, 2008, December 31, 2007
and September 30, 2007 for selected period intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap
position.
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% - -
------------------------------------------------------------
------------------------------------------------------------
As at September 30, 2007
-------------------------------------------------------------------------
In Thousands of
Dollars, Except Floating 0 to 3 3 Months 1 to 3
Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 38,578 $ 1,034,994 $1,412,867 $ 1,485,449
Total liabilities
and equity 227 596,127 1,746,833 1,355,491
Off-balance sheet
items - (276,216) 144,477 45,461
-------------------------------------------------------------------------
Interest rate
sensitive gap $ 38,351 $ 162,651 $ (189,489) $ 175,419
-------------------------------------------------------------------------
Cumulative gap $ 38,351 $ 201,002 $ 11,513 $ 186,932
-------------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 0.8% 4.3% 0.2% 4.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2007
------------------------------------------------------------
In Thousands of
Dollars, Except Over Non-interest
Percentages 3 Years Sensitive Total
------------------------------------------------------------
Total assets $ 581,302 $ 121,278 $4,674,468
Total liabilities
and equity 430,309 545,481 4,674,468
Off-balance sheet
items 86,278 - -
------------------------------------------------------------
Interest rate
sensitive gap $ 237,271 $ (424,203) $ -
------------------------------------------------------------
Cumulative gap $ 424,203 $ - $ -
------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 9.1% - -
------------------------------------------------------------
------------------------------------------------------------
Based on the current interest rate gap position at September 30, 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 $3.1 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
core residential mortgage lending, securitization of government-insured
mortgage loans, commercial real estate lending, and the administration of
Regency Finance Corp. second mortgage loans (secured loans). The consumer
lending operation consists of credit card services, installment lending
to customers of retail businesses and PSiGate operations as of October
17, 2007. The Other category includes the Company's treasury and
securities investment activities.
For the three months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
In Thousands September 30 September 30 September 30 September 30
of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 23,988 $ 24,507 $ 7,220 $ 5,349
Provision for credit
losses (3,091) (1,715) (329) (388)
Fees and other income 3,850 3,329 3,085 2,010
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 18,504 6,708 - -
Non-interest expenses (11,066) (8,958) (2,151) (1,127)
-------------------------------------------------------------------------
Income before income
taxes 32,185 23,871 7,825 5,844
Income taxes (10,148) (8,801) (2,680) (2,110)
-------------------------------------------------------------------------
Net income $ 22,037 $ 15,070 $ 5,145 $ 3,734
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 12,704 $ -
-------------------------------------------------------------------------
Total assets $ 4,520,667 $ 3,539,841 $ 401,599 $ 320,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
In Thousands September 30 September 30 September 30 September 30
of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 7,140 $ 8,456 $ 38,348 $ 38,312
Provision for credit
losses - - (3,420) (2,103)
Fees and other income 98 76 7,033 5,415
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary (2,524) (159) 15,980 6,549
Non-interest expenses (3,736) (3,204) (16,953) (13,289)
-------------------------------------------------------------------------
Income before income
taxes 978 5,169 40,988 34,884
Income taxes (221) (1,136) (13,049) (12,047)
-------------------------------------------------------------------------
Net income $ 757 $ 4,033 $ 27,939 $ 22,837
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,028 $ 2,324
-------------------------------------------------------------------------
Total assets $ 699,543 $ 813,760 $ 5,621,809 $ 4,674,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
In Thousands September 30 September 30 September 30 September 30
of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 70,572 $ 72,383 $ 19,448 $ 15,348
Provision for credit
losses (3,701) (2,327) (949) (1,266)
Fees and other income 11,264 8,699 9,765 6,138
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 37,822 17,472 - -
Non-interest expenses (30,383) (26,306) (6,594) (2,990)
-------------------------------------------------------------------------
Income before income
taxes 85,574 69,921 21,670 17,230
Income taxes (27,452) (24,671) (7,401) (6,223)
-------------------------------------------------------------------------
Net income $ 58,122 $ 45,250 $ 14,269 $ 11,007
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 12,704 $ -
-------------------------------------------------------------------------
Total assets $ 4,520,667 $ 3,539,841 $ 401,599 $ 320,867
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
In Thousands September 30 September 30 September 30 September 30
of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 25,318 $ 20,444 $ 115,338 $ 108,175
Provision for credit
losses - - (4,650) (3,593)
Fees and other income 319 252 21,348 15,089
Net gain on securities
mortgage-backed
securities and
disposition of
subsidiary (4,501) 945 33,321 18,417
Non-interest expenses (12,182) (9,215) (49,159) (38,511)
-------------------------------------------------------------------------
Income before income
taxes 8,954 12,426 116,198 99,577
Income taxes (1,697) (2,670) (36,550) (33,564)
-------------------------------------------------------------------------
Net income $ 7,257 $ 9,756 $ 79,648 $ 66,013
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,028 $ 2,324
-------------------------------------------------------------------------
Total assets $ 699,543 $ 813,760 $ 5,621,809 $ 4,674,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 12 to 14 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 interim unaudited consolidated financial
statements.
Home Capital Group Inc. is a public company, traded on the Toronto Stock
Exchange (HCG), operating through its principal subsidiary, Home Trust
Company. Home Trust is a federally regulated trust company offering deposit,
mortgage lending, retail credit and payment card services. Licensed to conduct
business across Canada, Home Trust has branch offices in Ontario, Alberta,
British Columbia, Nova Scotia and Quebec.
For further information: Gerald M. Soloway, CEO, or Nick Kyprianou,
President, (416) 360-4663, www.homecapital.com
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