Income Increases 20.6%, Return on Equity Reaches 27.7%
TORONTO, Aug. 5 /CNW/ - Home Capital Group Inc. (TSX: HCG) today
announced solid financial results for the second quarter and first six months
of 2008. Despite challenging market conditions affecting many financial
services firms, the Company's core business activities including residential
and commercial mortgage lending, CMHC-insured Mortgage-Backed Securities, and
Visa lending all generated strong earnings growth and returns.Key results from the second quarter included:
- Net income for the quarter was $26.6 million, an increase of 20.6%
over $22.0 million recorded in the same period last year. Earnings for
the first six months of 2008 reached $51.7 million, a rise of 19.8%
over the comparable period in 2007.
- Basic earnings per share were $0.77, 20.3% above $0.64 for the second
quarter of 2007, and $1.50 for the six-month period, 19.1% higher than
the $1.26 recorded last year. Diluted earnings per share were $0.76,
an increase of 20.6% from the $0.63 recorded in the second quarter of
2007; results for the six months were $1.48, 19.4% above the same
period last year.
- Return on equity was 27.7% for the second quarter, compared to 28.9%
for the quarter ended June 30, 2007 and 27.8% for the first six months
of 2008, versus 29.4% for the first half of last year.
- Total assets at June 30, 2008 reached $5.36 billion, 24.5% higher than
the $4.31 billion reported one year earlier. Total assets, together
with Mortgage-Backed Securities (MBS) originated and administered by
the Company, grew to $7.04 billion, a rise of 27.0% from $5.54 billion
at June 2007.
- Total mortgage originations were $886.9 million during the second
quarter, an increase of 42.5% over the $622.6 million advanced during
the same period in 2007. The Company advanced $768.6 million in
residential mortgages, $85.2 million in commercial mortgages,
$19.6 million in mortgages on store and apartment properties and
$13.5 warehouse commercial mortgages. Year-to-date, total mortgage
originations were $1.75 billion, an increase of 50.0% over the
$1.17 billion advanced during the same six-month period in 2007.
- Mortgage securitization activity continued to produce good results as
the Company securitized and sold $250.6 million in CMHC-insured
securities during the second quarter, compared to $150.7 million for
the same period last year. The increased level of securitization
activity was due to favourable market conditions that allowed Home to
raise funds by selling MBS pools at more cost effective rates than if
Home raised the funds through term deposits.
- Outstanding balances on the Equityline Visa portfolio reached
$339.1 million, a rise of 24.7% from the $272.0 million recorded in
the same period last year. Net income from consumer lending reached
$4.8 million for the second quarter, 29.6% over the $3.7 million
recorded last year.
- The Company's efficiency ratio (TEB) was 30.2% in the second quarter,
compared to 27.3% during the same period one year earlier.
- Net impaired loans represented 0.71% of the total loans portfolio,
down slightly from 0.72% at the end of 2007. Non-performing mortgages
continue to be diligently managed on a loan-by-loan basis by the
Company.Following extensive analysis and evaluation, the Company launched a new
mortgage initiative during the second quarter. Home Trust's Accelerator
Program offers a full range of insured mortgage products to a broad customer
base, including individuals who have traditionally been served by niche "A"
lending companies. Management believes that a lender with Home Trust's skills
and expertise can effectively compete in this marketplace, and that this suite
of products will position Home Trust as a "one stop shop" for mortgage
brokers, expanding the Company's penetration into the broker network. As with
all new opportunities, the Company is taking a prudent approach to developing
this business. Although the spread for this product is less than our regular
mortgage business, we anticipate being able to issue and sell through
securitization all of the mortgages originated under this program.
During the quarter, the Company expanded its premises in Toronto to
include an additional floor of office space, increasing its square footage by
50%. The Company is well positioned to accommodate continued growth and
further product development.
The Board of Directors has approved a Normal Course Issuer Bid,
commencing on August 1, 2008. The Company believes that, from time to time,
the market price of Home Capital's Common Shares does not fully reflect the
value of its business. In these situations, the purchase of outstanding shares
may represent an appropriate use of the Company's available funds.
Subsequent to the end of the second quarter, and in light of the
Company's increasing profitability, consistent, strong growth and financial
performance, the Board of Directors declared an increased quarterly cash
dividend of $0.13 per Common Share payable on September 1, 2008 to
shareholders of record at the close of business on August 15, 2008. This
increase reflects the Company's commitment to providing increasing long-term
value to all our shareholders.
Home Capital reported solid second quarter results in a period that
continued to be affected by turbulent financial markets. Notwithstanding these
circumstances, the Company continues to manage its core lending business with
an appropriate balance of prudence and opportunity and is well positioned for
the future. Home Capital's Board of Directors and management remain confident
that the Company will continue to deliver strong growth and profitability
through the remainder of 2008."signed" "signed"
GERALD M. SOLOWAY NORMAN F. ANGUS
Chief Executive Officer Chairman of the BoardAdditional 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
Second Quarter 2008.
Second Quarter Results Conference Call
The conference call will take place on Tuesday, August 5, 2008 at
10:30 a.m. Participants are asked to call 5 to 15 minutes in advance,
416-644-3417 in Toronto or toll-free 1-800-732-9307 throughout North America.
The call will also be accessible in listen-only mode via the Intranet at
www.homecapital.com
Conference Call Archive
A telephone replay of the call will be available between 12:30 p.m.
Tuesday, August 5, 2008 and midnight Tuesday, August 12, 2008 by calling
416-640-1917 or 1-877-289-8525 (enter passcode 21277632 followed by the number
sign). The archive audio web cast will be available for 90 days on CNW Group's
website at www.newswire.ca and Home Capital's website at www.homecapital.com.FINANCIAL HIGHLIGHTS
For the Period Ended June 30
(Unaudited) Three Months Ended Six Months Ended
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In Thousands of Dollars
(Except Per Share and
Percentage Amounts) 2008 2007 2008 2007
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OPERATING RESULTS
Net Income $ 26,550 $ 22,018 $ 51,709 $ 43,176
Total Revenue 112,953 87,708 219,749 169,453
Earnings per Share
- Basic $ 0.77 $ 0.64 $ 1.50 $ 1.26
Earnings per Share
- Diluted 0.76 0.63 1.48 1.24
Return on Shareholders'
Equity 27.68% 28.88% 27.84% 29.44%
Return on Average
Assets 1.97% 2.08% 2.00% 2.10%
Efficiency Ratio 30.78% 27.88% 29.64% 27.59%
Efficiency Ratio
(TEB(2)) 30.21% 27.25% 29.10% 26.99%
(Non-interest Expense
/Net Interest Income
Plus Fee Income)
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BALANCE SHEET
HIGHLIGHTS
Total Assets $ 5,361,771 $ 4,305,799
Loans 4,526,761 3,570,416
Deposits 4,716,571 3,808,159
Shareholders' Equity 394,999 309,841
Mortgage-Backed
Security Assets Under
Administration 1,679,822 1,237,239
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FINANCIAL STRENGTH
Capital Measures(1),(3)
Risk Weighted Assets(1),(3) $ 2,847,655 $ 2,306,464
Tier 1 Capital Ratio(1),(3) 12.45% 12.88%
Total Capital Ratio(1),(3) 13.82% 14.39%
Credit Quality
Net Impaired Loans as a
Percentage of Gross Loans 0.71% 0.68%
Allowance as a Percentage
of Gross Impaired Loans 74.21% 85.62%
Annualized Provision as a
Percentage of Gross Loans 0.05% 0.08%
Share Information
Book Value per Common Share $ 11.44 $ 8.98
Common Share Price - Close $ 39.50 $ 36.90
Market Capitalization 1,364,409 1,273,111
Number of Common Shares
Outstanding 34,542 34,502
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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 June 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
-------------------------------------------------------------------------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 $1.0 million for the second quarter and
$2.0 million for the first six months of 2008 ($1.1 million - Q2 2007 and
$2.1 million - six 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 June 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 July 31, 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.-------------------------------------------------------------------------
Six-Month Period Ended
June 30, 2008
2008 Objectives(1) Actual Results(1)
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Net Income $51.8 million $51.7 million, or 19.8%
increase over the same period
last year
Diluted Earnings per Share $1.49 $1.48 per share, or 19.4%
increase over the same period
last year
Total Assets and Assets
Under Administration $6.65 billion $7.04 billion, or 27.0%
increase over the same period
last year
Return on Shareholders'
Equity 25.0% 27.8%
Efficiency Ratio (TEB) 27.0% to 33.0% 29.1%
Capital Ratios(2)
Tier 1 Minimum of 10% 12.5%
Total Minimum of 12% 13.8%
Provision for Loan
Losses as a Percentage
of Total Loans 0.15% to 0.25% 0.05%
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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 in light of continued
uncertainty in Canadian capital markets and the broader economy. The Company
experienced growth across all of its operating segments, with key financial
results summarized below.
- Net income rose 20.6% over the comparable quarter of 2007.
- Diluted earnings per share for the quarter increased 20.6% to $0.76,
compared to $0.63 in the second quarter of 2007.
- Return on average shareholders' equity for the quarter was 27.7%,
compared to 28.9% for the same period last year.
- Non-interest income was up 51.0% over the second quarter of 2007,
driven by growth in securitization gains and fees for the
administration and servicing of the mortgage and Visa portfolios,
offset by small losses on the securities portfolio and unrealized
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 30.2%, compared to 27.3% 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.
- Net interest income was up 7.8% over the same period in 2007 as the
Company's income-producing assets grew by 23.7%, partly offset by a
contraction in overall spreads resulting from the continuing credit
market issues and growth of the commercial mortgage portfolio, which
achieves lower spreads.
Balance Sheet Highlights
- Total assets rose 24.5% year-over-year to reach $5.36 billion,
compared to the $4.31 billion reported at June 30, 2007. This asset
growth was primarily driven by expansion in the Company's residential
mortgage portfolio which increased by $376.6 million, other mortgages
(primarily commercial mortgages) which grew by $503.8 million,
securities which were $98.5 million higher, offset by a drop in cash
resources of $58.4 million. Although global markets have experienced
significant difficulties recently, the Company continues to have no
direct exposure to any non-bank sponsored asset backed commercial
paper, or American subprime lending.
- The Equityline Visa portfolio sustained its strong momentum, reaching
$339.1 million in receivables, representing growth of 24.7%, or
$67.1 million, over the second quarter of 2007.
- The Company continues to be able to access funding when required, and
has brought its liquidity levels back in line with historical levels,
accordingly. Liquid assets at June 30, 2008 were $480.5 million, down
from the liquidity position at December 31, 2007 of $627.1 million and
up from June 30, 2007 of $438.6 million.
- Deposit liabilities as at June 30, 2008 grew 23.9% to reach
$4.72 billion, as compared to $3.81 billion at June 30, 2007. These
proceeds were deployed to fund most of the growth in the Company's
loans portfolio.
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EARNINGS REVIEW
-------------------------------------------------------------------------Net Interest Income
Net interest income was $39.4 million in the second quarter, and
$77.0 million year-to-date representing increases of $2.8 million and
$7.1 million over the comparable periods in 2007. The increase over the
comparable quarter reflects strong growth of interest-bearing assets,
exceeding the growth in interest-bearing liabilities. The growth in interest-
earning assets was $996.5 million over June 2007, compared to an increase in
interest-bearing liabilities of $908.6 million for the same period. The net
interest margin (TEB) for the second quarter was 3.0% and 3.1% for the first
six months of 2008, down from 3.6% achieved in the comparable quarter of 2007
and down from 3.5% obtained for the first six months of 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 putting a premium on the cost of funding.
The interest spread between the loans portfolio and deposits ended the
quarter at 3.2%, compared to 3.7% for the comparable quarter in 2007, and 3.1%
for the first six months of 2008, compared to 3.7% for the same six 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 the global
liquidity crisis. The Company's average cost of funds increased 60 basis
points year-over-year while the yield on the Company's loans portfolio
remained consistent as the growth in the commercial lending portfolio, which
attracts lower spreads, had a moderating impact on yields. During the second
quarter of 2008 the Company drew down its liquidity reserves in line with
historic levels and expects to maintain these levels for the remainder of
2008. Further, as funding costs begin to stabalize the Company expects this
will have a positive impact on maintaining or slightly improving the Company's
interest spread on the loans portfolio in the second half 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 provide incremental net interest
income and loan origination growth that would otherwise not exist.
Non-Interest Income
Total non-interest income was $17.3 million for the second quarter, a
51.0% increase over the comparable quarter in 2007 and $31.7 million for the
first six months of 2008, or a 47.0% increase over the same six month period
in 2007. Both the quarter-over-quarter and six-month period increases were
driven by strong growth in securitization gains through the Company's
participation in the Canada Mortgage Bond (CMB) program and additional
short-term MBS securitizations, increases in fees generated from the
administration of the loans portfolio, which were offset by losses incurred on
the securities portfolio and mark-to-market losses on the seller swaps and
hedge swaps entered into through the Canada Mortgage Bond program.
The fees and other income components of non-interest income ended the
quarter at $7.1 million and $14.3 million for the first six months of 2008, an
increase of 38.0% over the comparable quarter of 2007 and 48.0% over the first
six months 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 seven MBS pools during the second quarter of 2008,
consisting of $250.6 million of Canada Mortgage and Housing Corporation (CMHC)
insured residential mortgages for a year-to-date total issuance of
$396.4 million. This represents an increase of $99.9 million from the
$150.7 million in MBS pools issued in the comparable quarter of 2007 and an
increase of $111.4 million over the $285.0 million in MBS pools that were
issued during the first six months of 2007. Securitization gains were
$8.5 million during the quarter and $17.4 million for the first six-months of
2008, compared to $3.9 million for the second quarter of 2007 and $8.7 million
for the comparable six-month period of 2007 (refer to Note 5 of these
unaudited interim consolidated financial statements). The increase in
securitization gains during the quarter and six months compared to the prior
periods was primarily due to a significant increase in the spread earned on
the pools, which averaged 2.9% in the second quarter of 2008 and 3.2% for the
pools issued in the first six months of 2008 compared to 2.4% for the
comparable quarter in 2007 and 2.6% for the first six months of 2007. The
higher yield is indicative of current credit market conditions. During the
quarter, the Company participated in CMHC's Canada Mortgage Bond 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 seven MBS pools issued during the quarter, one MBS
pool with a book value of $122.6 million was securitized through the Canada
Mortgage Bond program resulting in a gain of $4.6 million. Year-to-date, the
Company has securitized $206.9 million through the Canada Mortgage Bond
program and realized gains of $10.1 million.
Non-Interest Expenses
Total non-interest expenses for the quarter were $17.4 million and
$32.2 million for the first six months of 2008. This compares to $13.4 million
for the second quarter of 2007 and $25.2 million for the six-month period
ended June 30, 2007. The increases over the comparable periods of 2007 were
due to increased 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 $2.5 million, or
36.2% over the second quarter of 2007 and up $4.0 million, or 27.9% over the
comparable six-month period of 2007. The Company ended the quarter with 429
employees, up from 377 employees at December 31, 2007 and 359 employees one
year ago. The increased staffing levels reflect the hiring of 27 summer
students to assist the Company during higher employee vacation periods and
additional personnel to manage the Company's growth initiatives. Premises
expenses increased from the prior year 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.
General and administration expenses increased by $1.4 million, or 25.9%
compared to the second quarter of 2007 and up $2.8 million, or 30.9% from the
same six-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 30.2% and 29.1% for the
first six months of 2008, compared to 27.3% in the previous comparable quarter
and 26.9% for the first six 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 $0.6 million during the quarter and $1.2 million for
the first six month of 2008, compared to $1.0 million in the second quarter of
2007 and $1.5 million in the first six months of 2007, through the provision
for credit losses. This expense represented 0.1% (0.1% - Q2 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 $23.9 million
at the end of the quarter, an increase of $0.5 million over the $23.4 million
recorded at December 31, 2007 and a $3.2 million increase over the
$20.7 million allowance recorded at June 30, 2007.
At June 30, 2008 net impaired loans amounted to $32.4 million (0.71% of
gross loans), compared to $29.0 million (0.72% of gross loans) at December 31,
2007 and $24.3 million (0.68% of gross loans) at June 30, 2007 (refer to Note
4 of these unaudited interim consolidated financial statements). Total net
loans written-off during the quarter were $0.6 million, compared to
$0.8 million in the fourth quarter of 2007 and $0.3 million in the second
quarter 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 starting on page 24 in the 2007 Annual Report
under the heading Risk Management.
Income Taxes
The income tax expense amounted to $12.1 million (effective tax rate of
31.2%) for the second quarter and $23.5 million (effective tax rate of 31.3%)
year-to-date, compared to $11.6 million (effective tax rate of 34.5%) for the
comparable quarter of 2007 and $21.5 million (effective tax rate of 33.3%) for
the first six months 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 33.0% for both
the second quarter and first six months of 2008, compared to 36.6% for the
second quarter of 2007 and 35.3% for the comparable six-month period in 2007.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income (OCI) and totaled $26.1 million for the second quarter and
$54.6 million year-to-date, an increase of $12.8 million, or 95.3% over the
$13.3 million recorded in the same quarter last year and a $17.8 million, or
48.3% increase over the same six-month period in 2007. As previously noted net
income increased 20.6%, or $4.5 million over the same quarter last year and
increased 19.8%, or $8.5 million over the same six-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 June 30, 2008 was a loss of $0.5 million, compared to
a loss of $8.7 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, net of tax, in losses
from accumulated other comprehensive income in the consolidated statement of
income. The Company believes the remaining unrealized losses represent
temporary declines in value due to current market
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BALANCE SHEET REVIEW
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Assets
Total assets as at June 30, 2008 were $5.36 billion, an increase of
$386.7 million, or 7.8% over the $4.98 billion reported at December 31, 2007
and up by $1.06 billion, or 24.5% over the June 30, 2007 asset balance of
$4.31 billion.
Growth in the loans portfolio of $504.6 million, or 12.5% generated most
of the asset growth over December 31, 2007. Residential mortgages contributed
$184.1 million to the total loans portfolio growth, other mortgages (primarily
commercial mortgages) contributed growth of $279.6 million, consumer lending
contributed $37.5 million, secured loans added $3.9 million, while the general
allowance for credit losses increased by $0.5 million. The residential
mortgage portfolio growth excludes $250.6 million of loans securitized during
the quarter. The Company's cash resources decreased by $169.6 million from
December 31, 2007 while the securities portfolio increased by $17.7 million.
The Company utilized its excess liquidity accumulated over the past few
quarters to provide funding in support of the growth in the Company's loans
portfolio. Other assets increased by $11.1 million from the fourth quarter,
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 the fourth
quarter of 2007, growing by $22.1 million due to robust securitization
activity in the first six months of 2008.
Growth in the loans portfolio of $956.3 million, or 26.8% was the
principal contributor to asset growth over June 30, 2007. The loans portfolio
growth was driven by a $376.6 million increase in residential mortgages,
growth of $503.8 million in other mortgages (primarily commercial mortgages),
a $71.3 million rise in consumer loans, a $7.9 million increase in secured
loans, while the general allowance for credit losses rose by $3.2 million. The
Company's cash resources decreased by $58.4 million while the securities
portfolio rose by $98.5 million over June 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
$21.7 million, primarily resulting from the addition of goodwill and
intangible assets acquired through the acquisition of PSiGate, and accrued
interest earned on the loans portfolio. Securitization receivables increased
by $37.1 million over June 2007 resulting from higher securitization volumes
year-over-year.
Liabilities
Liabilities at June 30, 2008 rose to $4.97 billion, an increase of
$339.7 million, or 7.3% over the $4.63 billion reported at December 31, 2007
and up by $970.8 million, or 24.3% over the $4.00 billion recorded at June 30,
2007.
Most of the growth from December 2007 resulted from increased deposits of
$302.6 million. The growth in the deposit liabilities funded a significant
portion of the loans portfolio growth, with additional funds drawn from excess
liquidity reserves for the remaining loans portfolio growth. Other liabilities
(refer to Note 7 of these unaudited interim consolidated financial statements)
increased by $35.2 million, or 16.9% over the $208.7 million reported at
December 31, 2007. This growth was principally the result of increases in
accrued interest of $26.6 million related to higher deposits, a net increase
of $1.6 million in the Company's current and deferred corporate tax
liabilities, and an increase of $6.4 million in other liabilities resulting
from the timing of payments for administration of the off-balance sheet MBS
portfolio.
The rise in liabilities from June 30, 2007 resulted primarily from
increased deposits of $908.4 million. Higher deposit liabilities were the
primary funding source for the loans portfolio growth, year-over-year. Other
liabilities increased by $62.1 million, or 34.1% over June 30, 2007 primarily
due to increases in accrued interest of $43.3 million, increases of
$9.7 million in the Company's corporate future tax liabilities, and
$7.8 million in other liabilities resulting from the timing of payments for
administration of the off-balance sheet MBS portfolio.
Shareholders' Equity
The increase in shareholders' equity of $47.0 million, or 13.5% over the
$348.0 million reported at December 31, 2007 was internally generated from net
income $51.7 million over the six month period, less $8.6 million for
dividends paid and payable to shareholders. The remaining increase was
principally driven from movements in other comprehensive income of
$2.9 million, arising from the Company's available for sale financial assets
and securitization receivables and on the fair value amortization of employee
stock options.
Shareholders' equity rose to $395.0 million, an increase of
$85.2 million, or 27.5% over the $309.8 million reported at June 30, 2007.
This growth was internally generated from earnings for the twelve-month period
ended June 30, 2008 of $98.8 million, less $16.6 million for shareholder
dividends. The remaining changes 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 June 30, 2008 the book value per common share was $11.44,
compared to $10.08 at December 31, 2007 and $8.98 at June 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 in 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 second quarter of 2008,
the Company entered into a $50 million short sale of Government of Canada
bonds which was unwound during the quarter, resulting in a gain of
$0.3 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 Insitute 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 June 30,
2008 were $325.8 million and $12.8 million, respectively. These swaps were
marked-to-market at June 30, 2008 for an unrealized loss of $0.2 million,
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 June 30, 2008 outstanding securitized mortgage loans
under administration amounted to $1.68 billion ($1.46 billion - Q4 2007 and
$1.24 billion - Q2 2007) with retained interest of $87.9 million
($65.8 million - Q4 2007 and $50.8 million - Q2 2007). The off-balance sheet
portfolio continues to perform well with 97.3% of the portfolio current and
only 0.8% 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 $516.2 million at June 30, 2008
compared to $447.3 million at December 31, 2007 and $234.2 million at June 30,
2007. Included within the outstanding commitments are unutilized commercial
mortgage advances of $202.6 million at June 30, 2008 compared to
$238.0 million at December 31, 2007 and $42.5 million at June 30, 2007.
Commitments for the loans remain open for various dates through July 2009. As
at June 30, 2008 unutilized credit card balances amounted to $72.4 million,
compared to $78.0 million at December 31, 2007 and $72.4 million at June 30,
2007. Outstanding commitments for the Equityline Visa portfolio were
$5.4 million at June 30, 2008 compared to $5.9 million at December 31, 2007
and $8.0 million at June 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, will provide Home Trust with comprehensive
back-office merchant processing services, including settlement, charge-back
processing, retrieval services and customer support.
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CAPITAL MANAGEMENT
-------------------------------------------------------------------------
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, replaces 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 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 12.5%, up from the first quarter of
2008 of 12.0% and the fourth quarter of 2007 at 11.1%, and down from the
second quarter of 2007 at 12.9%. The total capital ratio was 13.8% at June 30,
2008 compared to 13.4% at March 31, 2008, 12.5% at December 31, 2007 and 14.4%
reported for June 30, 2007. The modest increase in total capital compared to
the first quarter of 2008 and the fourth quarter of 2007 was the result of the
shift into lower risk-weighting categories for residential mortgages,
partially offset by new capital required for operational risks as reported
under Basel II. The decline in the Tier 1 and total capital ratios versus the
comparative quarter in 2007 was due to an intercompany dividend paid during
the third quarter of 2007 to fund the acquisition of PSiGate. These ratios
both continue to exceed the minimum regulatory requirements of 7.0% for Tier 1
and 10.0% for total capital as well as Home Trust's internal capital targets.
As at June 30, 2008, Home Trust was utilizing 77.7% of its approved
Assets to Regulatory Capital Multiple of 17.5 times (80.6% - Q4 2007 and 74.3%
- Q2 2007), providing sufficient capital for continued lending growth going
forward.
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
-------------------------------------------------------------------------
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 risk. 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 June 30, 2008 the composition of the total mortgage portfolio was
83.0% residential and 17.0% non-residential, compared to a composition of
88.5% residential and 11.5% non-residential at December 31, 2007 and a
composition of 93.5% residential and 6.5% non-residential one year ago. Within
the Company's residential mortgage portfolio, 6.8% of the loans were insured
by CMHC at the end of the quarter, compared to 5.4% at December 31, 2007 and
5.1% one year ago. First mortgages represented 99.6% of the total mortgage
portfolio at June 30, 2008, consistent with the comparable periods. At
June 30, 2008 the average loan to value of the Company's mortgage loans
portfolio was 68.9%, compared to 65.7% at December 31, 2007. Refer to Note 4
to 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 95.6% of the portfolio
current and only 1.4% of the porfolio over 60 days in arrears at the end of
June 2008. This is an improvement from both December 31, 2007 and June 30,
2007 which had 1.6% and 1.7% over 60 days in arrears, respectively. When the
off-balance sheet mortgage portfolio of $1.68 billion is also factored in, the
combined mortgage loans portfolio has shown no signs of performance
deterioration with 96.1% of the combined portfolio being current and only 1.2%
over 60 days in arrears.
As at June 30, 2008 the gross credit card receivable balance totaled
$349.1 million, of which $348.4 million, or 99.8% of the portfolio was secured
either by cash deposits or residential mortgage collateral, and $0.7 million,
or 0.2% was unsecured. The total credit approved included $420.5 million in
secured and $1.0 million in unsecured credit, compared to $391.0 million in
secured, and $1.2 million of unsecured credit at December 31, 2007 and
$354.9 million in secured, and $1.6 million of unsecured credit at June 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 $339.1 million of the total credit card
receivable balance as at June 30, 2008 compared to $302.7 million at
December 31, 2007 and $272.0 million at June 30, 2007. Cash deposits securing
credit card accounts amounted to $16.1 million, and are included in the
Company's deposits. Further, the Equityline Visa portfolio has a loan to value
of 69.6% at June 30, 2008 down slightly from December 31, 2007 when the loan
to value was 69.7%. The Company has experienced minimal losses on the credit
card portfolio. At June 30, 2008 $6.6 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 $2.3 million, or 0.8% at June 30, 2007.
The secured loan portfolio of $86.2 million increased by $3.9 million
over the December 31, 2007 balance of $82.3 million, and increased
$7.9 million over the June 30, 2007 balance of $78.3 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
June 30, 2008, 97.8% of the secured loan portfolio was current while
$1.0 million, or 1.1% was over 60 days in arrears. 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 June 30, 2007, 97.9% of the
secured loan portfolio was current while $0.6 million, or 0.7% was over
60 days in arrears.
The Company experienced a slight rise in net impaired loans, to
$32.4 million at June 30, 2008 compared to $29.0 million at December 31, 2007
and $24.3 million at June 30, 2007. The loans portfolio continues to perform
well, as net impaired loans at June 30, 2008 represented less than 1% of the
gross loans portfolio. The Company improves its underwriting practices, taking
into account local market conditions in order to minimize the Company's
potential loss exposure. Experienced senior 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 three-month period
ended June 30, 2008 totaled $0.6 million, up from the $0.3 million realized in
the second quarter of 2007, however down from the $0.8 million realized in the
fourth quarter of 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 potential
losses in its loans portfolio by increasing general allowances to
$23.9 million at June 30, 2008 as compared to general allowances of
$23.4 million at December 31, 2007 and $20.7 million at June 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 84.0 basis points of the Company's
risk-weighted assets as at June 30, 2008 compared to 83.5 basis points at
December 31, 2007 and 90.1 basis points at June 30, 2007. It should be noted
that the risk-weighted assets for June 30, 2008 were 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 June 30, 2008 liquid assets amounted to 152% (165% as at
December 31, 2007 and 174% as at June 30, 2007) under the immediate scenario,
and 140% (146% at December 31, 2007 and 145% as at June 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. Despite the continuing liquidity crisis in
Canadian and global credit markets, the Company has maintained more than
sufficient liquidity to meet its obligations. At June 30, 2008 liquid assets
amounted to $480.5 million, down from the $627.1 million recorded at
December 31, 2007 and up from the $438.6 million recorded at June 30, 2007.
The drop in liquidity levels from December 2007 was due to the Company
leveraging excess liquidity to support the loans portfolio growth. Liquidity
levels at the end of the second quarter of 2008 are back in line with
historical levels. The Company's policy is to maintain a minimum 20% of
100-day obligations in liquid assets. For the twelve months ended June 30,
2008 the Company maintained an average of $567.1 million, or 50.5% of 100-day
obligations in liquid assets compared to $463.7 million, or 48.9% for the
twelve months ended December 31, 2007 and $340.0 million, or 40.9% for the
twelve months ended June 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,
but 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 June 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 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 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.-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Increase Decrease
in interest rate in interest rates
-------------------------------------------------------------------------
100 basis point shift
Impact on net
interest income,
after tax (for the
next 12 months) $ 1,857 $ (2,338) $ (1,857) $ 2,338
Impact on net
present value of
shareholders' equity (7,601) (3,228) 7,912 3,286
200 basis point shift
Impact on net
interest income,
after tax (for the
next 12 months) $ 3,713 $ (4,676) $ (3,713) $ 4,676
Impact on net
present value of
shareholders' equity (14,907) (6,401) 16,153 6,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 or short sale Government of Canada bond
positions specific to hedging commitment risk at June 30, 2008 or the
comparative periods. Through the Company's participation in CMHC's Canada
Mortgage Bond 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 Canada Mortgage Bonds. Refer to Note 12 of these
unaudited interim consolidated financial statements for additional
information.
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RESULTS BY BUSINESS SEGMENT
-------------------------------------------------------------------------
The following section discusses the mortgage lending, consumer lending
and other lines of business for the second quarter and first six months of
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 25.5% for
the first six months of 2008.
Mortgage Lending
The Company's principal line of business contributed $18.2 million to net
income during the second quarter and $36.1 million year-to-date, compared to
$15.3 million and $30.2 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 last several quarters has tightened
spreads across core residential lending, combined with growth in commercial
mortgage lending which attracts lower spreads. Net interest income ended the
quarter at $24.1 million and $46.6 million for the first six months of 2008,
down from $25.0 million and $47.9 million for the comparable periods in 2007.
The total value of new mortgages advanced in the quarter and for the first
six months of 2008 was $886.9 million and $1.75 billion, respectively,
increases of 42.5% and 50.0% over the $622.6 million and $1.17 billion
advanced for the comparative periods in 2007.
The Company securitized $250.6 million of government-guaranteed (CMHC)
residential mortgage loans through the creation of MBS securities during the
quarter and $396.4 million for the first six months of 2008, realizing total
gains from securitization of $8.5 million for the quarter and $17.4 million
year-to-date. This compares to $150.7 million for the second quarter of 2007
and $285.0 million for the first six months of 2007, resulting in gains of
$3.9 million and $8.7 million, respectively. During the quarter, the Company
participated in CMHC's Canada Mortgage Bond program. Of the $250.6 million
securitized during the quarter and $396.4 million securitized year to date,
$122.6 million and $206.9 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 $4.6 million in gains during the quarter and
$10.1 million for the first six months of 2008. 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 $86.2 million in Secured Loans as Notes
Receivable issued by Regency, compared to $82.3 million at December 31, 2007
and $78.3 million at June 30, 2007. These Notes yield 6.9% with an average
duration of 2.3 years. The Company also receives fee income for servicing and
administering these mortgages for Regency. This income amounted to 0.5% of the
portfolio value, on an annualized basis. The underlying credit quality of the
mortgage loans securing the Notes Receivable remains high, with 1.1% 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 second
quarter and first six months of 2008. Net income for the quarter and first
six months of 2008 was $4.8 million and $9.1 million, up 29.6% over the second
quarter of 2007 and up 25.5% over the comparable six-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 $0.2 million in net income during the quarter and
$0.6 million year-to-date.
The Equityline Visa loans portfolio amounted to $339.1 million at
June 30, 2008 ($302.7 million - Q4 2007, and $272.0 million - Q2 2007)
comprising 97.1% (96.3% - Q4 2007, and 95.7% - Q2 2007) of the total gross
credit card receivable balance of $349.1 million, and bearing an average
interest rate of 10.6% (10.9% - Q4 2007, and 10.8% - Q2 2007) on outstanding
balances. During the second quarter of 2008, 1,148 Equityline Visa accounts
with $51.8 million in authorized credit limits were issued, compared to 1,077
Equityline Visa accounts with $54.0 million in authorized credit limits issued
for the three months ended December 31, 2007 and 1,202 Visa accounts with
$55.5 million in authorized credit limits issued for the three-month period
ended June 30, 2007.
Other
The other segment, comprised of the Company's securities portfolio and
corporate activities, generated positive results in the second quarter and
first six months of 2008. Net income for the quarter and six-month period were
$3.5 million and $6.5 million, compared to $3.0 million and $5.7 million for
the comparative periods in 2007. The increases over 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
-------------------------------------------------------------------------
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 11 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 Canadian Institute of Chartered Accountants, 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.
Controls over Financial Reporting
No changes were made in the Company's internal controls over financial
reporting during the interim period ended June 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal controls over financial reporting.
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UPDATED SHARE INFORMATION
-------------------------------------------------------------------------
As at July 31, 2008 the Company had issued 34,541,990 Common Shares. In
addition, outstanding director and employee stock options amounted to
1,226,750 (1,293,750 - Q4 2007, and 1,130,000 - Q2 2007) of which 540,500 are
exercisable as of the quarter-end (526,250 - Q4 2007, and 570,000 - Q2 2007)
for proceeds to the Company upon exercise of $8.4 million ($7.9 million - Q4
2007, and $6.4 million - Q2 2007).
Subsequent to the end of the second quarter, the Board of Directors
declared a quarterly cash dividend of $0.13 per common share payable on
September 1, 2008 to shareholders of record at the close of business on
August 15, 2008.-------------------------------------------------------------------------
QUARTERLY FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
In Thousands of Dollars 2008 2007
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net interest income
(TEB)(1) $40,418 $38,590 $40,394 $39,396 $37,647 $34,276
Less TEB adjustment 1,056 962 2,311 1,084 1,118 942
-------------------------------------------------------------------------
Net interest income
per financial
statements 39,362 37,628 38,083 38,312 36,529 33,334
Non-interest income 17,318 14,338 14,561 11,964 11,467 10,075
Non-interest
expense 17,443 14,763 15,687 13,289 13,382 11,840
Total revenues 112,953 106,796 105,081 94,345 87,708 81,745
Net income 26,550 25,159 24,228 22,837 22,018 21,158
Return on common
shareholders'
equity 27.7% 27.9% 28.9% 28.9% 28.9% 29.3%
Return on average
total assets 2.0% 1.9% 2.0% 2.0% 2.1% 2.1%
Earnings per
common share
Basic $ 0.77 $ 0.73 $ 0.70 $ 0.66 $ 0.64 $ 0.62
Diluted $ 0.76 $ 0.72 $ 0.70 $ 0.65 $ 0.63 $ 0.61
Book value per
common share $ 11.44 $ 10.79 $ 10.08 $ 9.38 $ 8.98 $ 8.70
Efficency ratio
(TEB)(1) 30.2% 27.9% 28.5% 25.9% 27.3% 26.7%
Efficency ratio 30.8% 28.4% 29.8% 26.4% 27.9% 27.3%
Tier 1 capital
ratio(2),(3) 12.5% 12.0% 11.1% 11.7% 12.9% 12.7%
Total capital
ratio(2),(3) 13.8% 13.4% 12.5% 13.1% 14.4% 14.3%
Net impaired loans
as a % of gross
loans 0.71% 0.71% 0.72% 0.63% 0.68% 0.74%
Annualized provision
as a % of gross
loans 0.1% 0.1% 0.2% 0.2% 0.1% 0.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------
In Thousands of Dollars 2006
-------------------------------------
(Except Per Share and
Percentage Amounts) Q4 Q3
-------------------------------------
Net interest income
(TEB)(1) $33,040 $30,727
Less TEB adjustment 841 764
-------------------------------------
Net interest income
per financial
statements 32,199 29,963
Non-interest income 12,744 6,880
Non-interest
expense 12,276 12,027
Total revenues 81,053 70,621
Net income 20,518 16,618
Return on common
shareholders'
equity 30.5% 26.2%
Return on average
total assets 2.2% 1.8%
Earnings per
common share
Basic $ 0.60 $ 0.49
Diluted $ 0.59 $ 0.48
Book value per
common share $ 8.10 $ 7.62
Efficency ratio
(TEB)(1) 26.8% 32.0%
Efficency ratio 27.3% 31.2%
Tier 1 capital
ratio(2),(3) 12.7% 12.5%
Total capital
ratio(2),(3) 14.2% 14.1%
Net impaired loans
as a % of gross
loans 0.68% 0.56%
Annualized provision
as a % of gross
loans 0.1% 0.1%
-------------------------------------
-------------------------------------
(1) TEB - Taxable Equivalent Basis, see definition in this unaudited
interim consolidated financial report.
(2) These figures relate to the Company's operating subsidiary, Home
Trust Company
(3) The Tier 1 and Total capital ratios for 2008 are calculated under
Basel II requirements. See Capital Management section for additional
details.The Company's key financial measures for each of the last eight quarters
are summarized in the preceding 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 in the first half of 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.
Outlook
This Outlook section contains forward-looking statements. (Please see the
Caution Regarding Forward-Looking Statements in 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, and is well positioned to capitalize on market
opportunities in the current economic environment.
Having maintained positive growth and profitability through the first
half of the year, despite challenging market and credit conditions, the
Company remains confident that profitability and growth will continue for the
remainder of 2008 enabling the Company to meet its business objectives. The
Company anticipates that the Canadian economy will grow more slowly in the
second half of 2008, and will continue to experience an uncertain interest
rate environment as inflationary pressures arising from rising oil and food
prices hamper the likelihood that the Bank of Canada will lower benchmark
interest rates to stimulate the Canadian economy. Despite these uncertainties,
the Company continues to see a fundamentally sound Canadian housing market
underpinned by high employment levels and other positive economic
fundamentals. The Company's view is further supported by the recent proactive
moves by the Federal government to eliminate the option of 40-year
amortization periods and zero downpayment mortgages to protect the housing
industry from experiencing similar challenges as in the United States. The
Company has a proven corporate strategy and proprietary risk management
framework to manage through uncertain economic conditions while positioning
the Company for future growth.Consolidated Statements of Income
Three Months Ended Six Months Ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except per Share June 30 June 30 June 30 June 30
Amounts (Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income
Interest from loans $ 87,075 $ 70,183 $ 170,046 $ 136,451
Dividends from equity
securities 2,262 2,229 4,415 4,107
Other interest 6,298 3,829 13,632 7,353
-------------------------------------------------------------------------
95,635 76,241 188,093 147,911
Interest Expense
Interest on deposits 56,273 39,712 111,103 78,048
-------------------------------------------------------------------------
Net interest income 39,362 36,529 76,990 69,863
Provision for credit
losses (note 4(d)) 630 1,002 1,230 1,490
-------------------------------------------------------------------------
38,732 35,527 75,760 68,373
-------------------------------------------------------------------------
Non-interest Income
Fees and other income 7,092 5,139 14,315 9,674
Securitization income
on mortgage-backed
securities 11,038 5,568 21,135 10,791
Net gain (loss)
realized and
unrealized on
securities (421) 760 (2,046) 1,104
Net gain on
disposition of
subsidiary (note 16) - - 69 -
Loss on derivatives (391) - (1,817) (27)
-------------------------------------------------------------------------
17,318 11,467 31,656 21,542
-------------------------------------------------------------------------
56,050 46,994 107,416 89,915
-------------------------------------------------------------------------
Non-interest Expenses
Salaries and staff
benefits 9,574 7,029 18,192 14,219
Premises 1,072 956 2,063 1,873
General and
administration 6,797 5,397 11,951 9,130
-------------------------------------------------------------------------
17,443 13,382 32,206 25,222
-------------------------------------------------------------------------
Income Before
Income Taxes 38,607 33,612 75,210 64,693
Provision for income
taxes (note 11(a)) 12,057 11,594 23,501 21,517
-------------------------------------------------------------------------
NET INCOME $ 26,550 $ 22,018 $ 51,709 $ 43,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER
COMMON SHARE
Basic $ 0.77 $ 0.64 $ 1.50 $ 1.26
Diluted $ 0.76 $ 0.63 $ 1.48 $ 1.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING
(thousands)
Basic 34,535 34,408 34,534 34,403
Diluted 34,855 34,904 34,859 34,902
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total number of
outstanding common
shares (thousands) 34,542 34,502 34,542 34,502
Book value per
common share $ 11.44 $ 8.98 $ 11.44 $ 8.98
-------------------------------------------------------------------------
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 six months ended
-------------------------------------------------------------------------
In Thousands of Dollars June 30 June 30 June 30 June 30
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
NET INCOME $ 26,550 $ 22,018 $ 51,709 $ 43,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OTHER COMPREHENSIVE
INCOME (LOSS), NET OF
TAX
Unrealized income on
available for sale
securities
Net unrealized income
on securities
available for sale,
net of ($443) tax
(($5,123) - three
months ended
June 30, 2007;
$1,230 - six months
ended June 30, 2008;
($4,375) - six
months ended
June 30, 2007) (727) (7,764) 1,040 (5,025)
Reclassification of
earnings (losses)
in respect of
available for sale
securities, net of
$120 tax; (($514)
- three months ended
June 30, 2007; $849 -
six months ended
June 30, 2008;
($771) - six months
ended June 30, 2007) 242 (910) 1,815 (1,364)
-------------------------------------------------------------------------
Total other
comprehensive income
(loss) (485) (8,674) 2,855 (6,389)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 26,065 $ 13,344 $ 54,564 $ 36,787
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Balance Sheets
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars (Unaudited) 2008 2007 2007
-------------------------------------------------------------------------
ASSETS
Cash Resources
Deposits with regulated
financial institutions $ 184,688 $ 344,464 $ 68,854
Treasury bills guaranteed by Canada - 9,872 174,191
-------------------------------------------------------------------------
184,688 354,336 243,045
-------------------------------------------------------------------------
Securities (note 3)
Held for trading 301 114,423 19,668
Available for sale 488,323 356,458 370,460
-------------------------------------------------------------------------
488,624 470,881 390,128
-------------------------------------------------------------------------
Loans (note 4)
Residential mortgages 3,402,556 3,218,474 3,025,969
Personal and credit card loans 362,861 325,393 291,569
Other mortgages 699,043 419,400 195,286
Secured loans 86,227 82,304 78,282
General allowance for credit losses (23,926) (23,400) (20,690)
-------------------------------------------------------------------------
4,526,761 4,022,171 3,570,416
-------------------------------------------------------------------------
Other
Securitization receivable (note 5) 87,888 65,768 50,827
Capital assets 5,583 4,837 4,882
Other assets (note 6) 68,227 57,100 46,501
-------------------------------------------------------------------------
161,698 127,705 102,210
-------------------------------------------------------------------------
$ 5,361,771 $ 4,975,093 $ 4,305,799
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities
Deposits
Payable on demand $ 20,217 $ 30,793 $ 18,467
Payable on a fixed date 4,696,354 4,383,191 3,789,692
-------------------------------------------------------------------------
4,716,571 4,413,984 3,808,159
-------------------------------------------------------------------------
Other
Cheques and other items in transit 6,338 4,393 6,007
Other liabilities (note 7) 243,863 208,676 181,792
-------------------------------------------------------------------------
250,201 213,069 187,799
-------------------------------------------------------------------------
4,966,772 4,627,053 3,995,958
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 8) 39,217 38,899 37,985
Contributed surplus 2,531 1,818 1,256
Retained earnings 356,693 313,620 277,619
Accumulated other comprehensive
loss (note 10) (3,442) (6,297) (7,019)
-------------------------------------------------------------------------
394,999 348,040 309,841
-------------------------------------------------------------------------
$ 5,361,771 $ 4,975,093 $ 4,305,799
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 six months ended
-------------------------------------------------------------------------
In Thousands of Dollars June 30 June 30 June 30 June 30
(Unaudited) 2008 2007 2008 2007
CAPITAL STOCK (note 8)
Balance at beginning
of the period $ 38,899 $ 37,654 $ 38,899 $ 35,436
Proceeds of options
exercised 318 341 318 2,571
Normal course issuer
bid - (10) - (22)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 39,217 $ 37,985 $ 39,217 $ 37,985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS
Balance at beginning
of the period $ 2,225 $ 1,021 $ 1,818 $ 783
Amortization of fair
value of employee
stock options (note 9) 357 285 764 523
Employee stock options
exercised (51) (50) (51) (50)
-------------------------------------------------------------------------
BALANCE AT END OF
THE PERIOD $ 2,531 $ 1,256 $ 2,531 $ 1,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning
of the period
(note 8) $ 334,289 $ 259,687 $ 313,619 $ 240,647
Transitional
adjustment on
adoption of new
accounting policies - - - 1,391
Normal course issuer
bid - (291) - (697)
Net income for the
period 26,550 22,018 51,709 43,176
Dividends paid during
the period - (345) (4,489) (3,448)
Dividends declared,
unpaid during the
period (4,146) (3,450) (4,146) (3,450)
-------------------------------------------------------------------------
BALANCE AT END OF
THE PERIOD $ 356,693 $ 277,619 $ 356,693 $ 277,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
Balance at beginning
of the period $ (2,957) $ 1,655 $ (6,297) $ -
Transitional adjustment
on adoption of new
accounting policies - - - (630)
Other comprehensive
income (loss), net of
($323) tax; (($5,637)
- three months ended
June 30, 2007; $2,079
- six months ended
June 30, 2008;
($5,146) - six months
ended June 30, 2007) (485) (8,674) 2,855 (6,389)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ (3,442) $ (7,019) $ (3,442) $ (7,019)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 six months ended
-------------------------------------------------------------------------
In Thousands of Dollars June 30 June 30 June 30 June 30
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income for the
period $ 26,550 $ 22,018 $ 51,709 $ 43,176
Adjustments to
determine cash flows
relating to operating
activities:
Future income taxes 2,187 1,703 4,214 2,217
Amortization 4,534 6,428 5,772 6,204
Provision for credit
losses (note 4(d)) 630 1,002 1,230 1,490
Change in accrued
interest payable 5,495 (8,627) 26,569 6,990
Change in accrued
interest receivable (1,001) (722) (1,999) (2,101)
Net loss (gain)
realized and
unrealized on
investment
securities 421 (760) 2,046 (1,104)
Loss on derivatives 391 - 1,817 27
Securitization income
on mortgage-backed
securities (11,038) (5,568) (21,135) (10,791)
Amortization of fair
value of employee
stock options (note 9) 357 285 764 523
Other 12,277 (1,660) (5,421) (982)
-------------------------------------------------------------------------
Cash flows from
operating activities 40,803 14,099 65,566 45,649
-------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Net increase in deposits (110,633) 124,057 302,587 366,367
Issuance of
capital stock 318 341 318 2,571
Normal course issuer
bid - (301) - (719)
Exercise of stock options (51) (50) (51) (50)
Dividends paid (4,143) (3,448) (8,288) (6,524)
-------------------------------------------------------------------------
Cash flows from (used in)
financing activities (114,509) 120,599 294,566 361,645
-------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Activity in available
for sale and held for
trading securities
Purchases (46,088) (66,429) (263,555) (116,071)
Proceeds from sales 35,133 6,695 203,587 24,540
Proceeds from
maturities 18,913 21,581 32,952 40,120
Activity in mortgages
Net increase (417,929) (218,832) (860,388) (484,876)
Proceeds from
securitization of
mortgage-backed
securities 246,285 146,639 388,984 277,505
Change in mortgage-
backed securities
receivable 8,302 10,608 12,318 14,764
Net increase in
personal and credit
card loans (15,737) (22,817) (37,661) (54,866)
Net increase in
secured loans (1,426) (3,816) (4,172) (7,919)
Purchases of capital
assets (1,236) (761) (1,845) (977)
-------------------------------------------------------------------------
Cash flows used in
investing activities (173,783) (127,052) (529,780) (307,780)
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period (247,489) 7,646 (169,648) 99,514
Cash and cash
equivalents at
beginning of
the period 432,177 235,399 354,336 143,531
-------------------------------------------------------------------------
Cash and cash
equivalents at end
of the period $ 184,688 $ 243,045 $ 184,688 $ 243,045
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary
Disclosure of Cash
Flow Information
Interest paid $ 50,778 $ 46,596 $ 84,535 $ 66,825
Income taxes paid 13,595 9,928 27,417 24,717
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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.
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Securites issued or guaranteed by:
Canada $ 282 $ (111) $ (2,424)
Corporations (1,746) - -
Equity securities
Common (1,322) (494) (175)
Fixed rate preferred (5,372) (4,753) (2,149)
Floating rate preferred (668) (270) 112
Income trusts (3,590) (2,891) 304
Mutual funds 19 (5) 32
-------------------------------------------------------------------------
$ (12,397) $ (8,524) $ (4,300)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The above unrealized losses represent differences between the carrying
value of the security and the current fair value. The Company does not
consider these losses to be other than temporary based on market
conditions at the reporting date, and continues to regularly monitor
these investments and market conditions.
As at June 30, 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 above table.
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 June 30, 2008
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
British
Columbia $ 338,534 $ 28,792 $ 8,149 $ 150 $ 375,625
Alberta 431,362 81,979 112,538 9,607 635,486
Ontario 2,387,750 242,307 503,417 73,466 3,206,940
Quebec 81,658 746 48,768 - 131,172
Maritimes 109,241 7,360 18,863 3,004 138,468
Manitoba and
Saskatchewan 54,011 1,677 7,308 - 62,996
-------------------------------------------------------------------------
$3,402,556 $ 362,861 $ 699,043 $ 86,227 $4,550,687
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 June 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
British
Columbia $ 306,864 $ 20,454 $ - $ - $ 327,318
Alberta 301,352 52,670 - 7,943 361,965
Ontario 2,220,920 208,506 191,732 66,733 2,687,891
Quebec 51,263 - - - 51,263
Maritimes 139,525 7,988 3,554 3,606 154,673
Manitoba and
Saskatchewan 6,045 1,951 - - 7,996
-------------------------------------------------------------------------
$3,025,969 $ 291,569 $ 195,286 $ 78,282 $3,591,106
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(B) Past Due Loans that are not Impaired
As at June 30, 2008
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 117,293 $ 2,209 $ 1,866 $ 910 $ 122,278
31 - 60 days 3,847 1,357 971 142 6,317
61 - 90 days 27,545 723 461 - 28,729
-------------------------------------------------------------------------
$ 148,685 $ 4,289 $ 3,298 $ 1,052 $ 157,324
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
$ 150,150 $ 6,186 $ 3,918 $ 1,618 $ 161,872
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 106,922 $ 2,456 $ - $ 927 $ 110,305
31 - 60 days 9,820 1,627 - 219 11,666
61 - 90 days 32,517 362 - - 32,879
-------------------------------------------------------------------------
$ 149,259 $ 4,445 $ - $ 1,146 $ 154,850
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(C) Impaired Loans and Specific Allowances for Credit Losses
As at June 30, 2008
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 26,913 $ 4,186 $ 873 $ 979 $ 32,951
Specific
allowances (242) (108) (5) (172) (527)
-------------------------------------------------------------------------
$ 26,671 $ 4,078 $ 868 $ 807 $ 32,424
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $ 169 $ 29,019
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2007
-------------------------------------------------------------------------
In Personal
Thousands Residential and Credit Other Secured
of Dollars Mortgages Card Loans Mortgages Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 22,021 $ 1,407 $ 755 $ 581 $ 24,764
Specific
allowances (316) (158) - (39) (513)
-------------------------------------------------------------------------
$ 21,705 $ 1,249 $ 755 $ 542 $ 24,251
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(D) Allowance for Credit Losses
For the three months ended June 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 $ 457 $ 72 $ - $ 187 $ 716
Provisions
for credit
losses 130 122 5 123 380
Write-offs (420) (102) - (141) (663)
Recoveries 75 16 - 3 94
-------------------------------------------------------------------------
242 108 5 172 527
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 16,181 3,477 3,142 876 23,676
Provisions
for credit
losses (209) 151 291 17 250
-------------------------------------------------------------------------
15,972 3,628 3,433 893 23,926
-------------------------------------------------------------------------
Total
allowance $ 16,214 $ 3,736 $ 3,438 $ 1,065 $ 24,453
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 June 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 $ 121 $ 193 $ - $ - $ 314
Provisions
for credit
losses 293 149 - 39 481
Write-offs (112) (250) - - (362)
Recoveries 14 66 - - 80
-------------------------------------------------------------------------
316 158 - 39 513
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 15,742 2,695 965 767 20,169
Provisions
for credit
losses 216 227 41 37 521
-------------------------------------------------------------------------
15,958 2,922 1,006 804 20,690
-------------------------------------------------------------------------
Total
allowance $ 16,274 $ 3,080 $ 1,006 $ 843 $ 21,203
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended June 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 256 193 5 250 704
Write-offs (823) (261) - (341) (1,425)
Recoveries 175 48 - 32 255
-------------------------------------------------------------------------
242 108 5 172 527
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 17,127 3,201 2,216 856 23,400
Provisions
for credit
losses (1,155) 427 1,217 37 526
-------------------------------------------------------------------------
15,972 3,628 3,433 893 23,926
-------------------------------------------------------------------------
Total
allowance $ 16,214 $ 3,736 $ 3,438 $ 1,065 $ 24,453
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended June 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 166 334 - (56) 444
Write-offs (261) (424) - 13 (698)
Recoveries 25 100 - - 125
-------------------------------------------------------------------------
316 158 - 39 513
-------------------------------------------------------------------------
General
allowance
Balance at
the
beginning
of the
period 15,886 2,378 659 721 19,644
Provisions
for credit
losses 72 544 347 83 1,046
-------------------------------------------------------------------------
15,958 2,922 1,006 804 20,690
-------------------------------------------------------------------------
Total
allowance $ 16,274 $ 3,080 $ 1,006 $ 843 $ 21,203
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 and when a mortgage becomes impaired. At
June 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 $245.1 million. For impaired mortgages, the total
appraised value of collateral at June 30, 2008 is $38.2 million.
5. LOAN SECURITIZATION
The following table summarizes the Company's new securitization
activities.
For the three months ended For the six months ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except Percentages and June 30 June 30 June 30 June 30
Number of Years 2008 2007 2008 2007
-------------------------------------------------------------------------
Book value of
mortgages
securitized $ 250,630 $ 150,688 $ 396,401 $ 285,043
Securitization
receivable $ 13,755 $ 8,437 $ 26,809 $ 17,210
Servicing liability $ 377 $ 239 $ 642 $ 451
Net proceeds received
on securitized
mortgages $ 246,285 $ 146,639 $ 388,984 $ 277,505
Gain on sale of
mortgages $ 8,506 $ 3,910 $ 17,389 $ 8,651
Prepayment rate 10.7% 13.3% 11.7% 13.1%
Excess spread 2.9% 2.4% 3.2% 2.6%
Weighted average
life in years 3.4 3.9 3.7 3.8
Discount rate 3.9% 4.3% 3.8% 4.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter of 2008, the Company securitized insured
residential mortgages through CMHC's Canada Mortgage Bond Program with a
book value of $122.6 million for a total of $206.9 million in 2008 (nil
in Q2 2007 and for the six months ended June 30, 2007). The gain on sale
was $4.6 million during the second quarter and $10.1 million for the
six months ended June 30, 2008 (nil in Q2 2007 and for the six months
ended June 30, 2007). These figures are included in the above table.
6. OTHER ASSETS
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Accrued interest receivable $ 27,307 $ 25,308 $ 21,147
Income taxes receivable 8,474 - 3,434
Goodwill 15,028 15,028 2,324
Intangible assets 585 1,158 -
Other prepaid assets and
deferred items 16,560 15,606 19,596
-------------------------------------------------------------------------
$ 68,227 $ 57,100 $ 46,501
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. OTHER LIABILITIES
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Accrued interest payable $ 162,219 $ 135,650 $ 118,910
Income taxes payable - 5,795 -
Dividends payable 4,146 3,799 3,450
Future income tax liability
(Note 11) 23,956 16,586 14,260
Securitization servicing liability 2,127 1,786 1,528
Other, including accounts payable
and accrued liabilities 51,415 45,060 43,644
-------------------------------------------------------------------------
$ 243,863 $ 208,676 $ 181,792
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. CAPITAL
(A) Common Shares Issued and Outstanding
For the three months ended
-------------------------------------------------------------------------
June 30, 2008 June 30, 2007
-------------------------------------------------------------------------
Number of Number of
In Thousands Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at
beginning of period 34,532 $ 38,899 34,482 $ 37,684
Options exercised 10 318 28 341
Normal course issuer bid - - (8) (10)
-------------------------------------------------------------------------
Outstanding at end
of period 34,542 $ 39,217 34,502 $ 37,985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
June 30, 2008 June 30, 2007
-------------------------------------------------------------------------
Number of Number of
In Thousands Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at
beginning of period 34,532 $ 38,899 34,166 $ 35,436
Options exercised 10 318 356 2,571
Normal course issuer bid - - (20) (22)
-------------------------------------------------------------------------
Outstanding at end
of period 34,542 $ 39,217 34,502 $ 37,985
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
June 30, 2008 June 30, 2007
-------------------------------------------------------------------------
Weighted- Weighted-
In Thousands average average
Except Per Share Number of Exercise Number of Exercise
Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at
beginning of period 1,289 $ 27.12 1,157 $ 21.49
Granted - - - -
Exercised (10) 28.12 (27) 10.56
Forfeited (52) 35.98 - -
-------------------------------------------------------------------------
Outstanding at end
of period 1,227 $ 26.73 1,130 $ 21.76
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end of
period 541 $ 15.60 570 $ 11.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
June 30, 2008 June 30, 2007
-------------------------------------------------------------------------
Weighted- Weighted-
In Thousands average average
Except Per Share Number of Exercise Number of Exercise
Amounts Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at
beginning of period 1,294 $ 27.15 1,266 $ 15.43
Granted - - 220 34.44
Exercised (10) 28.12 (356) 7.08
Forfeited (57) 35.92 - -
-------------------------------------------------------------------------
Outstanding at end
of period 1,227 $ 26.73 1,130 $ 21.76
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end of
period 541 $ 15.60 570 $ 11.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
In Thousands of Dollars, June 30 December June 30(1)
Except Ratios and Multiple 2008 31(1) 2007 2007
-------------------------------------------------------------------------
Regulatory capital
Tier 1 $ 354,653 $ 311,760 $ 296,996
Total 393,579 350,160 332,003
Regulatory ratios
Tier 1 12.5% 11.1% 12.9%
Total 13.8% 12.5% 14.4%
Assets to capital multiple 13.6 14.2 13.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 second quarter of 2008, $357,000 was recorded as an expense
for a total of $764,000 for the first six months of 2008 ($285,000 -
Q2 2007 and $523,000 - six 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 (nil -
Q2 2007 and 220,000 - six months of 2007).
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Available for sale securities $ (12,397) $ (8,524) $ (4,300)
Income taxes recovery (expenses) 3,070 2,226 1,881
-------------------------------------------------------------------------
(9,327) (6,298) (2,419)
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Securitization receivables 8,806 2 (7,202)
Income taxes recovery (expenses) (2,921) (1) 2,602
-------------------------------------------------------------------------
5,885 1 (4,600)
-------------------------------------------------------------------------
Accumulated other comprehensive
loss $ (3,442) $ (6,297) $ (7,019)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. INCOME TAXES
(A) Reconciliation of income taxes
-------------------------------------------------------------------------
For the three months ended For the six months ended
In Thousands of June 30 June 30 June 30 June 30
Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Income before income
taxes $ 38,607 $ 33,612 $ 75,210 $ 64,693
-------------------------------------------------------------------------
Income taxes at
statutory combined
federal and provincial
income tax rates 12,628 12,141 24,944 23,367
Increase (decrease) in
income taxes at
statutory income tax
rates resulting from
Tax-exempt income (716) (673) (1,356) (1,316)
Non-deductible expenses 124 113 632 207
Future tax rate changes (177) (46) (397) (78)
Other 198 59 (322) (663)
-------------------------------------------------------------------------
Income tax $ 12,057 $ 11,594 $ 23,501 $ 21,517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(B) Sources of future income tax balances
-------------------------------------------------------------------------
June 30 December 31 June 30
In Thousands of Dollars 2008 2007 2007
-------------------------------------------------------------------------
Future income tax liabilities
Deferred agent commissions and
other charges $ 7,661 $ 7,907 $ 7,608
Mortgage-backed securities
receivable 28,667 21,282 17,349
-------------------------------------------------------------------------
36,328 29,189 24,957
-------------------------------------------------------------------------
Future income tax assets
Allowance for credit losses 6,771 6,767 6,302
Future tax recoverable acquired 860 1,370 -
Deferred commitment fees and
other charges 4,741 4,466 4,395
-------------------------------------------------------------------------
12,372 12,603 10,697
-------------------------------------------------------------------------
$ 23,956 $ 16,586 $ 14,260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilized off-balance sheet financial instruments during the
first six 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 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 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
June 30, 2008 or June 30, 2007. With respect to the Canada Mortgage Bond
program, at June 30, 2008 the Company notionally held $325.8 million of
seller swaps, and $12.8 million of accreting hedge swaps. These
outstanding swap arrangements were marked-to-market at June 30, 2008 for
unrealized loss of $0.2 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 June 30, 2008, December 31,
2007 and June 30, 2007 for selected period intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap
position.
As at June 30, 2008
-------------------------------------------------------------------------
In Thousands of
Dollars, Except Floating 0 to 3 3 Months 1 to 3
Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 35,129 $ 1,198,334 $ 1,549,664 $ 1,645,896
Total liabilities
and equity - 778,744 2,210,891 1,246,131
Off-balance sheet items - (372,279) 43,618 101,918
-------------------------------------------------------------------------
Interest rate
sensitive gap $ 35,129 $ 47,311 $ (617,609) $ 501,683
-------------------------------------------------------------------------
Cumulative gap $ 35,129 $ 82,440 $ (535,169) $ (33,486)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 0.7% 1.5% (10.0%) (0.6%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2008
------------------------------------------------------------
In Thousands of
Dollars, Except Over Non-interest
Percentages 3 Years Sensitive Total
------------------------------------------------------------
Total assets $ 738,087 $ 194,661 $ 5,361,771
Total liabilities
and equity 444,549 681,454 5,361,771
Off-balance sheet items 226,743 - -
------------------------------------------------------------
Interest rate
sensitive gap $ 520,281 $ (486,795) $ -
------------------------------------------------------------
Cumulative gap $ 486,795 $ - $ -
------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 9.1% - -
------------------------------------------------------------
------------------------------------------------------------
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 June 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 $ 55,554 $ 776,334 $ 1,228,411 $ 1,545,268
Total liabilities
and equity - 566,403 1,578,801 1,297,455
Off-balance sheet items - (226,071) 6,266 75,530
-------------------------------------------------------------------------
Interest rate
sensitive gap $ 55,554 $ (16,140) $ (344,124) $ 323,343
-------------------------------------------------------------------------
Cumulative gap $ 55,554 $ 39,414 $ (304,710) $ 18,633
-------------------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 1.3% 0.9% (7.1%) 0.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2007
------------------------------------------------------------
In Thousands of
Dollars, Except Over Non-interest
Percentages 3 Years Sensitive Total
------------------------------------------------------------
Total assets $ 570,832 $ 129,400 $ 4,305,799
Total liabilities
and equity 328,281 534,859 4,305,799
Off-balance sheet items 144,275 - -
------------------------------------------------------------
Interest rate
sensitive gap $ 386,826 $ (405,459) $ -
------------------------------------------------------------
Cumulative gap $ 405,459 $ - $ -
------------------------------------------------------------
Cumulative gap as a
percentage of
total assets 9.4% - -
------------------------------------------------------------
------------------------------------------------------------
Based on the current interest rate gap position at June 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
$1.9 million. A 100 basis point increase in interest rates would increase
net income after tax over the next twelve months by a similar amount.
14. EARNINGS BY BUSINESS SEGMENT
The Company operates principally through two business segments -
mortgage lending and consumer lending. The mortgage lending operation
consists of 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 business 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
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 24,127 $ 24,951 $ 6,505 $ 5,253
Provision for credit
losses (357) (626) (273) (376)
Fees and other income 3,707 2,989 3,288 2,076
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 10,647 5,568 - -
Non-interest expenses (11,168) (9,033) (2,198) (1,153)
-------------------------------------------------------------------------
Income before income
taxes 26,956 23,849 7,322 5,800
Income taxes (8,752) (8,579) (2,522) (2,095)
-------------------------------------------------------------------------
Net income $ 18,204 $ 15,270 $ 4,800 $ 3,705
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 12,704 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 4,400,471 $ 3,416,438 $ 392,083 $ 304,148
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 8,730 $ 6,325 $ 39,362 $ 36,529
Provision for credit
losses - - (630) (1,002)
Fees and other income 97 74 7,092 5,139
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary (421) 760 10,226 6,328
Non-interest expenses (4,077) (3,196) (17,443) (13,382)
-------------------------------------------------------------------------
Income before income
taxes 4,329 3,963 38,607 33,612
Income taxes (783) (920) (12,057) (11,594)
-------------------------------------------------------------------------
Net income $ 3,546 $ 3,043 $ 26,550 $ 22,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,028 $ 2,324
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 569,217 $ 585,213 $ 5,361,771 $ 4,305,799
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 46,584 $ 47,876 $ 12,228 $ 9,999
Provision for credit
losses (610) (612) (620) (878)
Fees and other income 7,414 5,370 6,680 4,128
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 19,318 10,764 - -
Non-interest expenses (19,317) (17,348) (4,443) (1,863)
-------------------------------------------------------------------------
Income before income
taxes 53,389 46,050 13,845 11,386
Income taxes (17,304) (15,870) (4,721) (4,113)
-------------------------------------------------------------------------
Net income $ 36,085 $ 30,180 $ 9,124 $ 7,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 12,704 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 4,400,471 $ 3,416,438 $ 392,083 $ 304,148
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
June 30 June 30 June 30 June 30
In Thousands of Dollars 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $ 18,178 $ 11,988 $ 76,990 $ 69,863
Provision for credit
losses - - (1,230) (1,490)
Fees and other income 221 176 14,315 9,674
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary (1,977) 1,104 17,341 11,868
Non-interest expenses (8,446) (6,011) (32,206) $ (25,222)
-------------------------------------------------------------------------
Income before income
taxes 7,976 7,257 75,210 64,693
Income taxes (1,476) (1,534) (23,501) (21,517)
-------------------------------------------------------------------------
Net income $ 6,500 $ 5,723 $ 51,709 $ 43,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,028 $ 2,324
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 569,217 $ 585,213 $ 5,361,771 $ 4,305,799
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 of this unaudited interim consolidated financial
report 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
