Home Capital Reports Strong First Quarter Results under IFRS: First Quarter Adjusted Net Income increases 18.8% over 2010; Adjusted Basic Earnings per Share of $1.31; Return on Equity Strong at 26.7%

TORONTO, May 4 /CNW/ - Home Capital today announced another period of solid earnings and growth for the three months ended March 31, 2011. The Company implemented International Financial Reporting Standards (IFRS) as of January 1, 2011 and prior period results have been restated to an IFRS basis. Key results for the first quarter of 2011 included:

  • Adjusted net income rose to $45.6 million in the first quarter representing an increase of 18.8% over adjusted net income of $38.4 million in the first quarter of 2010 and solidly within the Company's 2011 objective of 15-20% growth in adjusted net income.
  • Adjusted basic and diluted earnings per share were both $1.31 for the quarter. This represents an increase of 18.0% and 19.1%, respectively, from $1.11 and $1.10 per adjusted basic and diluted earnings per share in the first quarter of 2010.
  • Net interest income was $76.6 million in the first quarter representing an increase of 25.1% over the $61.3 million recorded in the first quarter of 2010, reflecting strong loan growth year over year. Net interest margin was 2.0% compared to 2.2% in the first quarter of 2010. This reflects an increase in net interest margin on the non-securitized assets to 2.6% compared to 2.5% in the first quarter of 2010, offset by a decline in the net interest margin on the securitized portfolio to 1.2% compared to 1.3% in the comparable quarter of 2010, due to margins on securitized assets contracting to normalized levels in 2010.
  • Return on equity continued to exceed the Company's performance objective of 20% at 26.7% in the quarter compared to 27.6% in the same period of 2010.
  • Home Trust's regulatory capital ratios remained strong with Tier 1 and Total capital ratios of 19.0% and 20.3% at March 31, 2011. The asset to capital multiple was 15.2 at March 31, 2011 and within authorized limits. Regulatory capital was further strengthened in early May 2011 through the issue of $100.0 million in subordinated debentures.
  • Total assets, which include securitized mortgages, were $16.01 billion at March 31, 2011 an increase of $492.1 million or 3.2% from the $15.52 billion at December 31, 2010. This represents an annualized growth rate in total assets of 12.7%, slightly below the Company's 2011 objective of 13-18% total asset growth.
  • The total value of mortgages originated in the first quarter of 2011 was $1.37 billion compared to $1.33 billion in the comparable quarter of 2010. Residential mortgages were $1.29 billion compared to $1.23 billion in the first quarter of 2010. The Company's traditional mortgages represented 58.3% of residential originations at $753.7 million in the quarter, compared to 43.6% of residential originations or $537.9 million in the first quarter of 2010. This represents an increase in traditional mortgage originations of 40.1% over the first quarter of 2010, consistent with the Company's objective of prudently growing the traditional mortgage portfolio.
  • Accelerator mortgage originations were $449.2 million in the first quarter of 2011 compared to $561.1 million in the first quarter of 2010.  The regulatory treatment of securitized mortgages upon adoption of IFRS has introduced new capital constraints and effectively increased the cost of capital allocated to Accelerator mortgages. Consequently, the Company scaled back lending in this segment in favour of more profitable products.
  • Residential originations also include multi-unit residential originations of $89.0 million for the first quarter of 2011 compared to $134.8 million in the quarter of 2010.
  • Non-residential mortgage advances were $48.7 million in the first quarter of 2011 compared to $61.2 million in the comparable quarter of 2010. Store and apartment advances were $25.1 million for the quarter compared to $23.8 in the first quarter of 2010. Warehouse commercial advances were $5.0 million in the first quarter of 2010 compared to $6.3 million in the comparable quarter of 2010.
  • As a source of funding, the Company securitized and sold $867.2 million in insured residential mortgages compared to $1.02 billion in the first quarter of 2010.
  • The Company opened 2,107 new Equityline Visa accounts in the first quarter compared to 1,008 accounts opened in the first quarter of 2010, as new marketing initiatives supported growth.
  • The credit performance of the loans portfolio remains strong with net impaired loans representing 0.29% of the total loans portfolio at March 31, 2011, improved from 0.47% at March 31, 2010.  The provision for credit losses was 0.03% of gross loans on an annualized basis compared to 0.04% in the first quarter of 2010 and below the Company's objective of 0.05% to 0.15% of gross loans.

The Company successfully implemented IFRS as its financial reporting framework on January 1, 2011, with a transition date of January 1, 2010.  Transition as at January 1, 2010 required restatement of the Company's 2010 financial information from its original Canadian GAAP basis to the IFRS basis.  This allows for inclusion of comparative information in the 2011 financial statements and management discussion and analysis. As discussed in the Company's quarterly and annual reports leading up to the implementation date, the primary impact of IFRS was a change in the accounting for securitization transactions. The Company now records the securitized mortgages as on-balance sheet mortgages along with secured borrowing representing the funding received from the transaction. Interest income on the mortgages and interest expense on the liabilities is recognized over the passage of time. On January 1, 2010, the Company reduced shareholder's equity by $86.7 million for the IFRS transition adjustment representing the difference between prior periods net income under Canadian GAAP compared to IFRS. Net income for 2010 on an IFRS basis was $154.8 million compared to $180.9 million under Canadian GAAP.

The inclusion of securitized mortgages on the Company's balance sheet increased the asset to capital multiple of the Company's wholly owned regulated subsidiary, Home Trust, from 10.5 to 15.1 on January 1, 2011, while Tier 1 and Total capital ratios remained strong and were not materially affected.  The asset to capital multiple has become a constraint to growth in the Company's insured Accelerator mortgage business as this product's profitability tends not to support the additional cost of the capital needed to maintain this product category. As the Company would like to continue offering competitive, well-serviced mortgages in this market segment, it and other industry representatives and CMHC have been working to explore potential solutions that may lead to a return of growth in this market segment. At this time such solutions are not available.

In early May 2011, the Company issued $150.0 million in long-term senior debt to support its growth objectives. Of the net proceeds, $100.0 million will provide additional capital Home Trust to meet regulatory requirements to support its future growth, with the balance to be used for general corporate purposes, including potentially providing additional capital to Home Trust at a future date. The subordinated debt issue will improve Home Trust's ACM and positions the Company to continue growing its assets, revenue and net income, and generating above average returns for its shareholders.

The Company has continued to observe stable and healthy real estate markets across the country and expects demand to remain strong through 2011. There may be some moderating influences of higher average unemployment rates in some of the country and the possibility of rising interest rates in the latter half of the year. The credit quality of the loan portfolio remains strong. The stabilization of housing markets has allowed for renewed focus on the Company's traditional mortgage portfolio, Equityline Visa and geographic growth strategies. The Company intends to continue focusing on superior customer and broker service, diverse and new product offerings, expansion of broker networks and increased market penetration. The Company expects origination volume increases in the traditional mortgage portfolio, increased originations outside Ontario and continued growth in consumer lending, which includes Equityline Visa, throughout 2011.

Subsequent to the end of the quarter, and in light of the Company's continued strong growth, profitability and solid financial position, the Board of Directors declared quarterly dividend of $0.18 per Common share payable on June 1, 2011 to shareholders of record at the close of business on May 13, 2011.

With continued strong performance in the first quarter of 2011, management remains confident that the Company will continue to generate growth in profitability for the balance of 2011, enabling Home Capital to continue generating above average operating performance and shareholder returns.

(signature)                     (signature) 
GERALD M. SOLOWAY    
Chief Executive Officer     










NORMAN F. ANGUS
Chairman of the Board  

Additional information concerning the Company's targets and related expectations for 2011, including the risks and assumptions underlying these expectations, may be found in the Management Discussion and Analysis (MD&A) of this quarterly report.

First Quarter Results Conference Call

The conference call will take place on Thursday, May 5, 2011, at 10:30 a.m. Participants are asked to call 5 to 15 minutes in advance, 647-427-7450 in Toronto or toll-free 1-888-231-8191 throughout North America. The call will also be accessible in listen-only mode via the Internet at www.homecapital.com.

Conference Call Archive

A telephone replay of the call will be available between 1:30 p.m. Thursday, May 5, 2011 and midnight Thursday, May 12, 2011 by calling 416-849-0833 or 1-800-642-1687 (enter passcode 60677522). The archived 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.

Annual and Special Meeting Notice

The Annual and Special Meeting of Shareholders of Home Capital Group Inc. will be held at the Design Exchange, Trading Floor, Second Floor, 234 Bay Street, Toronto, Ontario, on Wednesday, May 18, 2011 at 11:00 a.m. local time. Shareholders and guests are invited to join Directors and Management for lunch and refreshments following the Annual Meeting. All shareholders are encouraged to attend.

FINANCIAL HIGHLIGHTS

(Unaudited)                                  
(000s, except Per Share and Percentage Amounts)                                
For the three months ended March 31         2011         20101          
OPERATING RESULTS                              
Net Income     $   43,178     $   35,707          
Adjusted Net Income2         45,603         38,387          
Total Revenue         184,613         153,603          
Earnings per Share Basic/Diluted     $   1.24/1.24     $   1.03/1.03          
Adjusted Earnings per Share Basic/Diluted2         1.31/1.31         1.11/1.10          
Return on Shareholders' Equity3         26.7%         27.6%          
Return on Average Assets3         1.1%         1.2%          
Net Interest Margin                  2.0%          2.2%          
Net Interest Margin Non-Securitized Assets                  2.6%         2.5%          
Net Interest Margin Securitized Assets                  1.2%         1.3%          
Efficiency Ratio3                30.1%         28.5%          
Efficiency Ratio (TEB4)3         29.6%         27.7%          
As at         March 31
2011
        December 31
2010
        March 31
2010
BALANCE SHEET HIGHLIGHTS                              
Total Assets     $   16,010,923     $   15,518,818     $   11,762,793
Total Loans         14,956,752         14,091,755         10,561,535
Securitized Loans           8,649,203           8,116,636         4,945,816
Deposits           6,404,418           6,522,850         6,035,592
Shareholders' Equity              664,462         628,585         529,838
FINANCIAL STRENGTH                              
Capital Measures5                              
Risk-weighted Assets     $      3,720,495     $   3,777,267     $   3,420,125
Tier 1 Capital Ratio                  19.0%         18.1%         16.5%
Total Capital Ratio                  20.3%         19.4%         17.9%
Credit Quality                              
Non-performing Loans as a Percentage of Gross Loans         0.29%         0.24%         0.47%
Allowance as a Percentage of Gross Impaired Loans                  71.4%         87.0%         59.1%
Provision as a Percentage of Gross Loans (annualized)         0.03%         0.17%         0.04%
Share Information                              
Book Value per Common Share     $             19.14     $       18.14     $       15.26
Common Share Price - Close     $             56.91     $   51.79     $   43.23
Market Capitalization     $      1,975,915     $     1,794,316     $   1,501,464
Number of Common Shares Outstanding                 34,720                34,646               34,732

1 2010 figures have been restated to an IFRS basis; please see information under IFRS section of this unaudited interim consolidated financial report.
2 See definition of Adjusted Net Income under Non-GAAP Measures and reconciliation on page 12 of the unaudited interim consolidated financial report.
3 These key performance indicators have not been recalculated on an adjusted net income basis.
4 See definition of Taxable Equivalent Basis (TEB) under Non-GAAP Measures of this unaudited interim consolidated financial report.
5 These figures relate to the Company's operating subsidiary, Home Trust Company. 2010 has not been recalculated on an IFRS basis.

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 32 through 41 of the Company's 2010 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 Report 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 the Company to make assumptions and are subject to inherent risks and uncertainties, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements.  These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors.

These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.

Assumptions about the performance of the Canadian economy in 2011 and its effect on Home Capital's business are material factors the Company considers when setting its objectives and outlook.  In determining expectations for economic growth, both broadly and in the financial services sector, the Company primarily considers historical economic data provided by the Canadian government and its agencies.  In setting the outlook and objectives for 2011, management's expectations assume:

  • The Canadian economy will continue a modest recovery in 2011, but will be heavily influenced by the economic conditions in the US and international markets.  Inflation will be within the Bank of Canada's target of 1-3%.
  • If economic recovery remains on target, interest rates will begin to increase in mid to late 2011 as the Bank of Canada raises its target for the overnight rate.  However, interest rates remain low by historical standards.
  • The housing market will continue moving towards balanced supply and demand conditions in most regions.  Declining housing starts and flat resale activity on stable prices will continue with the market stabilizing from previous activity levels.
  • Unemployment will improve slightly as the economy grows, while a larger labour force marginally offsets job growth. Consumer debt levels will remain serviceable by Canadian households.
  • Net interest margins overall are expected to decline as securitized mortgages will decrease the margins, while margins are expected to remain stable on the traditional portfolio throughout 2011 and yields on the securities portfolio may improve.
  • Credit quality will remain sound with actual losses within Home Capital's historical range of acceptable levels.

Non-GAAP Measures

The Company has adopted IFRS as its accounting framework. IFRS are the generally accepted accounting principles (GAAP) for Canadian publically accountable enterprises for years beginning on or after January 1, 2011. The Company uses a number of financial measures to assess its performance.  Some of these measures are not calculated in accordance with GAAP, are not defined by GAAP, and do not have standardized meanings that would ensure consistency and comparability between companies using these measures.  The non-GAAP measures used in this Management's Discussion and Analysis (MD&A) are defined as follows:

Adjusted Net Income and Adjusted Earnings Per Share

Gains (losses), net of tax, that are associated with unmatched derivative volatility in 2010 and the first quarter of 2011 is adjusted against net income to present adjusted net income.

Return on Shareholders' Equity

Return on equity is a profitability measure that presents the annualized net income available to common shareholders' equity as a percentage of the capital deployed to earn the income.  The Company calculates its return on equity using average common shareholders' equity, including all components of shareholders' equity.

Return on Assets

Return on assets is a profitability measure that presents the net income as a percentage of the average total assets deployed to earn the income.

Efficiency or Productivity Ratio

Management uses the efficiency ratio as a measure of the Company's efficiency. This ratio represents non-interest expenses as a percentage of total revenue, net of interest expense. The Company also looks at the same ratio on a taxable equivalent basis and will include this adjustment in arriving at the efficiency ratio, on a taxable equivalent basis.

Net Interest Margin

Net interest margin is calculated by taking net interest income, on a taxable equivalent basis, divided by average total assets.

Tier 1 and Total Capital Ratios

The capital ratios provided in this MD&A are those of the Company's wholly owned subsidiary Home Trust Company.  The calculations are in accordance with guidelines issued by Office of the Superintendent of Financial Institutions Canada (OSFI).  Refer to Note 9 (C) of the Unaudited Interim Consolidated Financial Statements.

Taxable Equivalent Basis (TEB)

Most banks and trust companies analyze and report their financial results on a TEB to provide uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statements of income) includes tax-exempt income from certain securities. The adjustment to TEB increases income and the provision for income taxes to what they would have been had the income from tax-exempt securities been taxed at the statutory tax rate. The TEB adjustments of $1.6 million for the first quarter of 2011 ($2.1 million in the first quarter of 2010) increased reported interest income. TEB does not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Net interest income and income taxes are discussed on a TEB basis throughout this MD&A.

Regulatory Filings

The Company's continuous disclosure materials, including interim filings, annual Management's Discussion and Analysis and audited consolidated financial statements, Annual Information Form, Notice of Annual Meeting of Shareholders and Proxy Circular are available on the Company's web site at www.homecapital.com, and on the Canadian Securities Administrators' website at www.sedar.com.

Management's Discussion and Analysis of Operating Performance

This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended March 31, 2011 included herein, and the audited consolidated financial statements and MD&A for the year ended December 31, 2010. These are available on the Canadian Securities Administrators' website at www.sedar.com and on pages 61 through 88 of the Company's 2010 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 2010 remain substantially unchanged. These unaudited interim consolidated financial statements and MD&A have been prepared based on information available as at May 3, 2011. 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.

Business Profile

Business Segments and Portfolios

The Company divides its business into three segments. These segments and the related activities and portfolios are described below.

Mortgage Lending

This segment comprises single family residential lending and multi-unit residential lending as well as non-residential lending. The single-family residential portfolio includes the Company's traditional or "Classic" mortgage loans, Accelerator mortgages loans and secured loans.

The Company's traditional mortgage portfolio consists of mortgages with loan to value ratios of less than 80%, where the focus is on serving selected segments of the Canadian financial services marketplace that are not the focus of the major financial institutions. Accelerator mortgages are insured, with loan to value ratios generally exceeding 80%, at the time of origination, and are generally securitized and sold through Canada Mortgage Housing Corporation (CMHC) sponsored Mortgage-Backed Securities (MBS) and Canada Mortgage Bond (CMB) programs.

Multi-unit residential lending includes both insured and uninsured mortgage loans. Non-residential lending includes store and apartment mortgages, commercial mortgages and warehouse commercial mortgages.

Consumer Lending

Consumer lending includes Visa lending and other consumer retail lending for durable household goods, such as water heaters and larger ticket home improvement items. Consumer retail lending loans are supported by holdbacks or guarantees from the distributors of such items. The Company's Equityline Visa product, secured by real property, represents 97.5% of the Visa portfolio. The Company also offers cash secured Visa products. The consumer lending segment also includes the operations of PSiGate which offers payment card services.

Other

The Company's other segment includes management of the Company's treasury portfolio and general corporate activities.

Mission, Vision and Values

The Company's mission is to focus on well-defined niches in the Canadian financial marketplace that generate above average returns, have below average risk profiles, and are not adequately served by traditional financial institutions.

Home Capital's vision is to be a "Best in Class" financial services company, delivering first class products and services to Canadians with a strong emphasis on customer service.

The Company has a set of values that are integral to its day-to-day business. These values are the cornerstone of Home Capital's vision and play a key role in the Company achieving both its strategic and financial performance goals:

  • Consistently enhance shareholder value by adhering to our strategies and principles with a focus on customer service
  • Act with respect, trust and integrity in all interactions with our customers, employees and business partners
  • Personal responsibility to deliver the highest level of customer service to our clients, supported by our enthusiasm, teamwork and desire for continuous improvement
  • Make a positive difference to our community and environment through fundraising, community involvement and sustainable environmental initiatives

The Company's key long-term objective is to deliver superior shareholder value.

Over the past decade, the Company has sought to achieve a return on common equity of at least 20%, and has exceeded this benchmark in each of the past 13 years without exception. Management also seeks to align its capital with the risk profile of the business through an understanding of the nature and level of risk being taken and how these risks attract regulatory and risk based capital.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Impact of Adoption of International Financial Standards (IFRS)

General

The Company implemented IFRS as its financial reporting framework on January 1, 2011, with a transition date of January 1, 2010.  Transition as at January 1, 2010 required restatement of the Company's 2010 financial information from its original Canadian GAAP basis to the IFRS basis. This allows for inclusion of comparative information in the 2011 financial statements.  On transition, IFRS requires the application of certain mandatory and optional transition exemptions.  The details of the restatement and the mandatory and selected optional exemptions, which the Company applied on transition, are set out in Note 17 to the accompanying unaudited interim consolidated financial statements.

As IFRS represents a new accounting framework, it is generally not appropriate to directly compare the Company's financial position and results of operations as stated under IFRS to the financial position and results of operations as stated under Canadian GAAP.

While many of the accounting principles and standards comprising IFRS are similar to Canadian GAAP, certain standards and rules are fundamentally different, resulting in significant changes to previously reported financial results and financial position.  The most significant differences relate to the accounting treatment of securitization transactions, including the timing of income and expense recognition, and the treatment of assets and liabilities arising from securitization activities.  Under Canadian GAAP, the assets securitized by the Company were removed from the balance sheet and a gain was calculated by comparing the fair value of consideration received and receivable to the carrying value of the assets at the time of securitization.  The securitization transaction triggered income and expense recognition. Under IFRS, the proceeds received on the securitization are considered a secured loan. Interest income associated with the securitized assets is recognized on an effective interest rate method, amortizing origination costs over the term of the mortgage. Interest expense is recognized on the secured loan over the term of the securitization, amortizing transaction costs and the discount or premium over that term.  Under IFRS, income and expenses are recognized with the passage of time.

As the Company has previously discussed, the restatement of the Company's financial results from Canadian GAAP to IFRS results in a significant adjustment related to certain derivatives which the Company uses to hedge interest rate risk associated with its securitization programs.  The Company has generally used bond forwards and interest rate swaps to hedge interest rate risk associated the commitments and accumulation of mortgages held for securitization and interest rate risk associated with the obligations assumed through the securitizations.  Under Canadian GAAP, the hedging instruments and the hedged items were all carried at fair value and changes in fair value tended to offset each other.  Under IFRS, the hedging instruments used in 2010 must be accounted for at fair value, whereas the hedged items are accounted for at amortized cost.  This results in an accounting mismatch.  This mismatch has an impact on the measurement of income from quarter to quarter, with gains recognized in some quarters and losses in others.  These gains and losses are not a reflection of an economic relationship, but rather an accounting mismatch.  The Company has taken steps to eliminate or significantly reduce this mismatch in 2011. The Company will analyze its performance through 2011 by comparison to 2010 IFRS results, after adjustment, for this mismatch (adjusted net income and adjusted earnings per share).

Retained earnings and accumulated other comprehensive income as at January 1, 2010

On restatement of the Company's 2010 financial statements to the IFRS basis, the cumulative gains recognized on securitizations before January 1, 2010 have been deducted from retained earnings and the net interest income attributed to the securitized assets and related debt accumulated to December 31, 2009 was added to retained earnings. This resulted in a net reduction of retained earnings as at January 1, 2010 of $75.6 million.  Consequently, this amount will be recognized in future periods, including a portion in 2011. Accumulated other comprehensive income was reduced by $11.1 million to remove the fair value adjustments for the securitization receivables which are not part of the IFRS balance sheet.

Net income and earnings per share

As a result of the implementation of IFRS, net income recognized in the first quarter of 2010 was restated from $41.7 million to $35.7 million.  This restatement included an unmatched pre-tax loss on derivatives of $3.7 million.  On a basis that adjusts for the unmatched loss on derivatives, the net income for the first quarter of 2010 was $38.4 million. The Company's IFRS earnings per share for the first quarter of 2010 were $1.03 basic and diluted respectively, compared to $1.20 basic and diluted under Canadian GAAP.  On an adjusted net income basis, the IFRS basic and diluted earnings per share were $1.11 and $1.10.  The Company uses adjusted net income and adjusted earnings per share for performance evaluation to eliminate gains and losses on derivatives, which arise from the adoption of the IFRS framework.  For the most part, such gains and losses will not occur in 2011 or in future periods as a result of revised interest rate risk management procedures and the application of hedge accounting.

Net interest income and net interest margin

Under IFRS, all mortgages currently administered by the Company are included on the balance sheet, including securitized insured mortgages, along with a liability representing the funding of these mortgages through securitization.  A significant portion of securitized mortgages are Accelerator mortgages which generally carry lower interest rates than the Company's traditional mortgages and earn lower interest spreads against the funding.  Consequently, while total interest income and net interest income increased on conversion to IFRS, the total net interest margin declined.  The Company's net interest margin for the first quarter of 2010 was 2.2% on the IFRS basis compared to 2.7% on the Canadian GAAP basis.

Return on Equity

On restatement to the IFRS basis, the Company includes in liabilities the value of funds received on securitization of mortgage pools.  The Company also reduced net income and the stated value of retained earnings and accumulated other comprehensive income as at January 1, 2010, as described above.  On the IFRS basis, return on equity for the 2010 year was 27.3% compared to 27.2% reported under Canadian GAAP.

Capital measures

The Company's Board of Directors, Senior Management and its prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), set certain limits on the Company's activities based on measures of capital adequacy and leverage of Home Trust.  The primary measures are Home Trust's Tier 1 and Total capital ratios and Asset to Capital Multiple (ACM).  The conversion to IFRS does not significantly affect the Tier 1 and Total capital ratios.  The regulatory requirement to included all assets under administration, except those securitized prior to March 31, 2010 under CMHC's CMB and MBS programs, has the impact of increasing the ACM at January 1, 2011 from 10.5 under Canadian GAAP to 15.1 times under IFRS.  In this regard, to maintain growth objectives, Home Trust increased its regulatory capital base in early May 2011 through the issue of $100.0 million in subordinated debt to Home Capital which issued $150.0 million in external senior debt.  Had this $100.0 million in inter-company subordinated debt been in place at March 31, 2011, Home Trust's ACM would have been 13.6.

Other assets and liabilities and other performance indicators

The restatement of the Company's accounts and financial statements to the IFRS basis has an impact on other asset and liability categories and other performance indicators, such as credit ratios, credit provision ratios, efficiency ratio and return on assets. Readers are cautioned to take care when making comparisons to previous period reports.

Impact on Operating Results and Key Performance Indicators

The following table compares Canadian GAAP and IFRS operating results and key performance indicators for the three months ended March 31, 2010.

                           
For the three months ending               March 31
2010
        March 31
2010
(000s, except %)               IFRS         CANADIAN GAAP
                           
Net Interest Income                          
Non-securitized assets           $   47,215     $   47,495
Securitized Assets               14,043         -
                61,258         47,495
Provision for credit losses               911         967
                  60,347         46,528
Securitization Income               -         22,167
Other Non-interest Income               8,052         7,659
                68,399         76,354
Non-interest Expenses               19,753         20,101
                           
Income before taxes               48,646         56,253
Income taxes               12,939         14,534
NET INCOME           $   35,707     $   41,719
Basic Earnings per Share               1.03         1.20
Diluted Earnings per Share               1.03         1.20
                           
Net interest margin               2.2%         2.7%
Return on shareholders' equity               27.6%         27.4%
Return on average assets               1.2%         2.3%
Efficiency ratio (TEB)               27.7%         25.3%
Net impaired loans as a percentage of
gross loans
              0.47%         0.91%
Provisions as a percentage of gross
impaired loans
              59.13%         59.13%
Annualized provision as a percentage
of gross loans
              0.04%         0.07%

Impact on the Balance Sheet

The following table compares the Canadian GAAP and IFRS balance sheet at December 31, 2010.

                         
As at               December 31
2010
    December 31
2010
(000s, except %)               IFRS     CANADIAN GAAP
Total cash and securities           $   1,273,946 $   1,390,716
  Non-securitized loans               5,975,119     5,861,722
  Securitized loans               8,116,636     -
Total loans               14,091,755     5,861,722
  Collective allowance               29,153     29,153
                14,062,602     5,832,569
Other assets               182,270     488,954
Total Assets               15,518,818     7,712,239
                       
Deposits           $   6,522,850 $   6,522,850
Securitization liabilities               8,104,578     -
                14,627,428     6,522,850
Other liabilities               262,805     447,109
Total Liabilities               14,890,233     6,969,959
Shareholders' equity               628,585     742,280
Total Liabilities and Shareholders' Equity               15,518,818     7,712,239
Book Value per Common Share               18.14     21.42

Impact on Regulatory Capital and Capital Ratios

The following table compares the regulatory capital position and capital ratios of the Company's wholly owned subsidiary Home Trust Company at December 31, 2010 under Canadian GAAP to January 1, 2011 under IFRS.

         
         
As at   January 1
2011
  December 31
2010
(000s, except %)   IFRS   CANADIAN GAAP
Tier 1 capital1 $ 682,978 $ 682,978
Tier 2 capital   48,598   48,598
Total capital1   731,576   731,576
Risk-weighted assets   3,762,857   3,777,267
Tier 1 capital ratio   18.2%   18.1%
Total capital ratio   19.4%   19.4%
Asset to capital multiple2   15.1   10.5

1 OSFI permitted financial institutions the election of phasing-in most of the opening IFRS retained earnings adjustments into regulatory capital over 8 quarters ending December 31, 2012. All of Home Trust's adjustments qualified for this election and as such, at January 1, 2011, there was no immediate impact to regulatory capital.

2 OSFI permitted financial institutions to exclude from the asset to capital multiple calculation assets securitized through CMHC sponsored programs prior to March 31, 2010.

Quarterly IFRS Operating Results and Key Performance Indicators

The following table provides the quarterly IFRS operating results and key performance indicators for 2010.

                               
(000s, except per share and %)                               
        2011
Q1
  Q4     Q3   Q2   Q1   2010
Total
Net Interest Income Non-securitized                              
  Non-securitized loans interest   $   91,053 $ 90,195   $ 89,872 $ 88,235 $ 85,477 $ 353,779
  Dividends and other interest       5,951   7,375     8,164   5,381   7,090   28,010
  Interest on deposits       44,966   47,988     47,846   47,184   45,352   188,370
        52,038   49,582     50,190   46,432   47,215   193,419
Net Interest Income Securitized Assets                              
  Securitized loans interest       80,500   76,583     65,155   56,750   52,984   251,292
  Interest on Securitization Liabilities       55,932   53,706     47,234   40,800   38,941   180,681
        24,568   22,877     17,921   15,770   14,043   70,611
Total Net Interest Income       76,606   72,459     68,111   62,202   61,258   264,030
Provision for credit losses       974   5,816     2,167   537   911   9,431
          75,632   66,643     65,944   61,665   60,347   254,599
Non-interest Income                              
Fees and other income       8,360   8,621     7,127   7,126   7,816   30,690
Net gain (loss) on securities       2,029   (985)     1,347   5,488   3,890   9,740
Net gain on sale of loan portfolio       -   -     3,917   -   -   3,917
Net gain (loss) on derivatives 1       (3,280)   (5,745)     11,613   7,607   (3,654)   9,821
        7,109   1,891     24,004   20,221   8,052   54,168
Non-interest Expenses       25,216   26,610     24,756   24,357   19,753   95,476
Income before taxes       57,525   41,924     65,192   57,529   48,646   213,291
Income taxes       14,347   11,816     17,571   16,213   12,939   58,539
NET INCOME       43,178   30,108     47,621   41,316   35,707   154,752
Basic Earnings per Share   $          1.24 $ 0.87   $ 1.37 $ 1.19 $ 1.03 $ 4.46
Diluted Earnings per Share       1.24   0.87     1.37   1.19   1.03   4.45
                               
Adjusted Net Income2                              
Adjustment for unmatched derivative positions (net of tax)       2,425   4,124     (8,483)   (5,463)   2,680   (7,142)
ADJUSTED NET INCOME       45,603   34,232     39,138   35,853   38,387   147,610
Adjusted Basic Earnings per Share       1.31   0.99     1.13   1.03   1.11   4.25
Adjusted Diluted Earnings per Share       1.31   0.98     1.13   1.03   1.10   4.24
                               
Return on shareholders' equity2       26.7%   19.5%     32.7%   30.4%   27.6%   27.3%
Return on average assets2       1.1%   0.8%     1.4%   1.3%   1.2%   1.2%
Efficiency ratio (TEB)3       29.6%   35.0%     24.6%   28.8%   27.7%   28.7%
Non-performing loans as a percentage of gross loans       0.29%   0.24%     0.26%   0.34%   0.47%   0.24%
Annualized provision as a percentage of gross loans       0.03%   0.17%     0.07%   0.02%   0.04%   0.07%

1 The derivatives gain (loss) amount in 2010 and Q1 2011 results from the accounting mismatch discussed on page 8 under General Impacts of Adoption of IFRS. This amount is eliminated from net income on an after tax basis to arrive at adjusted net income.

2 These key performance indicators have not been recalculated based on adjusted net income.

3 The efficiency ratio is calculated as non-interest expenses as a percentage of total revenue, net of interest expense.

2011 Objectives and Performance

Home Capital published its financial objectives for 2011 on page 14 of the Company's 2010 Annual Report. The following table compares actual performance to date against each of these objectives.

Table 1: 2011 Targets and Performance

     
  2011 Targets1 Three Months ended March 31, 2011
Actual Results1
Adjusted net income2 15%-20% $7.2 million or 18.8% increase over the same period last year
     
Adjusted diluted earnings per share2 15%-20% $0.21 per share or 19.1% increase over the same period last year
     
Total assets 13%-18% $492.1 million over December 31, 2010, or 12.7% growth on an annualized basis
     
Total loans 13%-18% $865.0 million over December 31 2010, or 24.6% growth on an annualized basis
Return on shareholders' equity 20.0% 26.7%
     
Efficiency ratio (TEB) 28.0% to 34.0% 29.6%
Capital ratios3    
  Tier 1 Minimum of 13% 19.0%
  Total Minimum of 14% 20.3%
Provision for loan losses as a percentage of total loans 0.05% to 0.15% 0.03%

1 Objectives and results for adjusted net income and diluted earnings per share are for the current year.

2 Targets are based on adjusted 2010 IFRS net income. See definition of Adjusted Net Income under Non-GAAP Measures and reconciliation on page 12 of the unaudited interim consolidated financial report. 3 Based on the Company's wholly owned subsidiary, Home Trust Company.

INCOME STATEMENT REVIEW

Table 2: Income Statement Highlights

           
    March 31,   March 31, March 31, 2011
(000s, except %)   2011   2010 -March 31, 2010
Net Interest Income
Non-securitized Assets
         
  Non-securitized loans interest $ 91,053 $ 85,477 6.5%
  Dividends and other interest   5,951   7,090 (16.1)%
  Interest on deposits   44,966   45,352                       (0.9)%
    52,038   47,215 10.2%
Net Interest Income
Securitized Assets
         
  Securitized loans interest   80,500   52,984 51.9%
  Interest on securitization liabilities   55,932   38,941 43.6%
    24,568   14,043 74.9%
Net interest income   76,605   61,258 25.1%
Provision for credit losses   974   911 6.9%
      75,632   60,347 25.3%
Non-interest Income          
Fees and other income   8,360   7,816 7.0%
Net gain (loss) realized and unrealized on securities   2,029   3,890 (47.8)%
Gain (loss) on derivatives   (3,280)   (3,654) 10.2%
    7,109   8,052 (11.7)%
Non-interest Expenses   25,216   19,753 27.7%
Income before taxes   57,525   48,646 18.3%
Income taxes   14,347   12,939 10.9%
NET INCOME   43,178   35,707 20.9%
ADJUSTED NET INCOME1   45,603   38,387 18.8%

1 Adjusted net income is defined in the Non-GAAP measures section of this MD&A and reconciled to net income on page 12 of this quarterly report.

Net Interest Income

Table 3: Net Interest Income and Margin

  For the three months ended
         March 31, 2011 March 31, 2010

(000s, except %)
Income/
Expense
Average
Rate1
Income/ Expense Average
Rate1
Assets            
Cash and cash resources $ 1,119 0.9% $ 1,380 0.9%
Securities   4,832 4.1%   5,710 3.9%
Non-securitized loans   91,053 5.9%   85,477 6.0%
Taxable equivalent adjustment   1,626 -   2,096 -
Total on non-securitized interest earning assets   98,630 5.4%   94,663 5.4%
Securitized loans   80,500 3.9%   52,984 4.8%
Other assets   - -   - -
Total Assets $ 179,130 4.5% $ 147,647 5.1%
Liabilities and Shareholders' Equity            
Deposits $ 44,966 2.8% $ 45,352 2.9%
Securitization liabilities   55,932 2.7%   38,941 3.5%
Other liabilities and shareholders' equity   - -   - -
Total Liabilities and Shareholders' Equity $ 100,898 2.5% $ 84,293 2.9%
Net Interest Income $ 78,232 - $ 63,354 -
Tax Equivalent Adjustment   (1,626) -   (2,096) -
Net Interest Income per Financial Statements $ 76,606   $ 61,258  
Net Interest Margin Non-securitized Interest Earning Assets     2.6%     2.5%
Net Interest Margin Securitized Assets     1.2%     1.3%
Total Net Interest Margin2     2.0%     2.2%
Spread of Non-securitized Loans over Deposits Only     3.1%     3.1%

1 The average rate is an average calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.

2 Net interest margin is calculated on a TEB.

Table 4: Interest Income and Average Rate by Loan Portfolio

    For the three months ended
(000s, except %) March 31, 2011 March 31, 2010
  Average Assets1 Interest
Income
Average Rate1 Average
Assets1
Interest
Income
Average Rate1
Traditional single-family residential mortgages $ 4,221,791 $ 58,813 5.6% $ 3,712,020 $ 55,966 6.0%
Accelerator single-family residential mortgages   387,576   2,524 2.6%   699,500   5,515 3.2%
Multi-unit residential mortgages   276,730   4,548 6.6%   232,146   2,641 4.6%
Securitized residential mortgages   8,309,565   80,500 3.9%   4,416,213   52,984 4.8%
Non-residential mortgages   865,480   13,653 6.3%   695,378   11,243 6.5%
Personal and credit card loans   471,176   11,515 9.8%   398,297   10,112 10.2%
Total average loans $ 14,532,318 $ 171,553 4.7% $ 10,153,554 $ 138,461 5.5%

1 The average is an average calculated with reference to opening and closing monthly balances.

As noted in Table 3, net interest income was $76.6 million in the first quarter of 2011, an increase of 25.1% over the $61.3 million recorded in the first quarter of 2010. The increase in net interest income over the comparable quarter is primarily due to an increase in the average loan portfolio of $4.38 billion compared to the first quarter of 2010, tempered by a slight decline in the total net interest margin.

Net interest margin, including the securitized portfolio was 2.0% for the quarter compared to 2.2% in the comparable quarter of 2010. Margin compression quarter over quarter is due to a decline of 10 basis points in the net interest margin on the securitized portfolio resulting from declining margins in the securitization market and a larger proportion of Accelerator mortgages, both fixed and variable rate, which carry lower rates than the Company's traditional mortgages. The non-securitized assets net interest margin improved 10 basis points in the first quarter of 2011 compared to the first quarter of 2010 primarily due to improved yields in the securities portfolio. The spread of non-securitized loans over deposits remained stable compared to the first quarter of 2010. The Company expects stable to modest improvements in the net interest margin and spread in the non-securitized asset portfolio over the remainder of the year.

In the first quarter of 2011 the average rate earned on the loan portfolio declined 80 basis points from the first quarter of 2010. With the exception of multi-unit residential mortgages and non-residential mortgages, average rates have declined in response to lower market mortgage rates. The continued low Government of Canada bond yields have contributed to lower fixed mortgage rates in the fixed-rate mortgage market. Additionally, continued low prime interest rates and an increase in the market discount to prime for variable rate mortgages have lowered the average rate earned on mortgages in the Accelerator and securitized mortgage portfolios.

The average rate earned on the personal and credit card portfolio is marginally lower than 2010, as the Company expanded its offering of Equityline Visa to include a lower rate product to customers with higher quality credit.

Non-Interest Income

Total non-interest income was $7.1 million for the first quarter compared to $8.1 million in the first quarter of 2010.

Fees and other income of $8.4 million compared to $7.8 million in the first quarter of 2010 includes net mortgage and Visa account administration fees and increases as the size of the loan portfolio increases. The relative level of fee growth is slower than loan portfolio growth due to a higher proportion of lower fee products originated in 2010.

The Company recognized a net gain of $2.0 million on the sale of certain available for sale securities during the quarter, compared to a net gain of $2.9 million in the comparable quarter of 2010. The Company takes advantage of improvements in securities markets and will rebalance the investment portfolio as market conditions warrant. The Company did not recognize any impairments on available for sale securities in the first quarter of 2011 or 2010.

Gains (losses) on derivatives in the first quarter of 2011 include gains due to hedge ineffectiveness of $0.1 million on the Company's fair value and cash flow interest rate hedges. Additionally, in January 2011 the Company restructured certain derivative positions to achieve hedge accounting under IFRS. While the Company designated the restructured interest rate swaps and bond forwards in hedge accounting relationships from the restructure date forward, in the period prior to designation the Company recognized a net unrealized loss of $3.3 million. This amount is adjusted from income for performance measurement purposes.  Please see the derivatives and hedging section of this MD&A and note 13 of the unaudited consolidated financial statements. In the first quarter of 2010, the Company was not applying hedge accounting to its hedges of interest rate risk and as such, the unrealized fair value gains and losses on derivatives was recorded through income as they occurred.

Non-Interest Expenses

Total non-interest expenses incurred in the first quarter were $25.2 million an increase from the $19.8 million recorded in the first quarter of 2010 but down marginally from the $26.6 million incurred in the fourth quarter of 2010. The efficiency ratio (TEB) was 29.6% compared to 27.7% in the first quarter of 2010 reflecting continued low costs in compared to revenue less interest expense. The Company continues to manage expenses in a disciplined and measured manner and aligns its expense management strategy with its growth targets and objectives.

During the first quarter, salaries and staff benefits were $12.6 million, relatively consistent with the $12.4 million in the fourth quarter of 2010 and up from the $10.8 million in the first quarter of 2010. The Company currently anticipates modest increases in staff levels in 2011.  At March 31, 2011, the Company employed 564 staff compared to 505 staff one year ago. Premises expenses were $1.9 million during the quarter, consistent with the fourth quarter of 2010 and slightly increased from the $1.6 million in the first quarter of 2010 due to lease renewals and increased space in Toronto, as well as the impact of the harmonized sales tax (HST) which was effective July 1, 2010. There were no changes to premises during the quarter.

Other operational expenses were $10.8 million during the quarter, up from $7.3 million in the first quarter of 2010 and down from $12.4 million in the fourth quarter of 2010. The expenses increased through the first quarter of 2011 to support business growth. In particular, the Company has experienced increased information technology costs including additional advisory support, additional costs associated with the implementation of a new core banking system that are not eligible for capitalization and advisory and audit costs associated with the implementation of IFRS.

Provision for Credit Losses

Table 5: Provision for Credit Losses 

   
  For the three months ended
(000s, except %)   March 31
2011
  March 31
2010
Collective provision $ 87 $ 721
Individual provision   887   190
Total provision $ 974 $ 911
Provision as % of gross loans (annualized)   0.03%   0.04%
Net write-offs $ 1,505 $ 79
Net write-offs as % of gross loans (annualized)   0.04%   0.003%

Table 6: Net Impaired Loans & Allowances

             
            As at
(000s, except % )   March 31
2011
  December 31
2010
  March 31
2010
Net impaired loans $ 43,713 $ 34,225 $ 50,121
Gross loans   14,960,752   14,096,652   10,564,281
Net impaired as % of gross loans   0.29%   0.24%   0.47%
Collective allowance $ 29,240 $ 29,153 $ 28,514
Individual allowance   4,682   5,300   3,075
Total allowance $ 33,922 $ 34,453 $ 31,589

The provision for credit losses is charged to the income statement by an amount that brings the individual and collective allowances for credit losses to the level determined by management to be adequate to cover incurred losses, including losses that are not yet specifically identified. Factors which influence the provisions for credit losses include the formation of new impaired loans, the level of write-offs, management's assessment of the level of collective and individual allowances required based on available data, including current credit performance of the portfolio, external economic factors, the composition of the portfolio, and the overall growth in the loans portfolio.

The Company's individual provisions for the first quarter of 2011 were $0.9 million compared to $0.2 million in the first quarter of 2010 and down significantly from the $5.6 million recorded in the fourth quarter of 2010. The first quarter of benefited from higher than expected recoveries which lowered the individual provision.

The collective allowance balance at March 31, 2011 increased marginally over December 31, 2010 reflecting a slower rate of growth than the loans portfolio, due to continued improvement in the credit quality of the loans portfolio as reflected in the following factors:

  • A relatively low rate of loan impairments. Net impaired loans as a percentage of gross loans ended the quarter at 0.29%, which remains at low level when compared to 2009 and 2008. The general trend in net impaired loans has been downward since a peak in mid-2009 and has been relatively stable over the last few quarters. Credit losses and impaired loans are now in the range of the Company's historical averages. The Company continues to employ prudent strategies to maintain the credit quality of the loans portfolio.

  • Improving real estate markets, lower overall net write-offs and a continued and focused effort at working out non-performing loans. Write-offs in the residential mortgage portfolio have improved over the past two years and have returned to levels that are consistent with the Company's experience over the long term.   Personal and credit card loan and secured loan net write-offs are within expected levels. The Company's ongoing risk management philosophy includes close monitoring of non-performing loans and the employment of proactive measures to minimize losses, as described under the Credit Risk section of the 2010 Annual Report under the heading Risk Management.

  • An improvement in the overall risk profile of the loans portfolio and general Canadian economic factors that influence management's assessment of the level of collective allowance (please see the Credit Risk section of this MD&A for more information).

Income Taxes

The income tax expense amounted to $14.3 million (effective tax rate of 24.9%) for the first quarter of 2011. The effective tax rate was 26.6% for same period in 2010. The lower effective tax rate during the quarter is attributed to Canadian dividend income which is non-taxable to financial institutions and lower tax rates on deferred taxes.  Due to the nature of the Company's revenue and expense streams, an effective tax rate of approximately 26.5% to 28.0% should be sustainable.

Comprehensive Income

Comprehensive income is the aggregate of net income and other comprehensive income (OCI). Comprehensive income was $40.6 million for the three months ended March 31, 2011 compared to $30.9 million for the same period in 2010. A loss of $2.6 million was recorded through OCI, compared to a loss of $4.8 million for the comparable period in 2010.

OCI includes changes in unrealized gains or losses on available for sale securities, transfers of previously unrealized net gains and losses to net income once they have been realized, the impact of cash flow hedges and transfers of unrealized losses on investments considered impaired to net income.

During the quarter, the Company recognized a transfer of $2.0 million of realized gains from OCI to net income related to disposal of available for sale securities. This compares to a net transfer of $2.9 million of gains to net income in the comparable period in 2010. There was a net decrease in market value on securities available for sale, including fixed income, preferred and equity securities of $0.5 million during the three months ended March 31, 2011 compared to a net decrease of $1.5 million for the comparable period of 2010.

There was a net loss of $0.7 million related to cash flow hedging. The Company did not apply cash flow hedging in the first quarter of 2010.

BALANCE SHEET REVIEW

Table 7: Balance Sheet Highlights 

The table below presents the balance sheet position of the Company at March 31, 2011 and December 31, 2010 along with percentage changes.

        As at % Change
    March  31,   December 31, March 31, 2011
(000s, except %)   2011   2010 -December 31, 2010
Cash resources $ 411,414 $ 846,824 (51.4)%
Securities   478,310   427,122 12.0%
  Residential mortgages   4,921,302   4,683,527 5.1%
  Non-residential mortgages   895,820   838,253 6.9%
  Securitized residential mortgages   8,646,203   8,116,636 6.5%
  Personal and credit card loans   493,427   453,339 8.8%
Total Loans   14,956,752   14,091,755 6.1%
  Collective allowance   29,240   29,153 0.3%
    14,927,512   14,062,602 6.1%
Other assets   193,687   182,270 6.3%
Total assets   16,010,923   15,518,818 3.2%
           
Deposits $ 6,404,418 $ 6,522,850 (1.8)%
Securitization liabilities   8,641,038   8,104,578 6.6%
    15,045,456   14,627,428 2.9%
Other liabilities   301,005   262,805 14.5%
Total Liabilities   15,346,461   14,890,233 3.1%
Shareholders' equity   664,462   628,585 5.7%
Total liabilities and shareholders' equity   16,010,923   15,518,818 3.2%

Cash Resources and Securities

Combined cash resources and securities as at March 31, 2011 decreased by $384.2 million compared to December 31, 2010.  The Company continued to reduce liquidity levels, leading to lower cash resources compared to the end of 2010.    Record securitization volumes in the fourth quarter of 2010 resulted in the Company's liquidity position being at a historically high level as of the end of 2010. During the first quarter of 2011 the Company reduced the liquidity portfolio to levels it considers prudent, by funding new originations from existing cash balances. In addition, securitization volumes were lower in the first quarter of 2011 compared to the fourth quarter of 2010, as the Company strategically shifted new business to traditional mortgage loans from Accelerator loans, which are typically all securitized.

The securities portfolio has increased by $51.2 million since December 31, 2010. The Company continues to invest in conservative assets while seeking appropriate returns. During the three months ending March 31, 2011, the Company took advantage of market opportunities and sold certain securities realizing a net pre-tax gain of $2.0 million, compared to $2.9 million during the same period in 2010. The securities portfolio increased due to a number of acquisitions of new issues in the rate reset preferred share market. The disposals and acquisitions allowed the Company to diversify its single name counterparty risk and industry concentration risk. During the quarter, the Company also redeployed some of its liquidity cash and cash equivalents into longer duration bank deposit notes.

Loans Portfolio

Table 8: Mortgage Production

            For the three months ended
(000s) March 31
2011
         December 31
2010
March 31
2010
Traditional single family residential mortgages $ 753,681 $ 683,511 $ 537,942
Accelerator single family residential mortgages   449,164   755,632   561,116
Multi-unit residential mortgages   89,035   285,042   134,824
Non-residential mortgages   48,729   72,855   61,230
Store and apartments   25,077   33,623   23,782
Warehouse commercial mortgages   5,000   20,750   6,250
Total mortgage advances $ 1,370,686 $ 1,851,413 $ 1,325,144

Mortgage production for the first quarter of 2011 was similar in volume to the first quarter of 2010, with an increase of 3.4%. The distribution of production was more heavily weighted to the Company's traditional single-family loans products and away from Accelerator single family, multi-unit residential and non-residential mortgages. This reflects the Company's focus on its higher margin products. This shift in focus is in response to the cost of allocating capital to support insured securitized mortgages which has resulted from the implementation of IFRS and the regulatory framework. This additional cost of capital (which is an opportunity cost) reduced the relative profitability of the Company's Accelerator and insured multi-unit residential mortgage products. The Company expects this trend to continue and that it will be consistent within the regulated industry, until new off-balance sheet products become available or there are changes to the regulatory treatment of these insured securitized mortgages. The current regulatory treatment of insured mortgages constrains the growth that would otherwise be available.

Strong originations in the Accelerator product in 2010 led to the increase in the percentage of the loan portfolio in the securitized category.

Other Assets

Other assets include the Company's capital assets and other assets. Other assets increased by approximately $11.4 million primarily due to an increase of $9.2 million in prepaid interest on the CMB secured borrowing liability, $5.0 million increase in accrued interest on interest rate swap contracts and $2.7 million increased in accrued interest and dividends since December 31, 2010.  In addition intangible assets increased by $3.6 million since December 31, 2010 related to the development of the Company's new core banking system.

Liabilities

Deposit liabilities declined from December 31, 2010 as the Company utilized excess liquidity and securitization proceeds to fund loan portfolio growth.

Securitization liabilities, including both MBS and CMB liabilities, increased from December 31, 2010 as the Company securitized and legally sold $867.2 million in insured mortgages during the quarter, compared to $1.02 billion in the first quarter of 2010. The securitization and legal sale amounts include mortgages that are used as replacement assets in the CMB program which do not increase the liability amount as CMBs are bullet debt instruments. The securitization liabilities increased by $536.5 million over December 31, 2010. The average coupon on new securitization liabilities was 2.12% in the quarter compared to 1.71% in the first quarter of 2010. The average yield on the mortgages securitized and sold was 3.76% in the quarter compared to 3.24% in the first quarter of 2010.

From time to time, the Company securitizes mortgages and holds some of the related MBS securities. In these cases the MBS securities are held as future replacements assets for the CMB program or as part of the liquidity pool. These MBS securities are recorded on the balance sheet as securitized mortgages and accounting for at amortized cost. In such cases, the Company will record the securitization liabilities when the MBS are legally sold to third parties or when they are used as replacement assets in the CMB program.  Please see note 6 of the unaudited consolidated financial statements for additional information on securitization liabilities.

Growth in other liabilities of $38.2 million over December 31, 2010 was due in part to an increase in derivative liabilities of $9.3 million related to fair value changes on the interest rate swaps used for hedging interest rate risk (please see the Derivatives and Hedging section of the MD&A and note 13 of the unaudited interim consolidated financial statements).  Additionally, there were increases in accrued interest payable on both deposits and securitization liabilities of $30.2 million due to increases in securitization liability balances and higher interest rates on deposits.

Shareholder's Equity

The increase in total shareholders' equity since December 31, 2010 was internally generated from net income during the three month period ended March 31, 2010 of $43.2 million, plus $3.5 million in amounts related to stock based compensation, less $6.3 million for dividends paid and payable to shareholders, $2.0 million related to the repurchase of shares and a decrease of $2.6 million in Accumulated Other Comprehensive Income.

At March 31, 2011, the book value per common share was $19.14, compared to $18.14 at December 31, 2010 and $15.26 at March 31, 2010.

Derivatives and Hedging

From time to time, as part of its financing and liquidity management activities, the Company enters into transactions under CMHC sponsored MBS programs in which it transfers financial assets to CMHC sponsored securitization entities.  These transfers do not qualify for derecognition under IFRS. As such, the transaction is treated as a secured financing transaction and results in the recognition of a secured borrowing which may have a fixed coupon rate. The fixed interest rate in the secured borrowing above will be determined based on market rates at the time of issuance, plus an applicable credit spread.  The Company is exposed to cash flow variability on the future interest payments resulting from variability in market interest rates between the dates on which the Company originates the underlying mortgages and the actual date the secured borrowing (securitization transaction) is settled.  The Company uses forward contracts to sell Government of Canada bonds to hedge the variability in these future interest cash flows. The forward bond contracts settle at the time of the securitization transaction.

Beginning in December of 2010, the Company started applying cash flow hedge accounting to the bond forward hedges. The intent of hedge accounting is to recognize the effective matching of the gain or loss on the bond forward with the interest cash flows of the secured borrowing as the Company records the expense. In the first quarter of 2011, the company settled $175.0 million in bond forwards recognizing a net loss of $1.7 million in other comprehensive income. This loss reflects a decline in bond yields over the period of the hedge. This loss has been deferred through accumulated other comprehensive income and will be recognized in income over the term of the related MBS, as part of the interest expense on the hedged secured borrowing. The Company also recognized $0.5 million in realized losses into income through derivatives gains (losses) on these bond forwards due to hedge ineffectiveness. At March 31, 2011, the Company held forward bond sale contracts of $125.0 million in anticipation of future securitizations.  These contracts had a positive fair value of $1.0 million at March 31, 2011. The unrealized gain was recorded in other comprehensive income.

Prior to December 2010, the Company recognized unrealized and realized gains and losses on the bond forwards through income as they occurred, as hedge accounting was not in place.

Through the Company's participation in the CMB program, there is exposure to fluctuations in the fair value of the CMB secured borrowing due to changes in market interest rates. To hedge this risk, the Company enters into interest rate swaps. Beginning in January 2011 the Company started applying hedge accounting to this strategy. The intent of hedge accounting is to have the fair value changes in the interest rate swap offset, within a reasonable range the changes in the fair value of the CMB secured borrowing resulting from changes in the interest rate environment. Any unmatched fair value change is recorded in income as hedge ineffectiveness through net realized and unrealized gain (loss) on derivatives. The total notional value of the interest rate swaps at March 31, 2011 was $1.55 billion. In the first quarter of 2011, an unrealized loss of $16.4 million was recorded on the interest swaps and was offset by an unrealized gain on the hedged risk of the CMB liability of $16.8 million. The net hedge ineffectiveness gain of $0.4 million was recorded in the income statement through net realized and unrealized gains (losses) on derivatives.

Prior to January 2011, the interest rate swaps above were not designated in hedge accounting relationships and the fair value change was recorded in income without the fair value change offset of the hedged risk of the CMB liability. This resulted in income volatility in 2010 due the accounting mismatch. In January 2011, the interest rate swaps were restructured to rebalance the interest rate hedges and to meet hedge accounting requirements. During the period between December 31, 2010 and the restructuring and hedge designation date there was an unrealized loss on fair value changes of $3.7 million that was recorded in income through net realized and unrealized gains (losses) on derivatives. The Company also has one interest rate swap that is not designated in a hedge relationship and therefore is fair valued without an offsetting hedged amount. This swap had a notional amount of $18.1 million at March 31, 2011 and $0.1 million of unrealized losses were recorded in income through net realized and unrealized gains (losses) on derivatives during the first quarter of 2011.

Please see note 13 of the unaudited consolidated financial statements for further information.

Off-Balance Sheet Arrangements

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 $462.8 million at March 31, 2011 ($459.0 million - Q4 2010). Included within the outstanding commitments are unutilized non-residential loan advances of $42.5 million at March 31, 2011 ($45.4 million - Q4 2010).  Commitments for the loans remain open for various dates through August 2011.  As at March 31, 2011, unutilized credit card balances amounted to $83.3 million ($76.5 million - Q4 2010). Outstanding commitments for future advances for the Equityline Visa portfolio were $7.1 million at March 31, 2011 ($5.1 million - Q4 2010).

CAPITAL MANAGEMENT

Home Trust calculates capital ratios and regulatory capital based on capital adequacy rules issued by OSFI, which are based on the "International Convergence on Capital Management and Capital Standard - A Revised Framework" (Basel II).

Under Basel II, Home Trust calculates risk-weighted assets for each of credit and operational risk.  Home Trust's capital structure and risk-weighted assets were as follows:

Table 9: Regulatory Capital

  As at
(000s, except % and multiples)   March 31
2011
  December 31
20102
  March  31
20102
Capital stock $ 23,497 $ 23,497 $ 23,497
Retained earnings   595,591   658,530   540,637
Adjustment for transition to measurement under IFRS   86,080   -   -
Contributed surplus   951   951   951
Net tier 1 capital $ 706,119 $ 682,978 $ 565,085
Subordinated debt   15,000   15,000   15,000
Accumulated (net after tax) unrealized gains on available for sale equity securities   3,825   4,545   4,224
Eligible general allowance for credit losses   29,240   29,153   28,514
Total capital $ 754,184 $ 731,676 $ 612,823
Risk-weighted assets for:            
Credit risk $ 3,341,882 $ 3,423,017 $ 3,097,964
Operational risk   378,613   354,250   322,163
Total risk-weighted assets1 $ 3,720,495 $ 3,777,267 $ 3,420,127
Tier 1 capital ratio   19.0%   18.1%   16.5%
Total capital ratio   20.3%   19.4%   17.9%
Asset to capital multiple   15.2   10.5   11.5

1 Based on the Company's wholly owned subsidiary, Home Trust Company.

2 Regulatory Capital was calculated in accordance with Canadian GAAP in 2010

Home Trust's Tier 1 and Total capital ratios continue to significantly exceed OSFI's well-capitalized targets of 7.0% for Tier 1 and 10.0% for Total capital, as well as Home Trust's internal capital targets.

Home Trust elected to apply OSFI's IFRS transitional relief to the IFRS opening retained adjustment. Home is permitted to amortize the affect of the transition adjustment on regulatory capital over the 8 quarters ending December 31, 2012. The amount added to regulatory capital will reduce to zero over this time.

Upon adoption of IFRS on January 1, 2011, Home Trust's on-balance sheet assets increased by the amount of MBS assets under administration. For purposes of the Asset to Capital Multiple (ACM) calculation, OSFI grandfathered mortgages sold through CMHC-sponsored securitizations entered into on or before March 31, 2010 from inclusion in assets for purposes of the ACM calculation.  Mortgages securitized after March 31, 2010 are now included in the calculation of ACM and therefore Home Trust's ACM increased to 15.1 at January 1, 2011. The ACM increased in the first quarter of 2011 as the Company continued to grow its loan portfolio.  Home Trust's ACM is the Company's most constraining capital measure. In order to support further growth, the Home Trust increased its Total capital though the issuance of $100.0 million in intercompany subordinated debt to the Company. The Company issued $150.0 million in senior debt to the market to support this transaction. This debt issuance is more than sufficient to support further growth through the balance of the year.

Late in 2010, additional clarification was provided on the proposed Basel III requirements.  As anticipated, Basel III will affect capital and liquidity requirements in Canada with a phased-in approach beginning in 2013.  The Company has completed an analysis of the proposed Basel III requirements and has identified the following components as applicable:

  • Liquidity Coverage Ratio (LCR). LCR establishes a common measure of liquidity risk and requires institutions to maintain sufficient liquid assets to cover a minimum 30 days of cash flow requirements in a stress situation.  As at March 31, 2011 Home had sufficient liquid assets to meet the minimum LCR.
  • Revised definition of common equity Tier 1 capital.  Basel III proposes a number of deductions that begin in 2014 with a 20% reduction climbing to a 100% deduction in 2018, in particular unconsolidated investments in financial institutions.  After fully accounting for all deductions, Home Trust's capital ratios would continue to exceed both internal and regulatory minimum and 'well capitalized' levels.
  • Introduction of a 'conservation buffer' and 'pro-cyclical buffer'.  A capital conservation buffer of common equity equal to 2.5% of risk-weighted assets (RWA) will be phased-in between 2016 and 2019 and will ultimately require a minimum tangible common equity ratio of 7.0% and a Total capital ratio of 10.5%.  As at March 31, 2011 Home Trust had sufficient capital resources to adopt the conservation buffer.  A further 'countercyclical buffer' with a range of 0% to 2.5% of RWA in common equity will be required based on national circumstances with the intent of preventing 'overheating' or 'asset bubbles'.  As at March 31, 2011 Home Trust had sufficient capital resources to adopt the 'countercyclical buffer' at the top of the range.

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, among others, credit, liquidity, interest rate and operational risks. The Company has adopted enterprise risk management (ERM) as a discipline for managing all sources of risks. Supporting the Company's ERM structure is a governance framework that includes Board of Director and Senior Management oversight, independent monitoring and measurement by the ERM function, policies, management standards, guidelines and procedures appropriate to each business activity and source of risk. The Board of Directors reviews and approves the policies annually. The Company's key risk management practices remain in place and are continually reviewed and enhanced from those outlined on pages 37 through 48 in the MD&A section of the Company's 2010 Annual Report.

Credit Risk

This is the risk of the loss of principal and/or interest from the failure of debtors and/or counterparties, for any reason, to honour their financial or contractual obligations to the Company. Senior management, the ERM function, the Audit Committee and the Risk and Capital Committee of the Board of Directors, monitor the Company's exposure to credit risk. These parties undertake reviews of credit policies, lending practices, the adequacy of loan loss reserves and credit risk based capital. It is the Company's policy that different levels of senior management approve credit, based upon the level of risk and 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 part of credit risk management of the mortgage portfolio, senior management and the ERM function monitor various portfolio characteristics, including the characteristics in the following table.

Table 10: Mortgage Portfolio

             
(000s, except % )   March 31
2011
  December 31
2010
  March  31
2010
Total mortgage portfolio balance (net of specific allowance) $ 14,463,325 $ 13,638,416 $ 10,147,345
Percentage of residential mortgages   93.8%   93.9%   93.0%
Percentage of non-residential mortgages   6.2%   6.1%   7.0%
Percentage of insured residential mortgages   71.4%   72.8%   64.9%
Percentage of first mortgages   99.3%   99.2%   99.1%
Percentage of mortgages current   98.2%   98.2%   97.4%
Percentage of mortgages over 60 days past due   0.5%   0.4%   0.8%
Percentage of new residential originations insured
(for the three months ended)
  44.0%   62.2%   68.6%

The composition of the mortgage portfolio is well within the internal policy limits approved by the Company's Risk and Capital Committee. The relative proportion of non-residential mortgages has declined from March 31, 2010 and through the balance of 2010 and has remained relatively stable over the quarter.  As a proportion of the total portfolio, the Company anticipates that the non-residential portfolio will be at the current level or decline modestly.

Refer to Note 5 of the unaudited interim consolidated financial statements for a further breakdown of the loan portfolio by geographic region.

Insured mortgages reduce the credit risk to the Company. The insured portion of the mortgage portfolio has declined marginally from December 31, 2010 due to higher proportion of originations in the Company's traditional mortgage products, which are generally not insured.  Mortgages in the traditional program have lower loan to value ratios than the insured Accelerator product. For the three months ended March 31, 2011, the average loan to value on origination of the traditional mortgage product was 69.9%.

The Company reduces credit risk on residential mortgages through collateral in the form of real property. In that regard, first mortgages continue to represent almost the entire portfolio. At March 31, 2011, the average loan to value of the mortgage portfolio, which includes both insured and uninsured mortgages, was 67.6% compared to 65.3% at March 31, 2010.

Senior management and ERM closely monitor the credit performance of the mortgage loans portfolio. The portfolio continues to perform well with arrears returning to historical norms and showing signs of stability. The total mortgage loans portfolio is performing well with 98.2% of the portfolio current and 0.5% over 60 days in arrears.

At March 31, 2011 the gross credit card receivable balance totalled $362.9 million, of which 99.9% was secured either by cash deposits or residential property. Within the secured credit card portfolio, Equityline Visa credit cards represent the principal driver of receivable balances. Equityline Visa credit cards are secured by collateral residential mortgages, and this portfolio segment amounted to $353.0 million or 97.3% of the total credit card receivable balance as at March 31, 2011 compared to 97.5% at December 31, 2010. Cash deposits for secured credit card accounts amounted to $12.4 million at March 31, 2011 and are included in the Company's deposits. Additionally, the Equityline Visa portfolio has a loan to value of 70.3% at March 31, 2011 compared to a loan to value of 72.3% at December 31, 2010. At March 31 2011, $10.0 million or 2.8% of the credit card portfolio was over 60 days in arrears, compared to $8.1 million or 2.4% at December 31, 2010.

Included in the residential mortgage portfolio is a secured loan portfolio of $38.0 million which decreased by $0.8 million from December 31, 2010. These loans are secured by second mortgages on residential properties. At March 31, 2011, 97.7% of the secured loan portfolio was current while $0.5 million or 1.1% was over 60 days in arrears or non-performing. This compares to 97.2% of the secured loan portfolio being current while $0.3 million or 0.8% was over 60 days in arrears or non-performing at December 31, 2010.

Net impaired loans remain stable after reaching a peak in the second quarter of 2009. While the Company began prudently re-entering certain markets in 2010, including markets outside Ontario, its ongoing business strategy ensures that experienced employees of the Company undertake reviews of all non-performing loans greater than 60 days to analyze patterns and drivers, and then reflect emerging drivers in the Company's lending criteria going forward. This analytical approach and attention to emerging trends has resulted in continued low write-offs relative to the gross loans portfolio. Write-offs, net of recoveries, during the quarter totalled $1.5 million or 0.04% of gross loans compared to $0.1 million and 0.003% respectively in the comparable quarter of 2010. For the first quarter of 2010, The Company experienced a higher than expected level of recoveries which lowered the net write-offs. The Company continually monitors arrears and write-offs carefully and deals prudently and effectively with impaired loans.

The Company maintains a collective allowance that, in management's judgement, is sufficient to absorb probable incurred losses in its loans portfolio. At March 31, 2011, the Company held a collective allowance of $29.2 million compared to $29.2 million at December 31, 2010. The Company monitors the adequacy of the collective allowance on a monthly basis. The Company has security in the form of real property or cash deposits against loans totalling 99.9% of the total loans portfolio. The Company's evaluation of the adequacy of the collective allowance takes into account asset quality, borrowers' creditworthiness, property location, past loss experience and current economic conditions. The Company periodically reviews the methods utilized in assessing the collective allowance, giving due consideration to changes in economic conditions, interest rates and local housing market conditions. The total collective allowance was 78.6 basis points of the Company's risk-weighted assets at March 31, 2011 compared to 77.2 basis points at December 31, 2010.

Liquidity Risk

This is the risk that the Company would be unable 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. These include 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 the ERM function, and quarterly reporting to the Risk and Capital Committee of the Board of Directors.

The Company holds liquid assets in the form of cash and bank deposits, treasury bills, bankers' acceptances, government bonds, debentures, mortgage backed securities and Canadian bank bonds to comply with its liquidity policy. At March 31, 2011, liquid assets amounted to $415.2 million, compared to $951.3 million recorded at December 31, 2010.

The Company's policy is to maintain a minimum 20% of 100-day obligations in liquid assets and at March 31, 2011, the Company had 22.5% of 100-day liabilities in liquid assets. The average month-end liquidity for the first quarter of 2011 was $559.1 million or 32.6% of 100-day liabilities.

Another tool used in managing liquidity is a model that considers two stress scenarios. In the "immediate" scenario, the Company experiences a significant 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 March 31, 2011 liquid assets amounted to 190% under the immediate scenario and 150% under the ongoing scenario compared to 174% and 137%, respectively, at December 31, 2010. The Company continues to monitor these scenarios and will take appropriate actions should the need arise.

Structural Interest Rate Risk

Structural interest rate risk is the risk of lost earnings or capital due 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 that is designed to provide reasonable assurance that interest rate fluctuations will not materially impact future earnings, and to the best of its abilities matches liabilities to assets through its actions in the deposit market in priority to accessing off-balance sheet solutions. The Company's Asset Liability Management Committee (ALCO) manages exposure arising from interest rate and liquidity risk, and reports quarterly to the Board of Directors.

The interest rate sensitivity position as at March 31, 2011 is presented under Note 14 in these unaudited interim consolidated financial statements. The table provided there represents the Company's position at a point in time, and the gap represents the difference between assets and liabilities in each maturity category.  Note 14 summarizes 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 made but not materialize. In measuring its interest rate risk exposure, the Company will make assumptions about these factors, taking into account aspects such as past borrower history.

To assist in matching assets and liabilities, the Company utilizes two interest rate risk sensitivity models which measure the relationship between changes in interest rates and the resulting impact on both future net interest income and the economic value of shareholders' equity. The following table provides the potential after tax impact of immediate and sustained 100 basis point and 200 basis point increases and decreases in interest rates on net interest income and on the economic value of shareholders' equity.

Table 11: Impact of Interest Rate Shifts                
  March 31 March 31 March 31 March 31
(000s)       2011       2010       2011       2010
        Increase in interest rates       Decrease in interest rates
100 basis point shift                
       Impact on net interest income, after tax  (for the next 12 months) $ 6,855 $ 3,023 $ (6,855) $ (3,023)
       Impact on net present value of shareholders' equity   (575)   (8,716)   (1,644)   8,173
                 
200 basis point shift                
       Impact on net interest income, after tax  (for the next 12 months) $ 13,710 $ 6,046 $ (13,710) $ (6,046)
       Impact on net present value of shareholders' equity   (3,231)   (18,978)   (8,638)   9,929

As described in the Derivatives and Hedging section of this MD&A, the Company may enter into derivative contracts to economically hedge the interest rate risk on future funding under securitization. The purpose is to manage interest rate exposures during the period between the date a mortgage commitment is made and the date the mortgage loan is securitized. At March 31, 2011, the Company held notional $125.0 million ($23.2 million - Q1 2010) in bond forward contracts for the sale of Government of Canada bond positions to hedge this risk. Additionally, through the Company's participation in CMHC's CMB program, the Company is also required to enter into specific interest rate swap contracts to hedge interest rate risk.  Refer to Derivatives and Hedging section of this MD&A and Note 13 of these unaudited interim consolidated financial statements for additional information.

RESULTS BY BUSINESS SEGMENT

The following section discusses the mortgage lending, consumer lending and other segments for the three month period ended March 31, 2011 (refer to Note 15 of these unaudited interim consolidated financial statements).  The mortgage-lending segment continues to be the primary driver of the Company's overall growth while the consumer lending segment continues to provide a diversified income source.

Mortgage Lending

Table 12: Summary of Mortgage Lending Results

  For the three months ended
    March 31            March 31       % Change
(000s, except %)   2011         2010  
Net interest income $ 61,185 $ 45,759 33.7%
Net income   31,071   24,112 28.9%
Total assets   14,266,130   10,237,161 39.4%

Net income has grown 28.9% over the first quarter of 2010 due to increases in net interest income on higher mortgage loan balances due to robust origination activity in 2010. Growth in net interest income was tempered by a 10 basis point decline in the securitized asset net interest margin.

The mortgage-lending segment recorded increases in expenses of $5.5 million compared to the first quarter of 2010. The increases relate to higher costs associated with a significant growth in mortgage loans under administration and additional costs associated with the implementation of the Company's new core banking system. There were accompanying increases in income tax associated with higher income. Provisions for credit losses for the mortgage-lending segment were $1.1 million for the first quarter compared to $0.7 million for the first quarter of 2010. Please see the Provision for Credit Losses section of this MD&A for further discussion.

The mortgage-lending segment advanced $1.37 billion in the first quarter of 2011 compared to $1.33 billion in the first quarter of 2010 and $1.85 billion in the fourth quarter of 2010. Originations in the Accelerator product have declined due to the strategic shift in the allocation of capital discussed earlier in this MD&A.  The Company continues the careful and strategic expansion in the traditional portfolio and increased origination volumes by 40.1% over the first quarter of 2010 and 10.3% over the fourth quarter of 2010.

First quarter non-residential product advances of $48.7 million have decreased from the $72.9 million advanced in the comparable quarter of 2010. The Company is currently maintaining the portfolio and will prudently grow it, if appropriate and high quality assets are available.

Consumer Lending - Credit Cards and Retail Services

Table 13: Summary of Consumer Lending Results

  For the three months ended
          March 31         March 31       % Change
(000s, except %)         2011         2010  
Net interest income $ 9,802 $ 9,333 5.0%
Net income   7,367   6,206 18.7%
Total assets   536,739   454,017 18.2%

Consumer lending, which includes Visa, retail lending and payment card services, continues to generate positive returns for the Company. Net interest income for the first quarter of 2011 increased compared to the same period in 2010 due to an increase in outstanding receivables.  The growth in outstanding receivables was offset by an increase in the cost of funds for both the Visa and retail lending businesses. The Company anticipates net interest income in this portfolio to grow into 2011 as loan balances in this portfolio grow. The average net interest margin earned on the Visa portfolio was 8.6% during the first quarter in 2011 compared to 9.6% the first quarter of 2010.  The average net interest margin earned in the consumer-lending portfolio was 6.6% during the quarter ended March 31, 2011, a slight decrease of 0.7% from 7.3% during the same period last year.  The decrease in interest margin is primarily due to higher cost of funds. Net income in the first quarter increased by 18.7% over the comparable quarter of 2010 primarily due to an increase in fees and other income in the Visa portfolio and in net interest income discussed above. Additionally, expenses have been relatively flat during the quarter ended March 31, 2011 compared to the same period last year. The Company has effectively managed its expenditures while at the same time increasing the size of both its Visa and retail lending portfolios.

During the first quarter of 2011, 2,107 Equityline Visa accounts with $55.1 million in authorized credit limits were issued, up from 1008 accounts with $37.8 million in authorized credit limits issued in the first quarter of 2010. The Equityline Visa accounts are fully secured by residential real estate. The Company anticipates the momentum in this product line to continue through both the "one stop" bundled mortgage with Equityline Visa, and new strategic business and marketing initiatives.

The balance in the Equityline Visa loans portfolio amounted to $354.7 million at March 31, 2011 ($331.4 million - Q4 2010). Equityline Visa comprises 97.7% (97.5% - Q4 2010) of the total gross credit card receivable balance. The total credit card receivable balance was $362.9 million at March 31, 2011, carrying an average interest rate of 9.7% (10.0%- Q4 2010) on outstanding balances. The Company is continuing its strategy of prudently increasing this business line through new marketing and product initiatives, including packaging with the traditional mortgage products. The Company expects this growth to continue throughout the remainder of 2011.

The Company's consumer lending portfolio also includes the results from its retail lending operations.  The largest component of retail lending, representing 82.0% of the portfolio, is water heater loans.  There were 13,950 new water heater accounts during the first quarter, for a net increase in receivables over the fourth quarter of 2010 of $16.6 million. The Company anticipates continued measured growth in the water heater line of business and is currently exploring this channel for other opportunities.

Other

Table 14: Summary of Other Results

  For the three months ended
          March 31         March 31       % Change
(000s, except %)         2011         2010        
Net interest income $ 5,619 $ 6,166 (8.9)%
Net income   4,740   5,389 (12.0)%
Total assets   1,208,054   1,071,615 12.7%

The Other segment is comprised of the operating results from the Company's treasury portfolio and corporate activities.

The decline in net interest income over the first quarter of 2010 is due a lower comparative average balance in the Company's MBS portfolio in the quarter, which tends to earn higher spreads than other investments, and a decrease in the amortization of premiums on bonds. Gains on the sale of securities also declined $1.6 million quarter-over-quarter. These declines were partially offset by a decline non-interest expenses, primarily due to reduction in capital taxes.  

ACCOUNTING STANDARDS AND POLICIES

Critical accounting estimates that require management to make significant judgements, some of which are inherently uncertain, are outlined on pages 38 through 43 of the unaudited consolidated financial statements included in this quarterly report. These estimates are critical as they involve material amounts and require management to make determinations 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, financial instruments measured at fair value, impairment of available for sale securities, stock based compensation, goodwill, amortization of capital assets and intangibles and deferred income tax amounts. Further information can be found under Notes 4, 5, 6, 12, and 13 of these unaudited interim consolidated financial statements.

Future Changes in Accounting Standards

All accounting standards effective for periods beginning on or after January 1, 2011 have been adopted as part of the transition to IFRS. The following new IFRS pronouncements have been issued but are not effective and may have a future impact on the Company:

IFRS 7 Financial Instruments: Disclosures

Beginning with the 2011 annual financial statements the Company will adopt amendments to IFRS 7 regarding Disclosures - Transfers of Financial Assets, which requires additional disclosures on transfer transactions of financial assets (e.g. securitization transactions). There will be no impact to the operating results or financial position of the Company as this standard affects disclosures only.

IFRS 9 Financial Instruments

As of January 1, 2013 the Company will be required to adopt IFRS 9, Financial Instruments, which is the first phase of the International Accounting Standards Board's (IASB) project to replace IAS 39, Financial Instruments; Recognition and Measurement. IFRS 9 provides new requirements for how an entity should classify and measure financial assets and liabilities that are in the scope of IAS 39.  Management is currently evaluating the potential impact that the adoption of IFRS 9 will have on the Company's consolidated financial statements.

Controls over Financial Reporting

Management is responsible for the design and effectiveness of internal controls over financial reporting in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements that are free of material errors.  During the Company's transition period to IFRS, management identified and subsequently implemented certain changes to accounting processes and procedures in order to comply with IFRS.  The material changes in processes and procedures relate to the following;

  • Accounting for securitized mortgages on the Company's balance sheet.
  • Accounting for the secured borrowing liability.
  • Accounting for securitized mortgages interest income and secured borrowing interest expense.
  • Application of hedge accounting for hedges of interest rate risk.
  • Conversion of historical Canadian GAAP financial information to IFRS for comparative purposes.

As a result of these changes to accounting process and procedures, management revised existing internal controls and designed and implemented new internal controls over financial reporting to provide reasonable assurance that the risk of material misstatements in the Company's financial reporting has been mitigated.

There were no other changes that have or could be reasonably expected to materially affect internal control over financial reporting.

UPDATED SHARE INFORMATION

As at March 31, 2011, the Company had issued 34,720,740 Common Shares. In addition, outstanding employee stock options amounted to 954,250 (814,250 - Q1 2010) of which 369,375 were exercisable as of the quarter-end (381,750- Q1 2010) for proceeds to the Company upon exercise of $12.1 million ($12.5 million - Q1 2010).

Subsequent to the end of the first quarter, the Board of Directors declared a quarterly cash dividend of $0.18 per common share payable on June 1, 2011 to shareholders of record at the close of business on May 13, 2011.

QUARTERLY FINANCIAL HIGHLIGHTS

Table 18: Summary of Quarterly Results
(000s, except per share and %)   IFRS
2011
              IFRS
2010
          CGAAP
2009
    Q1   Q4   Q3   Q2   Q1   Q4   Q3   Q2
Net interest income (TEB1) $ 78,232 $ 74,238 $ 70,104 $ 64,234 $ 63,354 $ 48,178 $ 45,254 $ 42,024
Less TEB adjustment   1,626   1,779   1,993   2,032   2,096   2,842   2,300   1,535
Net interest income per financial statements   76,606   72,459   68,111   62,202   61,258   45,336   42,954   40,489
Non-interest income   7,109   1,891   24,004   20,221   8,052   28,015   33,589   30,437
Non-interest expense   25,216   26,610   24,756   24,357   19,753   19,856   21,674   18,222
Total revenues   184,613   176,044   187,195   170,407   153,603   121,381   125,299   121,778
Net income   43,178   30,108   47,621   41,316   35,707   40,481   38,243   34,351
Return on common shareholders' equity   26.7%   19.5%   32.7%   30.4%   27.6%   28.4%   28.7%   27.9%
Return on average total assets   1.1%   0.8%   1.4%   1.3%   1.2%   2.4%   2.5%   2.3%
Earnings per common share                                
       Basic $ 1.24 $ 0.87 $ 1.37 $ 1.19 $ 1.03 $ 1.17 $ 1.11 $ 1.00
       Diluted $ 1.24 $ 0.87 $ 1.37 $ 1.19 $ 1.03 $ 1.16 $ 1.10 $ 0.99
Book value per common share $ 19.14 $ 18.14 $ 17.44 $ 16.06 $ 15.26 $ 17.00 $ 15.99 $ 14.99
Efficiency ratio (TEB) 1   29.6%   35.0%   24.6%   28.8%   27.7%   26.1%   27.5%   25.1%
Efficiency ratio   30.1%   35.8%   25.1%   29.6%   28.5%   27.1%   28.3%   25.7%
Tier 1 capital ratio2   19.0%   18.1%   16.9%   16.7%   16.5%   16.4%   16.6%   15.2%
Total capital ratio2   20.3%   19.4%   18.1%   17.9%   17.9%   18.0%   18.2%   16.7%
Net impaired loans
as a % of gross loans
  0.29%   0.24%   0.26%   0.34%   0.47%   0.85%   1.22%   1.26%
Annualized provision
as a % of gross loans
  0.03%   0.17%   0.07%   0.02%   0.04%   0.17%   0.22%   0.26%

1 TEB - Taxable Equivalent Basis, see definition on page 6

2 These figures relate to the Company's operating subsidiary, Home Trust Company

The Company's key financial measures for each of the last eight quarters are summarized in the table above, figures prior to Q1 2010 are presented on a Canadian GAAP basis. Readers are cautioned to consider the differences between IFRS and Canadian GAAP when making comparisons between IFRS and Canadian GAAP operating results and financial position. These highlights illustrate the Company's profitability, return on equity, as well as efficiency measures and capital ratios. The quarterly results are modestly affected by seasonal factors, with first quarter mortgage advances typically impacted by winter weather conditions, and the fourth quarter normally experiencing increased credit card activity over the holiday period.

The Company continues to achieve positive financial results driven by revenue growth in mortgage lending, and continued low efficiency ratios.  Tier 1 and total capital ratios through 2009, 2010 and into 2011 reflect the Company's prudent capital management strategies and the proactive approach to maintain a strong capital base.

Net impaired loans as a percentage of gross loans were relatively high early in 2009 and have generally trended down over the two-year period.  The Company expects the level of net impaired loans to remain relatively low for the foreseeable future.

OUTLOOK

The Company will focus on its core mortgage lending business, including its traditional mortgage lending programs which have successfully operated for over 20 years, as well as developing new products in this suite of offerings. These products serve selected segments of the Canadian financial services marketplace which are generally not the focus of the major financial institutions. Additionally, the Company will also offer insured mortgage products which are competitive and well-serviced and will continue to participate in the CMB and National Housing Authority MBS securitization programs when market conditions are favourable.  Growth of the overall loans portfolio will continue through cautious and strategic geographic penetration combined with ongoing measured growth of the consumer portfolio, while maintaining the Company's prudent credit policies.

The Company is committed to maintaining its financial strength through a strong capital base and conservative liquidity. The Company believes that this positions it to continue generating above-average returns and capitalize on market opportunities where they arise, at controlled, acceptable levels of risk. With the addition of $150.0 million in long term debt in early May 2011, the Company is well positioned to continue to grow its assets, revenue and net income within its current objectives for 2011 and 2012.

The Company expects that the rate of growth in the total mortgage loans portfolio will moderate in 2011 compared to the record increases in 2009 and 2010 that exceeded all annual objectives. Net income and net interest income will remain strong. The Company will continue to securitize insured mortgages but at slower pace than 2010. Securitization volumes will reflect declines in Accelerator originations as the Company focuses its origination processes on its traditional mortgage products which are more profitable. Spreads earned on Accelerator and traditional mortgages are anticipated to remain relatively stable into 2011.

Real estate markets showed robust growth in early 2010 and began to slow later in 2010. The Company is currently observing healthy and stable real estate conditions across the country, with reasonable increases in new and resale home sale volumes and moderate price appreciation in most markets. The Company believes the housing market will remain healthy throughout 2011. The Company does not expect that recently implemented changes to the CMHC insurance rules which limit the amortization period and reduce the loan to value on refinances will negatively affect its current origination objectives. The elimination of eligibility of home equity lines of credit (HELOCs) for CMHC insurance does not impact the Company as its Equityline Visa accounts have lower loan to value ratios and are not insured.

Despite recent modest slowing in the real estate market, the Company has maintained growth in its profitability by adapting its strategies as the market changes. The stabilization of housing markets has allowed for renewed focus on the Company's traditional mortgage portfolio, Equityline Visa and geographic growth strategies. The Company intends to continue focusing on superior customer and broker service, diverse and new product offerings and expansion of broker networks and increased market penetration. The Company expects origination volume increases in the traditional mortgage portfolio, increased originations outside Ontario and continued growth in consumer lending, which includes Equityline Visa, throughout 2011.

Arrears in the Company's mortgage portfolio have generally improved since the second quarter of 2009 when the total arrears over 30 days reached $71.3 million and $56.3 million were non-performing at June 30, 2009. At March 31, 2011 arrears over 30 days were $70.7 million and $47.7 million were non-performing. Non-performing loans as a percentage of gross loans were 0.29% at March 31, 2011 compared to 0.24% at the end of 2010. Management believes these levels are within an acceptably low range and the Company expects arrears levels and non-performing loans to remain stable on a relative basis through 2011.

Looking ahead, the Board of Directors and management are confident that Home Capital is well positioned to continue generating improved earnings and growth throughout 2011. This Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements on page 5 of this quarterly report.

Consolidated Statements of Income

  For the three months ended
  March 31 March 31
    2011   2010
thousands of Canadian dollars, except per share amounts (Unaudited)       (restated to IFRS)
Net Interest Income Non-securitized Assets        
Interest from loans $ 91,053 $ 85,477
Dividends from securities   4,258   4,832
Other interest   1,693   2,258
    97,004   92,567
Interest on deposits   44,966   45,352
Net interest income non-securitized assets   52,038   47,215
         
Net Interest Income Securitized Loans and Assets (note 6)        
Interest from securitized loans and assets   80,500   52,984
Interest on securitization liabilities   55,932   38,941
Net interest income securitized loans and assets   24,568   14,043
         
Total Net Interest Income   76,606   61,258
Provision for credit losses (note 5(E))   974   911
    75,632   60,347
Non-interest Income        
Fees and other income   8,360   7,816
Net realized and unrealized gain on securities   2,029   3,890
Net realized and unrealized loss on derivatives (note 13)   (3,280)   (3,654)
    7,109   8,052
    82,741   68,399
Non-interest Expenses        
Salaries and benefits   12,577   10,775
Premises   1,872   1,641
Other operating expenses   10,767   7,337
    25,216   19,753
         
Income Before Income Taxes    57,525   48,646
Income taxes (note 12(A))        
  Current   14,075   7,114
  Deferred   272   5,825
    14,347   12,939
NET INCOME $ 43,178 $ 35,707
         
NET INCOME PER COMMON SHARE        
Basic $ 1.24 $ 1.03
Diluted $ 1.24 $ 1.03
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING        
Basic   34,691   34,723
Diluted   34,872   34,814
         
Total number of outstanding common shares  (note 9(A))   34,720   34,732
Book value per common share $ 19.14 $ 15.26

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Consolidated Statements of Comprehensive Income

  For the three months ended
  March 31 March 31
    2011   2010
thousands of Canadian dollars (Unaudited)       (restated to IFRS)
         
NET INCOME $  43,178 $ 35,707
         
OTHER COMPREHENSIVE LOSS        
         
Available for Sale Securities        
Net unrealized losses on securities available for sale   (501)   (1,519)
Net gains reclassified to net income   (1,828)   (3,614)
    (2,329)   (5,133)
Income tax recovery   (249)   (353)
    (2,080)   (4,780)
         
Cash Flow Hedges        
Net unrealized losses on cash flow hedges (note 13)   (674)   -
Net (gains) losses reclassified to net income   -   -
    (674)   -
Income tax recovery   (175)   -
    (499)   -
         
Total other comprehensive loss   (2,579)   (4,780)
         
COMPREHENSIVE INCOME $ 40,599 $ 30,927

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Consolidated Balance Sheets            
  March 31 December 31 January 1
    2011   2010   2010
thousands of Canadian dollars (Unaudited)     (restated to IFRS) (restated to IFRS)
ASSETS             
Cash Resources (note 4(A)) $ 411,414 $ 846,824 $ 930,134
Securities (note 4(B))            
Held for trading   -   -   99,938
Available for sale   475,485   424,168   494,602
Pledged securities (note 6(B))   2,825   2,954   -
    478,310   427,122   594,540
Loans (note 5)            
Residential mortgages   4,921,302   4,683,527   4,473,255
Securitized residential mortgages (notes 5 and 6)   8,646,203   8,116,636   4,126,707
Non-residential mortgages   895,820   838,253   708,425
Personal and credit card loans   493,427   453,339   342,918
    14,956,752   14,091,755   9,651,305
Collective allowance for credit losses   (29,240)   (29,153)   (27,793)
    14,927,512   14,062,602   9,623,512
Other            
Income taxes receivable   7,434   9,451   6,466
Derivative assets (note 13)   14,919   24,157   13,186
Other assets (note 7)   99,145   80,099   75,322
Capital assets   4,943   4,894   4,863
Other intangible assets   51,494   47,917   26,811
Goodwill   15,752   15,752   15,752
    193,687   182,270   142,400
  $ 16,010,923 $ 15,518,818 $ 11,290,586
LIABILITIES AND SHAREHOLDERS' EQUITY            
Liabilities            
Deposits            
  Payable on demand $ 29,006 $ 50,359 $ 38,223
  Payable on a fixed date   6,375,412   6,472,491   6,371,599
    6,404,418   6,522,850   6,409,822
Securitization Liabilities (note 6(C))            
  Mortgage-backed security liabilities   2,923,984   2,826,105   1,191,552
  Canada Mortgage Bond liabilities   5,717,054   5,278,473   2,964,904
    8,641,038   8,104,578   4,156,456
Other            
Derivative liabilities (note 13)   18,349   9,009   11,099
Other liabilities (note 8)   242,271   213,683   192,757
Deferred tax liabilities (note 12(C))   40,385   40,113   16,829
    301,005   262,805   220,685
    15,346,461   14,890,233   10,786,963
Shareholders' Equity            
Capital stock (note 9)   54,327   50,427   45,396
Contributed surplus   4,165   4,571   3,606
Retained earnings   602,643   567,681   444,416
Accumulated other comprehensive income (note 11)   3,327   5,906   10,205
    664,462   628,585   503,623
  $ 16,010,923 $ 15,518,818 $ 11,290,586

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Consolidated Statements of Changes in Shareholders' Equity
thousands of Canadian dollars, except per share amounts (Unaudited)   Capital Stock   Contributed Surplus   Retained
Earnings
  Net Unrealized Gains (Losses) on Securities Available for Sale, after Tax   Net Unrealized
Losses
on Cash Flow Hedges, after Tax
  Total Accumulated Other Comprehensive Income   Total
Shareholders' Equity
Balance at December 31, 2010 (restated to IFRS) $ 50,427 $ 4,571 $ 567,681 $ 5,906 $ - $ 5,906 $ 628,585
Comprehensive income           43,178   (2,080)   (499)   (2,579)   40,599
Stock options settled (note 9(A))   3,955   (858)   -   -   -   -   3,097
Amortization of fair value of employee stock options
(note 10(A))
  -   452   -   -   -   -   452
Repurchase of shares
(note 9(A))
  (55)   -   (1,948)   -   -   -   (2,003)
Dividends paid or declared ($0.18 per share)   -   -   (6,268)   -   -   -   (6,268)
Balance at March 31, 2011 $ 54,327 $ 4,165 $ 602,643 $ 3,826 $ (499) $ 3,327 $ 664,462
                             
Balance at January 1, 2010 $ 45,396 $ 3,606 $ 444,416 $ 10,205 $ - $ 10,205 $ 503,623
Comprehensive income           35,707   (4,780)   -   (4,780)   30,927
Stock options settled (note 9(A))   3,029   (519)   -   -   -   -   2,510
Amortization of fair value of employee stock options (note 10(A))   -   674   -   -   -   -   674
Repurchase of shares (note 9(A))   (77)   -   (2,259)   -   -   -   (2,336)
Dividends paid or declared ($0.16 per share)   -   -   (5,560)   -   -   -   (5,560)
Balance at March 31, 2010 (restated to IFRS) $ 48,348 $ 3,761 $ 472,304 $ 5,425 $   $ 5,425 $ 529,838

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Consolidated Statements of Cash Flows

  For the three months ended
  March 31 March 31
    2011   2010
thousands of Canadian dollars (Unaudited)       (restated to IFRS)
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income for the period $ 43,178 $ 35,707
Adjustments to determine cash flows relating to operating activities:        
       Deferred income taxes   272   5,825
       Amortization of capital assets   686   462
       Amortization of intangible assets   15   64
       Amortization of premium/discount on securities   718   221
       Amortization of securitization transaction costs   1,558   1,886
       Provision for credit losses (note 5(E))   974   911
       Change in accrued interest payable   30,189   19,507
       Change in accrued interest receivable   (2,345)   (611)
       Net gain realized and unrealized on investment securities   (2,029)   (3,890)
       Loss on derivatives   1,819   1,225
       Net increase in mortgages   (826,250)   (838,899)
       Net increase in personal and credit card loans   (39,634)   (71,577)
       Net decrease in deposits   (118,432)   (374,230)
       Activity in securitization liabilities        
        Proceeds from securitization of mortgage-backed security liabilities   729,843   938,705
        Settlement and repayment of securitization liabilities   (178,183)   (146,569)
       Amortization of fair value of employee stock options (note 10)   452   674
       Other   (16,721)   (6,418)
Cash flows used in operating activities   (373,890)   (437,007)
CASH FLOWS FROM FINANCING ACTIVITIES        
Repurchase of shares   (2,003)   (2,336)
Exercise of employee stock options and stock appreciation rights   3,097   2,510
Dividends paid   (6,254)   (5,557)
Cash flows used in financing activities   (5,160)   (5,383)
CASH FLOWS FROM INVESTING ACTIVITIES        
Activity in available for sale and held for trading securities        
       Purchases   (123,139)   (24,325)
       Proceeds from sales   67,671   16,224
       Proceeds from maturities   3,435   852
Purchases of capital assets   (735)   (819)
Purchases of intangible assets   (3,592)   (7,796)
Cash flows used in investing activities   (56,360)   (15,864)
Net decrease in cash and cash equivalents during the period   (435,410)   (458,254)
Cash and cash equivalents at beginning of the period   846,824   930,134
Cash and Cash Equivalents at End of the Period (note 4(A)) $ 411,414 $ 471,880
Supplementary Disclosure of Cash Flow Information        
Dividends received $ 4,189 $ 3,816
Interest received   169,208   137,850
Interest paid   70,709   64,787

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Notes to the Unaudited Interim Consolidated Financial Statements

(unless otherwise stated, all amounts are in Canadian dollars)

1. CORPORATE INFORMATION

Home Capital Group Inc. (the "Company") is a public limited liability holding company traded on the Toronto Stock Exchange.  The Company is incorporated and domiciled in Canada with its registered and principal business offices located at 145 King Street West, Suite 2300, Toronto, Ontario.  The Company operates primarily through its federally regulated subsidiary, Home Trust Company (Home Trust), which offers deposits, residential and non-residential mortgage lending, securitization of insured residential first mortgage products, consumer lending, Visa products and payment card services.  Licensed to conduct business across Canada, Home Trust has branch offices in Ontario, Alberta, British Columbia, Nova Scotia and Quebec.  The Company is the ultimate parent of the group.

These unaudited interim consolidated financial statements for the period ended March 31, 2011 were authorized for issuance by the Board of Directors of the Company on May 4, 2011.  The Board of Directors have the power to amend the financial statements after their issuance only in the case of discovery of an error.

Subsequent to the end of the first quarter and before the date these financial statements were authorized for issuance, the Board of Directors declared a quarterly cash dividend of $6.2 million or $0.18 per common share payable June 1, 2011 to shareholders of record at the close of business May 13, 2011.

2. ACCOUNTING POLICIES USED TO PREPARE THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

These unaudited interim consolidated financial statements of the Company have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34) as issued by the International Accounting Standards Board (IASB) and using the accounting policies and methods of application that the Company expects to adopt in its consolidated financial statements as at and for the year ending December 31, 2011.  Those accounting policies and methods of application are based on the International Financial Reporting Standards (IFRS) that the Company expects to be applicable as at December 31, 2011.  The accounting policies set out below were consistently applied to all periods presented unless otherwise noted.

As these unaudited interim consolidated financial statements are the Company's first financial statements prepared using IFRS, certain disclosures which are required to be included in annual financial statements prepared in accordance with IFRS that were not included in the Company's most recent annual financial statements prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) have been included in Note 17(D) of these financial statements for the comparative annual period.

These unaudited interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as at and for the year ended December 31, 2010 as set out in the 2010 Annual Report, on pages 59 through 88 and in consideration of the IFRS transition disclosures included in Note 17 to these financial statements and the additional annual disclosures included therein.  The effect of transitioning from Canadian GAAP is explained in Note 17(C).

The significant accounting policies used in the preparation of these unaudited interim consolidated financial statements are summarized below.

Use of judgement and estimates

Management has exercised judgement in the process of applying the Company's accounting policies.  In particular, the Company's accounting policy regarding loans and liabilities under current securitization programs, where such loans are not derecognized and securitization liabilities are recognized as described below, is based on management's judgement that substantially all of the risks and rewards of ownership of the securitized loans are retained.

The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated balance sheet date and the reported amounts of revenue and expenses during the reporting period.  Key areas where management has made estimates include allowance for credit losses, fair values and impairment of financial instruments, goodwill and intangible assets, income taxes, fair value of stock options and useful lives of capital assets and intangible assets. Actual results could differ from those estimates.

Principles of consolidation

The consolidated financial statements include the assets, liabilities and results of operations of the Company and all of its subsidiaries, after the elimination of intercompany transactions and balances.

Subsidiaries are entities the Company controls.  The Company has control when it has the power to govern the financial and operating policies of the entity.  The subsidiaries included in the consolidated financial statements are Home Trust and Payment Services Interactive Gateway Corp. (PSiGate) both of which are wholly owned.

The Company consolidates special purpose entities (SPEs) if the substance of the relationship with the Company and the SPE's risks and rewards indicates that Company has control over the SPE.  The Company is the sole beneficiary of a SPE and, accordingly, the SPE is consolidated and its assets are included in residential mortgages on the consolidated balance sheets.

Cash resources

For the purposes of the consolidated statement of cash flows, cash and cash equivalents comprise balances with less than 90 days to maturity from the date of acquisition, including cash and deposits with regulated financial institutions, treasury bills and other eligible deposits.  Cash and deposits are carried at amortized cost.  Interest income is recognized in income using the effective interest rate method and, to the extent not received at year-end, recorded as a receivable in other assets on the consolidated balance sheet.

Securities

Securities are classified as either held for trading or available for sale, based on management's intentions.  On the settlement date, all securities are recognized at their fair value, which is normally the transaction price.

Held for trading securities are financial assets purchased for resale, generally within a short period of time and primarily held for liquidity purposes.  Interest earned is included in other interest income.  Held for trading securities are measured at fair value, using published bid prices, as at the consolidated balance sheet date.  All realized and unrealized gains and losses are reported in income under non-interest income. Transaction costs are expensed as incurred. The Company has not elected under the fair value option to designate any financial asset or liability as held for trading.

Available for sale securities are financial assets purchased for longer-term investment that may be sold in response to or in anticipation of changes in market conditions.  Dividends and interest earned are included in dividends from securities or other interest income. Available for sale securities are measured at their fair value, using published bid prices, as at the consolidated balance sheet date. Unrealized gains and losses, net of related taxes, are included in accumulated other comprehensive income until the security is sold or an impairment loss is recognized, at which time the cumulative gain or loss is transferred to net income. Transaction costs are capitalized.

At the end of each reporting period, the Company conducts a review to assess whether there is any objective evidence that an available for sale security is impaired. Objective evidence of impairment results from one or more events that occur after the initial recognition of the security and which event (or events) has an impact, that can be reliably estimated, on the estimated future cash flows of the security.  Such objective evidence includes observable data that comes to the attention of the Company such as significant financial difficulty of the issuer of the security.  In the case of equity securities, objective evidence of impairment includes a significant or prolonged decline in the fair value of the security below its cost.  The determination of what is significant or prolonged is based on management's judgement.

When there is objective evidence of an impairment of an available for sale security, any cumulative loss that has been recognized in other comprehensive income is reclassified from accumulated other comprehensive income to net income.  The amount of the cumulative loss reclassified is the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value.  In the case of debt securities, subsequent increases in fair value that can be objectively related to an event occurring after the impairment loss was recognized result in a reversal of the impairment loss through net income.  Impairment losses on equity securities are not subsequently reversed through net income.

Loans

Loans are recorded at amortized cost using the effective interest rate method. Interest income is allocated over the expected term of the loan by applying the effective interest rate to the carrying amount of the loan. The effective interest rate is the rate that exactly discounts estimated future cash receipts over the expected life of the loan.  Origination revenues and costs are applied to the carrying amount of the loan.

Loans are carried net of the individual allowance for credit losses and any unearned income.

Interest income is accrued as earned with the passage of time and continues to accrue when a loan is considered impaired (with an appropriate allowance for credit loss as discussed below).

A loan is recognized as being impaired when the Company is no longer reasonably assured of the timely collection of the full amount of principal and interest.  As a matter of practice, a loan is deemed to be impaired at the earlier of the date it has been individually provided for or when it has been in arrears for 90 days.  Residential mortgages guaranteed by the Government of Canada on which payments are contractually past due for 365 days are considered impaired.  However, as such mortgages are insured, credit losses are generally not anticipated.  Secured and unsecured credit card balances that have a payment which is 120 days in arrears are individually provided for and those that have a payment that is 180 days in arrears are written off. Equityline Visa credit card balances are measured on a basis consistent with mortgage loans.

When loans are classified as impaired, the book value of such loans is adjusted to their estimated realizable value based on the fair value of any security underlying the loan, net of any costs of realization, by totally or partially writing off the loan and/or establishing an allowance for loan losses.

An impaired loan is not returned to an unimpaired status unless all principal and interest payments are up to date and management is reasonably assured as to the recoverability of the loan.

Allowance for credit losses

An allowance for credit losses is maintained at an amount which, in management's opinion, is considered adequate to absorb all credit-related losses which have occurred in the portfolio whether or not detected at the period end, including accrued interest on impaired loans.  Allowances are mainly related to loans but may also apply to other assets.  The allowance consists of accumulated individual and collective allowances, each of which is reviewed at least quarterly.  The collective allowance is deducted from the loans on the consolidated balance sheet.

Individual allowances

Individual allowances are determined on an item-by-item basis and reflect the associated estimate of credit loss.  In the case of loans and Equityline Visa credit cards, the individual allowances are the amounts required to reduce the carrying value of an impaired asset, including accrued interest, to its estimated realizable amount.  The fair value of the underlying security is used to estimate the realizable amount of the receivable. The allowance is the difference between the receivable's carrying value, including accrued interest, and its estimated realizable amount.  For secured and unsecured credit card receivables, individual provisions are provided for arrears over 120 days.

Collective allowances

Collective allowances are established to absorb credit losses on the aggregate exposures in each of the Company's business lines for which losses have been incurred but are not yet individually identified.  The collective allowance is based upon statistical analysis of past performance, level of allowance already in place and management's judgement. The collective allowance, based on the historical loss experience, adjusted to reflect changes in the portfolios and credit policies, is applied to each pool of loans with common risk characteristics. This estimate includes consideration of economic and business conditions.

The amount of the provision for credit losses that is charged to the consolidated statement of income is the amount that is required to establish a balance in the allowance for credit losses account that the Company's management considers adequate to absorb all credit-related losses in its portfolio of balance sheet items, after charging amounts written off during the year, net of any recoveries, to the allowance for credit losses account.

Securitized loans and securitization liabilities

The Company periodically transfers pools of mortgages to SPEs or trusts which, in turn, issue securities to investors.  Mortgage loan securitization is part of the Company's liquidity and capital management strategies.  The Company only transfers assets to Canada Mortgage and Housing Corporation (CMHC) sponsored entities.

Transfers of pools of mortgages under the current programs do not result in derecognition of the mortgages from the Company's balance sheet. As such, these transactions result in the recognition of securitization liabilities when cash is received from the securitization entities.  Such mortgages are reclassified to securitized residential mortgages on the balance sheet and continue to be accounted for as loans, as described above.

The securitization liabilities are recorded at amortized cost using the effective interest rate method. Interest expense is allocated over the expected term of the borrowing by applying the effective interest rate to the carrying amount of the liability. The effective interest rate is the rate that exactly discounts estimated future cash outflows over the expected life of the liability.  Transaction costs and premium or discounts are applied to the carrying amount of the liability.

Derivatives held for risk management purposes

The Company utilizes derivatives for risk management purposes to manage interest rate risk. Derivatives are carried at fair value and are reported as assets if they have a positive fair value and as liabilities if they have a negative fair value.  The Company applies hedge accounting to derivatives held for risk management purposes that meet the criteria for hedge accounting in IAS 39 Financial Instruments: Recognitions and Measurement (IAS 39).  The Company utilizes two types of hedge relationships for accounting purposes, fair value hedges and cash flow hedges. If derivative instruments do not meet the criteria for hedge accounting, the changes in fair value of such derivatives is recognized in net income.

In order to qualify for hedge accounting, a hedge relationship must be designated and formally documented in accordance with IAS 39. The Company's documentation, in accordance with the requirements, includes the specific risk management objective and strategy being applied, the specific financial asset or liability or cash flow being hedged and how hedge effectiveness is assessed. To qualify for hedge accounting,  there must be a correlation of between 80-125% in the changes in fair values or cash flows between the hedged and hedging items.

Hedge effectiveness is assessed at the inception of the hedge and on an ongoing basis, which is at least quarterly. Hedge ineffectiveness occurs when the changes in the fair value of the hedging item (derivative) differ significantly from the fair value changes in the hedged risk in the hedged item, or the cumulative change in the fair value of the hedging item exceeds the cumulative change in the fair value of the future expected cash flows of the hedged item. Hedge ineffectiveness is recognized immediately in income.

Fair value hedges

Fair value hedges are also designated as part of the Company's interest rate risk management strategies. These strategies generally use interest rate swap derivatives to hedge changes in the fair value of fixed rate liabilities (securitization liabilities attributable to interest rate risk). Changes in fair value of the hedged fixed rate liabilities attributable to the interest rate risk being hedged are recorded as part of the carrying value of the hedged item and are recognized in net interest income. Changes in fair value of the hedging item (interest rate swap) are also recognized in net interest income. As such, any hedge ineffectiveness resulting from differences in the fair values changes is also recognized in non interest income.

If the hedging instrument expires, is settled or sold, or if the hedge no longer meets the criteria for hedge accounting under IAS 39, the hedge relationship is terminated and the basis adjustment on the fixed rate liability is then amortized over the remaining term of the fixed rate liability.  If the hedged item is settled, the unamortized basis adjustment is recognized in income immediately.

Cash Flow Hedges

Cash flow hedges are designated as part of the Company's interest rate risk management strategies. These strategies generally use bond forwards to hedge changes in future cash flows attributable to interest rate fluctuations arising on highly probable forecasted issuances of fixed rate secured borrowings.

The effective portion of the change in fair value of the derivative instrument is recognized in Other Comprehensive Income (OCI) until the forecasted cash flows being hedged are recognized in income in future accounting periods. When the forecasted cash flows are recognized in income, an appropriate amount of the fair values changes of the derivative instrument in Accumulated Other Comprehensive Income (AOCI) is reclassified into income. Any hedge ineffectiveness is immediately recognized in non interest income. If the forecasted issuance of fixed rate debt is no longer expected to occur the related cumulative gain (loss) in AOCI is immediately recognized in income.

Capital assets

Capital assets, which comprise of office furniture and equipment, computer equipment and leasehold improvements, are recorded at cost and amortized over their estimated useful lives on a declining balance basis at the following annual rates:

Office furniture and equipment       20%
Computer equipment        30% - 45%

Leasehold improvements are amortized on a straight-line basis over the remaining term of the leases.

The Company assesses, at each reporting period date, whether there is an indication that a capital asset may be impaired.  If any indication of impairment exists, the Company performs an impairment test to determine whether an impairment loss is required to be recognized.  The impairment tests are performed in accordance with the steps discussed in the accounting policy note below entitled "Impairment of non-financial assets other than goodwill."

Goodwill

Goodwill is initially measured as the excess of the price paid for the acquisition of a consolidated entity over the fair value of the net identifiable tangible and intangible assets acquired.  Goodwill is allocated to the cash generating units (CGUs) or groups of CGUs which are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Each unit to which the goodwill has been allocated represents the lowest level within the Company at which the goodwill is monitored for internal management purposes and is not larger than an operating segment.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.  Goodwill is evaluated for impairment annually or more often if events or circumstances indicate there may be impairment.  Impairment is determined for goodwill by assessing whether the carrying amount of a CGU, including the allocated goodwill, exceeds its recoverable amount.  The recoverable amount is determined as the greater of the estimated fair value less costs to sell or the value in use.  Impairment losses recognized in respect of a CGU are first allocated to the carrying amount of goodwill and any excess is allocated to the carrying amount of other assets in the CGU, pro rata on the basis of the carrying amount of each asset in the unit.  Any goodwill impairment is charged to income in the period in which the impairment is identified.  Impairment losses on goodwill are not subsequently reversed.

Intangible assets

An intangible asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to the asset will flow to the Company.  Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.

The Company's intangible assets are comprised of software development costs.  The Company's software development costs are considered to have finite useful lives and are amortized on a straight-line basis over their useful lives, generally not exceeding 10 years.  The amortization period and the amortization method are reviewed at least at each financial year-end.  Changes in the expected useful life are accounted for by changing the amortization period, as appropriate, and treated as changes in accounting estimates.  Amortization expense is included in other operating expenses in the consolidated statement of income.

The Company capitalizes eligible development costs related to the development of its new core banking system. Amortization of these costs over their appropriate useful lives will commence when the software is available for use.  Eligible costs include external direct costs for materials and services, as well as payroll and payroll-related costs for employees directly associated with the project.  Overhead costs, costs incurred during the research phase, costs to train staff to operate the asset and costs incurred after the software is available for use are expensed as incurred.

The Company assesses, at each reporting period date, whether there is an indication that an intangible asset may be impaired.  If any indication of impairment exists, the Company performs an impairment test to determine whether an impairment loss is required to be recognized.  In relation to development costs for software that is not yet available for use, which includes the new core banking system, the Company performs an impairment test on an annual basis and also when indications of impairment exist.  Such annual impairment tests will continue until the software is available for use.  The impairment tests are performed in accordance with the steps discussed in the accounting policy note below entitled "Impairment of non-financial assets other than goodwill."

Impairment of non-financial assets other than goodwill

The Company assesses at each reporting date whether there is an indication that an asset may be impaired.  If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset's recoverable amount.  If it is not possible to determine the recoverable amount of the individual asset, the Company determines the recoverable amount of the cash-generating unit (CGU) to which the asset belongs.  The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell and its value in use, where value in use is the present value of the future cash flows expected to be derived from the asset or CGU.  Where the carrying amount of the asset or CGU exceeds its recoverable amount, the asset is considered impaired and written down to its recoverable amount.  The Company evaluates impairment losses for potential reversals when events or changes in circumstances warrant such consideration.

Deposits

Deposits are financial liabilities that are measured at cost using the effective interest rate method. Deposit origination costs are included in deposits on the consolidated balance sheet as incurred and amortized to interest expense over the term of the deposit.

Income taxes

The Company follows the asset and liability method of accounting for income taxes, whereby deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates applicable to taxable income in the period in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are only recognized for deductible temporary differences, carry-forward of unused tax credits and losses to the extent that it is probable that taxable profit will be available and the carry-forward of unused tax credits and losses can be utilized.

Stock-based compensation plans

The Company has three stock-based compensation plans, which are described in Notes 9 and 10 of the Company's audited consolidated financial statements as at and for the year ended December 31, 2010 and as set out in the 2010 Annual Report.

The Company's Employee Stock Option Plan provides for the granting of stock options to certain employees and Directors of the Company.  In some cases, stock appreciation rights are also granted in tandem with the stock option, providing the Company with, at its sole discretion, the alternative of settling the award in cash at an amount equal to the excess of the market price of the shares to which the option relates over the exercise price of the option.  The Company accounts for stock options, including those with tandem stock appreciation rights, as equity-settled transactions where the fair value of options granted is charged to salary expense over the option vesting period with the offsetting amount recognized in contributed surplus.  For awards with graded vesting, the fair value of each tranche is recognized separately over its respective vesting period.  For each reporting period, the Company reassesses its estimates of the number of awards that are expected to vest and recognizes the impact of any revision in the consolidated statement of income with a corresponding adjustment to equity.  The fair value of the options granted is determined using the Black-Scholes option pricing model using management's best estimates.

The Company offers a deferred share unit plan (DSU) which is only open to non-employee Directors of the Company who annually elect to accept remuneration in the form of cash, cash and DSUs, or DSUs. The Company accounts for the DSUs as cash-settled transactions.  Under the plan, the obligations for the DSUs are accrued quarterly based on the Directors' remuneration for the quarter. The obligations are periodically adjusted for fluctuations in the market price of the Company's common shares and allow for dividend equivalents. Changes in obligations under the plan are recorded as salaries and benefits in the consolidated statement of income with a corresponding increase in other liabilities on the consolidated balance sheet.

Under the Employee Share Purchase Plan, the Company's contribution is expensed when paid.

Translation of foreign currencies

Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the consolidated balance sheet date.  Revenues and expenses denominated in foreign currencies are translated at the average exchange rates prevailing during the period.  Realized and unrealized gains and losses on foreign currency transactions are included in fees and other income in the consolidated statement of income.

3. FUTURE CHANGES IN ACCOUNTING POLICIES

The following accounting pronouncements issued by the IASB were not effective as at March 31, 2011 and therefore have not been applied in preparing these consolidated financial statements.

IFRS 7 Financial Instruments: Disclosures

In October 2010, the IASB issued amendments to IFRS 7 regarding Disclosures - Transfers of Financial Assets, which are effective for annual periods beginning on or after July 1, 2011 with earlier application permitted.  The amendments comprise additional disclosures on transfer transactions of financial assets. These amendments will not have an impact of the results of operations or financial position of the Company as they are only disclosure requirements.

IFRS 9 Financial Instruments

In November 2009, the IASB issued, and subsequently revised in October 2010, IFRS 9 Financial Instruments (IFRS 9) as a first phase in its ongoing project to replace IAS 39.  IFRS 9, which is to be applied retrospectively, is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted.  IFRS 9 provides new requirements for how an entity should classify and measure financial assets and liabilities that are in the scope of IAS 39.  The standard requires all financial assets to be classified on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

A financial asset is measured at amortized cost if the objective of the business model is to hold the financial asset for the collection of the contractual cash flows and the contractual cash flows under the instrument solely represent payments of principal and interest.  A financial asset that meets the criteria to be measured at amortized cost can be designated at fair value through profit or loss under the fair value option if doing so would significantly reduce or eliminate an accounting mismatch.  If a financial asset does not meet the criteria be measured at amortized cost, it is measured at fair value.

IFRS 9 requires all equity investments to be measured at fair value with an option to present unrealized and realized fair value gains and losses in other comprehensive income for equity investments not held for trading.  This irrevocable designation to present in other comprehensive income must be made on initial recognition on an instrument-by-instrument basis.  There is no subsequent recycling of fair value gains and losses to profit or loss.  Dividends from such investments will continue to be recognized in profit or loss. Management is currently evaluating the potential impact that the adoption of IFRS 9 will have on the Company's consolidated financial statements.

4. CASH RESOURCES AND SECURITIES

(A) Cash Resources

             
thousands of Canadian dollars (Unaudited)   March 31    December 31   January 1
          2011   2010         2010
Deposits with regulated financial institutions $ 269,160 $ 347,631 $ 866,069
Treasury bills guaranteed by government   49,999   406,938   -
Cash and cash equivalents   319,159   754,569   866,069
Restricted cash - Canada Mortgage Bond program   70,000   70,000   46,100
Restricted cash - interest rate swaps   22,255   22,255   17,965
  $ 411,414 $ 846,824 $$ 930,134

Restricted cash - Canada Mortgage Bond program represents deposits held as collateral for the Company's securitization activities by CMHC. To participate in the National Housing Authority mortgage-backed security programs, the Company is required to maintain an amount of cash in a trust account to cover deposits of unscheduled principal prepayments (UPP). The amount represents a percentage of UPP, which is based on the Company's average monthly UPP rate for the last year and calculated on the basis of the end of year principal balance. The Company is allowed to invest the above amount in eligible securities. The funds must be invested on behalf of the Principal & Interest Custodial/Trust Account. Currently, these funds are deposits held by a Canadian Schedule A Bank.

Restricted cash - Interest rate swaps are deposits held by swap counterparties as collateral for the Company's interest rate swap transactions.  The Company is required to put collateral against its interest rate swap transactions as part of the agreements with related counterparties. The terms and conditions for these collaterals are governed by International Swaps Dealers Associations (ISDA) agreements.

(B) Available for Sale Securities - Net Unrealized Gains and Losses

             
thousands of Canadian dollars (Unaudited)   March 31   December 31   January 1
Gain (losses)         2011         2010         2010
Securities issued or guaranteed by:            
       Canada $ - $ - $ 237
       Corporations   1   130   (35)
Equity securities            
       Common   2,082   1,584   2,369
       Fixed rate preferred   3,571   6,282   8,105
Income trusts   (529)   (458)   2,317
Mutual funds   199   115   (55)
  $ 5,324 $ 7,653 $ 12,938

Net unrealized gains and losses are included in accumulated other comprehensive income except for impairment losses which are transferred to net income. Accumulated other comprehensive income is disclosed in Note 11.

The unrealized losses included above represent differences between the cost of a security and its current fair value. The Company does not consider any of the securities in an unrealized loss position to be permanently impaired, based on market conditions at the reporting date, and continues to regularly monitor these investments and market conditions.

For the three months ended March 31, 2011, the Company recognized $nil ($0.4 million - Q4 2010; $nil - Q1 2010) of impairment losses on available for sale securities. These losses were transferred into net income. These unrealized losses are not included in the above table.

5. LOANS

(A) Loans by Geographic Region and Type (net of individual allowances for credit losses)

                       
thousands of Canadian dollars, except % (Unaudited) As at March 31, 2011
  Residential
Mortgages
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total Percentage
of Portfolio
British Columbia $ 297,658 $ 864,123 $ 9,523 $ 15,827 $ 1,187,131 7.9%
Alberta   311,013   669,956   30,791   37,608   1,049,368 7.0%
Ontario   3,976,277   6,080,197   779,395   433,197   11,269,066 75.4%
Quebec    200,959   647,698   50,250   1,697   900,604 6.0%
Atlantic provinces   82,390   188,824   25,861   3,888   300,963 2.0%
Other   53,005   195,405   -   1,210   249,620 1.7%
  $ 4,921,302 $ 8,646,203 $ 895,820 $ 493,427 $ 14,956,752 100.0%
As a % of portfolio   32.9%   57.8%   6.0%   3.3%   100.0%  

                       
thousands of Canadian dollars, except % (Unaudited) As at December 31, 2010
  Residential
Mortgages
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total Percentage
of Portfolio
British Columbia $ 313,225 $ 897,890 $ 9,580 $ 15,921 $ 1,236,616 8.8%
Alberta   302,113   719,726   31,813   39,090   1,092,742 7.8%
Ontario   3,686,264   5,411,314   736,310   391,976   10,225,864 72.5%
Quebec    157,098   665,942   34,710   1,482   859,232 6.1%
Atlantic provinces   128,328   224,695   25,840   3,661   382,524 2.7%
Other   96,499   197,069   -   1,209   294,777 2.1%
  $ 4,683,527 $ 8,116,636 $ 838,253 $ 453,339 $ 14,091,755 100.0%
As a % of portfolio   33.3%   57.6%   5.9%   3.2%   100.0%  

                       
thousands of Canadian dollars, except % (Unaudited) As at January 1, 2010
  Residential
Mortgages
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total Percentage
of Portfolio
British Columbia $ 480,004 $ 494,867 $ 9,270 $ 22,617 $ 1,006,758 10.4%
Alberta   368,201   494,736   76,424   54,209   993,570 10.3%
Ontario   3,326,976   2,414,112   570,339   258,952   6,570,379 68.1%
Quebec    133,798   453,652   31,660   1,594   620,704 6.4%
Atlantic provinces   93,139   122,826   11,399   4,095   231,459 2.4%
Other   71,137   146,514   9,333   1,451   228,435 2.4%
  $ 4,473,255 $ 4,126,707 $ 708,425 $ 342,918 $ 9,651,305 100.0%
As a % of portfolio   46.3%   42.8%   7.3%   3.6%   100.0%  

(B) Past Due Loans that are not Impaired

A loan is recognized as being impaired when the Company is no longer reasonably assured of the timely collection of the full amount of principal and interest. As a matter of practice, a loan is deemed to be impaired at the earlier of the date it has been individually provided for or when it has been in arrears for 90 days.  Residential mortgages (including securitized residential mortgages) guaranteed by the Government of Canada are not considered impaired until payment is contractually 365 days past due.  As securitized residential mortgages are insured, credit losses are not anticipated on this portfolio. Secured and unsecured credit card balances that have a payment that is contractually 120 days in arrears are individually provided for and those that have a payment that is contractually 180 days in arrears are written off. Equityline Visa credit card balances are measured on a basis consistent with mortgage loans.

                     
thousands of Canadian dollars (Unaudited) As at March 31, 2011
  Residential
Mortgages1
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
1 - 30 days $ 110,049 $ 50,447 $ 4,452 $ 6,891 $ 171,839
31 - 60 days   22,400   12,277   1,179   3,035   38,891
61 - 90 days   5,187   1,030   -   1,974   8,191
Over 90 days   8,109   14,858   -   710   23,677
  $ 145,745 $ 78,612 $ 5,631 $ 12,610 $ 242,598

                     
thousands of Canadian dollars (Unaudited) As at December 31, 2010
  Residential
Mortgages1
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
1 - 30 days $ 108,842 $ 39,981 $ 4,671 $ 4,706 $ 158,200
31 - 60 days   26,027   5,836   1,022   1,922   34,807
61 - 90 days   6,038   3,055   -   1,857   10,950
Over 90 days   7,080   10,909   -   1,384   19,373
  $ 147,987 $ 59,781 $ 5,693 $ 9,869 $ 223,330

                     
thousands of Canadian dollars (Unaudited) As at January 1, 2010
  Residential
Mortgages1
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
1 - 30 days $ 134,925 $ 50,396 $ 4,058 $ 5,204 $ 194,583
31 - 60 days   36,149   10,450   1,910   1,428   49,937
61 - 90 days   3,080   3,386   -   2,162   8,628
Over 90 days   8,911   24,005   -   749   33,665
  $ 183,065 $ 88,237 $ 5,968 $ 9,543 $ 286,813

1 Residential mortgages include mortgages that are insured but not securitized.

(C) Impaired Loans

Residential mortgages guaranteed by the Government of Canada are not considered impaired until payment is contractually 365 days past due. As securitized residential mortgages are all fully insured, credit losses are not anticipated.

                     
thousands of Canadian dollars (Unaudited) As at March 31, 2011
  Residential
Mortgages
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
Gross amount of impaired loans $ 39,595 $ 219 $ 341 $ 7,558 $ 47,713
Individual allowances on principal   (1,464)   -   -   (2,536)   (4,000)
Net $ 38,131 $ 219 $ 341 $ 5,022 $ 43,713

                     
thousands of Canadian dollars (Unaudited) As at December 31, 2010
  Residential
Mortgages
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
Gross amount of impaired loans $ 29,586 $ - $ 2,295 $ 7,241 $ 39,122
Individual allowances on principal   (1,757)   -   -   (3,140)   (4,897)
Net $ 27,829 $ - $ 2,295 $ 4,101 $ 34,225

                     
thousands of Canadian dollars (Unaudited) As at January 1, 2010
  Residential
Mortgages
Securitized
Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
Gross amount of impaired loans $ 41,621 $ - $ 2,417 $ 4,847 $ 48,885
Individual allowances on principal   (1,483)   -   (135)   (961)   (2,579)
Net $ 40,138 $ - $ 2,282 $ 3,886 $ 46,306

(D) Collateral

The fair value of collateral held against mortgages is based on appraisals at the time a loan is originated. Appraisals are only updated should circumstances warrant it or if a mortgage becomes impaired. At March 31, 2011, the total appraised value of the collateral for mortgages past due that are not impaired, as determined when the mortgages were originated, was $423.7 million. For impaired mortgages, the total appraised value of collateral at March 31, 2011 was $56.7 million.

(E) Allowance for Credit Losses

                 
thousands of Canadian dollars (Unaudited) For the three months ended March 31, 2011
  Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
Individual allowances                
Allowance on loan principal                
  Balance at the beginning of the period $ 1,757 $ - $ 3,140 $ 4,897
  Provisions for credit losses   1,064   -   (456)   608
  Write-offs   (1,478)   -   (194)   (1,672)
  Recoveries   121   -   46   167
    1,464   -   2,536   4,000
Allowance on accrued interest receivable                
  Balance at the beginning of the period   403   -   -   403
  Provisions for credit losses   279   -   -   279
    682   -   -   682
Total individual allowance   2,146   -   2,536   4,682
Collective allowance                
  Balance at the beginning of the period   16,299   9,357   3,497   29,153
  Provisions for credit losses   543   (766)   310   87
    16,842   8,591   3,807   29,240
Total allowance $ 18,988 $ 8,591 $ 6,343 $ 33,922
Total provision $ 1,886 $ (766) $ (146) $ 974

                 
thousands of Canadian dollars (Unaudited) For the three months ended March 31, 2010
  Residential
Mortgages
Non-residential
Mortgages
Personal and
Credit Card Loans
Total
Individual allowances                
Allowance on loan principal                
  Balance at the beginning of the period $ 1,483 $ 135 $ 961 $ 2,579
  Provisions for credit losses   (219)   160   305   246
  Write-offs   (953)   -   (289)   (1,242)
  Recoveries   1,106   -   57   1,163
    1,417   295   1,034   2,746
Allowance on accrued interest receivable                
  Balance at the beginning of the period   385   -   -   385
  Provisions for credit losses   (56)   -   -   (56)
    329   -   -   329
Total individual allowance   1,746   295   1,034   3,075
Collective allowance                
  Balance at the beginning of the period   19,948   4,398   3,447   27,793
  Provisions for credit losses   1,095   (293)   (81)   721
    21,043   4,105   3,366   28,514
Total allowance $ 22,789 $ 4,400 $ 4,400 $ 31,589
Total provision $ 820 $ (133) $ 224 $ 911

There were no provisions, allowances or net write-offs on securitized residential mortgages, which are insured.

6. SECURITIZATION ACTIVITY

(A) Securitized Assets

The Company's wholly owned subsidiary, Home Trust, securitizes insured residential mortgage loans by participating in the National Housing Authority (NHA) mortgage-backed securities (MBS) program. Through the program the Company issues securities backed by residential mortgage loans that are insured against borrowers' default. Once the mortgage loans are securitized, the Company assigns underlying mortgages and/or related securities to CMHC.  As an issuer of the MBS, Home Trust is responsible for advancing all scheduled principal and interest payments to CMHC, irrespective of whether or not the amounts have been collected on the underlying transferred mortgages. The securitization activity includes the Company's participation in the Canada Mortgage Bond (CMB) program. Under the CMB program, CMHC guarantees the bonds of a special purpose trust, Canada Housing Trust (CHT). CHT uses the proceeds of its bond issuance to finance the purchase of NHA MBS.

In these securitizations the Company retains, prepayment risk and interest rate risk related to the transferred mortgages. Due to retention of these risks, transferred mortgages are not derecognized and the securitization proceeds are accounted for as secured borrowing transactions. There are no expected credit losses on the securitized mortgage assets as the mortgages are insured against default. Further, the investors and CMHC have no recourse to other assets of either the Company or Home Trust in the event of failure of debtors to pay when due.

The carrying amounts of the mortgages transferred during the quarter, including replacement assets, amounted to $867.2 million ($1.02 billion - Q1 - 2010), and are recorded on the consolidated balance sheets as securitized residential mortgages. The associated new liabilities of $689.4 million ($941.9 million - Q1 - 2010), secured by these mortgages and other pledged assets, are included under securitization liabilities and are carried at amortized cost.

(B) Assets Pledged as Collateral

As at March 31, 2011 the carrying value of the Company's mortgage loans securitized and pledged as collateral for associated liabilities was $8.59 billion ($8.06 billion - December 31, 2010; $4.10 billion - January 1, 2010). These mortgages are recorded as securitized residential mortgages on the consolidated balance sheets. The Company has also pledged $2.8 million as at March 31, 2011 ($3.0 million - December 31, 2010; $nil - January 1, 2010) in non-Home Trust MBS as collateral in the CMB program, which amount is recorded as pledged securities on the consolidated balance sheets.

Mortgage loans used in securitization activities are pledged against the associated secured borrowings (securitization liabilities). As a requirement of the NHA MBS program, the Company assigns, transfers, and sets over to CMHC, all of its rights, title, and interest in existing mortgage pools. If the Company fails to make timely payment under an NHA MBS security, CMHC may enforce the assignment to CMHC of the mortgages included in all the mortgage pools backing the securities issued. If CMHC enforces the assignments, all authority and power of the Company under the terms of NHA MBS guide, whether with respect to securities issued or mortgages pooled in the contract, shall pass to and be vested in CMHC.

(C) Securitization Liabilities

Securitization liabilities represent the funding secured by insured mortgages assigned under NHA MBS programs, which include both MBS securities directly sold to third party investors and participation in the CMB program.  As the securitization of mortgages does not lead to derecognition of the mortgages under accounting standards, proceeds received through securitization of these mortgages are recorded as CMB and MBS liabilities on the consolidated balance sheets of the Company.  The total amount of MBS and CMB liabilities outstanding as at March 31, 2011 amounted to $8.64 billion ($8.10 billion - December 31, 2010; $4.16 billion - January 1, 2010).  Accrued interest on these liabilities is classified in other liabilities as accrued interest payable on securitized liabilities.

MBS securitization liabilities are reduced on a monthly basis based on principal payments collected from securitized assets during the month. CMB liabilities are bullet bond liabilities with fixed maturities. Any principal collected against securitized assets underlying CMB liabilities is transferred to CMHC under the program on a monthly basis. The funds are received back from CMHC once the Company provides replacement assets monthly.

Interest accrued on MBS liabilities is based on MBS coupon and is paid monthly to MBS investors. Interest accrued on CMB liabilities is based on the CMB coupon related to the series in which the Company participated. Accrued interest on underlying MBS and replacement assets provided over the course of CMB liabilities is passed to counterparties on a monthly basis and is shown as MBS interest receivable in other assets. At the coupon settlement date, the Company pays/receives the difference between the amount already paid to counterparties and accrued interest based on the CMB coupon through an interest rate swap. Because the underlying cash flows associated with this interest rate swap are captured through the on-balance sheet recognition of the underlying mortgages and the associated CMB secured borrowing, these interest rate swaps are not recognized at fair value on the consolidated balance sheets and fair value changes are not recognized in the consolidated statements of income. The underlying cash flows of the interest rate swap are recognized on an accrual basis as described above. As at March 31, 2011, the notional amount of these swaps, which represents the CMB secured borrowing, was $5.73 billion compared to $3.51 billion at March 31, 2010.

7. OTHER ASSETS

             
thousands of Canadian dollars (Unaudited)   March 31   December 31   January 1
          2011   2010   2010
Accrued interest receivable $ 52,265 $ 49,920 $ 43,269
MBS interest receivable   18,658   9,449   5,521
Other prepaid assets and deferred items   28,222   20,730   26,532
  $ 99,145 $ 80,099 $ 75,322

8. OTHER LIABILITIES

             
thousands of Canadian dollars (Unaudited)   March 31   December 31   January 1
          2011   2010   2010
Accrued interest payable on deposits $ 163,141 $ 145,759 $ 138,498
Accrued interest payable on securitization liabilities   35,116   22,309   13,417
Cheques and other items in transit   5,749   5,241   4,617
Dividends payable   6,250   6,236   5,901
Other, including accounts payable and accrued liabilities   32,015   34,138   30,324
  $ 242,271 $ 213,683 $ 192,757

9. CAPITAL

(A) Common Shares Issued and Outstanding

                   
thousands of Canadian dollars, except number of shares (Unaudited) For the three months ended
  March 31, 2011 December 31, 2010 March 31, 2010
  Number of
Shares
Amount Number of
Shares
Amount Number of
Shares
Amount
Outstanding at beginning of period 34,646 $ 50,427 34,679 $ 50,475 34,713 $ 45,396
Options exercised 111   3,955 -   - 75   3,029
Repurchase of shares (37)   (55) (33)   (48) (56)   (77)
Outstanding at end of period 34,720 $ 54,327 34,646 $ 50,427 34,732 $ 48,348

The purchase cost of shares acquired through the repurchase of shares is allocated between capital stock and retained earnings.

(B) Share Purchase Options

                   
thousands of Canadian dollars, except number and per shares For the three months ended
  March 31, 2011 December 31, 2010 March 31, 2010
  Number of
Shares
Weighted-
average
Exercise
Price
Number of
Shares
      Weighted-
average
Exercise
Price
Number of
Shares
      Weighted-
average
Exercise
Price
Outstanding at beginning of period 1,066 $ 36.07 749 $ 30.80 925 $ 31.32
Granted -   - 333   47.92 -   -
Exercised (111)   27.85 -   - (75)   33.46
Forfeited (1)   47.92 (16)   35.97 (36)   39.23
Outstanding at end of period 954 $ 37.02 1,066 $ 36.07 814 $ 30.78
Exercisable, end of period 369 $ 32.64 421 $ 33.06 382 $ 32.72

(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 meet regulatory capital requirements, 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, is subject to the regulatory capital requirements governed by the Office of the Superintendent of Financial Institutions Canada (OSFI).  These requirements are consistent with international standards (Basel II) set by the Bank for International Settlements.  Home Trust follows the Standardized Approach for calculating credit risk and the Basic Indicator Approach for operational risk.

The regulatory capital position of Home Trust was as follows:

         
thousands of Canadian dollars, except ratios and multiple (Unaudited)   March 31   December 31
          2011   2010
        (Canadian GAAP3)
Tier 1 capital        
  Capital stock $ 23,497 $ 23,497
  Contributed surplus   951   951
  Retained earnings   595,591   658,530
  IFRS transition adjustment   86,080   -
  Total   706,119   682,978
Tier 2 capital        
  Collective allowance for credit losses1   29,240   29,153
  Accumulated other comprehensive income2   3,825   4,545
  Subordinated debentures   15,000   15,000
  Total   48,065   48,698
Total regulatory capital $ 754,184 $ 731,676
Risk-weighted assets for        
  Credit risk $ 3,341,882 $ 3,423,017
  Operational risk   378,613   354,250
Total risk-weighted assets $ 3,720,495 $ 3,777,267
Regulated capital to risk-weighted assets        
  Tier 1 capital   19.0%   18.1%
  Tier 2 capital   1.3%   1.3%
Total regulatory capital ratio   20.3%   19.4%
Assets to regulatory capital multiple   15.2   10.5

1 The Company is allowed to include its collective allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2 capital.  At March 31, 2011, the Company's collective allowance represented 0.79% of risk-weighted assets.

2 Accumulated other comprehensive income relates to unrealized gains on certain available for sale equity securities, net of tax, which increase Tier 2 capital.

3Regulatory capital and calculations as at December 31, 2010 is based on Canadian GAAP balances.

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.

Under IFRS transition relief permitted by OSFI, the Company has elected to amortize the December 31, 2010 IFRS retained earnings transition adjustment over eight quarters beginning March 31, 2011. The IFRS retained earnings transition adjustment for regulatory capital calculation purposes is the difference between retained earnings under Canadian GAAP and IFRS at December 31, 2010. In the absence of this election, the Company's Tier 1 and Total Capital would be $620.0 million and $668.1 million, respectively, at March 31, 2011.

10. STOCK-BASED COMPENSATION

(A) Common Shares Issued and Outstanding

During the first quarter of 2011, $452 thousand was recorded as an expense ($469 thousand - Q4 2010; $674 thousand - Q1 2010) for stock option awards in the consolidated statements of income, with an offsetting credit to contributed surplus. During the first quarter of 2011, no options were granted (333 thousand - Q4 2010: nil - Q1 2010).

(B) Deferred Share Unit Plan

Effective January 1, 2009 the Board of Directors approved a deferred share unit plan (DSU). The plan is only available to non-employee Directors of the Company who elect to accept remuneration in the form of cash, cash and DSUs or DSUs. During the first quarter of 2011, 1,593 DSUs were cash settled for $95 thousand.  At March 31, 2011, 8,727 DSUs remain issued with an associated liability of $407 thousand recorded in other liabilities on the consolidated balance sheet.

11. ACCUMULATED OTHER COMPREHENSIVE INCOME

             
thousands of Canadian dollars (Unaudited)   March 31   December 31   January 1
          2011   2010   2010
Unrealized gains on            
       Available for sale securities $ 5,324 $ 7,653 $ 12,938
       Income tax expense   1,498   1,747   2,733
    3,826   5,906   10,205
             
Unrealized losses on            
       Cash flow hedges   (674)   -   -
       Income tax expense   (175)   -   -
    (499)   -   -
Accumulated other comprehensive income $ 3,327 $ 5,906 $ 10,205

12. INCOME TAXES

(A) Reconciliation of Income Taxes

           
thousands of Canadian dollars (Unaudited) For the three months ended
        March 31       March 31
        2011       2010
Income before income taxes $ 57,525 $ 48,646
Income taxes at statutory combined federal and provincial income tax rates $ 16,188 $ 14,973
Increase (decrease) in income taxes at statutory income tax rates resulting from        
  Tax-exempt income   (1,168)   (613)
  Non-deductible expenses   144   73
  Future tax rate changes   (144)   (579)
  Other   (673)   (917)
Income tax $ 14,347 $ 12,939

(B) Reconciliation of Income Tax Rates

         
(Unaudited) For the three months ended
  March 31       March 31
        2011       2010
Statutory income tax rate   28.14%   30.78%
Increase (reduction) in income tax rate resulting from        
  Tax-exempt income   (2.03)%   (1.26)%
  Non-deductible expenses   0.25%   0.15%
  Future tax rate changes   (0.25)%   (1.19)%
  Other   (1.17)%   (1.88)%
Effective income tax   24.94%   26.60%

(C) Sources of Deferred Tax Balances

             
thousands of Canadian dollars (Unaudited)   March 31   December 31   January 1
          2011   2010   2010
Deferred tax liabilities            
       Commissions $ 5,737 $ 5,904 $ 6,754
       Finders fees and transfer costs   28,589   28,808   16,895
       Swaps   5,280   5,183   567
       Development costs   11,788   11,060   7,232
       Other   189   344   -
    51,583   51,299   31,448
             
Deferred tax assets            
       Allowance for credit losses   7,718   7,780   7,549
       Commitment fees   3,480   3,406   2,869
       Other   -   -   4,201
    11,198   11,186   14,619
  $ 40,385 $ 40,113 $ 16,829

Capital losses totalling $2.8 million are available to reduce capital gains in future years.  The future tax benefits arising from application of these losses have not been reflected in the consolidated statements of income and changes in shareholders' equity.

13. DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes interest rate swaps and forward contracts to hedge exposures to interest rate risk. The Company applies hedge accounting to its derivative instruments to minimize volatility in earnings caused by changes in interest rates. When a hedging derivative functions effectively, gains, losses, revenues or expenses of the hedging derivative will offset the gains, losses, revenues or expenses of the hedged item. To qualify for hedge accounting treatment, the hedging relationship is formally designated and documented at its inception. The documentation describes the particular risk management objective and strategy for the hedge and the specific asset, liability or cash flow being hedged and how effectiveness of the hedge is assessed. Changes in the fair value of the derivative instruments must be highly effective at offsetting either the changes in the fair value of the risk on the on-balance sheet asset or liability being hedged or the changes in the amount of future cash flows.

Hedge effectiveness is assessed at the inception of the hedge and on an ongoing basis, retrospectively and prospectively, over the life of the hedge. Any ineffectiveness in the hedging relationship is recognized immediately through non-interest expense.

Cash Flow Hedging Relationships

The Company uses bond forward contracts to hedge the economic value exposure of movements in interest rates between the time that the Company is committed to its mortgage liability pursuant to asset securitization, and the time the mortgages are legally sold and the liability is created. The intent of the bond forward is to manage the change in cash flows of the future interest payments on the anticipated secured borrowings through asset securitization.

The following table presents the impact of cash flow hedges on the Company's financial results:

             
thousands of Canadian dollars (Unaudited) For the three months ended
    March 31   December 31   March 31
          2011   2010   2010
Fair value changes recorded in other comprehensive income $ (674) $ - $ -
Fair value changes recorded in non-interest income   (492)   -   -

Fair Value Hedging Relationships

The Company uses interest rate swaps to hedge changes in the fair value of long term fixed rate CMB securitization liabilities associated with changes in market interest rates.

The following table presents the impact of fair value hedges on the Company's financial results:

             
thousands of Canadian dollars (Unaudited) For the three months ended
    March 31   December 31   March 31
          2011   2010   2010
Fair value changes recorded on interest rate swaps1 $ (16,354) $ (3,116) $ -
Fair value changes of hedged CMB liabilities for interest rate risk2   16,759   3,914   -
Hedge ineffectiveness recognized in non-interest income $ 405 $ 798 $ -

1 Unrealized gains and losses on hedging derivatives (interest rate swaps) are recorded as derivative assets or liabilities, as appropriate, on the consolidated balance sheets.

2 Unrealized gains and losses on hedged items (CMB liabilities) for the risk being hedged are recorded as part of the CMB liability on the consolidated balance sheets.

As at March 31, 2011, December 31, 2010 and January 1, 2010, the outstanding interest rate and bond forward contracts (bonds) positions were as follows:

                 
thousands of Canadian dollars (Unaudited) As at March 31, 2011
Term (years) Notional Amount Derivative Asset Derivative Liability Net Fair Value
                 
Hedging swaps                
1 to 5 $ 1,425,014 $ 13,838 $ (15,121) $ (1,283)
6 to 10   125,700   107   (3,117)   (3,010)
  $ 1,550,714 $ 13,945 $ (18,238) $ (4,293)
                 
Non-hedging swaps1                
1 to 5 $ 18,100 $ - $ (111) $ (111)
                 
Hedging bond forwards2                
1 to 5 $ 125,000 $ 974 $ - $ 974
                 
Total $ 1,693,814 $ 14,919 $ (18,349) $ (3,430)

                 
thousands of Canadian dollars (Unaudited) As at December 31, 2010
Term (years) Notional Amount Derivative Asset Derivative Liability Net Fair Value
                 
Hedging swaps                
1 to 5 $ 705,964 $ 1,292 $ (4,408) $ (3,116)
                 
Non-hedging swaps1                
1 to 5 $ 507,796 $ 21,111 $ (2,883) $ 18,228
6 to 10   13,108   1,421   (656)   765
  $ 520,904 $ 22,532 $ (3,539) $ 18,993
                 
Non-hedging bond forwards2                
1 to 5 $ 36,300 $ 44 $ (92) $ (48)
6 to 10   215,900   289   (970)   (681)
  $ 252,200 $ 333 $ (1,062) $ (729)
                 
Total $ 1,479,068 $ 24,157 $ (9,009) $ 15,148

                 
thousands of Canadian dollars (Unaudited) As at January 1, 2010
Term (years) Notional Amount Derivative Asset Derivative Liability Net Fair Value
                 
Non-hedging swaps1                
1 to 5 $ 226,988 $ 10,734 $ (7,345) $ 3,389
6 to 10   3,042   -   (3,739)   (3,739)
  $ 230,030 $ 10,734 $ (11,084) $ (350)
                 
Non-hedging bond forwards2                
1 to 5 $ 17,200 $ 307 $ - $ 307
6 to 10   166,600   2,145   (15)   2,130
  $ 183,800 $ 2,452 $ (15) $ 2,437
                 
  $ 413,830 $ 13,186 $ (11,099) $ 2,087

1 Non-hedging swaps includes swaps that were not in hedging relationships in 2010 or that did not meet hedging criteria in 2011.

2 The term of the bond forward contracts is based on the term of the underlying bonds.

The notional amount represents the amount to which the rate or price is applied in order to calculate the amount of cash exchanged under the contract. Notional amounts do not represent an asset or liability recorded on the consolidated balance sheets.

14. INTEREST RATE SENSITIVITY

The Company's exposure to interest rate risk results from the difference, or gap between earliest of the maturity or re-pricing dates of interest sensitive assets and liabilities, including off-balance sheet items. The following table shows the gap positions at March 31, 2011, December 31, 2010 and January 1, 2010 for selected period intervals. Figures in brackets represent an excess of liabilities over assets or a negative gap position.

                             
thousands of Canadian dollars, except % (unaudited) As at March 31, 2011
        Floating
Rate
      0 to 3
Months
      3 Months
to 1 Year
1 to 3 Years Over
3 Years
Non-interest
Sensitive
      Total
Total assets $ 119,196 $ 1,689,212 $ 2,546,812 $ 4,965,405 $ 6,530,188 $ 160,110 $ 16,010,923
Total liabilities and equity   (6)   (970,909)   (2,645,466)   (6,398,126)   (5,007,846)   (988,570)   16,010,923
Off-balance sheet items   -   (398,745)   13,601   233,645   151,499   -   -
Interest rate sensitive gap $ 119,190 $ 319,558 $ (85,053) $ (1,119,076) $ 1,673,841 $ (828,460) $ -
Cumulative gap $ 119,190 $ 438,748 $ 353,695 $ (845,381) $ 828,460 $ - $ -
Cumulative gap as a percentage of total assets   0.7%   2.7%   2.2%   (5.3)%   5.2%   -   -

                             
thousands of Canadian dollars, except % (unaudited) As at December 31, 2010
        Floating
Rate
      0 to 3
Months
      3 Months
to 1 Year
1 to 3 Years Over
3 Years
Non-interest
Sensitive
      Total
Total assets $ 82,211 $ 3,850,355 $ 2,434,387 $ 4,470,999 $ 4,492,797 $ 188,069 $ 15,518,818
Total liabilities and equity   (6)   (2,529,328)   (3,224,469)   (4,716,434)   (4,103,708)   (944,873)   (15,518,818)
Off-balance sheet items   -   (411,111)   16,408   179,836   214,867   -   -
Interest rate sensitive gap $ 82,205 $ 909,916 $ (773,674) $ (65,599) $ 603,956 $ (756,804) $ -
Cumulative gap $ 82,205 $ 992,121 $ 218,447 $ 152,848 $ 756,804 $ - $ -
Cumulative gap as a percentage of total assets   0.5%   6.4%   1.4%   1.0%   4.9%   -   -

                             
thousands of Canadian dollars, except % (unaudited) As at January 1, 2010
        Floating
Rate
      0 to 3
Months
      3 Months
to 1 Year
1 to 3 Years Over
3 Years
Non-interest
Sensitive
Total
Total assets $ 68,941 $ 2,443,513 $ 1,590,908 $ 2,864,679 $ 4,142,369 $ 180,176 $ 11,290,586
Total liabilities and equity   (6)   (663,651)   (3,001,431)   (3,060,937)   (3,801,226)   (763,335)   (11,290,586)
Off-balance sheet items   -   (307,364)   100,114   207,266   (16)   -   -
Interest rate sensitive gap $ 68,935 $ 1,472,498 $ (1,310,409) $ 11,008 $ 341,127 $ (583,159) $ -
Cumulative gap $ 68,935 $ 1,541,433 $ 231,024 $ 242,032 $ 583,159 $ - $ -
Cumulative gap as a percentage of total assets   0.6%   13.7%   2.0%   2.1%   5.2%   -   -

Based on the current interest rate gap position at March 31, 2011, the Company estimates that a 100 basis point decrease in interest rates would decrease net interest income and other comprehensive income after tax over the next twelve months by $6.9 million and $0.6 million, respectively. A 100 basis point increase in interest rates would increase net interest income and other comprehensive income after tax over the next twelve months by $6.9 million and $0.6 million, respectively.

15. EARNINGS BY BUSINESS SEGMENT

The Company operates principally through two segments - mortgage lending and consumer lending. The mortgage lending operation consists of mortgage lending, securitization of insured mortgage loans and secured loans. The consumer lending operation consists of credit cards, PSiGate and individual loans to customers of retail businesses. These operating segments are supported by other activities including treasury and security investments and general corporate activities.

For the three months ended March 31, 2011
thousands of Canadian dollars (unaudited)       Mortgage Lending       Consumer Lending Other Total
Net interest income $ 61,185 $ 9,802 $ 5,619 $ 76,606
Provision for credit losses   (1,120)   146   -   (974)
Fees and other income   3,637   4,524   199   8,360
Net (loss) gain on securities and others   (3,280)   -   2,029   (1,251)
Non-interest expenses   (18,098)   (4,235)   (2,883)   (25,216)
Income before income taxes   42,324   10,237   4,964   57,525
Income taxes   (11,253)   (2,870)   (224)   (14,347)
Net income $ 31,071 $ 7,367 $ 4,740 $ 43,178
Goodwill $ 2,324 $ 13,428 $ - $ 15,752
Total assets $ 14,266,130 $ 536,739 $ 1,208,054 $ 16,010,923

For the three months ended March 31, 2010
thousands of Canadian dollars (unaudited)       Mortgage Lending       Consumer Lending Other Total
Net interest income $ 45,759 $ 9,333 $ 6,166 $ 61,258
Provision for credit losses   (687)   (224)   -   (911)
Fees and other income   4,275   3,472   69   7,816
Net (loss) gain on securities and others   (2,910)   -   3,146   236
Non-interest expenses   (12,649)   (3,594)   (3,510)   (19,753)
Income before income taxes   33,788   8,987   5,871   48,646
Income taxes   (9,676)   (2,781)   (482)   (12,939)
Net income $ 24,112 $ 6,206 $ 5,389 $ 35,707
Goodwill $ 2,324 $ 13,428 $ - $ 15,752
Total assets $ 10,237,161 $ 454,017 $ 1,071,615 $ 11,762,793

16. SUBSEQUENT EVENT

In early May 2011 the Company issued $150.0 million in 5 year fixed senior debentures to the market. The senior debentures carry an annual interest rate of 5.20% payable semi-annually.  The Company will use $100.0 million of the net proceeds of the issuance to provide additional qualifying Tier 2 capital to Home Trust through the purchase of $100.0 million in intercompany subordinated debt of Home Trust. The balance of the net proceeds will be used for the Company's general corporate purposes, including possibly as additional capital for Home Trust.

17. TRANSITION TO IFRS

The Company has adopted IFRS effective January 1, 2011.  Prior to the adoption of IFRS, the Company prepared its consolidated financial statements in accordance with Canadian GAAP.  The Company's consolidated financial statements for the year ended December 31, 2011 will be the first annual financial statements that comply with IFRS.  Accordingly, the Company will make an explicit and unreserved statement of compliance with IFRS beginning with its 2011 annual consolidated financial statements.  The Company's transition date is January 1, 2010 (the "transition date") and the Company has prepared its opening consolidated balance sheet at that date.  These consolidated financial statements have been prepared in accordance with the accounting policies described in Note 2.  The Company will ultimately prepare its opening consolidated balance sheet and consolidated financial statements for 2010 and 2011 by applying existing IFRS with an effective date of December 31, 2011 or prior.  Accordingly, the opening consolidated balance sheet and consolidated financial statements for 2010 and 2011 may differ from these financial statements.

In preparing these consolidated financial statements, the Company has applied the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1).  IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS as of the first annual reporting date which for the Company will be December 31, 2011.  However, IFRS 1 provides for certain optional exemptions and certain mandatory exemptions from full retrospective application of IFRS.  The optional exemptions and mandatory exemptions applied by the Company are described below.

(A) Elected Exemptions from Full Retrospective Application

(i) Business combinations

The Company elected to apply the business combinations exemption in IFRS 1 and did not apply IFRS 3 Business Combinations retrospectively to past business combinations.  Accordingly, the Company has not restated business combinations that took place prior to the transition date to IFRS and the carrying amount of goodwill under IFRS at transition date is equal to the carrying amount under Canadian GAAP at that date.

(ii) Share-based payment transactions

The Company elected to apply IFRS 2 Share-based Payment (IFRS 2) to equity instruments granted after November 7, 2002, that have not vested by the transition date.  Accordingly, the Company has only applied IFRS 2 to grants of employee stock options that were granted after November 7, 2002 that remain unvested as at January 1, 2010.

(iii) Borrowing costs

The Company elected to apply IAS 23 Borrowing Costs to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after the transition date to IFRS.

(iv) Leases

The Company elected to determine whether an arrangement existing at the date of transition contains a lease on the basis of facts and circumstances existing at the transition date.

(B) Mandatory Exemptions from Full Retrospective Application

(i) Derecognition of financial assets and financial liabilities

Although recent amendments to IFRS 1 permit the Company to apply the derecognition requirements of IAS 39 Financial Instruments: Recognition and Measurement prospectively from January 1, 2010, the Company chose to apply the standards retroactively as directed by OSFI.

(ii) Hedge accounting

Hedge accounting cannot be reflected in the opening IFRS balance sheet if it does not qualify for hedge accounting under IFRS nor be applied retrospectively to transactions entered into prior to the transition to IFRS.  Accordingly, the Company only applied hedge accounting to transactions that qualified for hedge accounting after the date of transition to IFRS.  The Company did not apply hedge accounting under Canadian GAAP.

(iii) Estimates

Hindsight cannot be used to create or revise estimates and accordingly the estimates previously made by the Company under Canadian GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies.

(C) Reconciliations of Canadian GAAP to IFRS

The Company is required under IFRS 1 to provide the following reconciliations from Canadian GAAP to IFRS for its shareholders' equity and comprehensive income.

               
Reconciliation of Shareholders' Equity     December 31,   March 31,   January 1,
thousands of Canadian dollars (Unaudited) Note         2010   2010   2010
               
Shareholders' equity reported under Canadian GAAP   $ 742,280 $ 627,987 $ 590,288
Differences increasing (decreasing) reported shareholders' equity:              
       Securitization of mortgages (i)   (163,583)   (149,602)   (135,121)
       Hedge ineffectiveness (ii)   682   -   -
       Interest on non-performing loans (iv)   1,203   1,366   1,646
       Provision for accrued interest on non-performing loans (v)   (405)   (329)   (385)
       Deferred income taxes (vii)   48,408   50,416   47,195
Shareholders' equity reported under IFRS   $ 628,585 $ 529,838 $ 503,623

           
Reconciliation of Net Income     Year ended   Three months ended
thousands of Canadian dollars (Unaudited) Note   December 31, 2010   March 31, 2010
           
Net income reported under Canadian GAAP   $ 180,944 $ 41,719
Differences increasing (decreasing) reported net income:          
       Securitization of mortgages (i)   (28,962)   (7,732)
       Hedge ineffectiveness (ii)   682   -
       Impairment of AFS securities (iii)   739   744
       Interest on non-performing loans (iv)   (443)   (280)
       Provision for accrued interest on non-performing loans (v)   (20)   56
       Share-based compensation expense (vi)   (922)   (395)
       Deferred income taxes (vii)   2,734   1,595
Net income reported under IFRS   $ 154,752 $ 35,707

           
Reconciliation of Comprehensive Income     Year ended   Three months ended
thousands of Canadian dollars (Unaudited) Note   December 31, 2010   March 31, 2010
           
Comprehensive income reported under Canadian GAAP   $ 178,405 $ 42,806
Differences increasing (decreasing) reported comprehensive income:          
  Differences in net income     (26,192)   (6,012)
  Securitization of mortgages (i)   500   (6,749)
  Impairment of AFS securities (iii)   (739)   (744)
  Deferred income taxes (vii)   (1,521)   1,626
Comprehensive income reported under IFRS   $ 150,453 $ 30,927

Notes to Above Reconciliations

(i) Securitization of mortgages

The Company periodically transfers pools of mortgages to CMHC-sponsored special purpose entities or trusts which, in turn, issue securities to investors.

Under Canadian GAAP, these transfers were accounted for as sales when the Company surrendered control of the transferred assets and received consideration other than the beneficial interest in the transferred assets.  When such sales occur, the Company retained interest-only strips and servicing responsibilities for the assets sold.  Gains or losses on these transactions were recognized as income. The gains or losses recorded were dependent in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer, net of transaction costs.  Retained interests were classified as available for sale assets and were stated at their fair value at the date of transfer with unrealized gains and losses reported in accumulated other comprehensive income.  The servicing liabilities were included with other liabilities and stated originally at their fair value and amortized into income over the period of the mortgage pool.  As part of the securitization program, the Company entered into certain interest rate swaps.  These transactions did not qualify for hedge accounting and therefore were accounted for on a mark-to-market basis, with changes in the fair value of the swap being recognized in income.

Under IFRS, the above securitization transactions do not qualify for treatment as sales of mortgages and instead are treated as secured borrowing transactions.  Consequently, the securitized mortgages are accounted for in the same manner as non-securitized mortgages, remaining on the consolidated balance sheets with interest income recognized in the consolidated statements of income.  In addition, an obligation to repay the funding received in the securitization transaction is recognized on the consolidated balance sheets as secured borrowing (securitization liabilities) and related interest expense is recognized in the consolidated statements of income.

The difference in accounting treatment between Canadian GAAP and IFRS for these securitization transactions has resulted in the following adjustments to the Company's consolidated financial statements:

  • Securitized mortgages that were off-balance sheet under Canadian GAAP have been recognized in the consolidated balance sheets under IFRS
  • Securitization liabilities not previously recognized under Canadian GAAP has been recognized in the consolidated balance sheets under IFRS
  • Securitization receivables related to retained interests recognized on the consolidated balance sheets under Canadian GAAP have been removed from the consolidated balance sheets under IFRS
  • Securitization servicing liability included in other liabilities on the consolidated balance sheets under Canadian GAAP has been removed from the consolidated balance sheets under IFRS
  • Home Trust MBS held by the Company but not yet sold to third parties or used as replacement assets in the CMB program were reclassified to securitized mortgages from AFS securities. Unrealized fair value gains or losses recognized in accumulated other comprehensive income were reversed under IFRS
  • Gains and losses on securitization previously recognized in net income under Canadian GAAP have been reversed under IFRS
  • Interest income earned on the securitized mortgages not previously recognized under Canadian GAAP has been recognized in net income under IFRS
  • Interest expense on the securitization liabilities not previously recognized under Canadian GAAP has been recognized in net income under IFRS
  • Unrealized gains and losses on retained interests recognized in other comprehensive income under Canadian GAAP has been reversed under IFRS
  • Amortization of servicing liability recognized in net income under Canadian GAAP has been reversed under IFRS
  • Certain transaction costs that formed part of the gain or loss on securitization under Canadian GAAP have been capitalized and recognized in interest income and expense under IFRS through the use of the effective interest rate method
  • Gains and losses on the interest rate swaps (seller swaps) that were recognized in net income under Canadian GAAP were reversed under IFRS as the cash flows associated with these swaps are captured in the interest income recognized on the securitized mortgages and the interest expense recognized on the secured debt under IFRS

The above adjustments related to securitization transactions occurring before the date of transition have been adjusted through retained earnings or accumulated other comprehensive income in the consolidated balance sheet as at January 1, 2010.  The adjustments related to securitization transactions occurring on or after the date of transition and up to March 31, 2010 and December 31, 2010 have been reflected in the consolidated statements of comprehensive income for the periods ending March 31, 2010 and December 31, 2010, respectively, and through retained earnings and accumulated other comprehensive income on the consolidated balance sheet as at March 31, 2010 and December 31, 2010, respectively.

The overall impact of the difference in accounting treatment between Canadian GAAP and IFRS for these securitization transactions results in differences as to the timing of the recognition of the cash flows in total comprehensive income.  Ultimately, at the end of the life of each securitization pool, the same cumulative total amount of income will have been recognized in shareholders' equity under both Canadian GAAP and IFRS.

(ii) Hedging

In the latter part of 2010, the Company designated certain derivative instruments used to hedge interest rate risk in hedge accounting relationships under IFRS that did not qualify for hedge accounting under Canadian GAAP.   Accordingly, certain gains and losses recognized in net income under Canadian GAAP have been accounted for as fair value hedges under IFRS, where only the ineffective portion of the hedges are recorded in net income.

(iii) Impairment of equity investments

Under IFRS, a significant or prolonged decline in the fair value of an investment in an equity investment below its cost is considered objective evidence of impairment resulting in the recognition of an impairment loss.  Under Canadian GAAP, such significant or prolonged declines were considered as an indicator of impairment, but not a definitive factor.  The Company has recognized impairment losses as at January 1, 2010 and during 2010 under IFRS on certain equity investments with significant or prolonged declines in fair value below cost that were not considered impaired under Canadian GAAP.  Additionally, impairment losses on certain equity investments were recognized under Canadian GAAP during 2010 that would have been recognized prior to 2010 under IFRS and consequently recognized as at January 1, 2010 under IFRS.  Accordingly, adjustments from Canadian GAAP to IFRS were made between retained earnings and accumulated other comprehensive income as at January 1, 2010 and between net income and other comprehensive income during 2010.  These adjustments did not affect total shareholders' equity.

(iv) Accrued interest on non-performing loans

Under Canadian GAAP, when a loan becomes non-performing the accrual of interest ceases. Interest that is subsequently recovered is recognized at the time of recovery. Under IFRS, interest on non-performing loans continues to be accrued.  Accordingly, an adjustment from Canadian GAAP to IFRS has been made to retained earnings as at January 1, 2010 to reflect accrued interest on non-performing loans up to the date of transition.  Interest on non-performing loans subsequent to the date of transition has been recognized in net income in the relevant period.

(v) Allowance for accrued interest on non-performing loans

As a result of recognizing accrued interest on non-performing loans under IFRS as describe above, the carrying amount of accrued interest receivable related to these non-performing loans recognized in the consolidated balance sheets has increased.  Consequently, an allowance against the accrued interest receivable on these non-performing loans has been established where the Company does not expect to recover all of the accrued interest. Changes to this allowance are recognized in the provision for credit losses in the consolidated statements of income.

(vi) Share-based compensation

Under Canadian GAAP, the Company accounted for stock option grants with graded vesting as one award, recognizing as expense the total fair value on a straight-line basis over the vesting period.  Under IFRS, the Company is required to account for each tranche in an award with graded vesting as a separate grant with a different vesting period and fair value.  As a result, the Company adjusted its expense for these share-based awards to reflect this difference in recognition.

Under Canadian GAAP, the Company had the option of recognizing forfeitures as they occur or making an estimate of forfeitures.  The Company utilized both options under Canadian GAAP based on when the award was granted.  Under IFRS, the Company makes an estimate of forfeitures for all awards.  As a result, the Company adjusted its expense for these share-based awards to reflect this difference in recognition.

The above adjustments resulted in differences between Canadian GAAP and IFRS for the amount of expense recognized in net income.  However, as these differences only result in a reclassification between retained earnings and contributed surplus on the consolidated balance sheets, there was no resulting difference in total shareholders' equity.

(vii) Income taxes

The adjustments for income taxes reflect the impact of the other IFRS adjustments described above.  The portion of the adjustments to income taxes payable or recoverable that is related to items recorded through other comprehensive income does not affect net income.

Financial Statement Reconciliations

The following reconciliations demonstrate the impact of the above noted IFRS transition adjustments to the consolidated balance sheets and the consolidated statements of income, comprehensive income and cash flows.

                     
Reconciliation of Consolidated Balance Sheet  As at December 31, 2010
thousands of Canadian dollars (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS
Adjustments
IFRS
Reclassification
IFRS Balance   IFRS Line Items
ASSETS                    ASSETS 
Cash Resources $ 846,824 $ - $ - $ 846,824   Cash Resources
Securities                   Securities
Available for sale   543,892   (119,724)       424,168   Available for sale
        2,954       2,954   Pledged securities
    543,892   (116,770)   -   427,122    
Loans                   Loans
Residential mortgages   4,570,130   113,397       4,683,527   Residential mortgages
        8,116,636       8,116,636   Securitized residential mortgages
Non-residential mortgages   838,253           838,253   Non-residential mortgages
Personal and credit card loans   453,339           453,339   Personal and credit card loans
    5,861,722   8,230,033   -   14,091,755    
General allowance for credit losses   (29,153)           (29,153)   Collective allowance for credit losses
    5,832,569   8,230,033   -   14,062,602    
Other                   Other
Securitization receivable   343,402   (343,402)            
            9,451   9,451   Income taxes receivable
        24,157       24,157   Derivative assets
Other assets   140,658   12,561   (73,120)   80,099   Other assets
Capital assets   4,894           4,894   Capital assets
            47,917   47,917   Other intangible assets
            15,752   15,752   Goodwill
    488,954   (306,684)   -   182,270    
  $ 7,712,239 $ 7,806,579 $ - $ 15,518,818    
LIABILITIES AND SHAREHOLDERS' EQUITY                   LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities                   Liabilities
Deposits                   Deposits
Payable on demand $ 50,359 $   $   $ 50,359   Payable on demand
Payable on a fixed date   6,472,491           6,472,491   Payable on a fixed date
    6,522,850   -   -   6,522,850    
                    Securitization Liabilities
        2,826,105       2,826,105   Mortgage-backed security liabilities
        5,278,473       5,278,473   Canada Mortgage Bond liability
        8,104,578   -   8,104,578    
Other                   Other
        9,009       9,009   Derivative liabilities
Other liabilities1   447,109   (144,864)   (88,562)   213,683   Other liabilities
        (48,449)   88,562   40,113   Deferred tax liabilities
    447,109   (184,304)   -   262,805    
    6,969,959   7,920,274   -   14,890,233    
Shareholders' Equity                   Shareholders' Equity
Capital stock   50,427           50,427   Capital stock
Contributed surplus   3,649   922       4,571   Contributed surplus
Retained earnings   669,475   (101,794)       567,681   Retained earnings
Accumulated other comprehensive income   18,729   (12,823)       5,906   Accumulated other comprehensive income
    742,280   (113,695)   -   628,585    
  $ 7,712,239 $ 7,806,579 $ - $ 15,518,818    

1 Other liabilities under the Canadian GAAP balance includes cheques and other items in transit of $5,241 which was disclosed separately on the face of the consolidated balance sheet as presented in the 2010 annual report.  This change in presentation is not part of the transition to IFRS.

                     
Reconciliation of Consolidated Balance Sheet  As at March 31, 2010
thousands of Canadian dollars (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS Adjustments IFRS Reclassification IFRS Balance   IFRS Line Items
ASSETS                    ASSETS 
Cash Resources $ 471,880 $ - $ - $ 471,880   Cash Resources
Securities                   Securities
Held for trading   99,961           99,961   Held for trading
Available for sale   611,051   (110,168)       500,883   Available for sale
    711,012   (110,168)   -   600,844    
Loans                   Loans
Residential mortgages   4,376,931   109,718       4,486,649   Residential mortgages
        4,945,816       4,945,816   Securitized residential mortgages
Non-residential mortgages   714,880           714,880   Non-residential mortgages
Personal and credit card loans   414,190           414,190   Personal and credit card loans
    5,506,001   5,055,534   -   10,561,535    
General allowance for credit losses   (28,514)           (28,514)   Collective allowance for credit losses
    5,477,487   5,055,534   -   10,533,021    
Other                   Other
Securitization receivable   274,021   (274,021)            
        8,120   3,577   11,697   Income taxes receivable
        10,486       10,486   Derivative assets
Other assets   107,547   25,675   (53,872)   79,350   Other assets
Capital assets   5,220           5,220   Capital assets
            34,543   34,543   Other intangible assets
            15,752   15,752   Goodwill
    386,788   (229,740)   -   157,048    
  $ 7,047,167 $ 4,715,626 $ - $ 11,762,793    
LIABILITIES AND SHAREHOLDERS' EQUITY                   LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities                   Liabilities
Deposits                   Deposits
Payable on demand $ 12,873 $   $   $ 12,873   Payable on demand
Payable on a fixed date   6,022,719           6,022,719   Payable on a fixed date
    6,035,592   -   -   6,035,592    
                    Securitization Liabilities
        1,453,866       1,453,866   Mortgage-backed security liabilities
        3,496,612       3,496,612   Canada Mortgage Bond liability
        4,950,478   -   4,950,478    
Other                   Other
        9,623       9,623   Derivative liabilities
Other liabilities1   383,588   (104,002)   (64,978)   214,608   Other liabilities
        (42,324)   64,978   22,654   Deferred tax liabilities
    383,588   (136,703)   -   246,885    
    6,419,180   4,813,775   -   11,232,955    
Shareholders' Equity                   Shareholders' Equity
Capital stock   48,348           48,348   Capital stock
Contributed surplus   3,366   395       3,761   Contributed surplus
Retained earnings   553,918   (81,614)       472,304   Retained earnings
Accumulated other comprehensive income   22,355   (16,930)       5,425   Accumulated other comprehensive income
    627,987   (98,149)   -   529,838    
  $ 7,047,167 $ 4,715,626 $ - $ 11,762,793    

1 Other liabilities under the Canadian GAAP balance includes cheques and other items in transit of $6,148 which was disclosed separately on the face of the consolidated balance sheet as presented in the 2010 first quarter report.  This change in presentation is not part of the transition to IFRS.

                     
Reconciliation of Consolidated Balance Sheet  As at January 1, 2010
thousands of Canadian dollars (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS Adjustments IFRS Reclassification IFRS Balance   IFRS Line Items
ASSETS                    ASSETS 
Cash Resources $ 930,134 $   $   $ 930,134   Cash Resources
Securities                   Securities
Held for trading   99,938           99,938   Held for trading
Available for sale   550,659   (56,057)       494,602   Available for sale
    650,597   (56,057)   -   594,540    
Loans                   Loans
Residential mortgages   4,417,197   56,058       4,473,255   Residential mortgages
        4,126,707       4,126,707   Securitized residential mortgages
Non-residential mortgages   708,425           708,425   Non-residential mortgages
Personal and credit card loans   342,918           342,918   Personal and credit card loans
    5,468,540   4,182,765   -   9,651,305    
General allowance for credit losses   (27,793)           (27,793)   Collective allowance for credit losses
    5,440,747   4,182,765   -   9,623,512    
Other                   Other
Securitization receivable   229,418   (229,418)            
        6,466       6,466   Income taxes receivable
        13,186       13,186   Derivative assets
Other assets   105,115   12,770   (42,563)   75,322   Other assets
Capital assets   4,863           4,863   Capital assets
            26,811   26,811   Other intangible assets
            15,752   15,752   Goodwill
    339,396   (196,996)   -   142,400    
  $ 7,360,874 $ 3,929,712 $ - $ 11,290,586    
LIABILITIES AND SHAREHOLDERS' EQUITY                   LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities                   Liabilities
Deposits                   Deposits
Payable on demand $ 38,223 $   $   $ 38,223   Payable on demand
Payable on a fixed date   6,371,599           6,371,599   Payable on a fixed date
    6,409,822   -   -   6,409,822    
                    Securitization Liabilities
        1,191,552       1,191,552   Mortgage-backed security liabilities
        2,964,904       2,964,904   Canada Mortgage Bond liability
        4,156,456   -   4,156,456    
Other                   Other
        11,099       11,099   Derivative liabilities
Other liabilities1   360,764   (110,448)   (57,559)   192,757   Other liabilities
        (40,730)   57,559   16,829   Deferred tax liabilities
    360,764   (140,079)   -   220,685    
    6,770,586   4,016,377   -   10,786,963    
Shareholders' Equity                   Shareholders' Equity
Capital stock   45,396           45,396   Capital stock
Contributed surplus   3,606           3,606   Contributed surplus
Retained earnings   520,018   (75,602)       444,416   Retained earnings
Accumulated other comprehensive income   21,268   (11,063)       10,205   Accumulated other comprehensive income
    590,288   (86,665)   -   503,623    
  $ 7,360,874 $ 3,929,712 $ - $ 11,290,586    

1 Other liabilities under the Canadian GAAP balance includes cheques and other items in transit of $4,617 which was disclosed separately on the face of the consolidated balance sheet as presented in the 2009 annual report.  This change in presentation is not part of the transition to IFRS.

                 
Reconciliation of Consolidated Statement of Income  For the Year Ended December 31, 2010
thousands of Canadian dollars, except per share amounts (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS Adjustments IFRS Balance   IFRS Line Items
Income                Net Interest Income Non-Securitized Assets 
Interest from loans $ 354,222 $ (443) $ 353,779   Interest from loans
Dividends from securities   18,204       18,204   Dividends from securities
Other interest   9,806       9,806   Other interest
    382,232   (443)   381,789    
Interest on deposits   188,370       188,370   Interest on deposits
Net interest income   193,862   (443)   193,419   Net interest income non-securitized assets
                Net Interest Income Securitized Loans and Assets
        251,292   251,292   Interest from securitized loans and assets
        180,681   180,681   Interest on securitization liabilities
        70,611   70,611   Net interest income securitized loans and assets
                 
Net interest income   193,862   70,168   264,030   Total net interest income
Provision for credit losses   9,411   20   9,431   Provision for credit losses
    184,451   70,148   254,599    
Non-interest Income               Non-interest Income
Fees and other income   30,690       30,690   Fees and other income
Securitization income   107,724   (107,724)        
Gain on sale of loan portfolio   3,917       3,917   Gain on sale of loan portfolio
Net realized and unrealized gain (loss) on securities   8,953   787   9,740   Net realized and unrealized gain (loss) on securities
Net realized and unrealized gain (loss) on derivatives   421   9,400   9.821   Net realized and unrealized gain (loss) on derivatives
    151,705   (97,537)   54,168    
    336,156   (27,389)   308,767    
Non-interest Expenses               Non-interest expense
Salaries and benefits   46,739       46,739   Salaries and benefits
Premises   6,894       6,894   Premises
Other operating expenses   40,306   1,537   41,843   General and administrative
    93,939   1,537   95,476    
                 
Income Before Income Taxes   242,217   (28,926)   213,291   Income Before Income Taxes
                 
Income taxes               Income taxes
  Current   35,231       35,231     Current
  Future   26,042   (2,734)   23,308     Deferred
    61,273   (2,734)   58,539    
NET INCOME $ 180,944 $ (26,192) $ 154,752   NET INCOME
                 
NET INCOME PER COMMON SHARE               NET INCOME PER COMMON SHARE
Basic $ 5.21 $ (0.75) $ 4.46   Basic
Diluted $ 5.20 $ (0.75) $ 4.45   Diluted
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING               AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic   34,697       34,697   Basic
Diluted   34,776       34,776   Diluted
                 
Total number of outstanding common shares   34,646       34,646   Total number of outstanding common shares
Book value per common share $ 21.42 $ (3.28) $ 18.14   Book value per common share

                 
Reconciliation of Consolidated Statement of Comprehensive Income  For the Year Ended December 31, 2010
thousands of Canadian dollars (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS Adjustments IFRS Balance   IFRS Line Items
                 
NET INCOME $ 180,944 $ (26,192) $ 154,752   NET INCOME
                 
OTHER COMPREHENSIVE INCOME (LOSS)               OTHER COMPREHENSIVE INCOME (LOSS)
                 
Available for sale securities               Available for sale securities
Net unrealized gains (losses) on securities available for sale   3,224   - 1   3,224   Net unrealized gains (losses) on securities available for sale
Net (gains) losses reclassified to net income   (8,270)   (239)   (8,509)   Net (gains) losses reclassified to net income
    (5,046)   (239)   (5,285)    
Income tax expense (recovery)   (2,507)   1,521   (986)   Income tax expense (benefit)
Total other comprehensive income (loss)   (2,539)   (1,760)   (4,299)   Total other comprehensive income (loss)
                 
COMPREHENSIVE INCOME   178,405   (27,952)   150,453   COMPREHENSIVE INCOME

1This adjustment includes unrealized gains and losses on Home Trust MBS, securitization receivables and impairments of AFS securities. The net amount of these adjustments for the year-ended December 31, 2010 totals to zero.

                 
Reconciliation of Consolidated Statement of Income  For the Three Months Ended March 31, 2010
thousands of Canadian dollars, except per share amounts (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS Adjustments IFRS Balance   IFRS Line Items
Income                Net Interest Income Non-Securitized Assets 
Interest from loans $ 85,757 $ (280) $ 85,477   Interest from loans
Dividends from securities   4,832       4,832   Dividends from securities
Other interest   2,258       2,258   Other interest
    92,847   (280)   92,567    
Interest on deposits   45,352       45,352   Interest on deposits
Net interest income   47,495   (280)   47,215   Net interest income non-securitized assets
                Net Interest Income Securitized Loans and Assets
        52,984   52,984   Interest from securitized loans and assets
        38,941   38,941   Interest on securitization liabilities
        14,043   14,043   Net interest income securitized loans and assets
                 
    47,495   13,763   61,258   Total net interest income
Provision for credit losses   967   (56)   911   Provision for credit losses
    46,528   13,819   60,347    
Non-interest Income               Non-interest Income
Fees and other income   7,816       7,816   Fees and other income
Securitization income   22,167   (22,167)        
Net realized and unrealized gain (loss) on securities   3,146   744   3,890   Net realized and unrealized gain (loss) on securities
Net realized and unrealized gain (loss) on derivatives   (3,303)   (351)   (3,654)   Net realized and unrealized gain (loss) on derivatives
    29,826   (21,774)   8,052    
    76,354   (7,955)   68,399    
Non-interest Expenses               Non-interest expense
Salaries and benefits   10,775       10,775   Salaries and benefits
Premises   1,641       1,641   Premises
Other operating expenses   7,685   (348)   7,337   General and administrative
    20,101   (348)   19,753    
                 
Income Before Income Taxes   56,253   (7,607)   48,646   Income Before Income Taxes
                 
Income taxes               Income taxes
  Current   7,114       7,114     Current
  Future   7,420   (1,595)   5,825     Deferred
    14,534   (1,595)   12,939    
NET INCOME $ 41,719 $ (6,012) $ 35,707   NET INCOME
                 
NET INCOME PER COMMON SHARE               NET INCOME PER COMMON SHARE
Basic $ 1.20 $ (0.17) $ 1.03   Basic
Diluted $ 1.20 $ (0.17) $ 1.03   Diluted
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING               AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic   34,723       34,723   Basic
Diluted   34,814       34,814   Diluted
                 
Total number of outstanding common shares   34,732       34,732   Total number of outstanding common shares
Book value per common share $ 18.08 $ (2.82) $ 15.26   Book value per common share

                 
Reconciliation of Consolidated Statement of Comprehensive Income  For the Three Months Ended March 31, 2010
thousands of Canadian dollars (Unaudited)  
Canadian GAAP Line Items Canadian GAAP
Balance
IFRS Adjustments IFRS Balance   IFRS Line Items
                 
NET INCOME $ 41,719 $ (6,012) $ 35,707   NET INCOME
                 
OTHER COMPREHENSIVE INCOME (LOSS)               OTHER COMPREHENSIVE INCOME (LOSS)
                 
Available for sale securities               Available for sale securities
Net unrealized gains (losses) on securities available for sale   6,148   (7,667)   (1,519)   Net unrealized gains (losses) on securities available for sale
Net (gains) losses reclassified to net income   (3,788)   174   (3,614)   Net (gains) losses reclassified to net income
    2,360   (7,493)   (5,133)    
Income tax expense (recovery)   1,273   (1,626)   (353)   Income tax expense (recovery)
Total other comprehensive income (loss)   1,087   (5,867)   (4,780)   Total other comprehensive income (loss)
                 
COMPREHENSIVE INCOME   42,806   (11,879)   30,927   COMPREHENSIVE INCOME

Adjustments to the Consolidated Statement of Cash Flows

The transition from Canadian GAAP to IFRS resulted in certain cash flows included in financing and investing activities under Canadian GAAP to be reclassified to operating activities under IFRS.  Specifically, net changes in deposits were reclassified from financing activities to operating activities and net changes in mortgages and personal and credit card loans were reclassified from investing activities to operating activities.  In addition, certain cash flows related to the Company's securitization activities that were included in investing activities under Canadian GAAP are reflected in operating activities under IFRS.

(D) Selected Annual Disclosures

As referred to in Note 2, certain disclosures that are required to be included in annual financial statements prepared in accordance with IFRS were not included in the Company's most recent annual financial statements prepared in accordance with Canadian GAAP.  These disclosures have been presented below for the comparative annual period.

(i) Loan Maturities

The following table provides the contractual loan maturity profile for securitized residential mortgages that were not included in the Company's most recent annual financial statements prepared in accordance with Canadian GAAP

                     
thousands of Canadian dollars (Unaudited)  
  Within 1 Year 1 to 3 Years 3 to 5 Years Over 5 Years Total Book Value
Securitized residential mortgages as at December 31, 2010 $ 635,934 $ 2,246,524 $ 4,507,870 $ 726,308 $ 8,116,636
Securitized residential mortgages as at January 1, 2010   362,129   787,990   2,479,002   497,586   4,126,707

(ii) Securitization Liability Maturities

The following table provides the contractual liability maturity profile for securitization liabilities.

                     
thousands of Canadian dollars (Unaudited) As at December 31, 2010
  Within 1 Year 1 to 3 Years 3 to 5 Years Over 5 Years Total
Mortgage-backed security liabilities $ 230,435 $ 1,306,530 $ 1,289,140 $ - $ 2,826,105
  Effective yield   3.3%   2.7%   2.2%   -   2.5%
Canada Mortgage Bond liabilities   106,641   1,094,070   3,476,205   601,557   5,278,473
  Effective yield   4.0%   3.7%   2.8%   2.6%   3.0%
  $ 337,076 $ 2,400,600 $ 4,765,345 $ 601,557 $ 8,104,578

                     
thousands of Canadian dollars (Unaudited) As at January 1, 2010
  Within 1 Year 1 to 3 Years 3 to 5 Years Over 5 Years Total
Mortgage-backed security liabilities $ 320,597 $ 533,688 $ 337,267 $ - $ 1,191,552
  Effective yield   3.8%   4.3%   3.2%   -   3.9%
Canada Mortgage Bond liabilities   -   287,035   2,311,379   366,490   2,964,904
  Effective yield   -   4.2%   3.2%   3.5%   3.3%
  $ 320,597 $ 820,723 $ 2,648,646 $ 366,490 $ 4,156,456

(iii) Current and Non-Current Assets and Liabilities

The following table presents an analysis of each asset and liability line item by amounts expected to be recovered or settled within one year or after one year as at December 31, 2010 and January 1, 2010.

                         
thousands of Canadian dollars (Unaudited) As at December 31, 2010 As at January 1, 2010
  Within 1 Year After 1 Year Total Within 1 Year After 1 Year Total
Assets                        
Cash resources $ 844,527 $ 2,297 $ 846,824 $ 930,134 $ - $ 930,134
Held for trading securities   -   -   -   99,938   -   99,938
Available for sale securities   171,391   252,777   424,168   162,560   332,042   494,602
Pledged securities   -   2,954   2,954   -   -   -
Residential mortgages   2,301,767   2,381,760   4,683,527   1,371,289   3,101,966   4,473,255
Securitized residential mortgages   1,465,415   6,651,221   8,116,636   790,245   3,336,462   4,126,707
Non-residential mortgages   326,470   511,783   838,253   270,211   438,214   708,425
Personal and credit card  loans   347,686   105,653   453,339   314,190   28,728   342,918
Collective allowance for credit losses   (29,153)   -   (29,153)   (27,793)   -   (27,793)
Income taxes receivable   9,451   -   9,451   6,466   -   6,466
Derivative assets   750   23,407   24,157   -   13,186   13,186
Other assets   80,099   -   80,099   75,322   -   75,322
Capital assets   -   4,894   4,894   -   4,863   4,863
Other intangible assets   -   47,917   47,917   -   26,811   26,811
Goodwill   -   15,752   15,752   -   15,752   15,752
Total assets $ 5,518,403 $ 10,000,415 $ 15,518,818 $ 3,992,562 $ 7,298,024 $ 11,290,586
                         
Liabilities                        
Deposits payable on demand $ 50,359 $ - $ 50,359 $ 38,223 $ - $ 38,223
Deposits payable on a fixed date   3,422,072   3,050,419   6,472,491   3,333,386   3,038,213   6,371,599
Mortgage-backed security liabilities   770,862   2,055,243   2,826,105   321,665   869,887   1,191,552
Canada Mortgage Bond liabilities   106,641   5,171,832   5,278,473   -   2,964,904   2,964,904
Derivative liabilities   -   9,009   9,009   -   11,099   11,099
Other liabilities   213,683   -   213,683   192,757   -   192,757
Deferred tax liabilities   -   40,113   40,113   -   16,829   16,829
Total liabilities $ 4,563,617 $ 10,326,616 $ 14,890,233 $ 3,886,031 $ 6,900,932 $ 10,786,963
                         
Net $ 954,786 $ (326,201) $ 628,585 $ 106,531 $ 397,092 $ 503,623

(iv) Goodwill

The carrying amount of goodwill in relation to each of the Company's subsidiaries as is as follows:

         
thousands of Canadian dollars (Unaudited)   December 31   January 1
    2010   2010
Home Trust $ 2,324 $ 2,324
PSiGate   13,428   13,428
  $ 15,752 $ 15,752

There have been no additions, disposals or impairment losses of goodwill during the year.

Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing, considering the business level at which goodwill is monitored for internal management purposes.  The primary CGU to which PSiGate goodwill is allocated is the PSiGate legal entity (the "unit") for which the entire carrying amount of goodwill related to PSiGate of $13.4 million has been allocated.  The unit is included in the consumer lending operating segment.  Management has determined that the recoverable amount of the unit exceeds its carrying amount and that no impairment exists.  The following information relates to the annual impairment test of the unit which was conducted during the fourth quarter of 2010.

The recoverable amount of the unit was determined on the basis of its fair value less costs to sell.  The fair value of the unit was determined using a discounted cash flow methodology where estimated cash flows were projected to December 31, 2014 and assuming a terminal growth rate of 2% thereafter.  A revenue growth rate of 9.4% was assumed over the period of projections with a stable gross margin percentage.  Operating expenses considered necessary to support the expected growth were included and increased over the period of projections at an expected inflationary rate.  Planned capital expenditures, also necessary to support expected growth, were incorporated.

A discount rate of 15.5% was used, which was comprised of a risk free rate, equity risk premium, size premium and company specific risk premium.   The risk free rate, equity risk premium and size premium were based on data from external sources whereas the company specific risk premium was based on factors considered by management to be specific to PSiGate.

The discounted cash flow methodology used is most sensitive to the discount rate and revenue growth rate used.   In consideration of this sensitivity, management determined that either an increase in the discount rate from 15.5% to 20.1% or a decrease in annual revenue growth from 9.4% to 1.3% for each year of the projection, assuming unchanged values for the other assumptions, would have caused the recoverable amount to equal the carrying amount.

(v) Intangible Assets

Intangible assets are comprised of internally developed software costs which include software costs related to the Company's new core banking system.  As at December 31, 2010, this new core banking system was not yet available for use and as such, amortization of these costs has not yet begun.  The following table presents the net carrying amount of software costs for the new core banking system and other software costs as at January 1, 2010 and December 31, 2010 and the changes in net carrying amount for the year.

             
thousands of Canadian dollars (Unaudited)   Core Banking
System
  Other Software
Costs
  Total
             
Cost:            
Balance as of January 1, 2010 $ 25,112 $ 2,456 $ 27,568
Additions from internal development   21,298   142   21,440
Balance as of December 31, 2010 $ 46,410 $ 2,598 $ 49,008
             
Accumulated amortization:            
Balance as of January 1, 2010 $ - $ 757 $ 757
Amortization for the year   -   334   334
Balance as of December 31, 2010 $ - $ 1,091 $ 1,091
             
Carrying amount:            
As at January 1, 2010 $ 25,112 $ 1,699 $ 26,811
As at December 31, 2010 $ 46,410 $ 1,507 $ 47,917

During 2010, $1.1 million incurred for research and development of internally developed software was recognized as an expense in the consolidated statement of income.

(vi) Related Party Transactions

Compensation of key management personnel of the Company for 2010 is as follows:

thousands of Canadian dollars (Unaudited)    
Short-term employee benefits $ 4,670
Other long-term benefits   72
Share-based payment   1,437
  $ 6,179

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 deposits, residential and non-residential mortgage lending, securitization of insured residential first mortgage products, consumer lending, Visa products 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
Martin Reid, President
416-360-4663
www.homecapital.com


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