Home Capital Reports Record Fourth Quarter and Year-End Results: Net Income
Rises 39.4% for the Fourth Quarter; Return on Equity Remains Strong at 28.4%;
Basic Earnings per Share Increase to $1.17 for the Fourth Quarter and to
$4.19 for 2009
Financial and Operating Highlights:
- Net income for the fourth quarter was $40.5 million, a 39.4% increase
over the $29.0 million reported for the fourth quarter of 2008.
Earnings for the year reached $144.5 million, up 32.9% from 2008.
- Basic earnings per share were $1.17 for the fourth quarter, up 39.3%
from the $0.84 reported in the fourth quarter of 2008. For the year
basic earnings per share were $4.19, 33.0% higher than the $3.15
recorded in 2008. Diluted earnings per share were $1.16 in the fourth
quarter, an increase of 38.1% from the $0.84 recorded in the same
period last year. Diluted earnings per share for the year were $4.15,
32.6% higher than the $3.13 reported in 2008.
- Return on equity was 28.4% for the fourth quarter and 28.2% for year
compared to 27.4% and 27.8%, respectively, for the comparable periods
in 2008.
- Total assets under administration, including off-balance sheet
securitized mortgages, crossed the $10 billion mark and ended the
year at $11.51 billion. This is an increase of 36.6% from the $8.42
billion reported one year ago.
- Total on-balance sheet assets at December 31, 2009 reached $7.36
billion, 26.7% higher than the $5.81 billion reported one year
earlier.
- On-balance sheet residential mortgages increased by 6.8% to $4.37
billion at December 31, 2009 from $4.10 billion at September 30, 2009
and up 33.9% from the $3.26 billion reported one year ago.
- Net interest income increased to $45.3 million at December 31, 2009
from the $43.0 million reported in the third quarter of 2009. The
interest spread between the loans portfolio over deposits at the end
of the fourth quarter of 2009 was 3.1%, consistent with the third
quarter of 2009 and higher than the spread of 2.8% in the fourth
quarter of 2008.
- Total mortgage originations were $1.39 billion during the fourth
quarter, an increase of 39.6% over the $999.1 million advanced during
the same period in 2008. Total originations for the year were $4.80
billion a 24.4% increase over the $3.86 billion originated during
2008. Of the total mortgage originations in 2009, 69.1% were insured
compared to 50.9% in 2008, further reducing the Company's risk
profile.
- Residential mortgage advances were $1.30 billion during the fourth
quarter, up 51.4% from the $858.5 million advanced in the fourth
quarter of 2008. During the fourth quarter of 2009, the Company
advanced $1.00 billion for single family mortgages, a 77.6% increase
over the $563.0 million in the fourth quarter of 2008. The success of
the Accelerator mortgage program contributed significantly to this
increase. Residential advances during the quarter included $296.8
million for multi-unit residential mortgages consistent with the
$295.5 million advanced during the fourth quarter of 2008.
- Non-residential mortgage advances during the fourth quarter of 2009
were $60.2 million an increase from the $48.9 million advanced in the
same period in 2008. For 2009 non-residential advances were $135.4
million compared to $442.4 million in 2008. The overall decline in
the non-residential mortgage originations is consistent with the
Company's stated prudent strategy to reduce the Company's exposure to
this sector in light of the uncertainty in the commercial real estate
markets. The non-residential mortgage portfolio at December 31, 2009
was $708.4 million, down from $826.9 million at the end of 2008.
- Mortgage securitization volumes remained strong as the Company sold
$863.4 million in CMHC-insured securities during the fourth quarter
compared to $620.6 million sold during the third quarter of 2009 and
up from the $557.7 million securitized and sold during the same
period last year. The net gains on securitization during the fourth
quarter were $20.8 million compared to $12.1 million in the third
quarter of 2009 and $16.4 million for the same period last year.
- Outstanding balances on the Equityline Visa portfolio were $304.6
million, a decline of 17.4% from the $369.0 million reported at the
end of 2008. Although the Company is maintaining a prudent credit
policy on the Equityline Visa product during the current economic
climate, new marketing initiatives have recently been launched to
grow the portfolio in 2010 in anticipation of an improving economy.
There was an increase of 25.8% in newly issued Equityline Visa
accounts in the fourth quarter compared to third quarter of 2009.
- Growth from the retail loan portfolio remained positive in the fourth
quarter and is expected to continue growing in 2010. Total net income
from the consumer lending segment contributed $6.6 million during the
fourth quarter, a 38.5% increase over the $4.8 million recorded in
the fourth quarter of 2008.
- Capital ratios for Home Trust remained strong in the fourth quarter
of 2009 with Tier 1 and Total Capital ratios of 16.4% and 18.0%,
respectively, compared to 16.6% and 18.2% at September 30, 2009, and
12.9% and 14.2% one year ago. The Company will continue to maintain a
prudent approach to capital management while positioning Home Capital
for future growth opportunities.
- Net impaired loans as a percentage of the total loans portfolio
declined to 0.85% at December 31, 2009 from 1.2% at the end of the
third quarter of 2009, 1.3% at June 30, 2009, and 0.86% at the end of
2008.
On
During the fourth quarter, Standard & Poor's (S&P) affirmed its long-term and short-term counterparty ratings issued to Home Trust (BBB/A-2) and Home Capital (BBB-/A-3), with a stable outlook for both companies.
On
Subsequent to the end of the quarter, and in light of the Company's continued profitability and solid financial performance, the Board of Directors declared a quarterly cash dividend of
Home Capital continued to generate strong operating and financial performance through the fourth quarter of 2009, building on its proven strategy of long-term organic growth and increasing profitability. With the Company's continued growth, additional investments continue to be made in staffing in key business areas to manage further anticipated increases in business.
Looking ahead, we are confident that Home Capital remains well positioned to continue generating robust earnings and growth in 2010. As a result, the Board of Directors and management have established the following objectives for 2010: 15%-20% growth in each of total earnings, diluted earnings per share and total assets (including assets under administration), as well as a 20% return on equity.
(signed) (signed)
GERALD M. SOLOWAY NORMAN F. ANGUS
Chief Executive Officer Chairman of the Board
February 9, 2010
Additional information concerning the Company's targets and related expectations for 2010, including the risks and assumptions underlying these expectations, may be found in Management's Discussion and Analysis for the Fourth Quarter 2009.
Fourth Quarter Results Conference Call
The conference call will take place on
Conference Call Archive
A telephone replay of the call will be available between
FINANCIAL HIGHLIGHTS
For the Period Ended
December 31 (Unaudited) Three Months Ended Year Ended
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In Thousands of Dollars
(Except Per Share and
Percentage Amounts) 2009 2008 2009 2008
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OPERATING RESULTS
Net Income $ 40,481 $ 29,039 $ 144,493 $ 108,687
Total Revenue 121,381 117,996 489,179 454,695
Earnings per Share -
Basic $ 1.17 $ 0.84 $ 4.19 $ 3.15
Earnings per Share -
Diluted 1.16 0.84 4.15 3.13
Return on Shareholders'
Equity 28.4% 27.4% 28.2% 27.8%
Return on Average Assets 2.4% 2.0% 2.2% 2.0%
Efficiency Ratio 27.1% 27.5% 27.2% 28.5%
Efficiency Ratio (TEB(2)) 26.1% 27.0% 26.5% 28.0%
(Non-interest Expense/Net
Interest Income Plus Fee
Income)
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BALANCE SHEET HIGHLIGHTS
Total Assets $7,360,874 $5,809,713
Loans 5,440,747 4,506,391
Deposits 6,409,822 5,102,781
Shareholders' Equity 590,288 432,753
Mortgage-Backed Security Assets Under
Administration 4,147,711 2,614,258
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FINANCIAL STRENGTH
Capital Measures(1)
Risk Weighted Assets $3,227,155 $2,985,750
Tier 1 Capital Ratio 16.4% 12.9%
Total Capital Ratio 18.0% 14.2%
Credit Quality
Net Impaired Loans as a Percentage of Gross Loans 0.8% 0.9%
Allowance as a Percentage of Gross Impaired Loans 62.1% 66.7%
Annualized Provision as a Percentage of Gross Loans 0.2% 0.2%
Share Information
Book Value per Common Share $ 17.00 $ 12.57
Common Share Price - Close $ 41.85 $ 19.80
Market Capitalization $1,452,739 $ 681,793
Number of Common Shares Outstanding 34,713 34,434
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(1) These figures relate to the Company's operating subsidiary, Home
Trust Company.
(2) See definition of Taxable Equivalent Basis (TEB) under Non-GAAP
Measures of this unaudited interim consolidated financial report.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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Caution Regarding Forward-Looking Statements
From time to time Home Capital Group Inc. (the "Company" or "Home Capital") makes written and verbal forward-looking statements. These are included in the Annual Report, periodic reports to shareholders, regulatory filings, press releases, Company presentations and other Company communications. Forward-looking statements are made in connection with business objectives and targets, Company strategies, operations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. These statements regarding expected future performance are "financial outlooks" within the meaning of National Instrument 51-102. Please see the risk factors, which are set forth in detail on pages 28 through 38 of the Company's 2008 Annual Report, as well as its other publicly filed information, which may be located at www.sedar.com, for the material factors that could cause the Company's actual results to differ materially from these statements. Forward-looking statements can be found in the Message to the Shareholders, the Outlook Section and Future Accounting Changes in this quarterly report. Forward-looking statements are typically identified by words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "may," and "could" or other similar expressions.
By their very nature, these statements require us to make assumptions and are subject to inherent risks and uncertainties, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors.
These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.
Assumptions about the performance of the Canadian economy in 2010 and how it will affect Home Capital's business are material factors the Company considers when setting its objectives. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian government and its agencies. In setting performance target ranges for 2010, management's expectations assume:
- The Canadian economy will begin a slow recovery, with fragmented
growth prospects across the country, and inflation will remain low;
- Unemployment levels will remain elevated through much of 2010
potentially beginning to show improvement later in 2010;
- Housing demand will remain strong in 2010 but the rate of increase in
demand may begin to slow as interest rates begin to increase in the
second half of 2010;
- A slowly increasing interest rate environment in the second half of
2010, supported by stable inflation, driven by lower demand for
commodity and energy goods;
- Sound credit quality with actual losses within Home Capital's
historic range of acceptable levels; and
- A compressed net interest margin and comparatively lower investment
returns, reflecting the Company's shift to higher quality assets held
in the security and liquidity portfolio and prudent levels of liquid
assets being held in response to continuing uncertainty in the
capital markets.
Non-GAAP Measures
The Company uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability between companies using these measures. The non-GAAP measures used in this Management's Discussion and Analysis (MD & A) are defined as follows:
Return on Shareholders' Equity
Return on equity is a profitability measure that presents the net income available to common shareholders' equity as a percentage of the capital deployed to earn the income. The Company calculates its return on equity using average common shareholders' equity, including all components of shareholders' equity.
Return on Assets
Return on assets is a profitability measure that presents the net income as a percentage of the average total assets deployed to earn the income.
Efficiency Ratio
Management uses the efficiency ratio as a measure of the Company's efficiency. This ratio represents non-interest expenses as a percentage of total revenue, less interest expense. The Company also looks at the same ratio on a taxable equivalent basis and will include the adjustment for non-taxable dividends in arriving at the efficiency ratio, on a taxable equivalent basis.
Net Interest Margin
Net interest margin is calculated by taking net interest income, on a taxable equivalent basis, divided by average total assets.
Tier 1 and Total Capital Ratios
The capital ratios provided in this MD & A are those of the Company's wholly owned subsidiary Home Trust Company (Home Trust). The calculations are in accordance with guidelines issued by Office of the Superintendent of Financial Institutions
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
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
2009 Objectives and Performance
Home Capital published its financial objectives for 2009 on page 11 of the Company's 2008 Annual Report. The following table compares actual performance to date against each of these objectives.
Table 1: 2009 Objectives and Performance
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Year ended
December 31, 2009
2009 Objectives(1) Actual Results(1)
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Net Income 10%-15% $144.5 million, or
($119.6 million - 32.9% increase over the
$125.0 million) same period last year
Diluted Earnings per 10%-15% $4.15 per share, or
Share ($3.44 per share - 32.6% increase over the
$3.60 per share) same period last year
Total Assets and Assets 10%-15% $11.51 billion, or
Under Administration ($9.27 billion - 36.6% increase over the
$9.69 billion) same period last year
Return on Shareholders' 20.0% 28.2%
Equity
Efficiency Ratio (TEB) 28.0% to 34.0% 26.5%
Capital Ratios(2)
Tier 1 Minimum of 10% 16.4%
Total Minimum of 12% 18.0%
Provision for Loan Losses
as a Percentage of
Total Loans 0.2% to 0.5% 0.2%
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(1) Objectives and results for net income and diluted earnings per share
are for the current year.
(2) Based on the Company's wholly owned subsidiary, Home Trust Company.
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FINANCIAL HIGHLIGHTS
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The Company generated positive growth and robust earnings across all lines of business during the fourth quarter and the year ended
Income Statement Highlights
- Net income in the fourth quarter of 2009 was 39.4% higher than the
fourth quarter of 2008 while earnings for the year ended December 31,
2009 were 32.9% higher than 2008.
- Net interest income for the fourth quarter of 2009 was $45.3
million, compared to $43.0 million for the third quarter of 2009,
$40.5 million for the second quarter of 2009, $36.2 million for first
quarter of 2009 and $35.2 million in the fourth quarter of 2008. The
increasing trend in net interest income is attributed to growth in
the lending portfolio and the Company's ongoing strategy to maintain
margins over the past several quarters.
- Non-interest income in the quarter was 7.7% higher than the fourth
quarter of 2008 and was 53.8% higher than the year ended December 31,
2008. The quarter-over-quarter growth is attributed to increased
securitization gains marginally offset by mark-to-market adjustments
on the hedging instruments associated with the Canada Mortgage Bond
(CMB) program. Year-over-year growth is attributed to a marked
increase in securitization volumes compared to 2008 and improvement
in the performance of the securities portfolio.
- The efficiency ratio (TEB) (the lower the better) reflects the
Company's cost management leadership within the banking industry. The
ratio was 26.1% for the fourth quarter and 26.5% for the year ended
December 31, 2009, compared to 27.0% for the fourth quarter of 2008
and 28.0% for 2008.
- During 2009, the Company recognized $9.8 million reduction in future
tax provisions which reflected declining federal and provincial tax
rates and the extension of maturities on the net underlying
liabilities. Of this total, $4.7 million is attributed to the
Province of Ontario's November 2009 enactment of their reduced tax
rates which are effective July 1, 2010.
- Diluted earnings per share for the quarter increased 38.1% to $1.16
from $0.84 in the fourth quarter of 2008. For year ended December 31,
2009, diluted earnings per share increased 32.6% to $4.15 from the
$3.13 earned in 2008.
- Return on average shareholders' equity for the three and twelve
months ended December 31, 2009 was 28.4% and 28.2%, respectively,
compared to 27.4% and 27.8% for the same periods in 2008.
Balance Sheet Highlights
- Total on-balance sheet assets at December 31, 2009 rose 17.1% from
the third quarter of 2009 and 26.7% year-over-year, to reach $7.36
billion from the $5.81 billion reported at December 31, 2008. Asset
growth was achieved across the Company's core asset base including
the Company's loans, securities and liquidity portfolios. The Company
was able to achieve significant asset growth while reducing the
overall risk profile of the mortgage portfolio as the percentage of
insured mortgages grew to 31.0% at December 31, 2009 from 14.6% one
year ago.
- Total assets under administration, including the off-balance sheet
securitized mortgages, was $11.51 billion at December 31, 2009, an
increase of $1.62 billion or 16.4% from September 30, 2009 and an
increase of $3.09 billion or 36.6% from December 31, 2008. A
significant contributor to the growth in assets under administration
is the success of the Accelerator mortgage program.
- Total on balance sheet residential mortgages increased $277.0
million, or 6.8% over the third quarter of 2009 and $1.11 billion and
33.9% over December 31, 2008. The growth reflects the Company's
strategy to prudently grow its on-balance sheet loans portfolio and a
cautious return to our traditional lending criteria.
- Liquid assets at December 31, 2009 increased to $1.20 billion,
compared to $469.0 million at September 30, 2009 and $880.7 million
at December 31, 2008. The increase in liquid assets at end of the
fourth quarter reflects the timing of certain securitization
transactions, as well as the Company's strategy to hold prudent
levels of liquidity as the economy slowly recovers and to maintain
financial flexibility. The Company's access to funds through insured
deposits and securitization markets remains strong and will continue
to accommodate growth of the Company's loans portfolio.
- The Company's capital position remained strong in the fourth quarter
with Tier 1 and Total Capital ratios of 16.4% and 18.0%,
respectively, at December 31, 2009 compared to 16.6% and 18.2% at
September 30, 2009 and 12.9% and 14.2% one year earlier. A strong
balance sheet combined with robust capital ratios allows the Company
to maintain financial flexibility to weather any remaining challenges
in the economic environment and to capitalize on strategic
opportunities that may arise.
- Deposit liabilities as at December 31, 2009 were $6.41 billion, an
increase of $1.04 billion from the $5.37 billion at September 30,
2009 and an increase of $1.31 billion from the $5.10 billion recorded
December 31, 2008. Deposit liabilities continue as a stable and
growing funding source for the growth in the Company's lending
activity. The Company has grown debt free since September 2006.
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EARNINGS REVIEW
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Net Interest Income
Table 2: Net Interest Income
For the three months ended
-------------------------------------------------------------------------
December 31, 2009 December 31, 2008
In Thousands of Dollars Income/ Average Income/ Average
(Except Percentage Amounts) Expense Rate(1) Expense Rate(1)
-------------------------------------------------------------------------
Assets
Cash and cash resources $ 3,023 2.2% $ 2,178 1.8%
Securities 6,031 3.7% 7,123 5.7%
Loans 84,312 6.3% 82,672 7.3%
Taxable equivalent
adjustment 2,842 - 1,205 -
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Total interest earning
assets 96,208 5.9% 93,178 6.8%
Other assets - - - -
-------------------------------------------------------------------------
Total Assets $ 96,208 5.6% $ 93,178 6.6%
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Liabilities and
Shareholders' Equity
Deposits $ 48,030 3.3% $ 56,736 4.5%
Other liabilities - - - -
Shareholders' equity - - - -
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 48,030 2.8% $ 56,736 4.0%
-------------------------------------------------------------------------
Net Interest Income $ 48,178 - $ 36,442 -
Tax Equivalent Adjustment (2,842) - (1,205) -
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Net Interest Income per
Financial Statements $ 45,336 $ 35,237
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Net Interest Margin(2) 2.8% 2.6%
Spread of Loans over
Deposits Only 3.0% 2.8%
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For the year ended
-------------------------------------------------------------------------
December 31, 2009 December 31, 2008
In Thousands of Dollars Income/ Average Income/ Average
(Except Percentage Amounts) Expense Rate(1) Expense Rate(1)
-------------------------------------------------------------------------
Assets
Cash and cash resources $ 5,650 0.8% $ 10,504 2.3%
Securities 25,306 4.3% 24,257 4.9%
Loans 334,148 6.7% 339,242 8.0%
Taxable equivalent
adjustment 7,949 - 4,353 -
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Total interest earning
assets 373,053 5.9% 378,356 7.3%
Other assets - - - -
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Total Assets $ 373,053 5.7% $ 378,356 7.0%
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Liabilities and
Shareholders' Equity
Deposits $ 200,093 3.5% $ 223,428 4.7%
Other liabilities - - - -
Shareholders' equity - - - -
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Total Liabilities and
Shareholders' Equity $ 200,093 3.0% $ 223,428 4.1%
-------------------------------------------------------------------------
Net Interest Income $ 172,960 - $ 154,928 -
Tax Equivalent Adjustment (7,949) - (4,353) -
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Net Interest Income per
Financial Statements $ 165,011 $ 150,575
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Net Interest Margin(2) 2.7% 2.9%
Spread of Loans over
Deposits Only 3.2% 3.3%
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(1) The average rate is a simple average calculated with reference to
opening and closing period balances and as such may not be as precise
if daily balances were used.
(2) Net interest margin is calculated on a tax equivalent basis.
As noted in Table 2, net interest income of
The interest spread between the loans portfolio over deposits at the end of the fourth quarter of 2009 was 3.0%, consistent with the third quarter of 2009 and higher than the spread of 2.8% in the fourth quarter of 2008. The Company continues to benefit from lower rates on new deposits. The Company expects residential mortgage spreads to continue improving as the Company renews its focus on its core product again. The Company continues to prudently diversify its lending portfolio as it adds higher spread products.
For the year the spread between the loans portfolio and deposits was 3.2% compared to 3.3% for 2008. Cuts in the prime lending rate beginning late in 2008 continued to impact the average rate for loans and, while the Company was able to re-price deposits, some spread compression was still experienced during the year.
The net interest margin (TEB) for the Company's assets and liabilities for the fourth quarter of 2009 was 2.8%, which is higher than the 2.6% reported in the fourth quarter of 2008. The increase is partly due to the re-pricing of deposits and also because the net interest margin calculation is impacted by the level of assets the Company holds at the beginning and end of the quarter. As the margin is calculated using a simple average asset balance at the end of Q3 2009, the Company held a relatively lower liquidity portfolio which lowered the average cash and cash equivalent asset balance compared to Q4 2008 thus increasing the net interest margin.
For the year the net interest margin (TEB) was 2.7% compared to 2.9% for 2008. This margin declined in part due to the modest decline in the interest spreads between deposits and loans but also, as described above the level of assets held in the liquidity portfolio at the beginning and end of 2009. These liquidity portfolio balances were high at the beginning and end of 2009 due the timing of securitization transactions and the strategy to hold a prudent level of liquidity thus reducing overall interest margin earned on cash and cash resources.
Non-Interest Income
Total non-interest income was
The fees and other income components of non-interest income for the quarter were
Table 3: Securitization Activity
The following table summarizes the securitization activities during the fourth quarter of 2009 compared to the same period in 2008:
Three months ended
-------------------------------------------------------------------------
December 31, 2009
-------------------------------------------------------------------------
Single Single
Family Family
Residential Residential Multi-Unit
In Thousands of Dollars, MBS Under MBS Over Residential
except % 1 year 1 year MBS Total
-------------------------------------------------------------------------
Highlights of
Securitization Activity
Book value of mortgages
securitized $ 73,898 $ 368,643 $ 420,897 $ 863,438
Net gain on sale of
mortgages(1) $ 2,005 $ 10,137 $ 8,669 $ 20,811
Prepayment rate 4.5% 13.5% 0.0% 6.1%
Excess spread 4.5% 2.1% 1.3% 2.0%
Discount rate 1.1% 2.3% 3.4% 2.0%
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Three months ended
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
Single Single
Family Family
Residential Residential Multi-Unit
In Thousands of Dollars, MBS Under MBS Over Residential
except % 1 year 1 year MBS Total
-------------------------------------------------------------------------
Highlights of
Securitization Activity
Book value of mortgages
securitized $ 105,631 $ 182,308 $ 269,781 $ 557,720
Net gain on sale of
mortgages(1) $ 2,911 $ 10,111 $ 3,376 $ 16,398
Prepayment rate 4.2% 12.8% 0.0% 5.0%
Excess spread 4.3% 3.1% 1.7% 2.7%
Discount rate 2.6% 2.7% 3.0% 2.8%
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(1) The gain on sales of mortgages is net of gains and losses realized on
hedging activities.
The Company sold MBS pools during the fourth quarter of 2009, consisting of
The growth in securitization volumes was greatest in the Multi-Unit Residential MBS and the Single Family Residential MBS Over 1 Year which are categories with lower excess spreads and this lowered the overall excess spreads in the fourth quarter of 2009 compared to the fourth quarter of 2008.
Table 4: Reconciliation of Securitization Activity
The table below provides a summary reconciling the gains recorded during the respective quarter and the excess spread earned from the Company's continued servicing of these portfolios.
For the three months ended For the year ended
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Securitization gains $ 29,156 $ 25,699 $ 80,113 $ 61,314
Securitization hedging
activity (8,345) (9,301) (62) (12,521)
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Securitization gains,
net of hedge costs 20,811 16,398 80,051 48,793
Recurring securitization
income 3,472 4,552 12,346 9,789
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Net securitization income $ 24,283 $ 20,950 $ 92,397 $ 58,582
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Net securitization income was
Securitization income in the fourth quarter increased
As described in the Derivatives and Off-Balance Sheet Arrangements section of this MD & A, the Company utilizes forward bond contracts to manage exposure to movements in interest rates prior to the sale of securitized mortgage pools. Forward bond contracts are unwound at the time of securitization and any realized gain or loss is then included in the securitization gain as shown above. In the fourth quarter of 2009, an
Forward bond contracts that are outstanding as at the balance sheet date are fair valued with the resulting gain or loss recorded in the consolidated income statement through the derivatives gain (loss) account (refer to Note 12 of these unaudited interim consolidated financial statements and the Derivatives and Off-Balance Sheet Arrangements section of this MD & A).
Recurring securitization income earned from excess spreads, net of servicing fees, was
The Company's securitization activities include participation in CMHC's CMB program, administered through the
The Company also holds longer term derivative contracts to hedge its obligations for pools previously sold to
Non-Interest Expenses
Total non-interest expenses for the fourth quarter were
During the fourth quarter, salaries and staff benefits were
Premises expenses were
General and administration expenses were
The efficiency ratio (TEB) for the quarter was 26.1% and 26.5% for the year (the lower the better), compared to 27.0% in the fourth quarter of 2008 and 28.0% for 2008. The annual ratio is better then the Company's stated objective for the year, reflecting the Company's consistent and prudent cost management leadership within the industry. The Company is successfully growing revenue at a stronger pace than expenses.
Provision for Credit Losses
At
The expense for the provision for credit losses was
The general allowance balance at
The balance in specific provisions at
Total loans written-off net of recoveries during the quarter were
Income Taxes
The income tax expense amounted to
In addition, Canadian dividend income is non-taxable to financial institutions, which results in a lower effective income tax rate. In the absence of tax-free dividends, the tax rates would have been 24.9% for the fourth quarter and 30.0% for 2009, compared to 33.4% for the fourth quarter and 33.3% for 2008.
Comprehensive Income
Comprehensive income is the aggregate of net income and other comprehensive income (OCI). Total comprehensive income was
The Company's OCI includes changes in unrealized income on available for sale securities, valuation changes on the securitization receivables and transfers of previously unrealized net gains and losses to net income once they have been realized. During the fourth quarter of 2009, OCI of
-------------------------------------------------------------------------
BALANCE SHEET REVIEW
-------------------------------------------------------------------------
Assets
Total on-balance sheet assets at
The growth in total assets over
The Company's cash resources and securities portfolio increased 67.8% and 25.2%, respectively, year-over-year to
The Company's on-balance sheet residential mortgage portfolio increased
The non-residential mortgage portfolio decreased by
The consumer lending portfolio, which includes the Equityline Visa portfolio, has declined to
Other assets increased by
The growth in assets over
Liabilities
Total liabilities at
Much of the increase from
The increase in liabilities from
Shareholders' Equity
Total shareholders' equity at
Total shareholders' equity at the end of 2009 rose by
At
Derivatives and Off-Balance Sheet Arrangements
From time to time, the Company enters into hedging transactions to mitigate the interest exposure on outstanding loan commitments. For example, the Company utilizes forward contracts to sell Government of
Forward bond contracts are unwound at the time of securitization. A net realized loss of
At
The Company participates in the CMB program sponsored by CMHC, and administered by
The notional values of the swaps, including both seller and hedge swaps at
When the Company originates and securitizes insured residential mortgage loans through sales of MBS and through participation in the CMB program, the Company retains rights to certain excess interest spreads less servicing liabilities, which constitute retained interests which are recorded on the consolidated balance sheet as securitization receivables. The Company periodically reviews the fair value of securitization receivables, and any other than temporary impairment in value is charged to income. The Company continues to administer almost all securitized assets that the Company originates after the sale and, upon maturity of the mortgage, will renew or refinance these mortgage loans whenever possible. As at
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
-------------------------------------------------------------------------
CAPITAL MANAGEMENT
-------------------------------------------------------------------------
Home Trust's capital ratios are calculated using the guidance of OSFI. Effective
Under
Table 5: Risk-weighted Assets
As at As at As at
December September December
In Thousands of Dollars 31, 2009 30, 2009 31, 2008
-------------------------------------------------------------------------
Risk-weighted assets for:
Credit risk $2,913,092 $2,688,064 2,711,583
Operational risk 314,063 300,363 274,167
-------------------------------------------------------------------------
Total Risk-weighted Assets(1) $3,227,155 $2,988,427 2,985,750
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on the Company's wholly owned subsidiary, Home Trust Company.
The capital base of Home Trust remains strong. The Tier 1 capital ratio at the end of 2009 was 16.4%, compared to 16.6% recorded in the third quarter of 2009 and up from the 12.9% reported at
The Company continues to build its capital base through retained earnings. The Company's strong capital position affords additional flexibility to maintain and grow operations, both organically and, if the opportunity arose, through strategic acquisitions. These ratios both continue to substantially exceed OSFI's well capitalized targets of 7.0% for Tier 1 and 10.0% for Total Capital as well as Home Trust's internal capital targets.
For further information on the Company's regulatory capital see Note 8 to these unaudited interim consolidated financial statements.
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RISK MANAGEMENT
-------------------------------------------------------------------------
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 risk. The Company's ERM structure is supported by a governance framework which includes Board of Directors' and Senior Management oversight, policies, management standards, guidelines and procedures appropriate to each business activity and source of risk. The policies are reviewed and approved annually by the Board of Directors. The Company's key risk management practices remain in place and continue to be reviewed and enhanced from those outlined on pages 28 through 38 in the MD & A section of the Company's 2008 Annual Report.
Credit Risk
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. The Company's exposure to credit risk is monitored by senior management, the ERM function, the Audit Committee and the Risk and Capital Committee of the Board of Directors who undertake reviews of credit policies, lending practices, the adequacy of loan loss reserves and credit risk based capital. The Company's policy is that credit is approved by different levels of senior management, 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.
At
Within the Company's residential mortgage portfolio, 31.0% of the loans were insured by either CMHC or other approved insurers at the end of the quarter, compared to 28.8% at
The mortgage loans portfolio is showing signs of improvement with 95.4% of the portfolio current and 1.1% of the portfolio over 60 days in arrears at the end of 2009, comparing favourably to 94.5% of the portfolio current and 1.6% of the portfolio over 60 days in arrears at the end of 2008.
As at
The secured loan portfolio of
The Company experienced an improvement in net impaired loans in the fourth quarter to
The Company continues to be well positioned to absorb probable losses in its loans portfolio, holding general allowances of
The total general allowance was 86.1 basis points of the Company's risk-weighted assets (RWA) at
Liquidity Risk
This is the risk the Company is 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, such as the minimum levels of liquid assets to be held at all times, the composition of types of liquid assets to be maintained, the daily monitoring of the liquidity position by senior management, the ERM function and quarterly reporting to the Risk and Capital Committee of the Board of Directors. As one of the tools used in managing liquidity, the Company runs a model which 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
The Company holds liquid assets in the form of cash and bank deposits, treasury bills, bankers' acceptances, government bonds and debentures to comply with its liquidity policy. At
For the twelve months ended December, 31 2009 the Company maintained a monthly average of
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 to prevent interest rate fluctuations from materially impacting future earnings, and to the best of its abilities matches liabilities to assets through its actions in the deposit market in priority to accessing off-balance sheet solutions. The Company's Asset Liability Management Committee (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
To assist in matching assets and liabilities, the Company utilizes an interest rate risk sensitivity model that measures the relationship between changes in interest rates and the resulting impact on both future net interest income and the economic value of shareholders' equity. Limits based on these models are set and monitored by senior management, the ERM function, ALCO and the Risk and Capital Committee of the Board. 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 6: Impact of Interest Rate Shifts
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Increase in Decrease in
interest rates interest rates
-------------------------------------------------------------------------
100 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 7,418 $ 3,917 $ (7,418) $ (3,917)
Impact on net present
value of shareholders'
equity (7,837) (7,157) 9,245 7,589
200 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 14,835 $ 7,835 $ (14,835) $ (7,835)
Impact on net present
value of shareholders'
equity (14,410) (13,909) 20,059 15,637
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company may enter into derivative transactions for the purpose of hedging commitment risk. The purpose is to manage interest rate exposures during the period between when a mortgage commitment is made and when this mortgage loan is securitized into an MBS pool. The Company held notional
-------------------------------------------------------------------------
RESULTS BY BUSINESS SEGMENT
-------------------------------------------------------------------------
The following section discusses the mortgage lending, consumer lending and other business segments for the three-month period and year ended
Mortgage Lending
The Company's mortgage lending business contributed
The table below provides a breakdown of specific residential and non-residential advances made during the quarter and year-to-date with prior year comparables.
Table 7: Mortgage Production
For the three
months ended For the year ended
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Traditional single family
residential mortgages(1) $ 517,668 $ 432,543 $1,778,575 $2,164,395
Accelerator single family
residential mortgages(1) 483,809 130,431 1,519,024 236,935
Multi-unit residential
mortgages(1) 296,834 295,508 1,239,352 546,382
Warehouse residential
mortgages(1) - 35,477 49,951 296,744
Non-residential mortgages 60,156 48,861 135,380 442,356
Store and apartments 18,109 21,252 42,161 78,838
Warehouse commercial
mortgages 18,251 35,000 34,500 93,273
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Total Mortgage Advances $1,394,827 $ 999,072 $4,798,943 $3,858,923
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As defined by OSFI
The total value of new mortgages advanced in the quarter was
During the fourth quarter of 2009, single family residential advances increased by 77.9% or
During the fourth quarter, advances for non-residential mortgages increased
During the quarter, the Company sold
The Company's second mortgage program, (recorded as Secured Loans), is conducted through an agreement with a Trustee operating through the trust of Regency Finance Corp. (Regency), whereby the Company acts as Regency's agent in offering residential second mortgage loans. These mortgage loans are securitized and the investments are purchased by the Company. At the end of the fourth quarter of 2009 the Company held
Consumer Lending - Credit Cards and Retail Services
Consumer lending again generated positive results during the fourth quarter of 2009 while continuing to diversify the Company's sources of income. Net income for the quarter was
Growth in the Company's retail loan portfolio has contributed favourably to the overall results of this segment as net interest income increased 38.8% year-over-year and 29.4% quarter-over-quarter. This increase is despite the decline in the Equityline Visa portfolio during the economic downturn. Spreads on the portfolio improved due to short term interest rates remaining low throughout much of the year. The Company has commenced new marketing initiatives, in anticipation of economic recovery, to resume long term plans to grow this part of the business.
The Equityline Visa loans portfolio amounted to
During the fourth quarter of 2009, 936 Equityline Visa accounts with
Also included in the operating results of the consumer lending segment are the operations of PSiGate which contributed
Other
The Other segment is comprised of the operating results from the Company's securities portfolio and corporate activities. Net income for the quarter was
-------------------------------------------------------------------------
ACCOUNTING STANDARDS AND POLICIES
-------------------------------------------------------------------------
Critical Accounting Estimates
Critical accounting estimates which require management to make significant judgements, some of which are inherently uncertain, are outlined on pages 40 through 42 of the 2008 Annual Report. These estimates are critical since they involve material amounts and require management to make estimates that, by their very nature, include uncertainties. The preparation of unaudited interim consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions, mainly concerning the valuation of items, which affect the amounts reported. Actual results could differ from those estimates.
Accounting policies requiring critical accounting estimates include the allowance for credit losses, securitization of residential mortgages, financial instruments measured at fair value, other than temporary impairment of available for sale securities, goodwill and future income tax liabilities. Further information can be found under Notes 3, 4, 5, 11, and 12 of these unaudited interim consolidated financial statements. There have been no subsequent changes to the critical accounting estimates disclosed on pages 40 through 42 of the 2008 Annual Report.
Change in Accounting Policy
The significant accounting policies the Company follows are detailed in Note 1 to the Company's
Effective
Effective
Future Accounting Changes
In
In
International Financial Reporting Standards (IFRS)
In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five-year transition period. In
The Company will change over to IFRS starting with interim and annual financial statements relating to fiscal periods beginning on or after
The implementation project consists of three primary phases, which will in many instances occur concurrently as the IFRS standards are applied to specific areas from start to finish:
- Research, diagnostic and planning phase - This phase includes
performing a high-level assessment to identify key implications of
the transition to IFRS. As a result of these procedures the potential
issues and implications are ranked as high, medium or low priority
and assigned to the relevant teams. The core IFRS team has undergone
training to effectively carry out the remaining phases of the
project.
- Impact analysis, evaluation and design phase - In this phase, each
area identified from the research, diagnostic and planning phase will
be addressed in order of priority with project team members assigned
accordingly. This phase includes specification of changes required to
existing accounting policies, information systems, internal controls
over financial reporting and other operations business processes.
Following an analysis of policy alternatives allowed under IFRS,
preliminary IFRS financial statement content will be drafted.
- Implementation and review phase - This phase includes execution of
changes to information systems and business process, completing
formal authorization processes to approve recommended accounting
policy choices and training programs across the Company's finance
group and other staff, as necessary. The resulting efforts from the
other phases of the project will culminate with the collection of
financial information necessary to compile IFRS-compliant financial
statements, embedding IFRS standards in business process and related
controls for certification of internal controls over financial
reporting and Audit Committee approval of IFRS financial statements.
The Company completed the research, diagnostic and planning phase and started working on the impact analysis, evaluation and design phase during the fourth quarter of 2008. For certain key topics, including securitization accounting, the Company has begun the implementation and review phase.
The Company's analysis of IFRS and comparison with currently applied accounting principles has identified a number of differences. Many of the differences identified are not expected to have a material impact on the reporting results and financial positions. However, there may be significant changes following from the IFRS accounting principles and provisions for first-time adoption of IFRS standards on certain areas as described below.
Most adjustments required on transition to IFRS will be made retrospectively, against opening retained earnings as of the date of the first comparative balance sheet presentation based on standards applicable at that time. Transitional adjustments relating to those standards where comparative figures are not required to be restated will only be made as of the first day of the year of adoption.
IFRS 1 "First-Time Adoption of International Financial Reporting Standards", provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirement for full retrospective application of IFRS. The Company is analyzing the various accounting policy choices available and will implement those determined to be most appropriate for the Company's specific circumstances. The Company has completed preliminary conclusions on these choices but this is subject to ongoing assessment during the transition year.
The most significant IFRS implication for the Company is the accounting for the securitization and sale of mortgages under the CMHC sponsored CMB and MBS programs. Based on the current structure of these programs and the IFRS in effect at transition, the Company will no longer account for these transactions as sales of mortgages. As such, at the transition date to IFRS, all previously recognized securitization gains will be reversed through opening retained earnings. This reversal will be offset by the income that would have been recognized if the mortgages had not been securitized and sold less the cost of the securitization funding. The Company's IFRS balance sheet will include the mortgages previously securitized and sold, as well as any future securitization transactions undertaken through the current CMHC CMB and MBS structure. The balance sheet will also include a liability representing the funding provided through the securitization transaction. As such, upfront securitization gains related to transactions using this structure will no longer be recognized and instead will be replaced by the interest income on the mortgages less the interest expense on the funding. The Company has not yet quantified the impact on opening retained earnings or ongoing earnings.
In
Controls over Financial Reporting
No changes were made in the Company's internal controls over financial reporting during the interim period ended
-------------------------------------------------------------------------
UPDATED SHARE INFORMATION
-------------------------------------------------------------------------
As at
Subsequent to the end of the fourth quarter, the Board of Directors declared a quarterly cash dividend of
-------------------------------------------------------------------------
QUARTERLY FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
Table 8: Summary of Quarterly Results
-------------------------------------------------------------------------
In Thousands of Dollars 2009
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q4 Q3 Q2 Q1
Net interest income
(TEB)(1) $ 48,178 $ 45,254 $ 42,024 $ 37,505
Less TEB adjustment 2,842 2,300 1,535 1,273
-------------------------------------------------------------------------
Net interest income per
financial statements 45,336 42,954 40,489 36,232
Non-interest income 28,015 33,589 30,437 32,034
Non-interest expense 19,856 21,674 18,222 18,849
Total revenues 121,381 125,299 121,778 120,721
Net income 40,481 38,243 34,351 31,418
Return on common
shareholders' equity 28.4% 28.7% 27.9% 27.9%
Return on average total
assets 2.4% 2.5% 2.3% 2.2%
Earnings per common share
Basic $ 1.17 $ 1.11 $ 1.00 $ 0.91
Diluted $ 1.16 $ 1.10 $ 0.99 $ 0.91
Book value per common
share $ 17.00 $ 15.99 $ 14.99 $ 13.61
Efficiency ratio (TEB)(1) 26.1% 27.5% 25.1% 27.1%
Efficiency ratio 27.1% 28.3% 25.7% 27.6%
Tier 1 capital ratio(2) 16.4% 16.6% 15.2% 13.8%
Total capital ratio(2) 18.0% 18.2% 16.7% 15.2%
Net impaired loans as a %
of gross loans 0.8% 1.2% 1.3% 1.2%
Annualized provision as
a % of gross loans 0.2% 0.2% 0.3% 0.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In Thousands of Dollars 2008
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q4 Q3 Q2 Q1
Net interest income
(TEB)(1) $ 36,442 $ 39,478 $ 40,418 $ 38,590
Less TEB adjustment 1,205 1,130 1,056 962
-------------------------------------------------------------------------
Net interest income per
financial statements 35,237 38,348 39,362 37,628
Non-interest income 26,023 23,013 17,318 14,338
Non-interest expense 16,852 16,953 17,443 14,763
Total revenues 117,996 116,950 112,953 106,796
Net income 29,039 27,939 26,550 25,159
Return on common
shareholders' equity 27.4% 27.6% 27.7% 27.9%
Return on average total
assets 2.0% 2.0% 2.0% 1.9%
Earnings per common share
Basic $ 0.84 $ 0.81 $ 0.77 $ 0.73
Diluted $ 0.84 $ 0.81 $ 0.76 $ 0.72
Book value per common
share $ 12.57 $ 12.08 $ 11.44 $ 10.79
Efficiency ratio (TEB)(1) 27.0% 27.1% 30.2% 27.9%
Efficiency ratio 27.5% 27.6% 30.8% 28.4%
Tier 1 capital ratio(2) 12.9% 12.7% 12.5% 12.0%
Total capital ratio(2) 14.2% 14.0% 13.8% 13.4%
Net impaired loans as a %
of gross loans 0.9% 0.7% 0.7% 0.7%
Annualized provision as
a % of gross loans 0.2% 0.3% 0.1% 0.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) TEB - Taxable Equivalent Basis, see definition on page 7
(2) These figures relate to the Company's operating subsidiary, Home
Trust Company
The Company's key financial measures for each of the last eight quarters are summarized in the table above. These highlights illustrate the Company's profitability, return on equity, as well as efficiency measures and capital ratios. The quarterly results are modestly affected by seasonal factors, with first quarter mortgage advances typically impacted by winter weather conditions, and the fourth quarter normally experiencing increased credit card activity over the holiday period. The Company continues to achieve positive financial results driven by strong growth in net interest income in all business segments and robust securitization volumes combined with continued low efficiency ratios (where the lower the ratio the better). The increase in Tier 1 and Total Capital ratios throughout 2008 and 2009 reflect the Company's continuing efforts to preserve its capital base and maintain financial flexibility during uncertain economic and capital markets. The net impaired loans as a percentage of gross loans trended upwards over the last half of 2008 and into 2009; however, it is beginning to show improvement in the fourth quarter of 2009. The increase over 2008 and through much of 2009 was due to the effect of the economic slowdown in
Outlook
Home Capital remains committed to serving selected segments of the Canadian financial services marketplace that are not the focus of the country's major financial institutions. The Company also remains committed to continued diversification of its mortgage and consumer product offerings while prudently widening its geographical distribution, in particular, through the Accelerator product introduced in the second half of 2008. Additionally, Home Capital will continue seeking market opportunities and strategic partnerships in conjunction with the development of new products. This is expected to contribute to the Company meeting its strategy of growth and diversification within both mortgage lending and consumer lending, while continuing to reduce its overall risk profile.
Home Capital's financial strength is grounded in a solid capital base, robust liquidity reserves and no external debt which position the Company to capitalize on market opportunities as
While many indications point to the beginning of a recovery for the Canadian economy, there are a number of factors that lead the Company to remain cautious about where and to whom it provides mortgage advances. Canadian unemployment has not yet seen signs of improvement as key sectors of the Canadian economy, such as manufacturing, have not yet increased their payrolls. This sector will continue to struggle so long as the outlook for the
The Company expects market conditions to show slow improvement throughout 2010. While the increase in housing demand in the second half of 2009 exceeded expectations, it is not anticipated to continue growing at these levels throughout all of 2010. Increasing interest rates and home prices may slow the rate of increase in demand in the second half of 2010. Potential changes by the Federal Government to increase minimum downpayment and decrease maximum amortization periods is not expected to adversely impact the Company's growth expectations. The Company has considered these factors in its planning and strategies for 2010 and continues to manage its business prudently with a strong commitment to measured growth, profitability and creating long-term shareholder value. The Company has a proven track record of achieving its strategic objectives while remaining committed to its proprietary risk management framework. This approach has served management well to lead the Company through an uncertain economic period, and positions the Company for future opportunities.
Looking ahead, the Board of Directors and Management are confident that Home Capital is well positioned to continue generating robust earnings and growth in 2010, and have established the following objectives for 2010: 15-20% growth in each of total earnings, diluted earnings per share and total assets (including assets under administration), as well as, 20% return on equity.
This Outlook section contains forward-looking statements. (Please see the Caution Regarding Forward-Looking Statements on page 6 of these unaudited interim consolidated financial statements.)
Consolidated Statements of Income
For the
three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars,
except for per Share December December December December
Amounts (Unaudited) 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Income
Interest from loans $ 84,312 $ 82,672 $ 334,148 $ 339,242
Dividends from equity
securities 6,343 2,491 17,742 9,237
Other interest 2,711 6,810 13,214 25,524
-------------------------------------------------------------------------
93,366 91,973 365,104 374,003
Interest Expense
Interest on deposits 48,030 56,736 200,093 223,428
-------------------------------------------------------------------------
Net interest income 45,336 35,237 165,011 150,575
Provision for credit
losses (note 4(d)) 2,282 1,988 11,526 6,638
-------------------------------------------------------------------------
43,054 33,249 153,485 143,937
-------------------------------------------------------------------------
Non-interest Income
Fees and other income 7,182 7,104 29,326 28,452
Securitization income
on mortgage-backed
securities (note 5) 24,283 20,950 92,397 58,582
Net gain (loss) realized
and unrealized on
securities (431) (795) 2,097 (5,365)
Gain (loss) on derivatives (3,019) (1,236) 255 (1,046)
Net gain on sale of
subsidiary - - - 69
-------------------------------------------------------------------------
28,015 26,023 124,075 80,692
-------------------------------------------------------------------------
71,069 59,272 277,560 224,629
-------------------------------------------------------------------------
Non-interest Expenses
Salaries and staff
benefits 10,045 8,564 41,559 36,182
Premises 1,546 1,192 5,916 4,439
General and administration 8,265 7,096 31,126 25,390
-------------------------------------------------------------------------
19,856 16,852 78,601 66,011
-------------------------------------------------------------------------
Income Before Income Taxes 51,213 42,420 198,959 158,618
Provision for income taxes
(note 11(a)) 10,732 13,381 54,466 49,931
-------------------------------------------------------------------------
NET INCOME $ 40,481 $ 29,039 $ 144,493 $ 108,687
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER COMMON
SHARE
Basic $ 1.17 $ 0.84 $ 4.19 $ 3.15
Diluted $ 1.16 $ 0.84 $ 4.15 $ 3.13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(thousands)
Basic 34,552 34,501 34,450 34,512
Diluted 34,756 34,724 34,795 34,669
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total number of outstanding
common shares (thousands) 34,713 34,434 34,713 34,434
Book value per common
share $ 17.00 $ 12.57 $ 17.00 $ 12.57
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the
three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars December December December December
(Unaudited) 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
NET INCOME $ 40,481 $ 29,039 $ 144,493 $ 108,687
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX
Unrealized income on
available for sale
securities
Net unrealized income on
securities available for
sale, net of $362 tax
(($4,395) - three months
ended December 31, 2008;
$8,739 - year ended
December 31, 2009;
($4,049) - year ended
December 31, 2008) 6,812 (10,271) 22,092 (10,463)
Reclassification of
earnings in respect of
available for sale
securities, net of $3,085
tax ($312 - three months
ended December 31, 2008;
$4,941 - year ended
December 31, 2009;
$1,796 - year ended
December 31, 2008) (3,139) 2,613 10,229 5,707
-------------------------------------------------------------------------
Total other comprehensive
income 3,674 (7,658) 32,321 (4,756)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 44,155 $ 21,381 $ 176,814 $ 103,931
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Balance Sheets
-------------------------------------------------------------------------
December September December
In Thousands of Dollars 31 30 31
(Unaudited) 2009 2009 2008
-------------------------------------------------------------------------
ASSETS
Cash Resources (note 3)
Deposits with regulated financial
institutions $ 912,169 $ 129,794 $ 554,422
Restricted cash 17,965 16,165 -
-------------------------------------------------------------------------
930,134 145,959 554,422
-------------------------------------------------------------------------
Securities (note 3)
Held for trading 99,938 199,908 -
Available for sale 550,659 453,470 519,477
-------------------------------------------------------------------------
650,597 653,378 519,477
-------------------------------------------------------------------------
Loans (note 4)
Residential mortgages 4,369,458 4,092,476 3,263,206
Non-residential mortgages 708,425 719,838 826,882
Personal and credit card loans 342,918 342,539 368,962
Secured loans 47,739 53,493 72,518
General allowance for credit losses (27,793) (26,520) (25,177)
-------------------------------------------------------------------------
5,440,747 5,181,826 4,506,391
-------------------------------------------------------------------------
Other
Securitization receivable (note 5) 229,418 196,013 139,870
Capital assets 4,863 5,201 5,325
Other assets (note 6) 105,115 102,215 84,228
-------------------------------------------------------------------------
339,396 303,429 229,423
-------------------------------------------------------------------------
$7,360,874 $6,284,592 $5,809,713
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Payable on demand $ 38,223 $ 15,867 $ 34,808
Payable on a fixed date 6,371,599 5,357,595 5,067,973
-------------------------------------------------------------------------
6,409,822 5,373,462 5,102,781
-------------------------------------------------------------------------
Other
Cheques and other items in transit 4,617 4,671 4,811
Other liabilities (note 7) 356,147 355,636 269,368
-------------------------------------------------------------------------
360,764 360,307 274,179
-------------------------------------------------------------------------
6,770,586 5,733,769 5,376,960
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 8) 45,396 41,888 39,094
Contributed surplus 3,606 3,948 3,283
Retained earnings 520,018 487,393 401,429
Accumulated other comprehensive
income (loss) (note 10) 21,268 17,594 (11,053)
-------------------------------------------------------------------------
590,288 550,823 432,753
-------------------------------------------------------------------------
$7,360,874 $6,284,592 $5,809,713
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
For the
three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars December December December December
(Unaudited) 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
CAPITAL STOCK (note 8)
Balance at beginning of
the period $ 41,888 $ 39,142 $ 39,094 $ 38,899
Proceeds of options
exercised 3,572 - 6,498 318
Normal course issuer bid (64) (48) (196) (123)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 45,396 $ 39,094 $ 45,396 $ 39,094
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS
Balance at beginning of
the period $ 3,948 $ 2,910 $ 3,283 $ 1,818
Amortization of fair
value of employee stock
options (note 9) 349 373 1,543 1,516
Employee stock options
exercised (691) - (1,220) (51)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 3,606 $ 3,283 $ 3,606 $ 3,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
the period $ 487,393 $ 377,638 $ 401,429 $ 313,620
Normal course issuer bid (1,912) (773) (4,469) (2,940)
Net income for the period 40,481 29,039 144,493 108,687
Dividends paid or declared
during the period (5,944) (4,475) (21,435) (17,938)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 520,018 $ 401,429 $ 520,018 $ 401,429
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance at beginning of
the period $ 17,594 $ (3,395) $ (11,053) $ (6,297)
Other comprehensive income
(loss), net of $2,724 tax
(($4,083) - three months
ended December 31, 2008;
$13,680 - year ended
December 31, 2009;
($2,253) - year ended
December 31, 2008) 3,674 (7,658) 32,321 (4,756)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 21,268 $ (11,053) $ 21,268 $ (11,053)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Cash Flows
For the
three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars December December December December
(Unaudited) 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period $ 40,481 $ 29,039 $ 144,493 $ 108,687
Adjustments to determine
cash flows relating to
operating activities:
Future income taxes 5,458 5,170 26,641 14,397
Amortization (2,693) 19,042 (43,053) 29,392
Provision for credit
losses (note 4(d)) 2,282 1,988 11,526 6,638
Change in accrued
interest payable (9,618) 431 (21,116) 23,965
Change in accrued
interest receivable (606) (958) 1,709 (2,553)
Net loss (gain) realized
and unrealized on
investment securities 431 795 (2,097) 5,365
Loss (gain) on derivatives 3,019 1,236 (255) 1,046
Securitization income on
mortgage-backed
securities (24,287) (20,950) (92,396) (58,582)
Amortization of fair
value of employee stock
options (note 9) 349 373 1,543 1,516
Change in payments
received for
securitized pools 2,937 - 57,836 -
Other (13,711) (10,143) 24,721 (14,960)
-------------------------------------------------------------------------
Cash flows from operating
activities 4,042 26,023 109,552 114,911
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in deposits 1,036,360 158,742 1,307,041 688,797
Issuance of capital stock 3,572 - 6,498 318
Normal course issuer bid (1,976) (821) (4,665) (3,063)
Exercise of stock options (691) - (1,220) (51)
Dividends paid (5,555) (4,481) (20,010) (17,260)
-------------------------------------------------------------------------
Cash flows from financing
activities 1,031,710 153,440 1,287,644 668,741
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Activity in available
for sale and held for
trading securities
Purchases (287,627) (227,538) (954,444) (555,804)
Proceeds from sales 184,322 151,570 767,516 385,792
Proceeds from maturities 110,440 14,146 135,615 73,313
Activity in mortgages
Net increase (1,129,982) (551,833) (3,593,849) (1,954,052)
Proceeds from
securitization of
mortgage-backed
securities 843,710 548,807 2,550,007 1,478,138
Change in mortgage-backed
securities receivable 13,278 8,382 53,800 28,031
Net (increase) decrease
in personal and credit
card loans (395) (5,139) 23,918 (44,506)
Net increase in restricted
cash (1,800) - (17,965) -
Net decrease in secured
loans 5,736 5,889 24,308 8,833
Purchases of capital assets (580) (613) (2,181) (3,311)
Purchases of intangible
assets (6,644) - (26,174) -
-------------------------------------------------------------------------
Cash flows used in
investing activities (269,542) (56,329) (1,039,449) (583,566)
-------------------------------------------------------------------------
Net increase in cash and
cash equivalents during
the period 766,210 123,134 357,747 200,086
Cash and cash equivalents
at beginning of the
period 145,959 431,288 554,422 354,336
-------------------------------------------------------------------------
Cash and cash equivalents
at end of the period $ 912,169 $ 554,422 $ 912,169 $ 554,422
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary Disclosure
of Cash Flow Information
Interest paid $ 57,648 $ 56,281 $ 221,209 $ 199,440
Income taxes paid 14,563 4,345 45,506 43,055
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Notes to the Unaudited Interim Consolidated Financial Statements
1. ACCOUNTING POLICIES USED TO PREPARE THE UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
These unaudited interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements for the
year ended December 31, 2008 as set out in the 2008 Annual Report, on
pages 46 through 72. These unaudited interim consolidated financial
statements have been prepared in accordance with Canadian generally
accepted accounting principles. Except as disclosed in Note 2, the
accounting policies and methods of application used in the preparation of
these unaudited interim consolidated financial statements are consistent
with the accounting policies used in Home Capital Group Inc.'s (the
"Company") most recent annual audited financial statements. These
unaudited interim consolidated financial statements reflect amounts which
must, of necessity, be based on the best estimates and judgement of
management with appropriate consideration as to materiality. Actual
results may differ from these estimates.
2. CHANGES IN ACCOUNTING POLICIES
Goodwill and Intangible Assets
Effective January 1, 2009 the Company adopted Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3064, Goodwill and
Intangibles Assets. Section 3064 replaces Section 3062, Goodwill and
Other Intangible Assets, and Section 3450, Research and Development Costs
and provides clarifying guidance on the criteria that must be satisfied
in order for an intangible asset to be recognized, including internally
developed intangible assets. The new guidance did not have a material
effect on the financial position or earnings of the Company.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
Effective January 1, 2009, the Company adopted CICA Emerging issues
Committee Abstract EIC-173, Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities. The abstract clarifies how the
Company's own credit risk and the credit risk of the counterparty should
be taken into account in determining the fair value of financial assets
and financial liabilities, including derivatives. The new guidance did
not have a material effect on the Company's financial position or
earnings.
3. CASH RESOURCES AND SECURITIES
Cash resources include deposits with regulated financial institutions and
restricted cash held for collateral against interest rate swaps used the
CMB hedging activities.
Available for Sale Securities - Net Unrealized Gains and Losses
Net unrealized gains and losses are included in accumulated other
comprehensive income except unrealized losses which are other than
temporary in nature which are transferred to net income. Accumulated
other comprehensive income is disclosed in Note 10.
-------------------------------------------------------------------------
December September December
31 30 31
In Thousands of Dollars 2009 2009 2008
-------------------------------------------------------------------------
Securities issued or guaranteed by:
Canada $ 3 $ (2) $ 1,546
Corporations (35) 109 2,345
Equity securities
Common 360 440 (2,106)
Fixed rate preferred 8,105 6,319 (29,918)
Floating rate preferred - - (2,370)
Income trusts 2,317 1,536 (2,745)
Mutual funds (55) (129) (367)
-------------------------------------------------------------------------
$ 10,695 $ 8,273 $ (33,615)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The above unrealized gains and (losses) represent differences between the
carrying value of a security and its current fair value. The Company does
not consider these losses to be other than temporary based on market
conditions at the reporting date, and continues to regularly monitor
these investments and market conditions.
During 2009, the Company recognized $9.3 million ($1.8 million in 2008)
of unrealized losses on available for sale securities which are other
than temporary in nature, and have been transferred to net income. These
unrealized losses are not included in the table above. The Company did
not recognize any other than temporary unrealized losses in net income on
available for sale securities during the fourth quarter of 2009
($0.8 million gain - Q4 2008).
4. LOANS
(A) Loans by Geographic Region and Type
As at December 31, 2009
-------------------------------------------------------------------------
Non- Personal
Residential residential and Credit
In Thousands of Dollars Mortgages Mortgages Card Loans
-------------------------------------------------------------------------
British Columbia $ 297,185 $ 807 $ 22,617
Alberta 277,386 5,019 54,209
Ontario 3,634,463 699,274 258,952
Quebec 79,754 - 1,594
Maritimes 69,776 3,325 4,095
Manitoba and Saskatchewan 10,894 - 1,451
-------------------------------------------------------------------------
$4,369,458 $ 708,425 $ 342,918
-------------------------------------------------------------------------
As at December 31, 2009
-------------------------------------------------------------------------
Percentage
Secured of
In Thousands of Dollars Loans Total Portfolio
-------------------------------------------------------------------------
British Columbia $ 7 $ 320,616 5.9%
Alberta 5,367 341,981 6.3%
Ontario 40,749 4,633,438 84.7%
Quebec - 81,348 1.5%
Maritimes 1,616 78,812 1.4%
Manitoba and Saskatchewan - 12,345 0.2%
-------------------------------------------------------------------------
$ 47,739 $5,468,540 100.0%
-------------------------------------------------------------------------
As at September 30, 2009
-------------------------------------------------------------------------
Non- Personal
Residential residential and Credit
In Thousands of Dollars Mortgages Mortgages Card Loans
-------------------------------------------------------------------------
British Columbia $ 366,503 $ 9,786 $ 25,069
Alberta 356,646 89,369 60,537
Ontario 3,026,518 571,304 249,516
Quebec 149,198 28,967 1,686
Maritimes 87,626 11,805 4,315
Manitoba and Saskatchewan 105,985 8,607 1,416
-------------------------------------------------------------------------
$4,092,476 $ 719,838 $ 342,539
-------------------------------------------------------------------------
As at September 30, 2009
-------------------------------------------------------------------------
Percentage
Secured of
In Thousands of Dollars Loans Total Portfolio
-------------------------------------------------------------------------
British Columbia $ 7 $ 401,365 7.7%
Alberta 5,738 512,290 9.8%
Ontario 45,971 3,893,309 74.8%
Quebec - 179,851 3.5%
Maritimes 1,777 105,523 2.0%
Manitoba and Saskatchewan - 116,008 2.2%
-------------------------------------------------------------------------
$ 53,493 $5,208,346 100.0%
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Non- Personal
Residential residential and Credit
In Thousands of Dollars Mortgages Mortgages Card Loans
-------------------------------------------------------------------------
British Columbia $ 333,668 $ 8,998 $ 31,118
Alberta 398,939 115,336 78,157
Ontario 2,267,199 630,953 250,611
Quebec 105,236 48,701 1,477
Maritimes 90,167 12,408 6,002
Manitoba and Saskatchewan 67,997 10,486 1,597
-------------------------------------------------------------------------
$3,263,206 $ 826,882 $ 368,962
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Percentage
Secured of
In Thousands of Dollars Loans Total Portfolio
-------------------------------------------------------------------------
British Columbia $ 9 $ 373,793 8.2%
Alberta 8,319 600,751 13.3%
Ontario 61,929 3,210,692 70.9%
Quebec - 155,414 3.4%
Maritimes 2,261 110,838 2.4%
Manitoba and Saskatchewan - 80,080 1.8%
-------------------------------------------------------------------------
$ 72,518 $4,531,568 100.0%
-------------------------------------------------------------------------
(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 specifically provided for
or when it has been in arrears for 90 days. Residential mortgages
guaranteed by the Government of Canada where payment is contractually
past due 365 days are automatically placed on a non-accrual basis.
Secured and unsecured credit card balances that have a payment that is
contractually 180 days in arrears are written off. Equityline Visa credit
card balances are measured on a basis consistent with mortgage loans.
As at December 31, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 133,967 $ 4,058 $ 5,204 $ 958 $ 144,187
31 - 60 days 35,922 1,910 1,428 227 39,487
61 - 90 days 3,080 - 2,162 - 5,242
91 - 120 days 8,911 - 749 - 9,660
-------------------------------------------------------------------------
$ 181,880 $ 5,968 $ 9,543 $ 1,185 $ 198,576
-------------------------------------------------------------------------
As at September 30, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 104,254 $ 3,977 $ 3,689 $ 662 $ 112,582
31 - 60 days 28,931 897 1,500 254 31,582
61 - 90 days 7,985 - 2,062 58 10,105
91 - 120 days 17,104 - 877 - 17,981
-------------------------------------------------------------------------
$ 158,274 $ 4,874 $ 8,128 $ 974 $ 172,250
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 142,287 $ 4,406 $ 3,365 $ 973 $ 151,031
31 - 60 days 9,249 2,407 1,896 98 13,650
61 - 90 days 31,828 647 2,527 - 35,002
91 - 120 days - - 1,887 - 1,887
-------------------------------------------------------------------------
$ 183,364 $ 7,460 $ 9,675 $ 1,071 $ 201,570
-------------------------------------------------------------------------
(C) Impaired Loans and Specific Allowances for Credit Losses
As at December 31, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 41,149 $ 2,417 $ 4,847 $ 472 $ 48,885
Specific
allowances (1,346) (135) (961) (137) (2,579)
-------------------------------------------------------------------------
$ 39,803 $ 2,282 $ 3,886 $ 335 $ 46,306
-------------------------------------------------------------------------
As at September 30, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 57,140 $ 4,670 $ 5,613 $ 1,053 $ 68,476
Specific
allowances (2,783) (418) (1,332) (437) (4,970)
-------------------------------------------------------------------------
$ 54,357 $ 4,252 $ 4,281 $ 616 $ 63,506
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 34,643 $ 164 $ 6,309 $ 1,007 $ 42,123
Specific
allowances (1,680) - (547) (699) (2,926)
-------------------------------------------------------------------------
$ 32,963 $ 164 $ 5,762 $ 308 $ 39,197
-------------------------------------------------------------------------
(D) Allowance for Credit Losses
For the three months ended December 31, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at the
beginning
of the
period $ 2,783 $ 418 $ 1,332 $ 437 $ 4,970
Provisions
for credit
losses 1,258 (283) 15 19 1,009
Write-offs (3,461) - (467) (329) (4,257)
Recoveries 766 - 81 10 857
-------------------------------------------------------------------------
1,346 135 961 137 2,579
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of
the period 18,377 4,156 3,446 541 26,520
Provisions for
credit losses 1,084 242 1 (54) 1,273
-------------------------------------------------------------------------
19,461 4,398 3,447 487 27,793
-------------------------------------------------------------------------
Total
allowance $ 20,807 $ 4,533 $ 4,408 $ 624 $ 30,372
-------------------------------------------------------------------------
For the three months ended September 30, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at the
beginning
of the
period $ 2,139 $ 475 $ 1,328 $ 397 $ 4,339
Provisions for
credit losses 2,253 (57) 406 223 2,825
Write-offs (1,917) - (438) (250) (2,605)
Recoveries 308 - 36 67 411
-------------------------------------------------------------------------
2,783 418 1,332 437 4,970
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of
the period 17,817 4,516 3,526 624 26,483
Provisions for
credit losses 560 (360) (80) (83) 37
-------------------------------------------------------------------------
18,377 4,156 3,446 541 26,520
-------------------------------------------------------------------------
Total
allowance $ 21,160 $ 4,574 $ 4,778 $ 978 $ 31,490
-------------------------------------------------------------------------
For the three months ended December 31, 2008
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at the
beginning
of the
period $ 1,950 $ 5 $ 349 $ 67 $ 2,371
Provisions for
credit losses 838 (5) 438 617 1,888
Write-offs (1,135) - (277) (3) (1,415)
Recoveries 27 - 37 18 82
-------------------------------------------------------------------------
1,680 - 547 699 2,926
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of
the period 16,694 3,907 3,651 825 25,077
Provisions for
credit losses (558) 673 49 (64) 100
-------------------------------------------------------------------------
16,136 4,580 3,700 761 25,177
-------------------------------------------------------------------------
Total
allowance $ 17,816 $ 4,580 $ 4,247 $ 1,460 $ 28,103
-------------------------------------------------------------------------
For the year ended December 31, 2009
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at the
beginning
of the
period $ 1,680 $ - $ 547 $ 699 $ 2,926
Provisions for
credit losses 6,178 135 2,125 472 8,910
Write-offs (7,676) - (1,913) (1,146) (10,735)
Recoveries 1,164 - 202 112 1,478
-------------------------------------------------------------------------
1,346 135 961 137 2,579
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of
the period 16,136 4,580 3,700 761 25,177
Provisions for
credit losses 3,325 (182) (253) (274) 2,616
-------------------------------------------------------------------------
19,461 4,398 3,447 487 27,793
-------------------------------------------------------------------------
Total
allowance $ 20,807 $ 4,533 $ 4,408 $ 624 $ 30,372
-------------------------------------------------------------------------
For the year ended December 31, 2008
-------------------------------------------------------------------------
In Non- Personal
Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at the
beginning
of the
period $ 634 $ - $ 128 $ 231 $ 993
Provisions for
credit losses 2,972 - 937 952 4,861
Write-offs (2,177) - (644) (540) (3,361)
Recoveries 251 - 126 56 433
-------------------------------------------------------------------------
1,680 - 547 699 2,926
-------------------------------------------------------------------------
General allowance
Balance at the
beginning of
the period 17,127 2,216 3,201 856 23,400
Provisions for
credit losses (991) 2,364 499 (95) 1,777
-------------------------------------------------------------------------
16,136 4,580 3,700 761 25,177
-------------------------------------------------------------------------
Total
allowance $ 17,816 $ 4,580 $ 4,247 $ 1,460 $ 28,103
-------------------------------------------------------------------------
(E) Collateral
The fair value of collateral held against mortgages is based on
appraisals at the time a loan is originated. Appraisals are only updated
should circumstances warrant it or if a mortgage becomes impaired. At
December 31, 2009, the total appraised value of the collateral for
mortgages past due that are not impaired, as determined when the
mortgages were originated, was $361.7 million. For impaired mortgages,
the total appraised value of collateral at December 31, 2009 was
$71.5 million.
5. LOAN SECURITIZATION
The following table summarizes the Company's new securitization
activities.
For the
three months ended For the year ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except Percentages December December December December
and Number of Years 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Book value of mortgages
securitized $ 863,438 $ 557,720 $2,599,741 $1,498,866
Securitization receivable $ 60,623 $ 43,573 $ 156,996 $ 96,193
Servicing liability $ 9,268 $ 6,254 $ 24,362 $ 8,934
Net proceeds received on
securitized mortgages $ 843,710 $ 548,807 $2,550,007 $1,478,138
Net gain on sale of
mortgages(1) $ 20,811 $ 16,398 $ 80,051 $ 48,793
Prepayment rate 6.1% 5.0% 7.1% 7.6%
Excess spread 2.0% 2.7% 1.9% 2.6%
Weighted average life
in years 5.6 4.8 5.0 4.0
Discount rate 2.0% 2.8% 2.7% 3.4%
-------------------------------------------------------------------------
(1) The gain on sale of mortgages is net of hedging activities; see
Table 4 in the MD&A
During the fourth quarter of 2009, the Company securitized insured
residential mortgages through CMHC's CMB program with a book value of
$730.0 million for a total of $1.96 billion in 2009 ($452.1 million in Q4
2008 for a total of $1.09 billion in 2008). The gain on sale was
$16.9 million during the fourth quarter for a total of $62.1 million in
2009 ($13.4 million in Q4 2008 for a total of $36.4 million in 2008).
These figures are included in the table above.
6. OTHER ASSETS
-------------------------------------------------------------------------
December September December
31 30 31
In Thousands of Dollars 2009 2009 2008
-------------------------------------------------------------------------
Accrued interest receivable $ 26,153 $ 25,546 $ 27,861
Income taxes receivable - 2,712 10,472
Goodwill 15,752 15,752 15,752
Intangible assets(1) 26,811 20,340 1,449
Other prepaid assets and
deferred items 36,399 37,865 28,694
-------------------------------------------------------------------------
$ 105,115 $ 102,215 $ 84,228
-------------------------------------------------------------------------
(1) Intangible assets are primarily comprised of deferred costs
capitalized for the development of the Company's new core banking
system.
7. OTHER LIABILITIES
-------------------------------------------------------------------------
December September December
31 30 31
In Thousands of Dollars 2009 2009 2008
-------------------------------------------------------------------------
Accrued interest payable $ 138,498 $ 148,117 $ 159,615
Dividends payable 5,901 5,512 4,476
Future income tax liability (note 11) 57,559 57,329 36,974
Income taxes payable 3 - -
Securitization servicing liability 30,389 23,512 10,288
Payable to MBS and CMB holders 92,896 96,912 42,013
Other, including accounts payable
and accrued liabilities 30,901 24,254 16,002
-------------------------------------------------------------------------
$ 356,147 $ 355,636 $ 269,368
-------------------------------------------------------------------------
8. CAPITAL
(A) Common Shares Issued and Outstanding
For the three months ended
-------------------------------------------------------------------------
In Thousands December 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,450 $ 41,888 34,476 $ 39,142
Options exercised 312 3,572 - -
Normal course issuer bid (49) (64) (42) (48)
-------------------------------------------------------------------------
Outstanding at end of
period 34,713 $ 45,396 34,434 $ 39,094
-------------------------------------------------------------------------
For the year ended
-------------------------------------------------------------------------
In Thousands December 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,434 $ 39,094 34,532 $ 38,899
Options exercised 445 6,498 10 318
Normal course issuer bid (166) (196) (108) (123)
-------------------------------------------------------------------------
Outstanding at end of
period 34,713 $ 45,396 34,434 $ 39,094
-------------------------------------------------------------------------
The purchase price of shares acquired through the Normal course issuer
bid is allocated between capital stock and retained earnings.
(B) Share Purchase Options
For the three months ended
-------------------------------------------------------------------------
In Thousands
Except Per Share Amounts December 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
average average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,272 $ 25.49 1,227 $ 26.73
Granted 58 40.84 205 16.27
Exercised (312) 9.22 - -
Forfeited (93) 31.85 (25) 33.95
-------------------------------------------------------------------------
Outstanding at end of
period 925 $ 31.32 1,407 $ 25.08
-------------------------------------------------------------------------
Exercisable, end of period 458 $ 34.60 661 $ 18.73
-------------------------------------------------------------------------
For the year ended
-------------------------------------------------------------------------
In Thousands
Except Per Share Amounts December 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
average average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,407 $ 25.08 1,294 $ 27.15
Granted 168 30.12 205 16.27
Exercised (445) 11.86 (10) 18.12
Forfeited (205) 29.76 (82) 35.32
-------------------------------------------------------------------------
Outstanding at end of
period 925 $ 31.32 1,407 $ 25.08
-------------------------------------------------------------------------
Exercisable, end of period 458 $ 34.60 661 $ 18.73
-------------------------------------------------------------------------
(C) Capital Management
The Company has a Capital Management Policy which governs the quantity
and quality of capital held. The objective of the policy is to ensure
that regulatory capital requirements are met, while also providing a
sufficient return to investors. The Risk and Capital Committee and the
Board of Directors annually review the policy and monitor compliance with
the policy on a quarterly basis.
The Company's subsidiary Home Trust Company is subject to the regulatory
capital requirements governed by OSFI.
-------------------------------------------------------------------------
December September December
In Thousands of Dollars, 31 30 31
Except Ratios and Multiple 2009 2009 2008
-------------------------------------------------------------------------
Regulatory capital
Tier 1 $ 530,256 $ 496,388 $ 384,025
Total 581,036 544,801 424,202
Regulatory ratios
Tier 1 16.4% 16.6% 12.9%
Total 18.0% 18.2% 14.2%
Assets to capital multiple 12.7 11.5 13.7
-------------------------------------------------------------------------
Under Basel II, OSFI considers a financial institution to be well-
capitalized if it maintains a Tier 1 capital ratio of 7% and a total
capital ratio of 10%. Home Trust Company is in compliance with the OSFI
capital guidelines.
9. STOCK-BASED COMPENSATION
(A) Common Shares Issued and Outstanding
During the fourth quarter of 2009, $349,300 was recorded as an expense
for a year-to-date total of $1,543,000 ($373,000 - Q4 2008 and $1,516,000
- twelve months of 2008) for stock option awards in the consolidated
statements of income, with an offsetting credit to contributed surplus.
During the fourth quarter of 2009, 57,500 options were granted for a
year-to-date total of 167,500. During the fourth quarter of 2008,
205,000 options were granted for a total of 205,000 in 2008.
(B) Deferred Share Unit Plan
Effective January 1, 2009 the Board of Directors approved a deferred
share unit plan (DSU). The plan is open to Directors of the Company who
elect to accept remuneration in the form of cash, cash and DSUs or DSUs.
At December 31, 2009 there were 6,468 deferred share units issued with
the associated liability of $0.27 million recorded in other liabilities
on the consolidated balance sheet.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------------------------------------------
December September December
31 30 31
In Thousands of Dollars 2009 2009 2008
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Available for sale securities $ 10,695 $ 8,273 $ (33,615)
Income taxes recovery (expenses) (2,733) (1,312) 10,473
-------------------------------------------------------------------------
7,962 6,961 (23,142)
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Securitization receivables 19,772 15,796 18,080
Income tax expense (6,466) (5,163) (5,991)
-------------------------------------------------------------------------
13,306 10,633 12,089
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) $ 21,268 $ 17,594 $ (11,053)
-------------------------------------------------------------------------
11. INCOME TAXES
(A) Reconciliation of income taxes
For the For the
three months ended twelve months ended
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Income before income
taxes $ 51,213 $ 42,420 $ 198,959 $ 158,618
-------------------------------------------------------------------------
Income taxes at statutory
combined federal and
provincial income
tax rates $ 16,773 $ 14,060 $ 65,082 $ 52,565
Increase (decrease) in
income taxes at
statutory income tax
rates resulting from
Tax-exempt income (2,205) (765) (5,657) (2,835)
Non-deductible expenses (19) 707 1,792 1,491
Future tax rate changes (5,797) (502) (9,762) (1,378)
Other 1,980 (119) 3,011 88
-------------------------------------------------------------------------
Income tax $ 10,732 $ 13,381 $ 54,466 $ 49,931
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(B) Sources of Future Income Tax Balances
-------------------------------------------------------------------------
December September December
31 30 31
In Thousands of Dollars 2009 2009 2008
-------------------------------------------------------------------------
Future income tax liabilities
Deferred agent commissions and
other charges $ 18,761 $ 15,398 $ 7,761
Mortgage-backed securities
receivable 49,560 53,166 40,828
-------------------------------------------------------------------------
68,321 68,564 48,589
-------------------------------------------------------------------------
Future income tax assets
Allowance for credit losses 7,549 2,668 7,776
Deferred commitment fees and
other charges 3,213 8,567 3,839
-------------------------------------------------------------------------
10,762 11,235 11,615
-------------------------------------------------------------------------
$ 57,559 $ 57,329 $ 36,974
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilized derivative financial instruments during 2009. The
Company utilized forward bond contracts to hedge the economic value
exposure of movements in interest rates between the time that the
mortgages are committed to be funded under asset securitization, and the
time the mortgages are actually sold (these mortgages qualify for
government insurance). The intent of the forward bond contract is to have
fair value movements offset the fair value movements in the pool of
mortgages over the period in which the fixed rate pool may be exposed to
movements in interest rates, generally 60 to 150 days. During the
quarter, the Company unwound $587.8 million in forward bond contracts
realizing a loss of $8.3 million. This realized loss is included in the
consolidated income statement through securitization income.
The Company participates in the CMB program sponsored by CMHC. Under this
program, the Company sells MBS pools to Canada Housing Trust (CHT) which
finances the purchase by issuing a bullet CMB. Under this program, the
Company must manage the mismatch and reinvestment risk between the
amortizing MBS pool and the bullet CMB. As part of this arrangement, the
Company entered into seller swaps which have the effect of paying the
fixed interest payments on the CMB, and receiving the total return on the
MBS pool. As well, the Company entered into accreting hedge swaps to
manage the reinvestment risk between the amortizing MBS pool and the CMB.
As at December 31, 2009, September 30, 2009 and December 31, 2008, the
outstanding seller and hedge swap contracts (swaps) and forward contracts
(bonds) positions were as follows:
-------------------------------------------------------------------------
In Thousands of Dollars December 31, 2009 September 30, 2009
-------------------------------------------------------------------------
Notional Notional
Term (years) Amount Fair Value Amount Fair Value
-------------------------------------------------------------------------
Swaps
1 to 5 $2,710,744 $ 1,331 $2,299,270 $ (1,375)
6 to 10 491,498 (11,988) 234,082 4,151
-------------------------------------------------------------------------
$3,202,242 $ (10,657) $2,533,352 $ 2,776
-------------------------------------------------------------------------
Bonds(1)
1 to 5 $ 17,200 $ 307 $ 192,700 $ (310)
6 to 10 166,600 2,130 326,700 (1,360)
-------------------------------------------------------------------------
$ 183,800 $ 2,437 $ 519,400 $ (1,670)
-------------------------------------------------------------------------
-------------------------------------------------
In Thousands of Dollars December 31, 2008
-------------------------------------------------
Notional
Term (years) Amount Fair Value
-------------------------------------------------
Swaps
1 to 5 $1,194,043 $ 1,380
6 to 10 68,814 (947)
-------------------------------------------------
$1,262,857 $ 433
-------------------------------------------------
Bonds(1)
1 to 5 $ 34,300 $ (636)
6 to 10 - -
-------------------------------------------------
$ 34,300 $ (636)
-------------------------------------------------
(1) The term of the forward bond contracts is based on the term of the
underlying bonds.
The fair value of the swap and bond contracts are included in other
assets or other liabilities with changes in fair value included in gain
or loss on derivatives in the consolidated statement of income.
13. INTEREST RATE SENSITIVITY
The Company's exposure to interest rate risk results from the difference,
or gap between the maturity or re-pricing dates of interest sensitive
assets and liabilities, including off-balance sheet items. The following
table shows the gap positions at December 31, 2009, September 30, 2009
and December 30, 2008 for selected period intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap
position.
As at December 31, 2009
-------------------------------------------------------------------------
In Thousands of Dollars, Floating 0 to 3 3 Months 1 to 3
Except Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 68,941 $1,530,430 $1,426,143 $2,138,737
Total liabilities and
equity 6 568,242 2,765,144 2,240,214
Off-balance sheet items - (307,594) 100,114 207,322
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 68,935 $ 654,594 $(1,238,887) $ 105,845
-------------------------------------------------------------------------
Cumulative gap $ 68,935 $ 723,529 $ (515,358) $ (409,513)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.9% 9.8% (7.0%) (5.6%)
-------------------------------------------------------------------------
As at December 31, 2009
-------------------------------------------------------------
Non-
In Thousands of Dollars, Over interest
Except Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $1,806,267 $ 390,356 $7,360,874
Total liabilities and
equity 786,090 1,001,178 7,360,874
Off-balance sheet items 158 - -
-------------------------------------------------------------
Interest rate sensitive
gap $1,020,335 $ (610,822) $ -
-------------------------------------------------------------
Cumulative gap $ 610,822 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.3%
-------------------------------------------------------------
As at September 30, 2009
-------------------------------------------------------------------------
In Thousands of Dollars, Floating 0 to 3 3 Months 1 to 3
Except Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 47,364 $ 929,196 $1,540,687 $1,717,352
Total liabilities and
equity 6 945,948 1,982,433 1,854,920
Off-balance sheet items - (276,587) 77,508 198,934
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 47,358 $ (293,339) $ (364,238) $ 61,366
-------------------------------------------------------------------------
Cumulative gap $ 47,358 $ (245,981) $ (610,219) $ (548,853)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.8% (3.9%) (9.7%) (8.7%)
-------------------------------------------------------------------------
As at September 30, 2009
-------------------------------------------------------------
Non-
In Thousands of Dollars, Over interest
Except Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $1,671,016 $ 378,977 $6,284,592
Total liabilities and
equity 561,835 939,450 6,284,592
Off-balance sheet items 145 - -
-------------------------------------------------------------
Interest rate sensitive
gap $1,109,326 $ (560,473) $ -
-------------------------------------------------------------
Cumulative gap $ 560,473 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.9%
-------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
In Thousands of Dollars, Floating 0 to 3 3 Months 1 to 3
Except Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 29,006 $1,442,867 $1,506,606 $1,601,438
Total liabilities and
equity 6 923,590 2,359,833 1,318,924
Off-balance sheet items - (145,838) 64,955 80,837
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 29,000 $ 373,439 $ (788,272) $ 363,351
-------------------------------------------------------------------------
Cumulative gap $ 29,000 $ 402,439 $ (385,833) $ (22,482)
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.5% 6.9% (6.6%) (0.4%)
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------
Non-
In Thousands of Dollars, Over interest
Except Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $ 965,500 $ 264,296 $5,809,713
Total liabilities and
equity 451,102 756,258 5,809,713
Off-balance sheet items 46 - -
-------------------------------------------------------------
Interest rate sensitive
gap $ 514,444 $ (491,962) $ -
-------------------------------------------------------------
Cumulative gap $ 491,962 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.5%
-------------------------------------------------------------
Based on the current interest rate gap position at December 31, 2009, the
Company estimates that a 100 basis point decrease in interest rates would
decrease net interest income and other comprehensive income after tax
over the next twelve months by $7.4 million and $9.2 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 $7.4 million and $7.8 million, respectively.
14. EARNINGS BY BUSINESS SEGMENT
The Company operates principally through two business segments - mortgage
lending and consumer lending. The mortgage lending operation consists of
core residential mortgage lending, securitization of government-insured
mortgage loans, commercial real estate lending, and the administration of
Regency Finance Corp. second mortgage loans (secured loans). The consumer
lending operation consists of credit card services, instalment lending to
customers of retail businesses and PSiGate operations. The Other category
includes the Company's treasury and securities investment activities.
For the three months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Net interest income $ 28,303 $ 18,933 $ 9,073 $ 7,011
Provision for credit
losses (2,265) (1,501) (17) (487)
Fees and other income 3,973 3,899 3,076 3,123
Net gain on securities,
mortgage-backed securities
and disposition of
subsidiary 21,264 19,714 - -
Non-interest expenses (11,911) (9,145) (2,328) (2,406)
-------------------------------------------------------------------------
Income before income taxes 39,364 31,900 9,804 7,241
Income taxes (7,150) (10,297) (3,166) (2,448)
-------------------------------------------------------------------------
Net income $ 32,214 $ 21,603 $ 6,638 $ 4,793
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 13,428
-------------------------------------------------------------------------
Total assets $5,510,368 $4,709,331 $ 384,528 $ 392,458
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Net interest income $ 7,960 $ 9,293 $ 45,336 $ 35,237
Provision for credit
losses - - (2,282) (1,988)
Fees and other income 133 82 7,182 7,104
Net gain on securities,
mortgage-backed securities
and disposition of
subsidiary (431) (795) 20,833 18,919
Non-interest expenses (5,617) (5,301) (19,856) (16,852)
-------------------------------------------------------------------------
Income before income taxes 2,045 3,279 51,213 42,420
Income taxes (416) (636) (10,732) (13,381)
-------------------------------------------------------------------------
Net income $ 1,629 $ 2,643 $ 40,481 $ 29,039
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,752
-------------------------------------------------------------------------
Total assets $1,465,978 $ 707,924 $7,360,874 $5,809,713
-------------------------------------------------------------------------
For the twelve months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Net interest income $ 100,268 $ 89,505 $ 36,738 $ 26,459
Provision for credit
losses (9,653) (5,202) (1,873) (1,436)
Fees and other income 18,145 15,163 11,043 12,888
Net gain on securities,
mortgage-backed securities
and disposition of
subsidiary 92,652 57,536 - -
Non-interest expenses (48,482) (39,528) (10,862) (9,000)
-------------------------------------------------------------------------
Income before income taxes 152,930 117,474 35,046 28,911
Income taxes (41,279) (37,749) (11,631) (9,849)
-------------------------------------------------------------------------
Net income $ 111,651 $ 79,725 $ 23,415 $ 19,062
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 13,428
-------------------------------------------------------------------------
Total assets $5,510,368 $4,709,331 $ 384,528 $ 392,458
-------------------------------------------------------------------------
For the twelve months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
December December December December
In Thousands of Dollars 31 2009 31 2008 31 2009 31 2008
-------------------------------------------------------------------------
Net interest income $ 28,005 $ 34,611 $ 165,011 $ 150,575
Provision for credit
losses - - (11,526) (6,638)
Fees and other income 138 401 29,326 28,452
Net gain on securities,
mortgage-backed securities
and disposition of
subsidiary 2,097 (5,296) 94,749 52,240
Non-interest expenses (19,257) (17,483) (78,601) (66,011)
-------------------------------------------------------------------------
Income before income taxes 10,983 12,233 198,959 158,618
Income taxes (1,556) (2,333) (54,466) (49,931)
-------------------------------------------------------------------------
Net income $ 9,427 $ 9,900 $ 144,493 $ 108,687
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,752
-------------------------------------------------------------------------
Total assets $1,465,978 $ 707,924 $7,360,874 $5,809,713
-------------------------------------------------------------------------
15. FUTURE ACCOUNTING CHANGES
Financial Instruments
In August 2009, the CICA issued various amendments to Section 3855,
Financial Instruments - Recognition and Measurement. The Company will
adopt the amendments, which are retroactive, in its December 31, 2009
annual financial statements. The Company does not expect the changes to
have a material impact on the financial position or earnings of the
Company. Please see page 23 of the MD&A for more information on the
amendments.
International Financial Reporting Standards
The CICA will transition financial reporting for Canadian public entities
to International Financial Reporting Standards (IFRS) effective for
fiscal years beginning on or after January 1, 2011. The Company is
currently in phase two of the project which includes a detailed analysis
and evaluation of the impact of the relevant standards expected to impact
the Company's consolidated financial statements. The Company expects to
be able to quantify the preliminary impact on the January 1, 2010 opening
retained earnings in the first half of 2010. Please see page 23 of the
MD&A for more information on the transition to IFRS.
16. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative interim unaudited consolidated financial statements have
been reclassified from statements previously presented to conform to the
presentation of the 2009 interim unaudited consolidated financial
statements.
Home Capital Group Inc. is a public company, traded on the Toronto Stock
Exchange (HCG), operating through its principal subsidiary, Home Trust
Company. Home Trust is a federally regulated trust company offering
deposit, mortgage lending, retail credit and payment card services.
Licensed to conduct business across Canada, Home Trust has branch offices
in Ontario, Alberta, British Columbia, Nova Scotia and Quebec.
For further information: Gerald M. Soloway, CEO, or Martin Reid, President, (416) 360-4663, www.homecapital.com
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