TORONTO, Nov. 4 /CNW/ - Home Capital Group Inc. (TSX: HCG) today announced another quarter of exceptional results for the three months ended September 30, 2009. The Company's prudent strategies during the current global economic volatility has generated robust returns for our shareholders and positioned Home for further growth as economic conditions normalize.
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Financial and Operating Highlights:
- Net income for the quarter was $38.2 million, a 36.9% increase over
the $27.9 million reported for the third quarter of 2008. Earnings
for the first nine months of 2009 were $104.0 million, a 30.6% rise
over the comparable period in 2008.
- Basic earnings per share were $1.11 for the quarter, a 37.0% increase
over the $0.81 for the third quarter of 2008. For the first nine
months, basic earnings per share were $3.02, 30.7% higher than the
$2.31 recorded last year. Diluted earnings per share were $1.10, an
increase of 35.8% from the $0.81 recorded in the third quarter of
2008. Diluted earnings per share for the nine months ended September
30, 2009 were $3.00, 31.0% higher than the $2.29 reported last year.
- Return on equity was 28.7% for the third quarter and 28.2% for the
first nine months of 2009 compared to 27.6% and 27.8% respectively
for the comparable periods in 2008.
- Total assets at September 30, 2009 reached $6.28 billion, 11.8%
higher than the $5.62 billion reported one year earlier. Total
assets, together with the outstanding balance for Mortgage-Backed
Securities (MBS) and Canada Mortgage Bonds (CMB), originated and
administered by the Company, grew to $9.89 billion, a 27.8% increase
over the $7.74 billion at September 2008, and 17.4% from the $8.42
billion at December 31, 2008.
- Residential mortgages that are retained on the Company's balance
sheet and not securitized and sold increased by 12.4% to $4.09
billion at September 30, 2009 from $3.64 billion at June 30, 2009.
Net interest income from mortgage lending increased 8.8% during the
quarter from $24.7 million at June 30, 2009 to $26.8 million. The net
interest margin between the Company's assets and liabilities for the
third quarter of 2009 remained stable at 2.9% unchanged from the
second quarter and improved from 2.6% in the first quarter.
- Total mortgage originations were $1.40 billion during the third
quarter, an increase of 26.4% over the $1.11 billion advanced during
the same period in 2008. Total originations for the first nine
months were $3.40 billion a 19.0% increase over the $2.86 billion
originated during the comparable period in 2008. The increase in
mortgage originations is due primarily to growth in residential
mortgages.
- Residential mortgage advances were $1.34 billion during the third
quarter, up 36.3% from the $984.0 million advanced in the third
quarter of 2008. During the third quarter of 2009, the Company
advanced $948.9 million for single family mortgages, a 49.1% increase
over the $636.3 million in the third quarter of 2008 attributed
largely to the Accelerator program. Residential advances during the
quarter included $392.1 million for multi-unit residential mortgages,
a 101.3% increase over the $194.8 million during the third quarter of
2008.
- Non-residential mortgage advances during the third quarter of 2009
were $56.5 million, a 53.6% decrease from the $121.7 million advanced
in the same period in 2008. The decline in the non-residential
mortgage originations is pursuant to the Company's stated strategy to
lower the Company's exposure to non-residential mortgages in light of
current economic conditions.
- Mortgage securitization volumes remained strong as the Company sold
$620.6 million in CMHC-insured securities during the third quarter,
compared to $655.1 million sold during the second quarter of 2009 and
up from the $544.7 million securitized and sold during the same
period last year. The net gains on securitization during the third
quarter were $12.1 million, compared to $15.7 million for the same
period last year. Lower net gains are the result of narrowing
interest rate spreads.
- Outstanding balances on the Equityline Visa portfolio were $305.4
million, a decline of 10.0% from the $339.3 million reported at the
end of September 2008. Although the Company is maintaining a prudent
credit policy on the Equityline Visa product during the current
economic climate, new marketing initiatives were launched to grow the
portfolio in anticipation of an improving economy. Growth from the
retail loan portfolio remained positive in the third quarter,
building on momentum from the first half of 2009. Total net income
from the consumer lending segment contributed $6.2 million during the
third quarter, a 19.8% increase over the $5.1 million recorded in the
third quarter of 2008.
- Capital ratios for Home Trust strengthened again during the third
quarter of 2009 as Tier 1 and Total Capital ratios rose to 16.6% and
18.2% respectively from 15.2% and 16.7% at June 30, 2009, and 12.7%
and 14.0% one year ago. The Company will continue to maintain a
prudent approach to capital management while positioning Home Capital
for future growth opportunties.
- Net impaired loans as a percentage of the total loans portfolio
declined to 1.2% at September 30, 2009 from 1.3% at the end of the
second quarter of 2009. The decline in net impaired loans is the
first in six quarters. At the end of September 2008, the percentage
was was 0.7%.
- Looking ahead, the Company continues to plan for a higher than
historic average level of impaired loans due to the weakened economy
and the high level of unemployment. As a result, staffing in the
mortgage servicing department has been increased and a dedicated team
is focusing on early arrears and assisting homeowners in managing
their payments. This strategy has translated into a manageable level
of write-offs and the Company believes that, for the next one or two
quarters, arrears will be stable or decrease modestly.
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Home Capital continued to generate strong operating and financial performance through the third quarter of 2009, building on its proven strategy of long-term sustainability and increasing profitability. With the Company's continued growth, additional investments have been made in staffing in key business areas to manage further anticipated increases in business. The Company's management team has also been strengthened with the addition of senior personnel in the finance and risk management departments.
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 an increased quarterly cash dividend of $0.16 per Common share payable on December 1, 2009 to shareholders of record at the close of business on November 16, 2009. The revised quarterly dividend is reflective of an annual dividend of $0.64. This is the third increase in the Company's quarterly dividend this year and the eleventh increase in the past five years, reflecting Home Capital's ongoing commitment to enhancing long-term value for all shareholders.
Looking ahead, the Board of Directors and management are confident that Home Capital is well positioned to continue generating robust earnings and growth through the balance of 2009 and into 2010.
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(signed) (signed)
GERALD M. SOLOWAY NORMAN F. ANGUS
Chief Executive Officer Chairman of the Board
November 4, 2009
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Additional information concerning the Company's targets and related expectations for 2009, including the risks and assumptions underlying these expectations, may be found in Management's Discussion and Analysis for the Third Quarter 2009.
Third Quarter Results Conference Call
The conference call will take place on Wednesday, November 4, 2009 at 10:30 a.m. Participants are asked to call 5 to 15 minutes in advance, 416-644-3418 in Toronto or toll-free 1-800-587-1893 throughout North America. The call will be accessible in listen-only mode via the Internet at www.homecapital.com.
Conference Call Archive
A telephone replay of the call will be available between 12:30 p.m. Wednesday, November 4, 2009 and midnight Wednesday, November 11, 2009 by calling 416-640-1917 or 1-877-289-8525 (enter passcode 4170512 followed by the number sign). The archive audio web cast will be available for 90 days on CNW Group's website at www.newswire.ca and Home Capital's website at www.homecapital.com
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FINANCIAL HIGHLIGHTS
For the Period Ended
September 30 (Unaudited) Three Months Ended Nine Months Ended
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In Thousands of Dollars
(Except Per Share and
Percentage Amounts) 2009 2008 2009 2008
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OPERATING RESULTS
Net Income $ 38,243 $ 27,939 $ 104,012 $ 79,648
Total Revenue 125,299 116,950 367,798 336,699
Earnings per Share -
Basic $ 1.11 $ 0.81 $ 3.02 $ 2.31
Earnings per Share -
Diluted 1.10 0.81 3.00 2.29
Return on Shareholders'
Equity 28.7% 27.6% 28.2% 27.8%
Return on Average Assets 2.5% 2.0% 2.3% 2.0%
Efficiency Ratio 28.3% 27.6% 27.2% 28.9%
Efficiency Ratio (TEB(2)) 27.5% 27.1% 26.6% 28.4%
(Non-interest Expense/Net
Interest Income Plus Fee Income)
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BALANCE SHEET HIGHLIGHTS
Total Assets $6,284,592 $5,621,809
Loans 5,181,826 4,515,017
Deposits 5,373,462 4,944,039
Shareholders' Equity 550,823 416,295
Mortgage-Backed Security Assets Under
Administration 3,606,015 2,117,231
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FINANCIAL STRENGTH
Capital Measures(1)
Risk Weighted Assets $2,988,427 $2,941,647
Tier 1 Capital Ratio 16.6% 12.7%
Total Capital Ratio 18.2% 14.0%
Credit Quality
Net Impaired Loans as a Percentage of Gross Loans 1.2% 0.7%
Allowance as a Percentage of Gross Impaired Loans 46.0% 78.0%
Annualized Provision as a Percentage of Gross Loans 0.2% 0.1%
Share Information
Book Value per Common Share $ 15.99 $ 12.07
Common Share Price - Close $ 38.25 $ 31.50
Market Capitalization $1,317,713 $1,085,984
Number of Common Shares Outstanding 34,450 34,476
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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 and the Outlook Section in this quarterly report. Forward-looking statements are typically identified by words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "may," and "could" or other similar expressions.
By their very nature, these statements require us to make assumptions and are subject to inherent risks and uncertainties, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors.
These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.
Assumptions about the performance of the Canadian economy in 2009 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 2009, management's expectations assume:
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- The Canadian economy would contract in 2009, with fragmented growth
prospects across the country, and interest rates and inflation will
remain low;
- Canadian capital markets would improve somewhat in the last quarter
of 2009;
- A declining interest rate environment 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, reduced prime lending rates,
comparatively lower investment returns, reflecting the Company's
shift to high quality assets held in the security and liquidity
portfolio and prudent levels of liquidity in response to uncertainty
in the capital markets.
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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. The calculations are in accordance with guidelines issued by Office of the Superintendent of Financial Institutions Canada (OSFI). Refer to Note 8 of the unaudited interim consolidated financial statements.
Taxable Equivalent Basis (TEB)
Most banks and trust companies analyze and report their financial results on a TEB to provide uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statements of income) includes tax-exempt income from certain securities. The adjustment to TEB increases income and the provision for income taxes to what they would have been had the income from tax-exempt securities been taxed at the statutory tax rate. The TEB adjustments of $2.3 million for the third quarter and $5.1 million first nine months ($1.1 million - Q3 2008 and $3.1 million - nine months 2008) increased reported interest income. TEB does not have a standard meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. Net interest income and income taxes are discussed on a TEB basis throughout this MD & A.
Regulatory Filings
The Company's continuous disclosure materials, including interim filings, annual Management's Discussion and Analysis and audited consolidated financial statements, Annual Information Form, Notice of Annual Meeting of Shareholders and Proxy Circular are available on the Company's web site at www.homecapital.com, and on the Canadian Securities Administrators' website at www.sedar.com.
Management's Discussion and Analysis of Operating Performance
This MD & A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended September 30, 2009 included herein, and the audited consolidated financial statements and MD & A for the year ended December 31, 2008. These are available on the Canadian Securities Administrators' website at www.sedar.com and on pages 8 through 72 of the Company's 2008 Annual Report. Except as described in these unaudited interim consolidated financial statements and MD & A, all other factors discussed and referred to in the MD & A for fiscal 2008 remain substantially unchanged. These unaudited interim consolidated financial statements and MD & A have been prepared based on information available as at November 3, 2009. As in prior quarters, the Company's Audit Committee reviewed this document, and prior to its release the Company's Board of Directors approved it on the Audit Committee's recommendation.
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.
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Table 1: 2009 Objectives and Performance
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Nine-Month Period Ended
September 30, 2009
2009 Objectives(1) Actual Results(1)
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Net Income 10%-15% $104.0 million, or
($87.6 million - 30.6% increase over the
$91.6 million) same period last year
Diluted Earnings per 10%-15% $3.00 per share, or
Share ($2.52 per share - 31.0% increase over the
$2.63 per share) same period last year
Total Assets and Assets 10%-15% $9.89 billion, or
Under Administration ($8.51 billion - 27.8% increase over the
$8.90 billion) same period last year
Return on Shareholders' 20.0% 28.2%
Equity
Efficiency Ratio (TEB) 28.0% to 34.0% 26.6%
Capital Ratios(2)
Tier 1 Minimum of 10% 16.6%
Total Minimum of 12% 18.2%
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 period relative to the same period in the prior
year; asset growth is the change from twelve months prior; and ratios
are based on the current period, annualized.
(2) Based on the Company's wholly owned subsidiary, Home Trust Company.
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FINANCIAL HIGHLIGHTS
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Income Statement Highlights
The Company achieved solid performance across all lines of business during the third quarter and first nine months of 2009. The Company continues to operate from a strong capital base and maintains prudent liquidity levels, providing the necessary financial resources and flexibility to navigate the current volatility in the global economy and capital markets. The Company's key financial highlights for the third quarter and year-to-date are summarized below.
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- Net income in the third quarter of 2009 was 36.9% higher than the
third quarter of 2008 while earnings for the first nine months of
2009 were 30.6% higher than the comparable period of 2008.
- Net interest income for the third quarter of 2009 was $43.0 million,
compared to $40.5 million for the second quarter of 2009, $36.2
million for the first quarter of 2009 and $38.3 million for the
third quarter in 2008. The improvement in net interest income is
attributed to growth in the lending portfolio and the Company's
ongoing strategy to improve margins over the past several quarters.
- Non-interest income in the quarter was 46.0% higher than the third
quarter of 2008 while non-interest income for the nine months was
75.7% higher than the first nine months of 2008. The growth is
driven by robust securitization income, gains on securities portfolio
and mark-to-market adjustments on derivative positions under the CMB
program.
- The efficiency ratio (TEB) (the lower the better) reflects the
Company's cost management leadership within the banking industry. The
ratio was 27.5% for the third quarter and 26.6% for the first nine
months, compared to 27.1% for the third quarter of 2008 and 28.4% for
the first nine months of 2008.
- Diluted earnings per share for the quarter increased 35.8% to $1.10
compared to $0.81 in the third quarter of 2008. For the first nine
months of 2009, diluted earnings per share increased 31.0% to $3.00
from the $2.29 earned during the first nine months of 2008.
- Return on average shareholders' equity for the three and nine months
ended September 30, 2009 was 28.7% and 28.2%, respectively, compared
to 27.6% and 27.8% for the same periods in 2008.
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Balance Sheet Highlights
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- Total assets at September 30, 2009 rose 2.1% from the second quarter
of 2009 and 11.8% year-over-year, to reach $6.28 billion from $5.62
billion reported at September 30, 2008. Asset growth was achieved
across the Company's core asset base including the Company's loans
and securities portfolio. The Company has also grown through insured
off-balance sheet lending during the current period of economic
uncertainty.
- Total residential mortgages increased $452.5 million, or 12.4% over
the second quarter of 2009, up $829.3 million, or 25.4% over December
31, 2008 and up $785.3 million, or 23.7% from one year ago. The
growth reflects the Company's strategy to prudently grow its on-
balance sheet loans portfolio until interest spreads and credit risk
return to more historic norms.
- Liquid assets at September 30, 2009 declined to $469.0 million,
compared to $777.7 million at June 30, 2009, $880.7 million at
December 31, 2008 and $716.9 million at September 30, 2008. The
decline in liquid assets during the third quarter reflects the
Company's gradual return to more normalized liquidity levels as
economic circumstances improve. The Company's access to funds through
insured deposits remains strong which will accommodate growth of the
Company's loans portfolio.
- The Company's capital position strengthened further with Tier 1 and
Total Capital ratios climbing to 16.6% and 18.2%, respectively at
September 30, 2009 up from 12.7% and 14.0% one year earlier.
- Deposit liabilities as at September 30, 2009 were $5.37 billion, an
increase of $132.1 million from June 30, 2009 and an increase of
$429.4 million from $4.94 billion recorded at September 30, 2008.
Deposit liabilities are the Company's core source of capital to fund
lending activity. The Company has grown debt free since September
2006.
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EARNINGS REVIEW
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Net Interest Income
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Table 2: Net Interest Income
For the three months ended
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September 30, 2009 September 30, 2008
In Thousands of Dollars Income/ Average Income/ Average
(Except Percentage Amounts) Expense Rate(1) Expense Rate(1)
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Assets
Cash and cash resources $ 996 1.4% $ 1,501 1.9%
Securities 6,491 4.0% 5,912 4.8%
Loans 84,223 6.7% 86,524 7.7%
Taxable equilvalent
adjustment 2,300 - 1,130 -
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Total interest earning
assets 94,010 6.3% 95,067 7.1%
Other assets - - - -
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Total Assets $ 94,010 6.0% $ 95,067 6.9%
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Liabilities and
Shareholders' Equity
Deposits $ 48,756 3.7% $ 55,589 4.6%
Other liabilities - - - -
Shareholders' equity - - - -
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Total Liabililities and
Shareholders' Equity $ 48,756 3.1% $ 55,589 4.0%
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Net Interest Income $ 45,254 $ 39,478
Tax Equivalent Adjustment (2,300) (1,130)
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Net Interest Income per
Financial Statements $ 42,954 $ 38,348
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Net Interest Margin(2) 2.9% 2.9%
Spread of Loans over
Deposits Only 3.1% 3.1%
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For the nine months ended
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September 30, 2009 Semptember 30,2008
In Thousands of Dollars Income/ Average Income/ Average
(Except Percentage Amounts) Expense Rate(1) Expense Rate(1)
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Assets
Cash and cash resources $ 2,627 1.0% $ 8,326 5.1%
Securities 19,275 4.4% 17,134 4.7%
Loans 249,836 6.9% 256,570 8.0%
Taxable equilvalent
adjustment 5,108 - 3,148 -
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Total interest earning
assets 276,846 6.4% 285,178 7.6%
Other assets - - - -
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Total Assets $ 276,846 6.1% $ 285,178 7.4%
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Liabilities and
Shareholders' Equity
Deposits $ 152,063 3.9% $ 166,692 4.9%
Other liabilities - - - -
Shareholders' equity - - - -
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Total Liabililities and
Shareholders' Equity $ 152,063 3.4% $ 166,692 4.3%
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Net Interest Income $ 124,783 $ 118,486
Tax Equivalent Adjustment (5,108) (3,148)
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Net Interest Income per
Financial Statements $ 119,675 $ 115,338
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Net Interest Margin(2) 2.8% 3.0%
Spread of Loans over
Deposits Only 3.0% 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.
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As noted in Table 2, net interest income of $43.0 million was reported for the third quarter and $119.7 million year-to-date compared to $38.3 million for the third quarter of 2008 and $115.3 million for the first nine months of 2008. Net interest income continues its favourable trend quarter over quarter as third quarter net interest income surpassed the second quarter and first quarter figures of $40.5 million and $36.2 million respectively. The improvement is the result of portfolio growth as well as lower overall funding costs and higher fixed rates, particularly in the non-residential portfolio. The decline in the average cost of funding is attributed to new deposit rates since the second half of 2008 which reflect the significant reduction in interest rates. In the Company's non-residential mortgage portfolio, higher fixed rate terms have been implemented as floating rate loans based off of prime rate began to reset. During the third quarter of 2009, approximately $145.0 million of non-residential loans reset at higher fixed rate terms or were paid-out resulting in a higher portfolio spread. The decline in the average rate for the loans portfolio to 6.7% from 7.2% at the end of June 2009 reflects the current low interest rate environment where lower rates on new and renewed loans replace higher rates on loans that mature.
The net interest margin (TEB) for the Company's assets and liabilities for the third quarter of 2009 was 2.9%, which is consistent with the 2.9% reported in the second quarter of 2009 and the third quarter of 2008. As of September 30, 2009 the net interest margin (TEB) improved from 2.7% reported at the end of the second quarter to 2.8%. The improvement is attributed to a lower average cost of funds and the ongoing shift in the non-residential mortgage portfolio from floating rate to higher fixed rates as described in the preceding paragraph.
The interest spread between the loans portfolio and deposits at the end of the third quarter of 2009 was 3.1%, compared with 3.2% for the second quarter of 2009 and 3.1% in the third quarter in 2008. Year-to-date the spread between the loans portfolio and deposits was 3.0% compared to 3.3% for the same nine-month period in 2008.
The Company continues to benefit from the lower rates on new deposits, repricing of non-residential mortgages at higher fixed rates and robust residential mortgage rates as the Company began growing its core product again.
Non-Interest Income
Total non-interest income was $33.6 million for the third quarter and $96.1 million for the first nine months of 2009, a $10.6 million or 46.0% increase over the third quarter of 2008 and a $41.4 million or 75.7% increase over the comparable nine-month period in 2008. Year to date growth over 2008 was driven by the Company's securitization activity from sales of Mortgage-Backed Securities (MBS) which includes participation in the Canada Mortgage Bond (CMB) program net gains on securities and favourable mark-to-market valuation adjustments on the Company's derivatives portfolio as noted below.
The fees and other income components of non-interest income for the quarter were $7.4 million and $22.1 million for the first nine months of 2009, an increase of $0.3 million or 4.6% over the comparable quarter of 2008 and $0.8 million or 3.7% over the first nine months of 2008. The increase over the comparable periods is attributed to loan portfolio growth.
Table 3: Securitization Activity
The following table summarizes the securitization activities during the third quarter of 2009 compared to the same period in 2008:
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Three months ended
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September 30, 2009
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Single Single
Family Family
Residential Residential Multi-Unit
In Thousands of Dollars, MBS Under MBS Over Residential
except % 1 year 1 year MBS Total
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Highlights of
Securitization Activity
Book value of mortgages
securitized $ 20,705 $ 390,391 $ 209,490 $ 620,586
Net gain on sale of
mortgages $ 479 $ 8,231 $ 3,421 $ 12,131
Prepayment rate 4.1% 12.8% 0.0% 8.2%
Excess spread 3.7% 1.3% 1.4% 1.4%
Discount rate 1.0% 3.3% 2.6% 3.0%
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Three months ended
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September 30, 2008
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Single Single
Family Family
Residential Residential
In Thousands of Dollars, MBS Under 1 MBS Over
except % year 1 year Total
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Highlights of
Securitization Activity
Book value of mortgages
securitized $ 111,699 $ 433,046 $ 544,745
Net gain on sale of
mortgages $ 2,220 $ 13,490 $ 15,710
Prepayment rate 4.2% 8.1% 7.3%
Excess spread 3.5% 1.9% 2.2%
Discount rate 3.6% 3.7% 3.7%
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(1) The gain on sales of mortgages is net of gains and losses realized
on hedging activities.
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The Company sold MBS pools during the third quarter of 2009, consisting of $620.6 million of Canada Mortgage and Housing Corporation (CMHC) insured residential mortgages for a year-to-date total of $1.74 billion. This represents an increase of $75.8 million from the $544.7 million in MBS pools issued in the third quarter of 2008 and an increase of $795.2 million over the $941.1 million for the nine months ended September 30, 2008. In 2008, the Company began diversifying the MBS pools issued to include MBS pools with a maturity under one year and multi-unit residential pools. The one year and multi-unit residential pool assumptions are outlined in Table 3.
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 continuing servicing of these portfolios.
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For the three For the nine
months ended months ended
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September September September September
In Thousands of Dollars 30, 2009 30, 2008 30, 2009 30, 2008
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Securitization gains $ 16,021 $ 18,226 $ 50,957 $ 35,615
Securitization hedging
activity (3,890) (2,516) 8,283 (3,220)
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Securitization gains, net
of hedge costs 12,131 15,710 59,240 32,395
Recurring securitization
income 1,585 1,491 8,874 5,237
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Net securitization income $ 13,716 $ 17,201 $ 68,114 $ 37,632
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The securitization gains, net of hedging, were $12.1 million during the quarter and $59.2 million for the first nine months of 2009, compared to $15.7 million for the third quarter of 2008 and $32.4 million for the first nine months of 2008 (for additional information refer to Note 5 of these unaudited interim consolidated financial statements). The Company continues to enter into forward bond contracts to hedge commitment risk on the loans securitized. The unwinding of the forward bond contracts during the third quarter of 2009 resulted in a $3.9 million hedging loss recorded in the consolidated statement of income through securitization income producing a net hedging gain of $8.3 million for the first nine months of 2009. In the third quarter of 2008, a $2.5 million hedging loss was recorded resulting in a net hedging loss of $3.2 million for the first nine months of 2008.
As described in the Derivatives and Off-Balance Sheet Arrangements section of this MD & A, the Company utilizes swaps and/or forward contracts to manage exposure to movements in interest rates prior to the sale of securitized mortgage pools. The realized loss of $3.9 million on the unwinding of forward bond contracts as securitized mortgage pools were sold is attributed to the downward movement in bond yields which resulted in a larger securitization gain offset by the hedging losses to give a lower net securitization gain.
During the third quarter, despite growth in securitization volumes over the third quarter of 2008, net securitization gains declined by $3.6 million from the third quarter of 2008. The decline in securitization income is attributed to lower excess spread in 2009 as bond yields increased and mortgage yields decreased causing spreads to narrow further. For the quarter ended September 30, 2009 the excess spread on securitization gains was 1.4% and 1.9% for the first nine months of 2009, compared to 2.2% for the comparable quarter of 2008 and 2.6% for the fi rst nine months of 2008.
During the quarter, the Company's securitization activities included participation in CMHC's CMB program, administered through the Canada Housing Trust. This program provides the Company with an additional channel to diversify its funding stream for MBS pools. Of the total MBS pools issued during the third quarter and first nine months of 2009, pools with a book value of $288.3 million for a year-to-date total of $1.23 billion were securitized through the CMB program resulting in gains of $7.3 million and $45.2 million, respectively. This compares to 2008 when pools with a book value of $433.0 million for a total of $639.9 million were sold into the CMB program resulting in gains of $13.5 million and $22.9 million, respectively.
Recurring securitization income earned from excess spreads, net of servicing fees, was $1.6 million for the third quarter of 2009, an increase of $0.1 million or 6.3% over the $1.5 million earned in the third quarter of 2008. For the first nine months of 2009, $8.9 million in recurring securitization income was earned, up $3.6 million or 69.5% over the $5.2 million earned in the same nine month period of 2008. The growth of this income reflects growth in the outstanding principal for pools previously securitized.
The Company also holds longer term derivative contracts to hedge its obligations for pools previously sold to Canada Housing Trust under the CMB program. These derivative contracts do not qualify for hedge accounting treatment under current generally accepted accounting principles and must therefore be marked to market through net income. During the quarter, the Company recognized $11.4 million of gains from these mark-to-market adjustments for a year to date gain of $3.3 million. The mark-to-market adjustment is comprised of changes in market inputs, modifications to assumptions for changing circumstances and refi nements in the valuation model.
Non-Interest Expenses
Total non-interest expenses for the quarter were $21.7 million and $58.7 million for the first nine months of 2009 compared to $17.0 million for the third quarter of 2008 and $49.2 million for the first nine months of 2008. Third quarter expenses grew 27.9% over the comparable period in 2008, and increased 19.5% through the first nine months of 2009 compared to the same period in 2008. The total increase over 2008 is consistent with the overall growth of the Company which led to the addition of staff, space and general and administration expenses to support business operations.
During the third quarter, salaries and staff benefits were $11.3 million for a total of $31.5 million for the first nine months of 2009. The staff expenses increased by $1.9 million, or 20.2% over the third quarter of 2008 and $3.9 million, or 14.1% over the same nine month period in 2008 as the Company added employees to facilitate growth. In August, M.E. (Peggy) Gilmour, C.A., joined the Company as Senior Vice President, Finance. Ms. Gilmour previously held executive positions in finance and risk management in both the banking and insurance industries. As a result, the the Finance team was reorganized and new senior personnel added to better position the Company to meet its future objectives and regulatory changes. At the same time, Kerry Reinke, C.A., was appointed the Company's Chief Risk Officer. The Company ended the quarter with 475 employees, up from 395 employees at the end of 2008 and up from 407 employees one year ago.
General and administration expenses were $8.8 million during the quarter for a total of $22.9 million for the first nine months of 2009. The expenses increased by $2.4 million or 38.3% over the third quarter of 2008 and $4.6 million or 25.0% over the same nine month period in 2008. The growth in this area of expenses is attributed to growth in computing costs and professional fees to support the growth of the Company and the transition to a new core banking system.
Premises expenses were $1.6 million during the quarter for a total of $4.4 million for the first nine months of 2009. Premises expenses increased by $0.4 million over the third quarter of 2008 and $1.1 million over the same nine month period in 2008. Growth is attributed to rent increases and additional new equipment leases. The Company did not take on any additional premises.
The efficiency ratio (TEB) for the quarter was 27.5% and 26.6% for the first nine months of 2009, compared to 27.1% in the comparable quarter and 28.4% for the first nine months of 2008. The year to date ratio is slightly better than the Company's stated objective for the year reflecting the Company's cost management leadership within the industry.
Provision for Credit Losses
The provision for credit losses was $2.9 million during the quarter and $9.2 million for the first nine months of 2009, compared to $3.4 million in the comparable quarter of 2008 and $4.7 million for the first nine months of 2008. This expense represented 0.2% (0.1% - 2008) of total gross loans, on an annualized basis compared with the 0.2% average for the previous five years. The third quarter 2009 provision for credit losses declined $0.6 million compared to the third quarter of 2008 while the provision increased $4.6 million for the first nine months as compared to the same period in 2008. The increase in the nine month provision expensed is due to the economic downturn which took hold in the third quarter of 2008. The decline in the provision expense from the third quarter of 2008 is an encouraging sign that credit losses have stabilized and should begin to return to more normal levels.
The general allowance balance at September 30, 2009 is $26.5 million, an increase of less than $0.1 million since the end of June 2009 for a year to date total increase of $1.3 million since December 2008 and a $1.4 million increase since September 30, 2008. The general allowance reflects the overall growth in the Company's loans portfolios, the reduction of non-residential loans as well as additional prudence during the economic uncertainty. The general allowance was 88.8 basis points of the Company's risk-weighted assets at September 30, 2009 compared to 84.0 basis points at December 31, 2008 and 84.4 basis points at September 30, 2008.
The balance in specific provisions at September 30, 2009 is $5.0 million, an increase of $0.6 million during the third quarter of 2009 for a year to date total increase of $2.0 million and a $2.6 million increase since September 30, 2008. The increase in specific provisions reflects the growth in impaired loans during the economic challenges.
At September 30, 2009 net impaired loans amounted to $63.5 million (1.2% of gross loans), compared to $61.1 million (1.3% of gross loans) at June 30, 2009 and $32.8 million (0.7% of gross loans) at September 30, 2008 (refer to Note 4 of these unaudited interim consolidated financial statements). Total loans written-off during the quarter were $2.2 million and $5.9 million for the first nine months of 2009, compared to $0.4 million in the third quarter of 2008 and $1.6 million during the first nine months of 2008. Write-offs were experienced across the majority of the Company's loan product offerings and reflect the ongoing economic slowdown in Canada. The Company continues to monitor non-performing loans closely and takes proactive measures to minimize losses, as described under the Credit Risk section of this MD & A and in the 2008 Annual Report under the heading Risk Management.
Income Taxes
The income tax expense amounted to $13.8 million (effective tax rate of 26.5%) for the third quarter and $43.7 million (effective tax rate of 29.6%) for the first nine months of 2009, compared to $13.0 million (effective tax rate of 31.8%) for the third quarter and $36.6 million (effective tax rate of 31.5%) for the first nine months of 2008. The lower than usual effective tax rate during the third quarter is mainly attributed to increased tax exempt income and the effect of future tax rate changes.
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 29.5% for the third quarter and 32.0% for the first nine months of 2009, compared to 33.6% for the third quarter and 33.3% for the comparable nine-month period in 2008.
Comprehensive Income
Comprehensive income is the aggregate of net income and other comprehensive income (OCI). Total comprehensive income was $39.4 million for the third quarter of 2009 and $132.6 million year-to-date, reflecting increases of $11.4 million over the third quarter of 2008 and $50.1 million over the same nine-month period in 2008. The $11.4 million increase in the third quarter is composed of $10.3 million of additional net income and $1.1 million of additional OCI. The nine month increase of $50.1 million is composed of $24.4 million of additional net income and $25.7 million of additional OCI. The increase in comprehensive income that is attributed to net income is discussed under the previous headings of this Earnings Review section. The additional OCI is primarily attributed to mark-to-market and valuation adjustments based on favourable changes in capital markets and interest rates as described below.
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 third quarter of 2009, OCI of $1.2 million was reported for a total of $28.6 for the nine-month period compared with less than $0.1 million for the third quarter of 2008 and $2.9 million for the nine-month period ended September 30, 2008. During the third quarter, net unrealized income of $0.9 million on securities available for sale was recognized for a total of $15.3 million for the nine months. In addition, $0.3 of net realized losses were transferred from other comprehensive income to net income for a total of $13.4 million for the nine months.
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BALANCE SHEET REVIEW
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Assets
Total assets at September 30, 2009 were $6.28 billion, an increase of $474.9 million, or 8.2% over the $5.81 billion reported at December 31, 2008 and up by $662.8 million, or 11.8% over the September 30, 2008 asset balance of $5.62 billion.
The increase in total assets over December 31, 2008 is being driven by on-balance sheet growth in the Company's core residential mortgage portfolio which increased $829.3 million or 25.4% over the nine-month period. This growth does not factor in the $1.74 billion the Company securitized in the first nine months of 2009. The robust securitization activity has resulted in an increase in securitization receivables of $56.1 million or 40.1% compared to December 31, 2008. The non-residential mortgage portfolio decreased by $107.0 million, or 12.9% as the Company continues to focus on core residential mortgage lending. As well, the consumer lending portfolio, which includes the Equityline Visa portfolio, has declined to $342.5 million from $369.0 million at December 2008 due to the Company's tightened lending standards in response to the existing economic climate.
The growth in total assets over September 30, 2008 has been generated from growth in the loans portfolio and securitization receivables offset by a reduction in the Company's securities portfolio and cash resources utilized for the growth in the loan portfolio. The loans portfolio increased by $666.8 million with positive growth experienced in residential mortgages offset by declines in non-residential mortgages, personal and credit card loans and secured loans. Other assets increased by $115.9 million, primarily due to robust growth in the Company's securitization activities resulting in an increase of $89.0 million in securitization receivables and a $19.6 million increase in intangible assets for the development of the Company's new core banking system.
Liabilities
Liabilities at September 30, 2009 were $5.73 billion, an increase of $356.8 million, or 6.6% over the $5.38 billion reported at December 31, 2008 and up by $528.3 million, or 10.1% over the $5.21 billion recorded at September 30, 2008.
Much of the increase from December 31, 2008 resulted from an increase in deposit liabilities of $270.7 million. The growth in the deposit liabilities funded a significant portion of the loans portfolio growth, with additional funds drawn from excess liquidity reserves for the remaining loans portfolio growth. Other liabilities (refer to Note 7 of these unaudited interim consolidated financial statements) increased by $86.3 million, or 32.0% over the $269.4 million reported at December 31, 2008. This growth was principally the result of an increase of $54.9 million from the timing of payments due to MBS investors, an increase of $13.2 million in the servicing liability related to the Company's ongoing administration of the off-balance sheet residential mortgage loans, and a net increase of $20.4 million in the Company's deferred corporate tax liabilities.
The increase in liabilities from September 30, 2008 was primarily due to an increase in deposit liabilities of $429.4 million, or 8.7%, as deposit liabilities funded the on-balance sheet growth in the Company's residential loans portfolios, with excess funds being drawn from the Company's liquidity portfolio. As well, other liabilities increased by $97.6 million, or 37.8% over September 30, 2008 primarily due to increases of $53.0 million in liabilities resulting from the timing of payments due to MBS investors, an increase of $19.3 million in the servicing liability relating to Company's ongoing administration of the off-balance sheet residential mortgage loans, and a net increase of $26.9 million in the Company's deferred corporate tax liabilities.
Shareholders' Equity
Total shareholders' equity at September 30, 2009 increased by $118.0 million, or 27.3% to $550.8 million over the $432.8 million reported at December 31, 2008. The increase since December 2008 was internally generated from net income through the first nine months of 2009 of $104.0 million, less $15.5 million for dividends payable to shareholders and a significant positive movement in accumulated other comprehensive income of $28.6 million from the Company's available-for-sale financial assets. The remaining changes were due to the amortization of stock based compensation and proceeds of options exercised offset by net changes in the Company's common shares through the Normal Course Issuer Bid.
Total shareholders' equity at September 30, 2009 rose by $134.5 million, or 32.3% to $550.8 million from the $416.3 million reported at September 30, 2008. This growth was driven by internally generated earnings and positive movements in accumulated other comprehensive income offset by dividends and reduction of capital stock through the Company's Normal Course Issuer Bid. At September 30, 2009 the book value per common share was $15.99, compared to $12.57 at December 31, 2008 and $12.07 at September 30, 2008.
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 interest rate swaps or forward contracts to sell Government of Canada bonds to hedge the economic exposure to movements in interest rates between the time that mortgages are committed to being funded by asset securitization, and the time those mortgages are actually sold. The intent of the swap or forward bond contracts is to have the fair value movements of these instruments be effective in offsetting the fair value movements within a pool of mortgages during the period in which the fixed rate pool may be exposed to movements in interest rates, generally 60 to 150 days. During the third quarter of 2009, the Company entered into $698.7 million in notional forward bond contracts to hedge the commitment risk on the Company's securitization activities. Forward bond contracts are unwound at the time of securitization. The realized loss of $3.9 million was included in the income statement in securitization income on mortgage backed securities.
At September 30, 2009 the Company continued to hold notional forward bond contracts of $519.4 million in anticipation of future securitization. The forward bond contracts were marked-to-market at September 30, 2009 for a year to date unrealized loss of $1.7 million. At September 30, 2008 the Company held $40.0 million in notional forward bond contracts and marked those to market for an unrealized gain of $0.1 million. These unrealized gains and losses are included in the income statement in gain on derivatives.
The Company participates in the CMB program sponsored by CMHC, and administered by Canada Housing Trust. Through this program, the Company must manage the mismatch and reinvestment risk between the amortizing MBS pool and the CMB. As part of this arrangement, the Company enters into a seller swap which has the effect of paying the fixed interest payments on the CMB and receiving the total return on the MBS pool. As well, the Company entered into a hedge swap to manage the reinvestment risk between the amortizing MBS pool and the CMB. The notional values of the swaps, including both seller and hedge swaps at September 30, 2009, were $2.53 billion ($1.2 billion - Q4 2008; $760.9 million - Q3 2008). These swaps were marked-to-market at September 30, 2009 for a year-to-date unrealized gain of $2.8 million (unrealized gain of $0.4 million - Q4 2008; unrealized gain of $1.0 million - Q3 2008), recorded in the consolidated statements of income. For additional information refer to Note 12 of these unaudited interim consolidated fi nancial statements.
The Company originates and securitizes insured residential mortgage loans into special purpose entities for liquidity funding. When these assets are sold, the Company retains rights to certain excess interest spreads less servicing liabilities, which constitute retained interests. The Company periodically reviews the value of retained interests, and any other than temporary impairment in value is charged to income. The Company continues to administer all securitized assets that the Company originates after the sale and, upon maturity of the mortgage, will renew or refinance these mortgage loans whenever possible. As at September 30, 2009 outstanding securitized mortgage loans under administration amounted to $3.61 billion ($2.61 billion - Q4 2008; $2.12 billion - Q3 2008) with a retained interest of $196.0 million ($139.9 million - Q4 2008; $107.0 million - Q3 2008). The off-balance sheet portfolio continues to perform well, with 97.7% of the portfolio current and 1.1% greater than 60 days in arrears. For additional information, refer to Note 6 in the consolidated financial statements of the 2008 Annual Report, and Note 5 of these unaudited interim consolidated financial statements.
In the normal course of its business, the Company offers credit products to meet the financial needs of its customers. Outstanding commitments for future advances on mortgage loans amounted to $382.1 million at September 30, 2009 compared to $242.4 million at December 31, 2008 and $424.9 million at September 30, 2008. Included within the outstanding commitments are unutilized non-residential advances of $39.9 million at September 30, 2009 compared to $89.6 million at December 31, 2008 and $151.3 million at September 30, 2008. Commitments for the loans remain open for various dates through September 2010. As at September 30, 2009 unutilized credit card balances amounted to $52.0 million, compared to $62.9 million at December 31, 2008 and $69.0 million at September 30, 2008. Outstanding commitments for future advances for the Equityline Visa portfolio were $3.9 million at September 30, 2009 compared to $2.4 million at December 31, 2008 and $3.0 million at September 30, 2008.
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CAPITAL MANAGEMENT
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Home Trust's capital ratios are calculated using the guidance of the Office of the Superintendent of Financial Institutions (OSFI). Effective January 1, 2008, Home Trust began calculating its regulatory capital under the new capital adequacy rules issued by OSFI, which are based under the "International Convergence on Capital Management and Capital Standard - A Revised Framework" (Basel II).
Under Basel II for Home Trust, risk-weighted assets are calculated for each of credit and operational risk. Home Trust's risk-weighted assets were as follows:
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Table 5: Risk-weighted Assets
As at As at As at
September December September
In Thousands of Dollars 30, 2009 31, 2008 30, 2008
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Risk-weighted assets for:
Credit risk $2,688,064 $2,711,583 2,659,965
Operational risk 300,363 274,167 281,682
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Total Risk-weighted Assets(1) $2,988,427 $2,985,750 2,941,647
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(1) Based on the Company's wholly owned subsidiary, Home Trust Company.
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The capital base of Home Trust continues to be strong. The Tier 1 capital ratio at the end of the third quarter of 2009 was 16.6%, up from 15.2% recorded in the second quarter of 2009 and up from the 12.8% reported at September 30, 2008. The Total Capital ratio was 18.2% at September 30, 2009, up from the 16.7% reported in the second quarter of 2009 and up from the 14.1% reported at September 30, 2008.
The Company continues to build its capital base through retained earnings during this period of economic uncertainty. 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 fi nancial statements.
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RISK MANAGEMENT
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The Company is exposed to various types of risks owing to the nature of the business activities it conducts. The types of risk to which the Company is subject include credit, liquidity and interest rate risks. The Company has adopted Enterprise Risk Management (ERM) as a discipline for managing 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
Credit risk management is the oversight of credit risk associated with the total loans portfolio and counter-party exposures. This is the risk of the loss of principal and/or interest from the failure of debtors and counter-parties, 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 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, credit risk and 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 September 30, 2009 the composition of the total mortgage portfolio was 85.0% residential and 15.0% non-residential, compared to a composition of 79.8% residential and 20.2% non-residential at December 31, 2008 and a composition of 80.7% residential and 19.3% non-residential one year ago. The composition is well within the internal policy limits the Company's Risk and Capital Committee and the Board of Directors have approved. Within the Company's residential mortgage portfolio, 28.8% of the loans were insured by either CMHC or other OSFI-approved insurers at the end of the quarter, compared to 14.6% at December 31, 2008 and 9.0% one year ago reflecting the Company's strategic shift to reduce credit exposure. First mortgages represented 99.6% of the total mortgage portfolio at September 30, 2009, consistent with comparable periods. Further, with the launch of the Accelerator Program in the second quarter of 2008, the Company continues a trend of originating higher volumes of government-insured mortgages. Of all residential mortgage originations and renewals in the third quarter of 2009, 68.3% were government-insured for a year-to-date total of 69.6%. This is up from the comparable three-month period of 2008 where 52.7% of all residential mortgage originations and renewals were insured and up from 43.6% for the first nine months of 2008. At September 30, 2009 the average loan to value on origination of the Company's non-insured residential mortgage loans portfolio was 68.1% compared to 67.8% at December 31, 2008 and 66.4% one year ago. Refer to Note 4 of these unaudited interim consolidated financial statements for a further breakdown by geographic region.
The mortgage loans portfolio continued to perform well with 95.3% of the portfolio current and 1.8% of the portfolio over 60 days in arrears at the end of September 2009. The current portion of the portfolio has improved slightly from December 31, 2008 at which point 94.5% of the portfolio was current and is consistent with the 95.3% reported at September 31, 2008. The over 60 days arrears is up slightly from the 1.6% and 1.5% of the portfolio that was over 60 days arrears at December 31, 2008 and September 30, 2008, respectively, and is consistent with 1.8% reported at June 30, 2009 and an improvement from the 2.4% at March 31, 2009.
As at September 30, 2009 the gross credit card receivable balance totaled $312.9 million, of which $312.5 million, or 99.9% of the portfolio was secured either by cash deposits or residential property, and $0.4 million, or 0.1% was unsecured. The total credit approved included $364.4 million in secured and $0.5 million in unsecured credit, compared to $414.3 million in secured, and $0.7 million in unsecured credit at December 31, 2008 and $417.0 million in secured, and $0.8 million of unsecured credit at September 30, 2008. Within the secured credit card portfolio Equityline Visa credit cards represent the principal driver of receivable balances. Equityline Visa credit cards are secured by collateral residential mortgages, and this portfolio segment amounted to $305.4 million of the total credit card receivable balance as at September 30, 2009 compared to $342.9 million at December 31, 2008 and $339.3 million at September 30, 2008. Cash deposits securing credit card accounts amounted to $12.5 million, and are included in the Company's deposits. Further, the Equityline Visa portfolio has a loan to value of 69.4% at September 30, 2009, down from the loan to value of 69.5% and 69.8% at December 31, 2008 and September 30, 2008, respectively. At September 30, 2009, $8.4 million, or 2.7% of the credit card portfolio was over 60 days in arrears improving from the $10.6 million, or 3.0% at December 31, 2008 and up from the $6.8 million, or 1.9% at September 30, 2008.
The secured loan portfolio of $53.5 million decreased by $19.0 million from the December 31, 2008 balance of $72.5 million, and decreased $25.5 million from the September 30, 2008 balance of $79.0 million. These loans are secured by second mortgages on residential properties. At September 30, 2009, 96.2% of the secured loan portfolio was current while $1.1 million or 2.1% was over 60 days in arrears. This compares to 97.1% of the secured loan portfolio being current while $1.0 million or 1.4% was over 60 days in arrears at December 31, 2008. As at September 30, 2008, 97.4% of the secured loan portfolio was current while $0.8 million or 1.0% was over 60 days in arrears.
The Company experienced a rise in net impaired loans, to $63.5 million at September 30, 2009 compared to $39.2 million at December 31, 2008 and $32.8 million at September 30, 2008 driven by the deterioration in the overall economy. Although impaired loans have increased over September 2008, the percentage of gross loans declined from 1.3% at June 30, 2009 to 1.2% at September 30, 2009. The results are within the Company's historic range. Further, due to strong underwriting and credit standards, the Company is not experiencing a correlated increase in write-offs. The Company tightened its underwriting criteria, taking into account local market conditions in order to minimize potential loss exposure. Experienced employees of the Company undertake reviews of all non-performing loans greater than 60 days to analyze patterns and drivers, and then reflect emerging drivers in the Company's lending criteria going forward. This analytical approach and attention to emerging trends has resulted in continued low write-offs relative to the gross loans portfolio. Net write-offs applied against the accumulated allowance for credit losses realized on loans during the three-month period ended September 30, 2009 totaled $2.2 million for a year-to-date total of $5.9 million, up from the write-offs incurred in the third quarter of 2008 of $0.4 million and $1.6 million for the first nine months of 2008. The Company continues to monitor this area, and is dealing prudently and effectively with impaired loans. Additional experienced personnel have been hired during 2009 to manage the increased workload and the Company is working with clients to manage their payments through the challenging economic conditions.
The Company continues to be well positioned to absorb probable losses in its loans portfolio, holding general allowances of $26.5 million at September 30, 2009 as compared to $25.2 million at December 31, 2008 and $25.1 million at September 30, 2008. The Company routinely monitors the adequacy of the general allowance. The Company has security in the form of real property or cash deposits against loans totaling 99.5% of the total loans portfolio. The Company's evaluation of the adequacy of the general allowance takes into account asset quality, borrowers' creditworthiness, property location and past loss experience. The Company periodically reviews the methods utilized in reviewing the general allowance, giving due consideration to changes in economic conditions, interest rates and local housing market conditions.
The total general allowance was 88.8 basis points of the Company's risk-weighted assets at September 30, 2009 compared to 84.0 basis points at December 31, 2008 and 84.4 basis points at September 30, 2008. The increase in the ratio reflects the Company's commitment to adequately provide for future losses during the current economic downturn.
Liquidity Risk
The objective of liquidity risk management is to ensure the Company has the ability to generate or obtain cash or equivalents in a timely manner and at a reasonable cost to meet its commitments (both on- and off-balance sheet) as they become due.
The Company's liquidity management framework includes a policy relating to several key elements, such as the minimum levels of liquid assets to be held at all times, the composition of types of liquid assets to be maintained, the daily monitoring of the liquidity position by senior management, and quarterly reporting to the Risk and Capital Committee of the Board of Directors. 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 decline in new deposits over a one-month period. In the "ongoing" scenario, the situation is similarly stressed but is spread out over the course of one year. In each scenario, the Company must hold sufficient liquid assets to meet the potential and certain obligations for a period of one year beyond the time frame of the scenario. These scenarios require the Company to make assumptions regarding the probable behaviour and timing of cash flows for each type of asset and liability. The Company's liquidity ratio is the total of liquid assets, adjusted by the estimates in each scenario, divided by the adjusted liabilities. At September 30, 2009 liquid assets amounted to 163% under the immediate scenario and 141% under the ongoing scenario. The Company continues to monitor these scenarios and will take appropriate actions should the need arise.
The Company holds liquid assets in the form of cash and bank deposits, treasury bills, bankers' acceptances, government bonds and debentures to comply with its liquidity policy. At September 30, 2009 liquid assets amounted to $469.0 million, or 29.6% of 100-day obligations, compared to $880.7 million and 66.0% recorded at December 31, 2008 and $716.9 million and 50.1% at September 30, 2008. The lower liquidity levels year-over-year reflect the on-balance sheet growth of the core mortgage loans portfolio and the timing of certain securitization activities. The Company's policy is to maintain a minimum 20% of 100-day obligations in liquid assets.
For the twelve months ended September 30, 2009 the Company maintained a monthly average of $620.2 million, or 43.97% of 100-day obligations in liquid assets compared to $598.2 million, or 46.2% for the twelve months ended December 31, 2008 and $571.3 million, or 46.9% for the twelve months ended September 30, 2008.
Structural Interest Rate Risk
Structural interest rate risk is the sensitivity of earnings and capital to sudden changes in interest rates. The objective of interest rate risk management is to ensure that the Company is able to realize stable and predictable earnings over specific time periods despite interest rate fluctuations. The Company has adopted an approach to the management of its asset and liability positions to prevent interest rate fluctuations from materially impacting future earnings, and to the best of its abilities matches liabilities to assets through its actions in the deposit market in priority to accessing off-balance sheet solutions. The Company's Asset Liability Management Committee manages exposure arising from interest rate and liquidity risk, and reports quarterly to the Board of Directors.
The interest rate sensitivity position as at September 30, 2009 is presented under Note 13 in these unaudited interim consolidated financial statements. The table provided there represents the Company's position at a point in time, and the gap represents the difference between assets and liabilities in each maturity category. Note 13 summarizes both on- and off-balance sheet assets and liabilities, in terms of their contractual amounts. Over the lifetime of certain assets, some contractual obligations such as residential mortgages will be terminated prior to their stated maturity at the election of the borrower, by way of prepayments. Similarly, some contractual off-balance sheet mortgage commitments may be extended but not materialize. In measuring its interest rate risk exposure, the Company will make assumptions about these factors, taking into account aspects such as past borrower history.
To assist in matching assets and liabilities, the Company utilizes 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. 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
September September September September
30 30 30 30
In Thousands of Dollars 2009 2008 2009 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) $ 5,465 $ 3,096 $ (5,465) $ (3,096)
Impact on net present
value of shareholders'
equity (1,450) (6,591) 1,712 6,910
200 basis point shift
Impact on net interest
income, after tax (for
the next 12 months) $ 10,930 $ 6,191 $ (10,930) $ (6,191)
Impact on net present
value of shareholders'
equity (2,673) (12,879) 3,724 14,158
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
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 $519.4 million in forward bond contracts specifically to hedge commitment risk at September 30, 2009 in anticipation of future securitization activities compared to $40.0 million as September 30, 2008 and $34.3 million at December 31, 2008. Through the Company's participation in CMHC's CMB program, the Company was required to enter into specific swap agreements to hedge interest rate risk and the reinvestment risk between the amortizing MBS pool and the CMB. Refer to Note 12 of these unaudited interim consolidated financial statements for additional information.
<<
-------------------------------------------------------------------------
RESULTS BY BUSINESS SEGMENT
-------------------------------------------------------------------------
>>
The following section discusses the mortgage lending, consumer lending and other business segments for the three- and nine-month periods ended September 30, 2009 (refer to Note 14 of these unaudited interim consolidated financial statements). The mortgage lending segment continues to be the primary driver of the Company's overall growth while the consumer lending segment continues to provide a diversifi ed income source.
Mortgage Lending
The Company's principal line of business contributed $29.4 million of net income during the third quarter of 2009 and $79.4 million for the first nine months of 2009, as compared to $22.0 million and $58.1 million, respectively, for the comparable periods in 2008. Growth over the prior periods was driven primarily by loan originations which drive higher interest and fee income plus a significant contribution to income through securitization activities. During the third quarter of 2009, net interest income benefited from a lower cost of funding and fixed rate conversions on the variable rate non-residential mortgage loans. Net interest income for the quarter was $26.8 million, compared with $24.0 million for the three-month period ended September 30, 2008.
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 For the nine
months ended months ended
-------------------------------------------------------------------------
September September September September
30 30 30 30
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Single family residential
mortgages(1) $ 948,853 $ 636,288 $2,296,122 $1,838,356
Multi-unit residential
mortages(1) 392,134 194,819 942,518 250,874
Warehouse residential
mortgages(1) - 152,938 49,951 261,267
Non-residential mortgages 36,609 78,714 75,224 393,495
Store and apartments 9,662 18,502 24,051 57,586
Warehouse commercial
mortgages 10,250 24,500 16,250 58,273
-------------------------------------------------------------------------
Total Mortgage Advances $1,397,508 $1,105,761 $3,404,116 $2,859,851
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As defined by the Office of the Superintendent of Financial
Institutions
>>
The total value of new mortgages advanced in the quarter was $1.40 billion, an increase of 26.4% over the $1.11 billion advanced for the same quarter in 2008. Total value of new mortgages advanced for the first nine months of 2009 was $3.40 billion, an increase of 19.0% over the $2.86 billion advanced for the first nine months of 2008. During the third quarter of 2009, residential advances increased by 36.3% or $356.9 million over the comparable quarter in 2008. Year to date residential advances increased $938.1 million or 39.9% over the first nine months of 2008. Residential Mortgages include the advances from loans originated under the Accelerator Program and Multi-unit Residential loans which are all insured products and included in the Company's MBS and CMB securitization program.
During the third quarter, advances for non-residential mortgages declined $65.2 million or 53.6% while year to date advances declined by $393.8 million or 77.3%. This decline is consistent with the Company's strategy of reducing its exposure to non-residential mortgages during the economic volatility.
During the quarter, the Company sold $620.6 million of mortgage-backed securities created through CMHC's insured residential mortgage securitization program while year-to-date, a total of $1.74 billion was sold. Total gains realized from securitization were $12.1 million for the quarter and $59.2 million for the first nine months of 2009. This compares to $544.7 million securitized for the third quarter of 2008 and $941.1 million for the first nine months of 2008, resulting in gains of $15.7 million and $32.4 million, respectively.
During the third quarter, the Company's securitization activities included participation in CMHC's CMB program. Of the $620.6 million sold during the quarter, $288.3 million relates to this program compared with $433.0 million in the comparable period of 2008. Year to date, sales into the CMB program were $1.23 billion compared to $639.9 million for the first nine months of 2008. The sales realized $7.3 million in gains during the quarter and $45.2 million year to date compared to $13.5 million during the third quarter of 2008 and $22.9 million. The growth in securitization activity reflects current economic circumstances which cause origination funding through securitization to be less costly than traditional deposits. The Company anticipates shifting its funding back to a traditional deposit on-balance sheet approach as securitization spreads normalize. As this occurs, securitization will continue to contribute to the Company's income; however, core mortgage lending utilizing funding from deposits is expected to remain the main driver of the Company's future financial results. For additional information refer to Note 5 of these unaudited interim consolidated financial statements.
The Company's second mortgage program, (recorded as Secured Loans), is conducted through an agreement with a Trustee operating as Regency Finance Corp. (Regency), whereby the Company acts as Regency's agent in offering residential second mortgage loans. These mortgage loans are securitized and the investments are purchased by the Company. At the end of the third quarter of 2009 the Company held $53.5 million in Secured Loans as Notes Receivable issued by Regency, compared to $72.5 million at December 31, 2008 and $79.0 million at September 30, 2008. These Notes yield 6.6% with an average duration of 2.0 years. The Company also receives fee income for servicing and administering these mortgages for Regency. This income amounted to 0.4% of the portfolio value, on an annualized basis. The underlying credit quality of the mortgage loans securing the Notes Receivable remains high, with 2.1% of the portfolio in arrears over 60 days. This program has experienced minimal losses since inception. The Company had decided to discontinue advancing funds under this program during the economic downturn and recently resumed marketing of this product in anticipation of the improved housing markets.
Consumer Lending - Credit Cards and Retail Services
Consumer lending again generated positive results during the first nine months of 2009. Net income for the quarter was $6.2 million for a year-to-date total of $16.8 million, compared to $5.1 million for the third quarter of 2008 and $14.3 million for the nine months of 2008. Growth in the Company's retail loan portfolio has contributed favourably to the overall results of this segment. The Equityline Visa portfolio has declined during the economic downturn as the Company has tightened lending standards over the past year to manage credit risk. This has lowered net interest income and Visa fee income. The Company has commenced new marketing initiatives, in anticipation of economic recovery, to resume long term plans to grow this part of the business. Also included in the operating results of the consumer lending segment are the operations of PSiGate which contributed $0.3 million of net income during the quarter and $1.1 million for the first nine months of 2009.
The Equityline Visa loans portfolio amounted to $305.4 million at September 30, 2009 ($342.9 million - Q4 2008; $339.3 million - Q3 2008) comprising 97.6% (97.4% - Q4 2008; 97.3% - Q3 2008) of the total gross credit card receivable balance of $312.9 million, and bearing an average interest rate of 10.8% (10.3% - Q4 2008; 10.5% - Q3 2008) on outstanding balances. During the third quarter of 2009, 744 Equityline Visa accounts with $26.7 million in authorized credit limits were issued for a year-to-date total of 1,741 Equityline Visa accounts with $66.1 million in authorized credit limits. Both the current and year-to-date totals in 2009 are down from 868 Equityline Visa accounts with $37.7 million in authorized credit limits issued in the third quarter of 2008 and down from 3,074 Equityline Visa accounts with $139.2 million in authorized credit limits issued for the nine months ended September 30, 2008. The decrease in new accounts from the comparable prior year periods is due to ongoing careful management of credit in certain geographical locations during the current economic environment.
Other
The Other segment is comprised of the operating results from the Company's securities portfolio and corporate activities. Net income for the quarter was $2.7 million for a year-to-date total of $7.8 million compared with $0.8 million for the three months ended September 30, 2008 and $7.3 million for the first nine months of 2008. Growth in this segment is attributed to gains on sale from the securities investments portfolio.
<<
-------------------------------------------------------------------------
ACCOUNTING STANDARDS AND POLICIES
-------------------------------------------------------------------------
>>
Critical Accounting Estimates
Critical accounting estimates which require management to make significant judgements, some of which are inherently uncertain, are outlined on pages 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 December 31, 2008 consolidated financial statements. Effective January 1, 2009 the Company adopted the new accounting standard issued by the Canadian Institute of Chartered Accountants (CICA), Section 3064, Goodwill and Intangible Assets. The implementation of this standard did not have a material impact on the Company's consolidated financial position and results of operations. For further details, see Note 2 to these unaudited interim consolidated financial statements. 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 financial position or earnings of the Company.
Future Accounting Changes
In June 2009, the CICA issued amendments to Section 3862, Financial Instruments - Disclosures that provides improved disclosures for liquidity risk and fair value measurement. The Company will adopt the amendments for its December 31, 2009 annual financial statements.
In August 2009, the CICA issued various amendments to Section 3855, Financial Instruments - Recognition & Measurement that will reduce differences with International Financial Reporting Standards (IFRS). The amendments include changes to the classification of certain debt securities where there is no active market for those securities and how impairment is measured for those debt securities. Impairment on debt securities will be reversed if the conditions for reversal are met. The changes also permit the reclassification from the held for trading and available for sale classifications in certain limited circumstances. Additionally, the amendments remove exemption for loans and receievables to be categorized as held for trading. The Company will adopt the amendments, which are retroactive, in its December 31, 2009 annual financial statements. The Company does not expect these amendments to have a material impact on the financial position or earnings of the Company.
International Financial Reporting Standards
In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) over an expected five-year transition period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly accountable companies to use IFRS, replacing Canadian GAAP. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. In the period leading up to the changeover, the AcSB will continue to issue accounting standards that converge with IFRS, thus mitigating the impact of adopting IFRS on the changeover date.
The Company will change over to IFRS starting with interim and annual financial statements relating to fiscal periods beginning on or after January 1, 2011. The transition date will require the restatement for comparative purposes of amounts reported by the Company for the interim periods and the year-ended December 31, 2010. The Company has commenced the process of transition from current Canadian GAAP to IFRS. It has established a project team and includes representatives from various areas of the organization as necessary to plan for and achieve a smooth transition to IFRS. Regular progress reporting to the Audit Committee of the Board of Directors on the status of the IFRS implementation project has been instituted.
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. The impact analysis, evaluation and design phase is scheduled for completion in the fourth quarter of 2009. 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 and dependant upon proposed changes to IFRS.
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 as circumstances may change as IFRS proposals are fi nalized.
Set out below are the key areas where changes in accounting policies are expected and may impact the Company's consolidated financial statements. The list and comments should not be regarded as a complete list of changes that will result from the transition to IFRS. The commentary is intended to highlight those areas the Company believes to be the most significant; however, analysis of changes is still in progress and not all decisions have been made where choices of accounting policy are available. The Company notes that the standard-setting bodies that shape Canadian GAAP and IFRS have significant ongoing projects that could affect the ultimate differences between Canadian GAAP and IFRS and their impact on the Company's consolidated financial statements in future years. The future impact of IFRS will also depend on the particular circumstances prevailing in those years. The differences described below are those existing based on Canadian GAAP and IFRS standards at September 30, 2009. At this stage, the Company is not able to quantify the impact expected on the consolidated fi nancial statements.
The initial impact assessment identified the following areas as having the greatest potential impact to the Company:
<<
- Financial Instruments - Classification & Recognition, Derecognition,
Derivatives and Hedging
- Financial Instruments - Measurement and Impairment
- Financial Instruments - Disclosures
>>
In October 2009 OSFI released a Draft Advisory on the conversion to IFRS by Federally Regulated Entities that among other items provided guidance on the capital treatment under IFRS of securtization activities under the CMB and NHA MBS programs. These activities, as off-balance sheet items, were previously excluded from the calulation of the assets to capital multiple (ACM) prescibed by OSFI. The Draft Advisory proposes that these activities be included in the calculation of ACM when these activities are accounted for on-balance sheet under IFRS. Securitizations entered into on or before December 31, 2009 would be grandfathered for purposes of the ACM calculation. The Company believes that the proposed ACM rules for securitization will not materially impact our participation in the CMB and MBS NHA programs, nor effect the Company's ability to continue offering these competitive mortgage products which utilize these programs to provide additional funding sources.
In April 2009 the International Accounting Standards Board (IASB) issued an exposure draft on amendments to the derecognition principals within International Accounting Standard 39 - Financial Instruments: Recognition and Measurement. The proposals are aimed at improving the current requirement for the derecognition of financial assets and financial liabilities. The current approach is based on both risk and rewards and control. The amendments in the exposure draft focus the assessment on whether a financial asset or financial liability are derecognized from the balance sheet based on control. Further, the IASB has put forth a proposed approach and an alternative approach to derecognition which could potentially have significantly different conclusions on whether the Company's securitization program remains off- or on-balance sheet. Lastly, the transition rules currently proposed in the exposure draft provide for a grandfathering provision such that the new standard will only apply to transactions entered into on or after January 1, 2010. Management is currently assessing the impact on the Company's IFRS consolidated financial position and earnings.
In July 2009 the IASB issued an exposure draft on amendments to the classification and measurement principles in IAS 39. The exposure draft is part of a three phase project to replace IAS 39 that includes the derecognition exposure draft discussed above and improvements to the impairment model for financial assets carried at amortized cost. The classification and measurement proposals are aimed at simplifying the accounting for and providing better information about financial instruments. Currently, IAS 39 classification and measurement principles are substantially consistent with Canadian GAAP. The amendments in the exposure draft propose two measurement categories, fair value and amortized cost. Amortized cost measurement would be limited to financial instruments that are managed on a contractual yield basis and have basic loan features. All other financial instruments would be measured at fair value. Fair value changes would be recorded in profit and loss with the exception of elected equity securities where fair value changes and dividend income would be recorded in OCI, however, the amount recorded in OCI would never be recycled to profit and loss on disposal or impairment. Management is currently assessing the potential impact on the Company's IFRS consolidated financial statements and, at this stage, it is too early to determine the significance of the proposals.
Controls over Financial Reporting
No changes were made in the Company's internal controls over financial reporting during the interim period ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over fi nancial reporting.
<<
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UPDATED SHARE INFORMATION
-------------------------------------------------------------------------
>>
As at September 30, 2009 the Company had issued 34,449,790 Common Shares. In addition, outstanding director and employee stock options amounted to 1,271,750 (1,406,750 - Q4 2008, and 1,226,750 - Q3 2008) of which 755,500 were exercisable as of the quarter-end (661,125 - Q4 2008, and 540,500 - Q3 2008) for proceeds to the Company upon exercise of $18.3 million ($12.4 million - Q4 2008, and $8.4 million - Q3 2008).
Subsequent to the end of the third quarter, the Board of Directors declared an increased quarterly cash dividend of $0.16 per common share payable on December 1, 2009 to shareholders of record at the close of business on November 16, 2009. This is the third increase in the Company's quarterly dividend in 2009 and the eleventh increase in the past five years.
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QUARTERLY FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
Table 8: Summary of Quarterly Results
-------------------------------------------------------------------------
In Thousands of Dollars 2009 2008
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q3 Q2 Q1 Q4
Net interest income
(TEB)(1) $ 45,254 $ 42,024 $ 37,505 $ 36,399
Less TEB adjustment 2,300 1,535 1,273 1,162
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest income per
financial statements 42,954 40,489 36,232 35,237
Non-interest income 33,589 30,437 32,034 26,023
Non-interest expense 21,674 18,222 18,849 16,852
Total revenues 125,299 121,778 120,721 117,996
Net income 38,243 34,351 31,418 29,039
Return on common
shareholders' equity 28.7% 27.9% 27.9% 27.4%
Return on average total
assets 2.5% 2.3% 2.2% 2.0%
Earnings per common share
Basic $ 1.11 $ 1.00 $ 0.91 $ 0.84
Diluted $ 1.10 $ 0.99 $ 0.91 $ 0.84
Book value per common
share $ 15.99 $ 14.99 $ 13.61 $ 12.57
Efficency ratio (TEB)(1) 27.5% 25.1% 27.1% 27.0%
Efficency ratio 28.3% 25.7% 27.6% 27.5%
Tier 1 capital ratio(2) 16.6% 15.2% 13.8% 12.9%
Total capital ratio(2) 18.2% 16.7% 15.2% 14.2%
Net impaired loans as a %
of gross loans 1.2% 1.3% 1.2% 0.9%
Annualized provision as a
% of gross loans 0.2% 0.3% 0.3% 0.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In Thousands of Dollars 2008 2007
-------------------------------------------------------------------------
(Except Per Share and
Percentage Amounts) Q3 Q2 Q1 Q4
Net interest income
(TEB)(1) $ 39,478 $ 40,418 $ 38,590 $ 40,394
Less TEB adjustment 1,130 1,056 962 2,311
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest income per
financial statements 38,348 39,362 37,628 38,083
Non-interest income 23,013 17,318 14,338 14,561
Non-interest expense 16,953 17,443 14,763 15,687
Total revenues 116,950 112,953 106,796 105,081
Net income 27,939 26,550 25,159 24,228
Return on common
shareholders' equity 27.6% 27.7% 27.9% 28.9%
Return on average total
assets 2.0% 2.0% 1.9% 2.0%
Earnings per common share
Basic $ 0.81 $ 0.77 $ 0.73 $ 0.70
Diluted $ 0.81 $ 0.76 $ 0.72 $ 0.70
Book value per common
share $ 12.08 $ 11.44 $ 10.79 $ 10.08
Efficency ratio (TEB)(1) 27.1% 30.2% 27.9% 28.5%
Efficency ratio 27.6% 30.8% 28.4% 29.8%
Tier 1 capital ratio(2) 12.7% 12.5% 12.0% 11.1%
Total capital ratio(2) 14.0% 13.8% 13.4% 12.5%
Net impaired loans as a %
of gross loans 0.7% 0.7% 0.7% 0.7%
Annualized provision as a
% of gross loans 0.3% 0.1% 0.1% 0.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) TEB - Taxable Equivalent Basis, see definition on page 5
(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 revenue growth in all business segments, and continued low efficiency ratios (where the lower the ratio the better). The increase in Tier 1 and Total Capital ratios throughout 2008 and into 2009 reflect the Company's continuing efforts to preserve its capital base during uncertain economic and capital markets as well as changes required to calculate capital requirements under Basel II which came into effect January 1, 2008, resulting in modest positive results due to a shift into lower risk-weighted categories for residential mortgages offset by new capital requirements related to operational risk. The net impaired loans as a percentage of gross loans have trended upwards over the last half of 2008 and into 2009. The increase is due to the effects of the economic slowdown in Canada driving higher unemployment levels. Net impaired as a percentage of gross loans decreased during the third quarter, however, the Company continues to take proactive steps to manage the higher than average level of impaired loans, including maintaining a strong mortgage servicing department to support clients in payment management.
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's financial strength is grounded in a solid capital base, robust liquidity reserves and no external debt which position Home Capital to capitalize on market opportunities as Canada emerges from the current economic downturn.
While some indications point to the beginning of a recovery for the Canadian economy, a number of factors lead the Company to remain cautious about where and to whom it provides mortgage advances. Canadian unemployment continues to rise as key sectors of our economy, such as manufacturing, are forced to reduce their payrolls. This sector will continue to struggle so long as the outlook for the United States economy remains uncertain, which puts a damper on Canadian exports. This lack of job security and significant negative economic news in the media will continue to put a damper on consumer confidence. Until these issues are resolved, a prudent approach to growth and capital preservation are warranted. Within these boundaries, the Company is optimistic that it will achieve its stated objectives for 2009.
The Company 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 for achieving the objectives of its corporate strategy while remaining committed to its proprietary risk management framework. This has approach has served management well to lead the Company through the current economic uncertainty and position the Company for future opportunities.
This Outlook section contains forward-looking statements. (Please see the Caution Regarding Forward-Looking Statements on page 5 of these unaudited interim consolidated financial statements.)
<<
Consolidated Statements of Income
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
In Thousands of Dollars, September September September September
except for per Share 30 30 30 30
Amounts (Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Income
Interest from loans $ 84,223 $ 86,524 $ 249,836 $ 256,570
Dividends from equity
securities 5,132 2,331 11,399 6,746
Other interest 2,355 5,082 10,503 18,714
-------------------------------------------------------------------------
91,710 93,937 271,738 282,030
Interest Expense
Interest on deposits 48,756 55,589 152,063 166,692
-------------------------------------------------------------------------
Net interest income 42,954 38,348 119,675 115,338
Provision for credit
losses (note 4(d)) 2,862 3,420 9,244 4,650
-------------------------------------------------------------------------
40,092 34,928 110,431 110,688
-------------------------------------------------------------------------
Non-interest Income
Fees and other income 7,360 7,033 22,144 21,348
Securitization income on
mortgage-backed securities 13,716 17,201 68,114 37,632
Net gain (loss) realized and
unrealized on securities 1,146 (2,524) 2,528 (4,570)
Gain on derivatives 11,367 1,303 3,274 190
Net gain on sale of
subsidiary - - - 69
-------------------------------------------------------------------------
33,589 23,013 96,060 54,669
-------------------------------------------------------------------------
73,681 57,941 206,491 165,357
-------------------------------------------------------------------------
Non-interest Expenses
Salaries and staff benefits 11,334 9,426 31,514 27,618
Premises 1,565 1,184 4,370 3,247
General and administration 8,775 6,343 22,861 18,294
-------------------------------------------------------------------------
21,674 16,953 58,745 49,159
-------------------------------------------------------------------------
Income Before Income Taxes 52,007 40,988 147,746 116,198
Provision for income taxes
(note 11(a)) 13,764 13,049 43,734 36,550
-------------------------------------------------------------------------
NET INCOME $ 38,243 $ 27,939 104,012 $ 79,648
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 1.11 $ 0.81 $ 3.02 $ 2.31
Diluted $ 1.10 $ 0.81 $ 3.00 $ 2.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
(thousands)
Basic 34,412 34,522 34,397 34,530
Diluted 34,684 34,822 34,711 34,783
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total number of outstanding
common shares (thousands) 34,450 34,476 34,450 34,476
Book value per common
share $ 15.99 $ 12.07 $ 15.99 $ 12.07
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-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
NET INCOME $ 38,243 $ 27,939 $ 104,012 $ 79,648
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME,
NET OF TAX
Unrealized income on
available for sale securities
Net unrealized income on
securities available for
sale, net of $1,916 tax
(($884) - three months
ended September 30, 2008;
$9,101 - nine months
ended September 30, 2009;
$346 - nine months ended
September 30, 2008) 925 (1,232) 15,280 (192)
Reclassification of
earnings in respect of
available for sale
securities, net of $140
tax ($635 - three months
ended September 30, 2008;
$1,856 - nine months
ended September 30, 2009;
$1,484 - nine months
ended September 30, 2008) 253 1,279 13,368 3,094
-------------------------------------------------------------------------
Total other comprehensive
income 1,178 47 28,648 2,902
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 39,421 $ 27,986 $ 132,660 $ 82,550
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Balance Sheets
-------------------------------------------------------------------------
September December September
In Thousands of Dollars 30 31 30
(Unaudited) 2009 2008 2008
-------------------------------------------------------------------------
ASSETS
Cash Resources
Deposits with regulated
financial institutions $ 145,959 $ 554,422 $ 431,288
-------------------------------------------------------------------------
Securities (note 3)
Held for trading 199,908 - 301
Available for sale 453,470 519,477 487,654
-------------------------------------------------------------------------
653,378 519,477 487,955
-------------------------------------------------------------------------
Loans (note 4)
Residential mortgages 4,092,476 3,263,206 3,307,197
Non-residential mortgages 719,838 826,882 789,611
Personal and credit card loans 342,539 368,962 364,261
Secured loans 53,493 72,518 79,025
General allowance for credit losses (26,520) (25,177) (25,077)
-------------------------------------------------------------------------
5,181,826 4,506,391 4,515,017
-------------------------------------------------------------------------
Other
Securitization receivable (note 5) 196,013 139,870 106,969
Capital assets 5,201 5,325 5,725
Other assets (note 6) 102,215 84,228 74,855
-------------------------------------------------------------------------
303,429 229,423 187,549
-------------------------------------------------------------------------
$6,284,592 $5,809,713 $5,621,809
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Payable on demand $ 15,867 $ 34,808 $ 16,457
Payable on a fixed date 5,357,595 5,067,973 4,927,582
-------------------------------------------------------------------------
5,373,462 5,102,781 4,944,039
-------------------------------------------------------------------------
Other
Cheques and other items in transit 4,671 4,811 3,396
Other liabilities (note 7) 355,636 269,368 258,079
-------------------------------------------------------------------------
360,307 274,179 261,475
-------------------------------------------------------------------------
5,733,769 5,376,960 5,205,514
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock (note 8) 41,888 39,094 39,142
Contributed surplus 3,948 3,283 2,910
Retained earnings 487,393 401,429 377,638
Accumulated other comprehensive
income (loss) (note 10) 17,594 (11,053) (3,395)
-------------------------------------------------------------------------
550,823 432,753 416,295
-------------------------------------------------------------------------
$6,284,592 $5,809,713 $5,621,809
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
CAPITAL STOCK (note 8)
Balance at beginning of
the period $ 39,757 $ 39,217 $ 39,094 $ 38,899
Proceeds of options
exercised 2,152 - 2,926 318
Normal course issuer bid (21) (75) (132) (75)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 41,888 $ 39,142 $ 41,888 $ 39,142
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS
Balance at beginning of
the period $ 3,941 $ 2,531 $ 3,283 $ 1,818
Amortization of fair value
of employee stock options
(note 9) 422 379 1,194 1,143
Employee stock options
exercised (415) - (529) (51)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 3,948 $ 2,910 3,948 $ 2,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of
the period (note 8) $ 455,625 $ 356,693 $ 401,429 $ 313,620
Normal course issuer bid (616) (2,167) (2,557) (2,167)
Net income for the period 38,243 27,939 104,012 79,648
Dividends paid or declared
during the period (5,859) (4,827) (15,491) (13,463)
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 487,393 $ 377,638 $ 487,393 $ 377,638
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance at beginning of
the period $ 16,417 $ (3,442) $ (11,053) $ (6,297)
Other comprehensive income
(loss), net of $2,056 tax;
($249 - three months ended
September 30, 2008; $10,957
- nine months ended
September 30, 2009; $1,830
- nine months ended
September 30, 2008) 1,177 47 28,647 2,902
-------------------------------------------------------------------------
BALANCE AT END OF THE
PERIOD $ 17,594 $ (3,395) $ 17,594 $ (3,395)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
Consolidated Statements of Cash Flows
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 30 30 30
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period $ 38,243 $ 27,939 $ 104,012 $ 79,648
Adjustments to determine
cash flows relating to
operating activities:
Future income taxes 8,215 5,013 21,183 9,227
Amortization (8,049) 4,578 (40,360) 10,350
Provision for credit losses
(note 4(d)) 2,862 3,420 9,244 4,650
Change in accrued interest
payable (13,409) (3,035) (11,498) 23,534
Change in accrued interest
receivable 735 404 2,315 (1,595)
Net loss (gain) realized and
unrealized on investment
securities (1,146) 2,524 (2,528) 4,570
(Gain) on derivatives (11,367) (1,303) (3,274) (190)
Securitization income on
mortgage-backed
securities (13,716) (17,201) (68,114) (37,632)
Amortization of fair value
of employee stock options
(note 9) 422 379 1,194 1,143
Change in payments received
for securitized pools (24,400) 3,590 54,899 8,058
Other 1,240 (2,986) 22,272 (12,875)
-------------------------------------------------------------------------
Cash flows from operating
activities (20,370) 23,322 89,345 88,888
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase (decrease) in
deposits 132,085 227,468 270,681 530,055
Issuance of capital stock 2,152 - 2,926 318
Normal course issuer bid (637) (2,242) (2,689) (2,242)
Exercise of stock options (415) - (529) (51)
Dividends paid (5,163) (4,491) (14,455) (12,779)
-------------------------------------------------------------------------
Cash flows from financing
activities 128,022 220,735 255,934 515,301
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Activity in available for
sale and held for trading
securities
Purchases (130,684) (64,711) (666,817) (328,266)
Proceeds from sales 130,910 30,635 583,194 234,222
Proceeds from maturities 11,914 26,215 25,175 59,167
Activity in mortgages
Net increase (1,021,033) (541,831) (2,463,867) (1,402,219)
Proceeds from
securitization of
mortgage-backed
securities 614,324 540,347 1,706,297 929,331
Change in mortgage-backed
securities receivable 10,842 7,331 40,522 19,649
Net (increase) decrease in
personal and credit card
loans 7,605 (1,706) 24,313 (39,367)
Net decrease in secured loans 9,475 7,116 18,572 2,944
Purchases of capital assets (485) (853) (1,601) (2,698)
Purchases of intangible
assets (6,747) - (19,530) -
Cash flows used in
investing activities (373,879) 2,543 (753,742) (527,237)
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents
during the period (266,227) 246,600 (408,463) 76,952
Cash and cash equivalents at
beginning of the period 412,186 184,688 554,422 354,336
-------------------------------------------------------------------------
Cash and cash equivalents
at end of the period $ 145,959 $ 431,288 $ 145,959 $ 431,288
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary Disclosure
of Cash Flow Information
Interest paid $ 62,165 $ 58,624 $ 163,561 $ 143,159
Income taxes paid 10,550 11,293 30,943 38,710
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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). 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. SECURITIES
Available for Sale Securities - Net Unrealized Gains and Losses
Net unrealized gains and losses are included in accumulated other
comprehensive income except unrealized losses which are other than
temporary in nature which are transferred to net income. Accumulated
other comprehensive income is disclosed in Note 10.
-------------------------------------------------------------------------
September December September
30 31 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Securities issued or guaranteed by:
Canada $ (2) $ 1,546 $ 599
Corporations 109 2,345 (2,507)
Equity securities
Common 440 (2,106) (1,584)
Fixed rate preferred 6,319 (29,918) (9,446)
Floating rate preferred - (2,370) (301)
Income trusts 1,536 (2,745) (2,714)
Mutual funds (129) (367) (80)
-------------------------------------------------------------------------
$ 8,273 $ (33,615) $ (16,033)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
As at September 30, 2009, the Company had $6.2 million of unrealized
losses on available for sale securities which are other than temporary in
nature, and have been transferred into net income. These unrealized
losses are not included in the table above. The Company did not recognize
any other than temporary unrealized losses in net income on available for
sale securties during the third quarter of 2009.
4. LOANS
(A) Loans by Geographic Region and Type
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%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Non- Personal
Residential residential and Credit
In Thousands of Dollars Mortgages Mortgages Card Loans
-------------------------------------------------------------------------
British Columbia $ 337,498 $ 9,604 $ 30,909
Alberta 413,988 114,952 80,052
Ontario 2,301,325 585,772 244,170
Quebec 93,198 58,313 1,073
Maritimes 94,203 11,974 6,423
Manitoba and Saskatchewan 66,985 8,996 1,634
-------------------------------------------------------------------------
$3,307,197 $ 789,611 $ 364,261
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Percentage
Secured of
In Thousands of Dollars Loans Total Portfolio
-------------------------------------------------------------------------
British Columbia $ 8 $ 378,019 8.3%
Alberta 8,981 617,973 13.6%
Ontario 67,488 3,198,755 70.5%
Quebec - 152,584 3.4%
Maritimes 2,548 115,148 2.5%
Manitoba and Saskatchewan - 77,615 1.7%
-------------------------------------------------------------------------
$ 79,025 $4,540,094 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 specifi cally 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 September 30, 2009
-------------------------------------------------------------------------
Non- Personal
In 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
-------------------------------------------------------------------------
Non- Personal
In 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
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
1 - 30 days $ 119,685 $ 3,185 $ 2,391 $ 989 $ 126,250
31 - 60 days 8,433 332 2,015 258 11,038
61 - 90 days 28,163 - 2,038 122 30,323
91 - 120 days - - 1,369 - 1,369
-------------------------------------------------------------------------
$ 156,281 $ 3,517 $ 7,813 $ 1,369 $ 168,980
-------------------------------------------------------------------------
(C) Impaired Loans and Specific Allowances for Credit Losses
As at September 30, 2009
-------------------------------------------------------------------------
Non- Personal
In 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
-------------------------------------------------------------------------
Non- Personal
In 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
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Gross amount
of impaired
loans $ 30,887 $ 284 $ 3,361 $ 662 $ 35,194
Specific
allowances (1,950) (5) (349) (67) (2,371)
-------------------------------------------------------------------------
$ 28,937 $ 279 $ 3,012 $ 595 $ 32,823
-------------------------------------------------------------------------
(D) Allowance for Credit Losses
For the three months ended September 30, 2009
-------------------------------------------------------------------------
Non- Personal
In 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
-------------------------------------------------------------------------
Non- Personal
In 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 three months ended September 30, 2008
-------------------------------------------------------------------------
Non- Personal
In Thousands Residential residential and Credit Secured
of Dollars Mortgages Mortgages Card Loans Loans Total
-------------------------------------------------------------------------
Specific
allowances
Balance at the
beginning
of the
period $ 242 $ 5 $ 108 $ 172 $ 527
Provisions for
credit losses 1,878 - 306 85 2,269
Write-offs (219) - (106) (196) (521)
Recoveries 49 - 41 6 96
-------------------------------------------------------------------------
1,950 5 349 67 2,371
-------------------------------------------------------------------------
General
allowance
Balance at the
beginning of
the period 15,972 3,433 3,628 893 23,926
Provisions for
credit losses 722 474 23 (68) 1,151
-------------------------------------------------------------------------
16,694 3,907 3,651 825 25,077
-------------------------------------------------------------------------
Total
allowance $ 18,644 $ 3,912 $ 4,000 $ 892 $ 27,448
-------------------------------------------------------------------------
For the nine months ended September 30, 2009
-------------------------------------------------------------------------
Non- Personal
In 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 4,920 418 2,110 453 7,901
Write-offs (4,215) - (1,446) (817) (6,478)
Recoveries 398 - 121 102 621
-------------------------------------------------------------------------
2,783 418 1,332 437 4,970
-------------------------------------------------------------------------
General
allowance
Balance at the
beginning of
the period 16,136 4,580 3,700 761 25,177
Provisions for
credit losses 2,241 (424) (254) (220) 1,343
-------------------------------------------------------------------------
18,377 4,156 3,446 541 26,520
-------------------------------------------------------------------------
Total
allowance $ 21,160 $ 4,574 $ 4,778 $ 978 $ 31,490
-------------------------------------------------------------------------
For the nine months ended September 30, 2008
-------------------------------------------------------------------------
Non- Personal
In 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 2,134 5 499 335 2,973
Write-offs (1,042) - (367) (537) (1,946)
Recoveries 224 - 89 38 351
-------------------------------------------------------------------------
1,950 5 349 67 2,371
-------------------------------------------------------------------------
General
allowance
Balance at the
beginning of
the period 17,127 2,216 3,201 856 23,400
Provisions for
credit losses (433) 1,691 450 (31) 1,677
-------------------------------------------------------------------------
16,694 3,907 3,651 825 25,077
-------------------------------------------------------------------------
Total
allowance $ 18,644 $ 3,912 $ 4,000 $ 892 $ 27,448
-------------------------------------------------------------------------
(E) Collateral
The fair value of collateral held against mortgages is based on
appraisals at the time a loan is originated. Appraisals are only updated
should circumstances warrant it or if a mortgage becomes impaired. At
September 30, 2009, the total appraised value of the collateral for
mortgages past due that are not impaired, as determined when the
mortgages were originated, was $346.2 million. For impaired mortgages,
the total appraised value of collateral at September 30, 2009 was $103.5
million.
5. LOAN SECURITIZATION
The following table summarizes the Company's new securitization
activities.
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
In Thousands of Dollars,
Except Percentages and September September September September
and Number of Years 30 2009 30 2008 30 2009 30 2008
-------------------------------------------------------------------------
Book value of mortgages
securitized $ 620,586 $ 544,745 $1,736,304 $ 941,146
Securitization receivable $ 27,482 $ 25,811 $ 101,632 $ 52,620
Servicing liability $ 3,774 $ 2,039 $ 15,096 $ 2,681
Net proceeds received on
securitized mortgages $ 614,324 $ 540,347 $1,706,297 $ 929,331
Net gain on sale of
mortgages(1) $ 12,131 $ 15,710 $ 59,240 $ 32,395
Prepayment rate 8.2% 7.3% 7.6% 9.2%
Excess spread 1.4% 2.2% 1.9% 2.6%
Weighted average life
in years 4.7 3.6 4.7 3.6
Discount rate 3.0% 3.7% 2.7% 3.7%
-------------------------------------------------------------------------
(1) The gain on sale of mortgages is net of hedging activities, see Table
4 in the MD&A
During the third quarter of 2009, the Company securitized insured
residential mortgages through CMHC's Canada Mortgage Bond Program with a
book value of $288.3 million for a total of $1.23 billion in 2009 ($433.0
million in Q3 2008 and $639.9 million for the nine months ended September
30, 2008). The gain on sale was $7.3 million during the third quarter and
$45.2 million for the nine months ended September 30, 2009 ($13.5 million
in Q3 2008 and $22.9 million for the nine months ended September 30,
2008). These figures are included in the table above.
6. OTHER ASSETS
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Accrued interest receivable $ 25,546 $ 27,861 $ 26,903
Income taxes receivable 2,712 10,472 12,555
Goodwill 15,752 15,752 15,028
Intangible assets(1) 20,340 1,449 708
Other prepaid assets and
deferred items 37,865 28,694 19,661
-------------------------------------------------------------------------
$ 102,215 $ 84,228 $ 74,855
-------------------------------------------------------------------------
(1) Intangible assets are primarily comprised of deferred costs
capitalized for the development of the Company's new core banking
system. These costs will commence amortization in the first quarter
of 2010.
7. OTHER LIABILITIES
-------------------------------------------------------------------------
September 30 December 31 September 30
In Thousands of Dollars 2009 2008 2008
-------------------------------------------------------------------------
Accrued interest payable $ 148,117 $ 159,615 $ 159,184
Dividends payable 5,512 4,476 4,482
Future income tax liability
(note 11) 57,329 36,974 30,391
Securitization servicing liability 23,512 10,288 4,262
Payable to MBS and CMB holders 96,912 42,013 43,872
Other, including accounts payable
and accrued liabilities 24,254 16,002 15,888
-------------------------------------------------------------------------
$ 355,636 $ 269,368 $ 258,079
-------------------------------------------------------------------------
8. CAPITAL
(A) Common Shares Issued and Outstanding
For the three months ended
-------------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------------------------------------------------
Number of Amount Number of Amount
In Thousands Shares Shares
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,398 $ 39,757 34,542 $ 39,217
Options exercised 70 2,152 - -
Normal course issuer bid (18) (21) (66) (75)
-------------------------------------------------------------------------
Outstanding at end of
period 34,450 $ 41,888 34,476 $ 39,142
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------------------------------------------------
Number of Amount Number of Amount
In Thousands Shares Shares
-------------------------------------------------------------------------
Outstanding at beginning
of period 34,434 $ 39,094 34,532 $ 38,899
Options exercised 133 2,926 10 318
Normal course issuer bid (117) (132) (66) (75)
-------------------------------------------------------------------------
Outstanding at end of
period 34,450 $ 41,888 34,476 $ 39,142
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------------------------------------------------
Number of Weighted- Number of Weighted-
Shares average Shares average
In Thousands Exercise Exercise
Except Per Share Amounts Price Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,374 $ 25.47 1,227 $ 26.73
Granted 10 35.56 - -
Exercised (70) 24.82 - -
Forfeited (42) 29.28 - -
-------------------------------------------------------------------------
Outstanding at end of
period 1,272 $ 25.49 1,227 $ 26.73
-------------------------------------------------------------------------
Exercisable, end of period 756 $ 24.19 541 $ 15.60
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------------------------------------------------
Number of Weighted- Number of Weighted-
Shares average Shares average
In Thousands Exercise Exercise
Except Per Share Amounts Price Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,407 $ 25.08 1,294 $ 27.15
Granted 110 24.52 - -
Exercised (133) 18.09 (10) 28.12
Forfeited (112) 28.04 (57) 35.92
-------------------------------------------------------------------------
Outstanding at end of
period 1,272 $ 25.49 1,227 $ 26.73
-------------------------------------------------------------------------
Exercisable, end of period 756 $ 24.19 541 $ 15.60
-------------------------------------------------------------------------
(C) Capital Management
The Company has a Capital Management Policy which governs the quantity
and quality of capital held. The objective of the policy is to ensure
that regulatory capital requirements are met, while also providing a
sufficient return to investors. The Risk and Capital Committee and the
Board of Directors annually review the policy and monitor compliance with
the policy on a quarterly basis.
The Company's subsidiary Home Trust Company is subject to the regulatory
capital requirements governed by the Office of the Superintendent of
Financial Institutions (OSFI).
-------------------------------------------------------------------------
In Thousands of
Dollars, Except September December September
Ratios and Multiple 30 2009 31 2008 30 2008
-------------------------------------------------------------------------
Regulatory capital
Tier 1 $ 496,388 $ 384,025 $ 375,688
Total $ 544,801 424,202 415,765
Regulatory ratios
Tier 1 16.6% 12.9% 12.7%
Total 18.2% 14.2% 14.0%
Assets to capital multiple 11.5 13.7 13.5
-------------------------------------------------------------------------
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 third quarter of 2009, $422,000 was recorded as an expense for
a year-to-date total of $1,194,000 ($379,000 - Q3 2008 and $1,143,000 -
nine months of 2008) for stock option awards in the consolidated
statements of income, with an offsetting credit to contributed surplus.
During the third quarter of 2009, 10,000 options were granted for a year-
to-date total of 110,000. There were no new options granted for the third
quarter or first nine months of 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 renumeration in the form of cash, cash and DSUs or DSUs.
At September 30, 2009 there were 5,128 deferred share units issued with
the associated liability of $0.17 million recorded in other liabilities
on the consolidated balance sheet.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------------------------------------------
September December September
In Thousands of Dollars 30 2009 31 2008 30 2008
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Available for sale securities $ 8,273 $ (33,615) $ (16,033)
Income taxes recovery (expenses) (1,312) 10,473 4,454
-------------------------------------------------------------------------
6,961 (23,142) (11,579)
-------------------------------------------------------------------------
Unrealized gains and (losses) on
Securitization receivables 15,796 18,080 12,239
Income taxes recovery (expenses) (5,163) (5,991) (4,055)
-------------------------------------------------------------------------
10,633 12,089 8,184
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) $ 17,594 $ (11,053) $ (3,395)
-------------------------------------------------------------------------
11. INCOME TAXES
(A) Reconciliation of income taxes
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 2009 30 2008 30 2009 30 2008
-------------------------------------------------------------------------
Income before income
taxes $ 52,007 $ 40,988 $ 147,746 $ 116,198
-------------------------------------------------------------------------
Income taxes at statutory
combined federal and
provincial income tax
rates 17,112 13,561 48,307 38,505
Increase (decrease) in
income taxes at
statutory income tax
rates resulting from
Tax-exempt income (1,560) (714) (3,451) (2,070)
Non-deductible expenses (781) 152 1,811 784
Future tax rate changes (1,832) (479) (3,964) (876)
Other 825 529 1,031 207
-------------------------------------------------------------------------
Income tax $ 13,764 $ 13,049 $ 43,734 $ 36,550
-------------------------------------------------------------------------
(B) Sources of Future Income Tax Balances
-------------------------------------------------------------------------
September December September
In Thousands of Dollars 30 2009 31 2008 30 2008
-------------------------------------------------------------------------
Future income tax
liabilities
Deferred agent commissions and
other charges $ 15,398 $ 7,761 $ 7,864
Mortgage-backed securities
receivable 53,166 40,828 34,654
-------------------------------------------------------------------------
68,564 48,589 42,518
-------------------------------------------------------------------------
Future income tax assets
Allowance for credit losses 2,668 7,776 7,593
Future tax recoverable acquired - - 530
Deferred commitment fees and other
charges 8,567 3,839 4,004
-------------------------------------------------------------------------
11,235 11,615 12,127
-------------------------------------------------------------------------
$ 57,329 $ 36,974 $ 30,391
-------------------------------------------------------------------------
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilized off-balance sheet financial instruments during 2009.
In this period the Company entered into economic hedge swap transactions
with major financial institutions. The Company may utilize interest rate
swaps or bond forward 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 swap or bond forward 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. The interest
rate swaps referred to as "pay-fixed interest rate swaps" are structured
such that the Company agrees to pay a fixed rate (as designated in the
swap) and receives the floating rate (as designated in the swap). During
the quarter, the Company unwound $489.7 million in bond forward contracts
realizing a loss of $3.9 million. This is included in securitization
income.
The Company participates in the Canada Mortgage Bond program sponsored by
CMHC. Under this program, the Company sells MBS pools to Canada Housing
Trust which finances the purchase by issuing a bullet Canada Mortgage
Bond. Under this program, the Company must manage the mismatch and
reinvestment risk between the amortizing MBS pool and the bullet Canada
Mortgage Bond. As part of this arrangement, the Company entered into
seller swaps which have the effect of paying the fixed interest payments
on the Canada Mortgage Bond, and receiving the total return on the MBS
pool. As well, the Company entered into accreting hedge swaps to manage
the reinvestment risk between the amortizing MBS pool and the Canada
Mortgage Bond.
As at September 30, 2009 and 2008, the outstanding seller and hedge swap
contract (swaps) and bond forward contract (bonds) positions were as
follows:
-------------------------------------------------------------------------
In Thousands of Dollars September 30, 2009 December 31, 2008
-------------------------------------------------------------------------
Notional Notional
Term (years) Amount Fair Value Amount Fair Value
-------------------------------------------------------------------------
Swaps
1 to 5 $2,299,270 $ (1,375) $ 360,654 $ 1,380
6 to 10 234,082 4,151 68,814 (947)
-------------------------------------------------------------------------
$2,533,352 $ 2,776 $ 429,468 $ 433
-------------------------------------------------------------------------
Bonds
1 to 5 $ 192,700 $ (310) $ 34,300 $ (636)
6 to 10 326,700 (1,360) - -
-------------------------------------------------------------------------
$ 519,400 $ (1,670) $ 34,300 $ (636)
-------------------------------------------------------------------------
-------------------------------------------------
September 30, 2008
-------------------------------------------------
Notional
Term (years) Amount Fair Value
-------------------------------------------------
Swaps
1 to 5 $ 785,248 $ 1,058
6 to 10 - -
-------------------------------------------------
$ 785,248 $ 1,058
-------------------------------------------------
Bonds
1 to 5 $ 40,000 $ 115
6 to 10 - -
-------------------------------------------------
$ 40,000 $ 115
-------------------------------------------------
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 repricing dates of interest sensitive
assets and liabilities, including off-balance sheet items. The following
table shows the gap positions at September 30, 2009, December 31, 2008
and September 30, 2008 for selected period intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap
position.
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% - -
-------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------------------
In Thousands of Dollars, Floating 0 to 3 3 Months 1 to 3
Except Percentages Rate Months to 1 Year Years
-------------------------------------------------------------------------
Total assets $ 8,687 $1,295,361 $1,569,166 $1,622,285
Total liabilities and
equity 6 869,835 2,290,982 1,312,811
Off-balance sheet items - (253,617) 81,392 172,200
-------------------------------------------------------------------------
Interest rate sensitive
gap $ 8,681 $ 171,909 $ (640,424) $ 481,674
-------------------------------------------------------------------------
Cumulative gap $ 8,681 $ 180,590 $ (459,834) $ 21,840
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 0.2% 3.2% (8.2%) 0.4%
-------------------------------------------------------------------------
As at September 30, 2008
-------------------------------------------------------------
Non-
In Thousands of Dollars, Over interest
Except Percentages 3 Years Sensitive Total
-------------------------------------------------------------
Total assets $ 906,671 $ 219,639 $5,621,809
Total liabilities and
equity 438,620 709,555 5,621,809
Off-balance sheet items 25 - -
-------------------------------------------------------------
Interest rate sensitive
gap $ 468,076 $ (489,916) $ -
-------------------------------------------------------------
Cumulative gap $ 489,916 $ - $ -
-------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.7% - -
-------------------------------------------------------------
Based on the current interest rate gap position at September 30, 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 $5.5 million and $1.8 million,
respectively. A 100 basis point increase in interest rates would increase
net income and other comprehensive income after tax over the next twelve
months by a similar amount.
14. EARNINGS BY BUSINESS SEGMENT
The Company operates principally through two business segments - mortgage
lending and consumer lending. The mortgage lending operation consists of
core residential mortgage lending, securitization of government-insured
mortgage loans, commercial real estate lending, and the administration of
Regency Finance Corp. second mortgage loans (secured loans). The consumer
lending operation consists of credit card services, installment lending
to customers of retail businesses and PSiGate operations. The Other
category includes the Company's treasury and securities investment
activities.
For the three months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 2009 30 2008 30 2009 30 2008
-------------------------------------------------------------------------
Net interest income $ 26,839 $ 23,988 $ 9,599 $ 7,220
Provision for credit
losses (2,536) (3,091) (326) (329)
Fees and other income 4,970 3,850 2,813 3,085
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 25,083 18,504 - -
Non-interest expenses (13,394) (11,066) (2,823) (2,151)
-------------------------------------------------------------------------
Income before income
taxes 40,962 32,185 9,263 7,825
Income taxes (11,560) (10,148) (3,100) (2,680)
-------------------------------------------------------------------------
Net income $ 29,402 $ 22,037 $ 6,163 $ 5,145
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 12,704
-------------------------------------------------------------------------
Total assets $5,252,272 $4,520,667 $ 384,805 $ 401,599
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income $ 6,516 $ 7,140 $ 42,954 $ 38,348
Provision for credit
losses - - (2,862) (3,420)
Fees and other income (423) 98 7,360 7,033
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 1,146 (2,524) 26,229` 15,980
Non-interest expenses (5,457) (3,736) (21,674) (16,953)
-------------------------------------------------------------------------
Income before income
taxes 1,782 978 52,007 40,988
Income taxes 896 (221) (13,764) (13,049)
-------------------------------------------------------------------------
Net income $ 2,678 $ 757 $ 38,243 $ 27,939
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,028
-------------------------------------------------------------------------
Total assets $ 647,515 $ 699,543 $6,284,592 $5,621,809
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
Mortgage Lending Consumer Lending
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 30 2009 30 2008 30 2009 30 2008
-------------------------------------------------------------------------
Net interest income $ 71,965 $ 70,572 $ 27,665 $ 19,448
Provision for credit
losses (7,388) (3,701) (1,856) (949)
Fees and other income 14,172 11,264 7,967 9,765
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 71,388 37,822 - -
Non-interest expenses (36,571) (30,383) (8,534) (6,594)
-------------------------------------------------------------------------
Income before income
taxes 113,566 85,574 25,242 21,670
Income taxes (34,129) (27,452) (8,465) (7,401)
-------------------------------------------------------------------------
Net income $ 79,437 $ 58,122 $ 16,777 $ 14,269
-------------------------------------------------------------------------
Goodwill $ 2,324 $ 2,324 $ 13,428 $ 12,704
-------------------------------------------------------------------------
Total assets $5,252,272 $4,520,667 $ 384,805 $ 401,599
-------------------------------------------------------------------------
For the nine months ended
-------------------------------------------------------------------------
Other Total
-------------------------------------------------------------------------
September September September September
In Thousands of Dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest income $ 20,045 $ 25,318 $ 119,675 $ 115,338
Provision for credit
losses - - (9,244) (4,650)
Fees and other income 5 319 22,144 21,348
Net gain on securities,
mortgage-backed
securities and
disposition of
subsidiary 2,528 (4,501) 73,916 33,321
Non-interest expenses (13,640) (12,182) (58,745) (49,159)
-------------------------------------------------------------------------
Income before income
taxes 8,938 8,954 147,746 116,198
Income taxes (1,140) (1,697) (43,734) (36,550)
-------------------------------------------------------------------------
Net income $ 7,798 $ 7,257 $ 104,012 $ 79,648
-------------------------------------------------------------------------
Goodwill $ - $ - $ 15,752 $ 15,028
-------------------------------------------------------------------------
Total assets $ 647,515 $ 699,543 $6,284,592 $5,621,809
-------------------------------------------------------------------------
15. FUTURE ACCOUNTING CHANGES
Financial Instruments
In August 2009, the CICA issued various amendments to Section 3855,
Finanical Instruments - Recognition and Measurement. The Company will
adopt the amendments, which are retroactive in its December 31, 2008
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 21 of the MDA 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 its 2010 first quarter report to shareholders.
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 Nick Kyprianou, President, (416) 360-4663, www.homecapital.com
© CNW Group
