Home Capital Group Annual Report 2012

FY2012 Annual Report · Home Capital Group

Loading PDF…

CANADA’S ONE-STOP MORTGAGE LENDER

Business Proﬁ le

Home Capital Group Inc.
Suite 2300
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663
Toll Free: 1-800-990-7881

H
O
M
E

C
A
P
I

T
A
L

G
R
O
U
P

N
C

A
N
N
U
A
L

R
E
P
O
R
T

2
0
1
2

RESPONSIBLE LEADERSHIP
SUPERIOR RESULTS

ANNUAL REPORT 2012

Home Capital Group Inc., together with its operating subsidiary Home Trust Company, has developed a
track record of success as Canada’s leading alternative lender. Building on the demonstrated strength of
its core residential mortgage lending business, the Company also offers complementary lending services,
as well as highly competitive deposit investment products.

MORTGAGE
LENDING

CONSUMER
LENDING

DEPOSIT
INVESTMENTS

Home Trust is one of Canada’s leading
mortgage lenders, focusing on homeowners
who typically do not meet all the lending
criteria of traditional ﬁ nancial institutions.
By offering a range of mortgage products,
Home Trust is uniquely positioned to provide
ﬁ nancial solutions to meet the needs of
thousands of Canadians. With a proprietary
lending approach, comprehensive borrower
proﬁ ling and ﬂ exible alternative options,
Home Trust is a one-stop shop for borrowers
and mortgage brokers. Home Trust is also
a provider of commercial ﬁ rst mortgages to
high-quality borrowers in selected markets
across Canada.

Home Trust’s Equityline Visa program brings
the advantages to cardholders of accessing
the equity they have built in their homes
together with the features and convenience
of a Gold Visa card. The Company also offers
deposit-secured credit cards for individuals
who wish to build or re-establish a positive
credit history and preferred unsecured Visa
cards to current mortgage customers with
good credit history. Home Trust’s Retail Credit
Services provides installment ﬁ nancing
for customers making purchases from
established businesses. PSiGate, a wholly
owned subsidiary, offers electronic card-based
payment services to merchants who conduct
business primarily on the Internet.

Home Trust provides a broad range of deposit
investment services including certiﬁ cates of
deposit, guaranteed investment certiﬁ cates,
registered retirement savings plans,
registered retirement income funds, tax free
savings accounts and high interest savings
accounts. The Company has developed an
extensive customer base and fostered strong
relationships with hundreds of deposit
brokers and investment dealers across the
country. With efﬁ cient, personal service and
competitive rates, Home Trust offers a number
of solutions to meet the long-term and short-
term needs of investors looking to diversify
their portfolios.

Home Trust Branches
Home Trust Branches

MISSION STATEMENT

Home Capital’s mission is to deliver
superior shareholder value by focusing
on well-deﬁ ned niches in the Canadian
lending and deposit-taking marketplace
that generate above average returns,
have acceptable residual risk proﬁ les
and are not adequately served by
traditional ﬁ nancial institutions, while
protecting the depositors and operating
within regulatory guidelines and the
Company’s risk appetite.

CANADA’S ONE-STOP MORTGAGE LENDER

CONTENTS 1 Report to Shareholders 6 Proven Results 7 Performance vs. Target 8 Corporate Governance
11 Environmental Responsibility 12 Management’s Discussion and Analysis 73 Consolidated Financial Statements
80 Notes to the Consolidated Financial Statements

CANADA’S ONE-STOP MORTGAGE LENDER

Business Proﬁ le

Home Capital Group Inc.
Suite 2300
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663
Toll Free: 1-800-990-7881

H
O
M
E

C
A
P
I

T
A
L

G
R
O
U
P

N
C

A
N
N
U
A
L

R
E
P
O
R
T

2
0
1
2

RESPONSIBLE LEADERSHIP
SUPERIOR RESULTS

ANNUAL REPORT 2012

MORTGAGE
LENDING

CONSUMER
LENDING

DEPOSIT
INVESTMENTS

Home Trust Branches
Home Trust Branches

MISSION STATEMENT

CANADA’S ONE-STOP MORTGAGE LENDER

Financial Highlights
Summary of Data for 10 Year Review

For the years ended December 31 (000s, except per share amounts)

Total assets

Total assets under administration

Total loans

Total loans under administration

Securitized residential mortgages

Deposits

Shareholders’ equity

Revenue

Net income

Book value of common shares

Earnings per share – basic

Earnings per share – diluted

2012

18,800,079

19,681,750

16,904,435

17,786,106

6,450,682

10,136,599

968,213

887,685

221,983

27.96

6.40

6.38

2011

2010 IFRS

2010 GAAP

2009

2008

2007

2006

2005

2004

2003

17,696,471

15,518,818

7,712,239

7,360,874

5,809,713

4,975,093

3,902,316

3,284,829

2,568,513

1,897,176

17,696,471

15,518,818

15,878,772

11,508,585

8,423,971

6,434,548

5,009,878

4,085,013

3,069,253

2,212,307

16,089,648

14,091,755

5,861,722

5,468,540

4,531,568

4,045,571

3,328,858

2,813,459

2,257,740

1,618,601

16,089,648

14,091,755

14,028,255

9,616,251

7,145,826

5,505,026

4,436,420

3,613,643

2,758,480

1,933,732

8,243,350

8,116,636

–

7,922,124

6,595,979

6,522,850

6,409,822

5,102,781

4,413,984

3,443,640

2,901,515

2,269,157

1,666,788

774,785

790,274

190,080

22.38

5.48

5.46

628,585

687,249

154,752

18.14

4.46

4.45

742,280

533,937

180,944

21.42

5.21

5.20

590,288

489,179

144,493

17.00

4.19

4.15

432,753

454,695

108,687

12.57

3.15

3.13

348,040

368,881

90,241

10.08

2.62

2.59

276,866

282,549

67,815

8.10

1.99

1.95

218,885

234,704

60,861

6.44

1.80

1.72

162,207

181,839

44,551

4.80

1.33

1.27

121,166

141,365

29,507

3.61

0.88

0.86

In 2011, Home Capital Group Inc. implemented International Financial Reporting Standards (IFRS) with a transition date of January 1, 2010. Figures for 2010
have been restated on an IFRS basis. Figures for 2009 and prior years are on a former Canadian Generally Accepted Accounting Principles (GAAP) basis.

25.5%

Return on equity was 25.5%,
exceeding 20% for the 15th
consecutive year

$222.0million

Net income for 2012 was
$222.0 million, an increase
of 16.8% over 2011

Ten-year Cumulative Total Return on $100 Investment
Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG)
December 31, 2002–December 31, 2012

COMPOUNDED ANNUAL
GROWTH OVER 10 YEARS

25%

1,500

1,200

900

600

300

HCG
25%

S&P/TSX
9%

HCG Stock Price
Performance

Closing Price as of
December 31

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$16.63

$31.25

$34.75

$34.05

$41.90

$19.80

$41.85

$51.79

$49.10

$59.07

Share prices have been restated to reflect two-for-one stock split on January 29, 2004.

$16.90billion

Total loans grew by 5.1%
over 2011 to reach
$16.90 billion at the
end of 2012

$6.38

an eleventh hour change before we printed the report with 2008 on the cover resulted in
the styled graph losing one year and being stretched to accommodate, the rough graph below was not edited at the time
due to short scheduling, this year’s graph will be created the same way (again… short scheduling)

Diluted earnings per share
were $6.38 for the year,
an increase of 16.8%
over 2011

Net Income
($ millions)

222

1500

190

181

155

144

1200

109

Earnings per Share
(basic in dollars)

6.40

5.48

5.21

4.46

4.19

3.15

Return on Equity
(percentage)

27.8 28.2

27.2 27.3

27.1

25.5

199.800007

177.600006

155.400005

133.200005

111.000004

88.800003

66.600002

44.400002

22.200001

0.000000

2500

2000

1500

1000

500

6.40

5.76

5.12

4.48

3.84

3.20

2.56

1.92

1.28

0.64

1999
0.00

2000

2001

2002

900

600

300

10
08

16.8%

Home Capital reported a 16.8% increase
in net income over the $190.1 million
“2002”
attained in 2011, reaching $222.0 million
for the year ended 2012.

“2004”

“2003”

“2005”

“2006”

Basic earnings per share rose to $6.40
for the year ended December 31, 2012,
“2007”
a 16.8% increase over the $5.48 reported
for 2011.

“2010”

“2009”

“2008”

“2011”

25.5%

“08” . . . . . . .109
“09” . . . . . . . 144
Home Capital surpassed 20% return on
“10” . . . . . . . 181
equity for the 15th consecutive year and
“2012”
“10” . . . . . . . 155
25% ROE for the 10th successive year,
“11” . . . . . . . 190
reaching 25.5% at December 31, 2012.
“12” . . . . . . . 222

“08” . . . . . . . . . 3.15
“09” . . . . . . . . . 4.19
“10” . . . . . . . . . 5.21
“10” . . . . . . . . . 4.46
“11” . . . . . . . . . 5.48
“12” . . . . . . . . . 6.40

Corporate Directory

For Shareholder
Information, Please
Contact:
Chris Ahlvik
Senior Vice President,
Corporate Counsel

Home Capital Group Inc.
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663

1-800-990-7881

Fax: 416-363-7611

1-888-470-2092
www.homecapital.com
www.hometrust.ca

Montreal:
2020 Rue University
Suite 2420
Montreal, Quebec
H3A 2A5
Tel: 514-843-0129

1-866-542-0129

Fax: 514-843-7620

1-866-620-7620

Danny Antoniazzi
Senior Branch Manager

Carlo Vignone
Team Leader

Winnipeg:
201 Portage Avenue
18th Floor
Winnipeg, Manitoba
R3B 3K6
Tel: 204-942-1619
Fax: 204-942-1638
Darryl Bazylo
Business Development
Manager

Auditors:
Ernst & Young LLP
Chartered Accountants
Toronto, Ontario

Principal Bankers:
Bank of Montreal
Bank of Nova Scotia

Transfer Agent:
Computershare Investor
Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
Tel: 1-800-564-6253

Stock Listing:
Toronto Stock Exchange
Ticker Symbol: HCG

Capital Stock:
As at December 31, 2012,
there were 34,630,440
Common Shares outstanding

Memberships:
Canada Deposit Insurance
Corporation
Trust Companies Association
of Canada

Calgary:
10655 Southport Road SW
Suite 920
Calgary, Alberta T2W 4Y1
Tel: 403-244-2432

1-866-235-3081

Fax: 403-244-6542

1-866-544-3081

Jim Edwards
Branch Manager

Corbin Raison
Senior Mortgage Underwriter

Vancouver:
200 Granville Street
Suite 1288
Vancouver, British Columbia
V6C 1S4
Tel: 604-484-4663

1-866-235-3080

Fax: 604-484-4664

1-866-564-3524

Jim Bearman
Branch Manager

Renu Paruthi
Team Leader

Halifax:
5251 Duke Street
Suite 1205, Duke Tower
Halifax, Nova Scotia B3J 1P3
Tel: 902-422-4387

1-888-306-2421

Fax: 902-422-8891

1-888-306-2435

Scott Congdon
Asst. Vice President,
Mortgages

David Neville
Senior Business
Development Manager
28.8

25.6

22.4

19.2

16.0

12.8

9.6

6.4

2003

3.2
2004
0.0

2005

2006

2007

2008

2009

“08” . . . . . . . . 27.8
“09” . . . . . . . . 28.2
“10” . . . . . . . . 27.2
“10” . . . . . . . . 27.3
“11” . . . . . . . . 27.1
“12” . . . . . . . . 25.5

m
o
c

m
b
.

w
w
w

o
s

s
e
d
a

n
a

m
b

y
b

d
e
n
g

s
e
D

1500

1200

900

600

300

“2002”

“2003”

“2004”

“2005”

“2006”

“2007”

“2008”

“2009”

“2010”

“2011”

“2012”

“2002” . . . . . . . 100.00 . . . . . . . 100.00

“2003” . . . . . . . 126.72 . . . . . . . 230.78

“2004” . . . . . . . 145.07 . . . . . . . 435.97

“2005” . . . . . . . 180.08 . . . . . . . 487.09

“2006” . . . . . . . 211.16 . . . . . . . 481.38

“2007” . . . . . . . 231.92 . . . . . . . 598.84

“2008” . . . . . . . 155.38 . . . . . . . 287.81

“2009” . . . . . . . 209.84 . . . . . . . 620.42

“2010” . . . . . . . 246.79 . . . . . . . 779.40

“2011” . . . . . . . 225.29 . . . . . . . 749.73

“2012” . . . . . . . 241.49 . . . . . . . 918.64

Former Canadian GAAP Basis

IFRS Basis

1185 bgf earnings.eps

1185 bgf earnings per share.eps

1185 bgf return on equity.eps

in the 2008 book the graff title was “Earnings”

Financial Highlights
Summary of Data for 10 Year Review

For the years ended December 31 (000s, except per share amounts)

Total assets

Total assets under administration

Total loans

Total loans under administration

Securitized residential mortgages

Deposits

Shareholders’ equity

Revenue

Net income

Book value of common shares

Earnings per share – basic

Earnings per share – diluted

2012

18,800,079

19,681,750

16,904,435

17,786,106

6,450,682

10,136,599

968,213

887,685

221,983

27.96

6.40

6.38

2011

2010 IFRS

2010 GAAP

2009

2008

2007

2006

2005

2004

2003

17,696,471

15,518,818

7,712,239

7,360,874

5,809,713

4,975,093

3,902,316

3,284,829

2,568,513

1,897,176

17,696,471

15,518,818

15,878,772

11,508,585

8,423,971

6,434,548

5,009,878

4,085,013

3,069,253

2,212,307

16,089,648

14,091,755

5,861,722

5,468,540

4,531,568

4,045,571

3,328,858

2,813,459

2,257,740

1,618,601

16,089,648

14,091,755

14,028,255

9,616,251

7,145,826

5,505,026

4,436,420

3,613,643

2,758,480

1,933,732

8,243,350

8,116,636

–

7,922,124

6,595,979

6,522,850

6,409,822

5,102,781

4,413,984

3,443,640

2,901,515

2,269,157

1,666,788

774,785

790,274

190,080

22.38

5.48

5.46

628,585

687,249

154,752

18.14

4.46

4.45

742,280

533,937

180,944

21.42

5.21

5.20

590,288

489,179

144,493

17.00

4.19

4.15

432,753

454,695

108,687

12.57

3.15

3.13

348,040

368,881

90,241

10.08

2.62

2.59

276,866

282,549

67,815

8.10

1.99

1.95

218,885

234,704

60,861

6.44

1.80

1.72

162,207

181,839

44,551

4.80

1.33

1.27

121,166

141,365

29,507

3.61

0.88

0.86

25.5%

Return on equity was 25.5%,
exceeding 20% for the 15th
consecutive year

$222.0million

Net income for 2012 was
$222.0 million, an increase
of 16.8% over 2011

Ten-year Cumulative Total Return on $100 Investment
Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG)
December 31, 2002–December 31, 2012

COMPOUNDED ANNUAL
GROWTH OVER 10 YEARS

25%

1,500

1,200

900

600

300

HCG
25%

S&P/TSX
9%

HCG Stock Price
Performance

Closing Price as of
December 31

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$16.63

$31.25

$34.75

$34.05

$41.90

$19.80

$41.85

$51.79

$49.10

$59.07

Share prices have been restated to reflect two-for-one stock split on January 29, 2004.

$16.90billion

Total loans grew by 5.1%
over 2011 to reach
$16.90 billion at the
end of 2012

$6.38

Diluted earnings per share
were $6.38 for the year,
an increase of 16.8%
over 2011

Net Income
($ millions)

222

1500

190

181

155

144

1200

109

Earnings per Share
(basic in dollars)

6.40

5.48

5.21

4.46

4.19

3.15

Return on Equity
(percentage)

27.8 28.2

27.2 27.3

27.1

25.5

199.800007

177.600006

155.400005

133.200005

111.000004

88.800003

66.600002

44.400002

22.200001

0.000000

2500

2000

1500

1000

500

6.40

5.76

5.12

4.48

3.84

3.20

2.56

1.92

1.28

0.64

1999
0.00

2000

2001

2002

900

600

300

10
08

16.8%

Home Capital reported a 16.8% increase
in net income over the $190.1 million
“2002”
attained in 2011, reaching $222.0 million
for the year ended 2012.

“2004”

“2003”

“2005”

“2006”

Basic earnings per share rose to $6.40
for the year ended December 31, 2012,
“2007”
a 16.8% increase over the $5.48 reported
for 2011.

“2010”

“2009”

“2008”

“2011”

25.5%

“08” . . . . . . . . . 3.15
“09” . . . . . . . . . 4.19
“10” . . . . . . . . . 5.21
“10” . . . . . . . . . 4.46
“11” . . . . . . . . . 5.48
“12” . . . . . . . . . 6.40

Corporate Directory

For Shareholder
Information, Please
Contact:
Chris Ahlvik
Senior Vice President,
Corporate Counsel

Home Capital Group Inc.
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663

1-800-990-7881

Fax: 416-363-7611

1-888-470-2092
www.homecapital.com
www.hometrust.ca

Montreal:
2020 Rue University
Suite 2420
Montreal, Quebec
H3A 2A5
Tel: 514-843-0129

1-866-542-0129

Fax: 514-843-7620

1-866-620-7620

Danny Antoniazzi
Senior Branch Manager

Carlo Vignone
Team Leader

Winnipeg:
201 Portage Avenue
18th Floor
Winnipeg, Manitoba
R3B 3K6
Tel: 204-942-1619
Fax: 204-942-1638
Darryl Bazylo
Business Development
Manager

Auditors:
Ernst & Young LLP
Chartered Accountants
Toronto, Ontario

Principal Bankers:
Bank of Montreal
Bank of Nova Scotia

Transfer Agent:
Computershare Investor
Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
Tel: 1-800-564-6253

Stock Listing:
Toronto Stock Exchange
Ticker Symbol: HCG

Capital Stock:
As at December 31, 2012,
there were 34,630,440
Common Shares outstanding

Memberships:
Canada Deposit Insurance
Corporation
Trust Companies Association
of Canada

Calgary:
10655 Southport Road SW
Suite 920
Calgary, Alberta T2W 4Y1
Tel: 403-244-2432

1-866-235-3081

Fax: 403-244-6542

1-866-544-3081

Jim Edwards
Branch Manager

Corbin Raison
Senior Mortgage Underwriter

Vancouver:
200 Granville Street
Suite 1288
Vancouver, British Columbia
V6C 1S4
Tel: 604-484-4663

1-866-235-3080

Fax: 604-484-4664

1-866-564-3524

Jim Bearman
Branch Manager

Renu Paruthi
Team Leader

Halifax:
5251 Duke Street
Suite 1205, Duke Tower
Halifax, Nova Scotia B3J 1P3
Tel: 902-422-4387

1-888-306-2421

Fax: 902-422-8891

1-888-306-2435

Scott Congdon
Asst. Vice President,
Mortgages

David Neville
Senior Business
Development Manager
28.8

25.6

22.4

19.2

16.0

12.8

9.6

6.4

2003

3.2
2004
0.0

2005

2006

2007

2008

2009

“08” . . . . . . . . 27.8
“09” . . . . . . . . 28.2
“10” . . . . . . . . 27.2
“10” . . . . . . . . 27.3
“11” . . . . . . . . 27.1
“12” . . . . . . . . 25.5

m
o
c

m
b
.

w
w
w

o
s

s
e
d
a

n
a

m
b

y
b

d
e
n
g

s
e
D

1500

1200

900

600

300

“2002”

“2003”

“2004”

“2005”

“2006”

“2007”

“2008”

“2009”

“2010”

“2011”

“2012”

“2002” . . . . . . . 100.00 . . . . . . . 100.00

“2003” . . . . . . . 126.72 . . . . . . . 230.78

“2004” . . . . . . . 145.07 . . . . . . . 435.97

“2005” . . . . . . . 180.08 . . . . . . . 487.09

“2006” . . . . . . . 211.16 . . . . . . . 481.38

“2007” . . . . . . . 231.92 . . . . . . . 598.84

“2008” . . . . . . . 155.38 . . . . . . . 287.81

“2009” . . . . . . . 209.84 . . . . . . . 620.42

“2010” . . . . . . . 246.79 . . . . . . . 779.40

“2011” . . . . . . . 225.29 . . . . . . . 749.73

“2012” . . . . . . . 241.49 . . . . . . . 918.64

Former Canadian GAAP Basis

IFRS Basis

1185 bgf earnings.eps

1185 bgf earnings per share.eps

1185 bgf return on equity.eps

in the 2008 book the graff title was “Earnings”

Report to Shareholders

In 2012 we celebrated a quarter century of growth and prosperity with another
year of record ﬁnancial and operating performance. Despite a number of
challenges in our markets and economic uncertainty around the world, our
consistent and stable growth is the result of a relentless focus on our proven
strategies and our core competencies. We believe this focus will continue to
build on the progress demonstrated in 2012, and will serve our shareholders
well in the years to come.

HOME CAPITAL HAS A STRONG TEAM AT
THE HELM. WHAT SETS HOME CAPITAL’S
LEADERSHIP APART?

OUR SENIOR LEADERSHIP TEAM IS EXPERIENCED AND
KNOWLEDGEABLE, WITH A BROAD UNDERSTANDING
OF OUR BUSINESS AND OUR INDUSTRY, AND A
“ROLL UP THE SLEEVES” PHILOSOPHY. WE WORK
HARD AT IDENTIFYING KEY PRIORITIES WHILE
CHALLENGING AND DEVELOPING PEOPLE TO REACH
AND EXCEED BUSINESS GOALS. WE HAVE ATTRACTED
AND RETAINED SOME OF THE BEST PEOPLE IN THE
INDUSTRY, PROVIDING OPPORTUNITIES FOR GROWTH
AND PROMOTION FROM WITHIN THE COMPANY AND
BRINGING IN EXTERNAL EXPERTISE WHEN NEEDED.
WITH OUR ONGOING TRAINING, DEVELOPMENT
AND SUCCESSION PLANNING PROGRAMS, WE ARE
CONFIDENT WE HAVE THE RIGHT PEOPLE IN THE
RIGHT PLACES. WE KNOW THAT STRONG LEADERS
NEED A STRONG FORCE BEHIND THEM, AND WE HAVE
A TEAM OF ENTHUSIASTIC EMPLOYEES WHO BRING
DRIVE, COMMITMENT AND ENERGY TO WORK EVERY
DAY. OUR GREATEST ASSET IS OUR PEOPLE.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Report to Shareholders (continued)

another year of Record performances

once again, in 2012 a rigorous focus on our strategic priorities and core competencies allowed us to capitalize on stable
economic conditions in Canada to generate strong operating and financial performance. Despite a slowing housing market in
many of our geographic regions, new and tighter lending rules mandated during the year, and challenging economic climates
in both the united States and europe, we enjoyed solid traditional loan growth and consistent margins that resulted in
another year of record profitability.

At Home Capital, our proven and tested value-enhancing strategies have been designed to ensure we deliver solid results
through all phases of the economic cycle. Since the Company’s founding over twenty-five years ago, our focus has been
on generating steady and sustainable growth in earnings while at the same time maintaining a stable risk profile with a
strong financial position and industry-leading capital ratios. each year we establish a set of objectives to benchmark our
performance, and in 2012 we met or exceeded the majority of these goals:

> net income rose 16.8%, within our target of 13% to 18% growth;

> Diluted earnings per share were up 16.8% in 2012, within our objective of 13% to 18% growth; and

> Return on equity was 25.5% for 2012, well in excess of the Company’s minimum performance objective of 20% for the

fifteenth consecutive year and surpassing 25% for the tenth successive year.

our total loan portfolio grew by 5.1% and the total portfolio of loans administered, including off-balance sheet securitized
assets, increased by 10.5% in 2012 – strong performance but below our target of 13% to 18% for the year. the lower rate of
growth was the result of our strategic decision to accelerate the planned reduction of our insured loans with the objective of
repositioning our asset base toward the more profitable traditional mortgage offerings. As a result, the majority of the growth
in our loans portfolio in 2012 came from our traditional, higher yielding non-securitized mortgage business. We continue to
experience strong demand for our traditional product offerings and, as we have increased this segment of our business, we
have also improved the risk profile, with average credit scores up from last year and lower loan to value ratios. We look for this
segment of our business to continue to grow and generate increased profitability in the years ahead.

With the decision to reduce our insured mortgage portfolio, originations under our secured Accelerator program declined to
$804.7 million in 2012 from $1.10 billion last year. However, insured mortgages remain one of our key products and help to
fulfill our mandate to provide a true full-service, one-stop shop for the Canadian mortgage industry. We look for the insured
segment of our mortgage originations to return to growth in the quarters ahead.

Reflecting our cautious approach, and in anticipation of new guidelines introduced in 2012 limiting home equity lines of
credit, we reduced marketing, approvals and advances under our equityline Visa program during the year. With a review and
confirmation of the new guidelines proposed later in the year, we are confident we can now resume prudent growth in this
segment of our business within the mandate of our risk tolerance and the new guidelines.

Along with our growth and increased profitability, we enhanced the quality and strength of our capital base yet again in 2012
while reducing our risk exposure. At year-end Home trust remained well capitalized with solid tier 1 and total capital ratios
of 17.01% and 20.68%, respectively, well above our minimum annual targets. the credit quality of our loan portfolio also
remained strong with non-performing loans representing only 0.33% of the total portfolio as at December 31, 2012, well
within our expected and acceptable range. our strong capital base and conservative risk profile are reflected in the continuing
solid credit ratings awarded by Standard & poor’s, Fitch Ratings and Dominion Bond Rating Service.

With our strong performance in 2012, and our positive outlook on the future, we were pleased to announce an 18% increase
in our common share dividends in november to $1.04 on an annual basis, the fifteenth common share dividend increase
over the last eight years, and a reflection of our commitment to enhancing long-term shareholder value.

2
2

Home Capital GRoup inC. AnnuAl RepoRt 2012
Home Capital GRoup inC. AnnuAl RepoRt 2012

Focused on Our Strategic Priorities

A key reason for our growth and success in 2012, and indeed over the twenty-ﬁve years since our founding, is our relentless
focus on our core competencies and our well-deﬁned strategic priorities.

Our ﬁrst priority is to build and maintain Canada’s leading alternative ﬁnancial institution. By serving those segments of the
Canadian ﬁnancial services market that we believe are unserved and underserved, we have built an established and growing
market niche, and we will continue to offer a full line of products that meet the needs of borrowers and brokers while targeting
our high-value alternative mortgage segment. We also continue to expand our geographic footprint, opening a new ofﬁce in
Winnipeg in 2012, while maintaining high levels of service for all of our clients.

Our second priority is to maintain a strong and conservative balance sheet and ﬁnancial position so that we can continue
to generate strong returns for our shareholders through both good times and bad. Our continuing conservative capital ratios,
our prudent risk proﬁle, and our strong liquidity position all bode well for the future. We also continue to maintain stable and
ﬂexible sources to fund our growth, including our deposit broker network, the securitization and capital markets, and our new
high interest savings account and direct deposit initiatives launched in 2012.

HOW HAS HOME CAPITAL LEVERAGED
TECHNOLOGY AND INNOVATION TO INVEST
IN THE FUTURE?

OVER THE PAST FEW YEARS, HOME CAPITAL HAS
STRENGTHENED ITS BUSINESS BY ENHANCING ITS
INFRASTRUCTURE AND IMPLEMENTING LEADING EDGE
TECHNOLOGIES TO SUPPORT THE COMPANY’S GROWTH
AND PRODUCTIVITY. IN 2011, WE EMPLOYED A NEW
CORE BANKING SYSTEM, OPTIMIZING BUSINESS
PROCESSES, DRIVING OPERATIONAL EFFICIENCIES
AND SUPPORTING SUPERIOR CUSTOMER SERVICE.
IN ADDITION, WE HAVE IMPLEMENTED SOLUTIONS TO
AUGMENT OUR REGULATORY COMPLIANCE, FINANCIAL
REPORTING AND RISK MANAGEMENT PRACTICES. WE
ARE CURRENTLY INSTITUTING A TRANSFORMATIONAL
DATA MANAGEMENT SYSTEM THAT WILL SUPPORT THE
COMPANY’S MOVE TO A FULLY DIGITAL BUSINESS,
AND WE CONTINUE TO EXPLORE OPPORTUNITIES TO
INCREASE BUSINESS FLEXIBILITY AND ENHANCE
OPERATIONAL EFFECTIVENESS. HOME CAPITAL HAS
THE SYSTEMS IN PLACE TO SUPPORT ITS BUSINESS
AND IS WELL POSITIONED FOR FUTURE GROWTH
AND PROFITABILITY.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012
HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

3
3

Report to Shareholders (continued)

Our third priority is to build on our operational excellence by continuing to invest in corporate governance, risk management
and customer service processes and systems. During 2012 we enhanced our risk management, compliance and internal
audit capabilities with experienced and talented new people, and enhanced processes. To accommodate our growth, during
the ﬁrst quarter of the year we expanded into our newly renovated facilities in our Toronto headquarters, adding 24,500
square feet of ofﬁce and meeting space.

Our strategic priorities are underpinned by the Company’s risk appetite and ability to mitigate risk. Risk management is an
essential component of Home Capital’s strategy, contributing directly to the Company’s proﬁtability and consistently high
return on equity. The Board of Directors is accountable for establishing the overall vision, mission, objectives and strategies
of the Company and setting the Company’s risk appetite and risk-bearing capacity. Your Board is committed to supporting
a balance between managed and deﬁned risk and reward to deliver consistent results.

To further strengthen the Board, Ms. Diana Graham will stand as a nominee for election to the Board at the upcoming
Annual Meeting. Ms. Graham brings extensive risk management experience to the Board, including governance, credit,
operational, market and enterprise risk management, both in the United States and Canada, most recently retiring from the
position of Chief Risk Ofﬁcer at a Canadian ﬁnancial institution. We are conﬁdent that Ms. Graham’s signiﬁcant experience
and depth of knowledge will be assets to the Board and the Company.

HOME CAPITAL HAS RECORDED ANOTHER YEAR
OF SUPERIOR PERFORMANCE. HOW HAS THE
COMPANY PRODUCED GREAT RESULTS FOR SO
MANY YEARS?

WE CONTINUE TO FOCUS ON THE FUNDAMENTALS
OF OUR BUSINESS, REMAINING TRUE TO OUR CORE
VISION WHILE DEVELOPING PRODUCT OFFERINGS
THAT ENHANCE OUR POSITION AS A LEADER IN THE
ALTERNATIVE LENDING MARKET IN CANADA. TO
COMPLEMENT THIS FOCUS, WE HAVE A NIMBLE AND
ENTREPRENEURIAL CULTURE, AND ADAPT QUICKLY TO
MEET THE NEEDS OF OUR CUSTOMERS, MORTGAGE
BROKERS AND OTHER STAKEHOLDERS, AND THE
CHANGING MARKETS AND ECONOMIC ENVIRONMENT,
ALLOWING US TO BUILD ON OUR COMPETITIVE
ADVANTAGE, EVEN DURING CHALLENGING ECONOMIC
TIMES. WITH PRUDENT LENDING STRATEGIES, A
ROBUST RISK MANAGEMENT FRAMEWORK, SOLID
BUSINESS ESSENTIALS AND RIGOROUS PROCESSES,
HOME CAPITAL GENERATES CONSISTENTLY STRONG
FINANCIAL RESULTS AND CREATES VALUE FOR
ALL SHAREHOLDERS.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

twenty-five years and Growing

In 2012 we celebrated our twenty-fifth year in business. Home Capital has grown from 12 employees in one office, $3 million
in equity and $50 million in total assets to where we now employ more than 600 highly experienced and talented people in
six offices across Canada. our asset base has grown to almost $19 billion and total assets under administration have grown
to almost $20 billion, with shareholders’ equity standing at $968 million as at December 31, 2012. Most importantly, our
shareholders have benefitted from the growth and success of the Company. over the last 10 years alone, Home Capital’s
shareholders have received a compound annual return of 25%, significantly higher than the 9% return for the toronto Stock
exchange during the same period.

looking ahead, we believe we can continue to deliver solid growth and strong operating performance for our shareholders.
While real estate markets may soften somewhat in 2013 as the result of continued global economic uncertainty and the
tightening of mortgage requirements introduced in 2012, we believe supply and demand will remain in balance and the
slowdown in activity will lead to a healthier market supported by continued low interest rates, stable employment and solid
housing affordability. As a result, we will continue to focus on growing our traditional alternative mortgage business and other
retail products while increasing our presence in targeted urban and suburban growth markets across the country.

With this positive outlook in mind, we have established the following objectives for 2013:

> 13% to 18% growth in total net earnings;

> 13% to 18% growth in diluted earnings per share;

> 10% to 15% growth in total loans under administration; and

> 20% return on shareholders’ equity.

In closing, we want to thank everyone at Home Capital for their hard work, dedication and commitment over the years.
We have demonstrated that by sticking to our core competencies and focusing on our strategic priorities, we can successfully
build our business to meet the needs of Canadians and delivers superior returns to our shareholders through both good times
and bad. We are confident we can continue to build on this progress in the years ahead, and look forward to an exciting,
profitable and rewarding future.

dr. kevin p.d. Smith
Chair of the Board

Gerald m. Soloway
Chief Executive Officer

Home Capital GRoup inC. AnnuAl RepoRt 2012

Proven Results

GROWTH

Home Capital sustained its
strength in key ﬁnancial
measurements. The Company’s
core business activities generated
strong results, contributing to asset
growth of 6.2% and an increase
in total revenue of 12.3%.

RETURNS

The Company recorded
pre-tax return on assets of
1.6% and after-tax return
on assets of 1.2%, while
shareholders’ equity increased
to $968.2 million, a 25.0%
rise from the previous year.

RISK

Home Capital continued to
surpass all applicable regulatory
and related standards. The level
of impaired loans is comparable
to that of large, traditional
ﬁnancial institutions. Home
Capital’s robust risk management
framework is a key component
of the Company’s philosophy.

18,800

17,696

15,519

19,682

17,696

15,879 15,519

888

790

687

7,361 7,712

5,810

11,509

8,424

534

489

455

3.2

3.0

2.9

2.4

2.2

2.0

968

742

775

629

590

1.6

1.5

1.6

1.2

1.1

1.2

433

18.08 18.08

17.29 17.01

16.43

19.37

18.00

20.46 20.68

0.86 0.85

12.86

14.21

0.58

0.33

0.24 0.25

6
6

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012
HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Former Canadian GAAP Basis

IFRS Basis

Performance vs. Target

RETURN ON EQUITY
Home Capital again exceeded 20%
in return on equity, reaching 25.5% for
the year ended December 31, 2012,
representing the 15th consecutive year
in which the Company surpassed
20% ROE.

TARGET:
20% return on equity

EARNINGS
The Company reported net earnings
of $222.0 million for the year
ended December 31, 2012,
representing a 16.8% increase
over the $190.1 million achieved
in 2011.

TARGET:
13% to 18% increase
in total net earnings

Return on equity at

Increase in earnings of

25.5%

for the year ended
December 31, 2012

16.8%

over 2011

EARNINGS PER SHARE
Diluted earnings per share rose
to $6.38 at December 31, 2012,
a 16.8% increase over the
$5.46 recorded for 2011.

TARGET:
13% to 18% increase in diluted earnings
per share

TOTAL LOANS
Total loans grew to $16.90 billion by
December 31, 2012, an increase of
5.1% over the $16.09 billion recorded
on December 31, 2011.

TARGET:
13% to 18% increase in total loans

Diluted earnings per share grew

Total loans increased

16.8%

over 2011

5.1%

over year-end 2011

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012
HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

7
7

Corporate Governance at Home Capital

Home Capital recognizes the importance of strong and effective corporate
governance. As a publicly traded company, Home Capital has governance standards
that reflect best practices, are consistent with the corporate governance guidelines
set out by the toronto Stock exchange and are compliant with applicable rules
adopted by the Canadian Securities Administrators.

the Board of Directors of Home Capital ensures that appropriate structures and procedures are in place so that it can
independently and effectively oversee the Company’s strategy, risk profile and operations. the Company continually looks
for ways to improve its corporate governance policies and procedures, and the Governance, nominating and Conduct
Review Committee is responsible for reviewing Home Capital’s corporate governance practices on at least an annual
basis. Home Capital and its wholly owned subsidiary, Home trust, also proactively adopted the new Corporate Governance
Guidelines issued by the office of the Superintendent of Financial Institutions in January of 2013, and will implement them
well ahead of the deadline.

the Board reviews and approves Home trust’s strategic and financial plans and risk appetite at least annually. throughout the
year, the Board receives strategic updates from each of the principal business groups and risk updates from the enterprise
Risk Management department.

the Board is responsible for the stewardship of Home Capital and for the supervision of the management of the business affairs
of the Company, including creating a culture of integrity throughout the Company. All employees, officers and directors are subject
to Home Capital’s Code of Business Conduct and ethics, which requires the highest standards of ethical behaviour in all dealings
on behalf of the Company.

tiv

e
r
si

h
t

Risk Appetite

Strategic Planning

P
l
a

a
t
e

n
i
n

Effective
Governance
Structure

Robust Policy
Frameworks

Timely and
Transparent
Reporting

Finance

Enterprise
Risk Management

Compliance

Credit

Audit

e
r
n

e
r
si

h
t

c
ti

o
l

e
r
a

Lines of
Business

Operations

Human
Resources

Information
Technology

did
you
know?

Home trust has over 600
full-time employees in branches
from Vancouver to Halifax

More than 50% of employees
participate in Home Capital’s
employee Share ownership plan

Home Capital GRoup inC. AnnuAl RepoRt 2012

Highlights of Home Capital’s corporate governance framework include:

> Eight of nine directors are independent, the Chairs and all members of each of the Board Committees are independent, and

the roles of CEO and Chairman of the Board are separate

> The Company maintains a minimum share ownership requirement for directors, the Chief Executive Officer and other designated

executive officers to ensure alignment with the interests of all shareholders

> The Board has adopted a Shareholder Rights Plan to preserve the fair treatment of all shareholders in the event of a take-over bid

> The Board and its Committees function under charters that specify their roles, accountabilities and responsibilities

> The Chair of the Governance, Nominating and Conduct Review Committee conducts an annual Board evaluation survey to
assess the effectiveness of the Board and its Committees, as well as the effectiveness of each director through a self-evaluation
and one-on-one meetings with the Chairman of the Board

> Home Capital provides an orientation program for new directors as well as conducting internal education sessions

> The Board is responsible for approving the Company’s risk appetite, strategic plan and related processes annually

> The Board reviews and approves all critical risk policies, delegations of authorities, and Company-wide limits

> The Board of Directors holds in-camera meetings of the independent directors at every Board meeting, and with the Chief
Financial Officer, Chief Risk Officer, Chief Credit Officer, Head of Internal Audit, Chief Compliance Officer and Chief Anti-Money
Laundering Officer, and external auditors no less than quarterly

the Board of Directors is assisted in its oversight of the business by four Committees of the Board and by independent oversight
functions within the business that report directly to the Board and its Committees.

audit Committee

the Audit Committee assists the Board in its oversight role with respect to:

> the quality and integrity of its financial reporting;

> the qualifications, independence, performance and compensation of the external auditor;

> the effectiveness of the Company’s internal controls, including the effectiveness of its internal audit and compliance functions;

> oversight of employee complaints and concerns; and

> the Company’s capital management position, in conjunction with the Risk and Capital Committee.

the Chief Financial officer, Chief Compliance officer and Chief Anti-Money laundering officer, and the Senior Vice president of
Internal Audit report to the Audit Committee independently and meet in camera at least quarterly.

Risk and Capital Committee

the Risk and Capital Committee assists the Board in its oversight role with respect to:

> setting the Company’s overall risk appetite and risk management framework, including risk limits;

> assessing and managing the Company’s overall risk profile;

> reviewing, approving and regularly assessing the effectiveness of the Company’s risk and capital policies;

> the Company’s capital management strategies, in conjunction with the Audit Committee; and

> reviewing the Company’s adherence to the Company’s risk and capital policies and procedures.

the Chief Risk officer and the Chief Credit officer report to the Risk and Capital Committee independently and meet in camera at
least quarterly.

employees raised more than $60 thousand for various charities and
held toy and food bank drives through the year, showing their
commitment to a range of charitable causes and social programs

our employees can
serve customers in over
40 languages

Home Capital GRoup inC. AnnuAl RepoRt 2012

Corporate Governance at Home Capital (continued)

Governance, nominating and Conduct Review Committee

the Governance, nominating and Conduct Review Committee assists the Board in its oversight role with respect to:

> identification of suitable Board candidates;

> the quality and effectiveness of the Company’s corporate governance policies and practices;

> evaluation of the contributions of individual directors;

> review of conflicts of interest, related party transactions, disclosure of information; and

> director orientation and continuing education.

Human Resources and Compensation Committee

the Human Resources and Compensation Committee assists the Board in its oversight role with respect to the
Company’s human resources policies and programs, succession planning and the management of compensation-
related risk.

Board of
Directors

Risk and Capital
Committee

Human Resources
and Compensation
Committee

Governance,
Nominating and
Conduct Review
Committee

Audit
Committee

Enterprise
Risk
Management

Credit

CEO and Executive
Committee

Corporate
Compliance

Internal
Audit

Senior Leadership
Committee

Operational
Risk Committee

Credit Risk
Committee

Asset/Liability
Committee

Executive
IT Change
Advisory Board

Governance, Risk
and Compliance
Committee

Credit Risk
Transaction
Sub-Committee

Retail Product
Pricing
Sub-Committee

Home Capital sees robust corporate governance principles and practices not only as a critical matter of regulatory
compliance, but also as a competitive advantage in its core market. For more information about corporate governance
at Home Capital, please refer to Home Capital’s Management Information Circular. the Circular contains detailed
information about directors and management, as well as the Company’s Statement of Corporate Governance practices.

www.homecapital.com

the Company’s website contains information about corporate governance at Home Capital, including the Statement of
Corporate Governance practices, Charters of the Board of Directors and Board Committees, position Descriptions, Director
Compensation and Independence Standards, Code of Business Conduct and ethics, and Shareholder Rights plan.

the Company has established two scholarships – the Home Capital Scholarship in
Honour of John J. Ruffo at the university of toronto Rotman School of Management and the
Debbie Simon Award for excellence in Human Resources at George Brown College (toronto)

More than 10% of employees
have been with the Company
for over 10 years

Home Capital GRoup inC. AnnuAl RepoRt 2012

environmental Responsibility
at Home Capital

enviRonmental
Commitment

Home Capital is committed to implementing environmentally
sustainable business practices that reduce our impact on the
environment and encourage our employees to make green choices.
the Company participates in a number of programs to reduce energy consumption and
greenhouse gas emissions, and has implemented initiatives that promote green practices
and motivate employees to reduce, reuse and recycle.

the Company’s environmental Committee has adopted a holistic approach to raising environmental awareness among
employees across the country, supporting changes that make a difference in the Company’s environmental impact.

Some highlights of Home Capital’s green activities in 2012 include:

> Commencing the migration to a leading enterprise information management solution to digitize operational processes,

enabling the Company to embrace digital documents and reduce the amount of paper we use

> Partnering with our landlord in the “Race to Reduce” initiative to reduce energy use and improve air quality at our head

office location in Toronto

> Working with an engineering firm to conduct an on-site audit of office space and equipment, and implementing

recommendations to further reduce our energy consumption

> Ensuring that the meeting rooms and offices currently being built in our expanded office space in Toronto will have auto
shut-off of lights, with the objective of implementing this energy reduction switch in all our meeting rooms and offices
in Toronto

> Implementing technology to receive faxed documents electronically to desktop computers to further reduce paper usage

> Continuing to participate in comprehensive composting, recycling and waste disposal programs in our offices

> Diverting electronic waste from garbage through ongoing donations of obsolete computer equipment

> Participating in the annual Toronto 20-Minute Makeover, during which a number of employees headed outdoors to

collect litter and clean up the surrounding neighbourhood

employees are encouraged to turn off desktop electronic devices and lighting when they are not in use, reduce paper consumption
by using available electronic communication methods, and use teleconferencing when applicable to reduce the need for travel.

the office tower that accommodates Home trust’s main branch in toronto has been leeD (leadership in energy and environmental
Design) Gold certified. leeD provides building owners and operators with a concise framework for identifying and implementing
practical and measurable green building design, construction, operations and maintenance solutions. the building also won
the Building owners and Managers Association (BoMA) of Greater toronto outstanding Building of the Year award (toBY).

Home Capital remains dedicated to reducing the Company’s environmental impact by encouraging employee awareness,
supporting business practices and participating in initiatives that benefit the environment in practical and meaningful ways.

Home trust’s Social Committee hosted numerous events for
charitable causes in 2012, fostering community involvement,
teambuilding and fellowship among employees

over 640,000 customers trust Home trust
with their mortgage, credit card, retail credit
or investment needs

Home Capital GRoup inC. AnnuAl RepoRt 2012

Management’s Discussion and Analysis

BUS INESS PROFILE

Business Model and Risk Taking
Business Segments and Portfolios

VISION, MISSION, OBJEC TIVES A ND V AL UE S

Risk-taking Philosophy

2012 PER FOR MANCE AND 20 13 STR ATEG I ES AN D TA R GETS

2012 Performance
2012 Strategies and Achievements
2013 Strategic Priorities
2013 Performance Targets
2013 Overall Outlook

FINANC IAL H IGHLIGHTS

Income Statement Highlights for 2012
Balance Sheet Highlights for 2012

FINANC IAL PER FOR MANCE REVI EW

Net Interest Income and Margin
Non-interest Income
Non-interest Expenses
Provision and Allowance for Credit Losses
Taxes
Comprehensive Income

FINANC IAL POS ITION R EVIEW

Cash Resources and Securities
Loans Portfolio
Deposits, Senior Debt and Securitization Liabilities
Other Assets and Liabilities
Shareholders’ Equity
Contingencies and Contractual Obligations
Derivatives and Hedging
Off-balance Sheet Arrangements

OPER ATING SEG MENT R EVIEW

Mortgage Lending
Consumer Lending
Other

SUMMARY OF Q UARTER LY RESULTS

14
15

16
17
17
18
18

20
20

21
23
25
26
27
27

29
30
34
35
35
36
36
37

38
39
40

FOURT H QUARTER 201 2 PER FOR MA NC E

Fourth Quarter Segment Review

FOURT H QUARTER FINANC IAL INFOR MATION

CAPI TAL MA NAGEM ENT

Capital Management Framework
Basel III
Capital Management Activity
Internal Capital Adequacy Assessment Process (ICAAP)
Credit Ratings
Share Information

RI SK MANAGEM ENT

Risk Appetite
Risk Governance
Stress Testing
Principal Risks
Strategic Risk
Credit Risk
Market Risk
Funding and Liquidity Risk
Upcoming Basel Liquidity Requirements
Operational Risk
Legislative and Regulatory Risk
Reputational Risk
Risk Factors That May Affect Future Results

ACC OUNTING STANDA RDS A ND POLIC IES

ACC OUNTING DE VE LOPMENTS

CONTR OLS OVER FINA NC IA L R EPOR TING

Disclosure Controls and Internal Control over Financial Reporting
Disclosure Controls and Procedures
Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting
Comparative Consolidated Financial Statements

NON-G AAP ME ASURE S A ND G LOS SAR Y

Non-GAAP Measures
Glossary of Financial Terms

51
53
54
54
54
55

56
56
59
59
59
60
64
65
66
66
67
68
68

70
70
70
70
70

71
72

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

MANAGEMENT’S DI SCU SSION AND A N ALYSI S

This Management’s Discussion and Analysis (MD&A) is provided to enable readers to assess the ﬁnancial condition and results of
operations of Home Capital Group Inc. (the “Company” or “Home Capital”) for the year ended December 31, 2012. The discussion
and analysis relates principally to the Company’s subsidiary Home Trust Company (Home Trust), which provides residential mortgage
lending, non-residential mortgage lending, consumer lending and deposit-taking services. This MD&A should be read in conjunction with
the audited consolidated ﬁnancial statements and notes. Unless otherwise indicated, this MD&A has been prepared in accordance with
International Financial Reporting Standards (IFRS), which are Generally Accepted Accounting Principles (GAAP), and all amounts are
presented in Canadian dollars. This MD&A is current as of February 13, 2013. A glossary of terms and Non-GAAP measures used in this
MD&A and ﬁnancial statements is presented on pages 71 to 72 of this report.

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 website at www.homecapital.com, and on the Canadian Securities Administrators’ website at www.sedar.com.

Caution Regarding Forward-looking Statements

From time to time 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 in the
Risk Management section of this report, as well as its other publicly ﬁled information, which are available on the System for Electronic
Document Analysis and Retrieval (SEDAR) at www.sedar.com, for the material factors that could cause the Company’s actual results to
differ materially from these statements. These risk factors are material risk factors a reader should consider, and include credit risk, funding
and liquidity risk, structural interest rate risk, operational risk, investment risk, strategic and business risk, reputational risk and regulatory
and legal risk along with additional risk factors that may affect future results. Forward-looking statements can be found in the Report to the
Shareholders and the Outlook sections in the Annual Report. Forward-looking statements are typically identiﬁed by words such as “will,”
“believe,” “expect,” “anticipate,” “estimate,” “plan,” “forecast,” “may,” and “could” or other similar expressions.

By their very nature, these statements require the Company to make assumptions and are subject to inherent risks and uncertainties,
general and speciﬁc, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements.
These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic
policies, changes in interest rates, inﬂation levels, 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 2013 and its effect on Home Capital’s business are material factors
the Company considers when setting its objectives and outlook. In determining expectations for economic growth, both broadly and in the
ﬁnancial services sector, the Company primarily considers historical and forecasted economic data provided by the Canadian government
and its agencies. In setting and reviewing the outlook and objectives for 2013, management’s expectations assume:

> The Canadian economy will produce modest growth in 2013 with stable to modestly improving employment conditions in most regions.
The economy will continue to be heavily inﬂuenced by the economic conditions in the United States and global markets. Inﬂation will
generally be within the Bank of Canada’s target of 1% to 3%.

> The Bank of Canada has indicated that increases to its target overnight interest rate are not imminent and, as such, the Company is
assuming the rate will remain at its current level for most of 2013. This is expected to continue to support low mortgage interest rates.

> The housing market will remain stable with balanced supply and demand conditions in most regions supported by continued low
interest rates, stable to improving employment, and immigration. There will be declines in housing starts and resale activity with stable
to modestly declining prices throughout most of Canada.

> Consumer debt levels will remain serviceable by Canadian households.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

BUS INESS PROFILE

Home Capital is a holding company that operates primarily through its principal, federally regulated subsidiary, Home Trust, which offers
insured deposits, residential and non-residential mortgage lending and consumer lending. The Company’s subsidiary Payment Services
Interactive Gateway Inc. (PSiGate) provides payment card services. Licensed to conduct business across Canada, Home Trust has ofﬁces
in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba.

Business Model and Risk Taking

The Company is primarily a residential mortgage lender, with ancillary commercial mortgage lending, consumer lending and payment card
services. The lending operations can be divided between uninsured lending and insured lending.

Uninsured Lending

Lending to borrowers who have difﬁculty qualifying for mortgage loans at Canada’s chartered banks (non-prime) has been the core of the
Company’s business over the past 25 years. This core or traditional business generally involves lending to self-employed individuals, individuals
who are relatively new residents of Canada and individuals who have experienced credit difﬁculties, generally related to speciﬁc circumstances
which are not expected to reoccur. By their nature, loans to these groups of individuals generally do not qualify for mortgage insurance.

The Company measures the risk associated with this class of lending through careful underwriting on an individual loan basis, applying
its proprietary methodologies. The risk associated with this class of lending is managed through extended real estate appraisal processes,
reduced loan to value lending ratios and timely monitoring of performance, matched with diligent collection processes. Over the past
25 years, the Company has consistently observed that this class of loans has performed well and the interest rate charged is sufﬁcient
to absorb funding costs, credit losses and operating expenses, and provide attractive shareholder returns, while providing appropriate
protection for the Company’s depositors.

In addition to single family residential loans, the Company’s uninsured loan portfolios include commercial mortgages and loans to
consumers that are secured by collateral real estate mortgages, charges against home ﬁxtures or cash deposits. These groups of loans
carry higher rates of interest and have also performed well, providing enhanced shareholder returns.

The uninsured classes of lending are generally funded by ﬁxed-term deposits from retail investors sourced through deposit brokers and
ﬁnancial advisors. The majority of these deposits are received through channels that are controlled by several of the major Canadian banks.
The Company is a member of the Canadian Deposit Insurance Corporation (CDIC) and its deposits qualify for insurance to the limits set
by CDIC. Competition for ﬁxed-term deposits is highly rate sensitive.

Insured Lending

The Company’s insured (prime) lending business was developed as an extension of its non-prime lending business, aimed at serving
customers of the core business who subsequently qualiﬁed for insured lending. Market and economic factors led to the expansion of this
business in the period extending from 2008 to 2010, with this lending class becoming more than one-half of the overall lending portfolio.
During this period, margins available to prime lenders were attractive and the business could be operated with minimal capital. In 2011,
changes to the ﬁnancial accounting standards for deposit-taking institutions resulted in much greater capital requirements. This change
was coincident with a period of declining margins in this market sector, as competition for borrowers intensiﬁed. Although there is no
expectation of credit losses in this class of lending, the current margins are frequently not sufﬁcient to provide attractive returns to the
capital required to support this business. Consequently, the Company has reduced its activity in this loan class.

Insured lending includes single family homes and multi-unit residential properties. This lending is generally funded by securitizing
underlying loan portfolios and selling the resulting insured mortgage-backed securities (MBS) through programs sponsored by the
Canadian Mortgage and Housing Corporation (CMHC). The Company has good access to these markets and participates on an ongoing
basis. To manage risk in this class, the Company carefully follows the standards set by the insurers, which are complemented by the
Company’s own procedures such as individual loan adjudication.

The competition for prime loans involves all of the major Canadian lending institutions and many other participants. The market is highly
rate sensitive and the current rate environment is very low, resulting in relatively low margins for all lenders.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Business Segments and Portfolios

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

Mortgage Lending

This segment comprises single family residential lending and multi-unit residential lending as well as non-residential lending. The single-
family residential portfolio includes the Company’s traditional or “Classic” mortgage loans and Accelerator mortgages. The Company’s
traditional mortgage portfolio consists of mortgages with loan to value ratios of 80% or less, where the focus is on serving selected
segments of the Canadian ﬁnancial services marketplace that are not the focus of the major ﬁnancial institutions. Accelerator mortgages
are insured, with loan to value ratios generally exceeding 80% at the time of origination, and are generally securitized and sold through
CMHC-sponsored MBS and Canada Mortgage Bond (CMB) programs.

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

Consumer Lending

Consumer lending includes Visa lending and other consumer retail lending for durable household goods, such as water heaters and larger-
ticket home improvement items. Consumer retail lending loans are supported by holdbacks or guarantees from the distributors of such items
and/or collateral charges on real property. The Company’s Equityline Visa product, secured by real property, represents almost all of the Visa
portfolio. The Company also offers cash secured Visa products and preferred unsecured Visa cards to current mortgage customers with good
credit history. The consumer lending segment includes the operations of PSiGate, the Company’s subsidiary involved in payment processing.

Other

In addition to its operating segments, the Company accounts for treasury portfolio and general corporate activities.

VISION, MISSION, OBJEC TIVES AND V A LUES

During the year, the Company updated and reﬁned its statements of vision, mission, objectives and values.

It is the vision of the Company to be recognized as the leading alternative lender in the Canadian ﬁnancial market place.

The Company’s mission is to deliver superior shareholder value by focusing on well-deﬁned niches in the Canadian lending and deposit-
taking marketplace that generate above average returns, have acceptable residual risk proﬁles and are not adequately served by traditional
ﬁnancial institutions, while protecting the depositors and operating within regulatory guidelines and the Company’s risk appetite.

The Company’s progress toward its objectives will be measured by:

> A return on common equity of at least 20%

> Capital aligned with the risk proﬁle of the business and the needs of the Company’s depositor base

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

> Respect, trust and integrity

> The highest level of customer service to our clients and business partners

> A nimble, entrepreneurial culture with our enthusiasm, teamwork and desire for continuous improvement

> Community and environmental improvement through fundraising, community involvement and sustainable environmental initiatives

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

The Company seeks to achieve a return on common equity of at least 20%, and has exceeded this benchmark in each of the past 15 years.
Management also seeks to align its capital with the risk proﬁle of the business through an understanding of the nature and level of risk
being taken and how these risks attract regulatory and risk-based capital.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Risk-taking Philosophy

The Company’s core strategy focuses on serving a large portion of the Canadian ﬁnancial services market that traditionally has not been
adequately served by larger ﬁnancial institutions. The Company’s strategy provides opportunity for higher returns but carries an inherently
different risk proﬁle than one serving the broader market and requires an integrated risk management strategy. The Company recognizes
this risk and proactively seeks to reduce overall risk exposure to an acceptable level through:

> Active Board and senior management oversight, monitoring and timely revision of corporate strategies, and risk appetite and risk

mitigation activities;

> Promotion of a sound risk management culture and awareness throughout the entire organization;

> Adoption of a conservative ﬁnancial risk proﬁle, comprised of prudent levels of liquidity; capital levels in excess of regulatory and risk-

based minimums; and reserves that account for all incurred losses;

> Extensive, customized risk evaluation practices and controls at the transactional level executed by experienced personnel and supported

by effective and efﬁcient processes and technology;

> Proactive, independent and timely monitoring and assessment of all risk exposures, regardless of the source, by the business, with

enterprise risk management and Internal Audit acting as second and third lines of defense; and

> Ongoing efforts to diversify funding sources.

The Company’s acceptable business and risk-taking activities can be substantially characterized by the following:

> The Company conducts business with individuals, other businesses and borrowers that are well understood, including, but not limited

to, conﬁrmation of identity, credit proﬁle, employment and willingness and ability to repay debts;

> New products/initiatives are subject to a new initiative review process and undertaken only after complete risk identiﬁcation and
control infrastructure has been established. All acquisitions will be subject to a due diligence process that ensures alignment with the
Company’s risk appetite;

> For any material lending, the Company requires strong collateral against the loan, speciﬁcally where legal and equity rights can be held
against the collateral asset. Unsecured credit exposures must ﬁt within the Company’s risk appetite framework and have appropriate
risk management processes in place to mitigate the associated risk;

> The Company conducts business in geographies that are well known and understood, particularly when lending against properties;

> The Company employs various risk mitigation techniques and actions to reduce inherent business risks to acceptable residual levels,
including trusted asset appraisals and valuations, limited loan to value lending, and risk-based pricing, among other mitigating factors;

> The Company will not pursue proﬁts through trading activities and will limit the use of derivatives for hedging purposes only; and

> The Company will manage interest rate gaps within its risk appetite.

201 2 PER FOR MANCE AND 201 3 STR ATEGIES AN D TA R GETS

2012 Performance

The table below summarizes the Company’s 2012 targets and performance.

Table 1: 2012 Targets and Performance

For the year ended December 31, 2012

Growth in net income
Growth in diluted earnings per share
Growth in total loans1
Return on shareholders’ equity
Efﬁciency ratio (TEB)2
Capital ratios3
Tier 1
Total
Provision as a percentage of gross loans

1 Includes loans held for sale.

2012 Targets

Actual Results

13%–18%
13%–18%
13%–18%
20.0%
28.0%–34.0%

16.8% $
16.8%
5.1%
25.5%
27.7%

Amount
221,983 $
6.38
16,904,435

Increase
over 2011
31,903
0.92
814,787

Minimum of 13%
Minimum of 14%
0.05%–0.15%

17.01%
20.68%
0.09%

2 See deﬁnition of Taxable Equivalent Basis (TEB) under the Non-GAAP Measures and Glossary section in this report.

3 Based on the Company’s wholly owned subsidiary, Home Trust Company.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

The Company applies IFRS which are the GAAP for Canadian publicly accountable enterprises.

Non-GAAP measures are discussed in the Non-GAAP Measures and Glossary section located at the end of this MD&A.

The Company was successful in meeting or exceeding all of its performance targets in 2012 except for growth in total loans. The Company
was able to achieve its proﬁt objectives with lower loan growth by focusing on higher yielding core mortgages, balancing its proﬁt objectives
with maintaining strong capital ratios under the Basel II and upcoming Basel III frameworks. Total loans were also reduced during the year
by $896.0 million for loans that qualiﬁed for off-balance sheet treatment in 2012. Including these loans, growth was 10.5% over 2011.

2012 Strategies and Achievements

The Company employs three strategic priorities to achieve its long-term objectives:

Strategic Priority

2012 Strategies and Achievements

Focused Marketplace Growth

Build and maintain Canada’s leading alternative ﬁnancial institution

> Sustained focus on underserved niches and market-leading position

> Continued to offer “one-stop” convenience to borrowers and brokers,

while focusing on the high-value alternative mortgage segment

> Continued the expansion of the geographic footprint of the business with

the opening of the Winnipeg ofﬁce

> Maintained industry-leading service levels to clients and mortgage brokers

Prudent Balance Sheet
Management

Improve the ﬁnancial strength of the Company so that it is capable of absorbing
market events and position the Company for strong shareholder returns

> Maintained a strong capital position, with a Tier 1 capital ratio of 17.01%
at the end of 2012 and the increase in total capital of Home Trust, through
earnings and the addition of $56 million of subordinated debt from the
resources of Home Capital

> Maintained the prudent credit risk proﬁle of the loan portfolio, with improving

credit scores and reduced loan to value ratios

> Maintained and managed strong liquidity positions; average liquid assets

decreased during the course of the year as the Company balanced liquidity
against investment returns

> Maintained a ﬂexible supply of funding through the deposit broker network;

continued to utilize funding through securitization markets; introduced a high
interest savings account and launched a direct deposit initiative

Operational and Governance
Excellence

Invest in robust corporate governance, risk management and efﬁcient
customer-focused processes and systems

> Initiated an executive level governance, risk and compliance committee

> Continued to achieve industry-leading returns on shareholders’ equity

> Further enhanced risk measurement, monitoring and reporting capabilities

> Maintained a low level of credit losses through strong underwriting, active

portfolio monitoring and collections activities

> Maintained leading cost efﬁciencies through tight cost controls

> Strengthened the capabilities of the risk management, compliance
and internal audit functions with additional experienced staff and
more robust processes

2013 Strategic Priorities

Strategic priorities for 2013 will continue to include the three priorities previously noted, along with strategies that include greater
diversiﬁcation of the Company’s sources of funding and the development of new complementary deposit products and related technology.
Execution of these strategies will lower the overall business risk of the Company by reducing funding risk while continuing to grow the asset
base and related interest and fee revenues.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

2013 Performance Targets

The following table summarizes the Company’s 2013 performance targets.

Table 2: Targets for 2013

Growth in net income
Growth in diluted earnings per share
Growth in total loans under administration
Return on shareholders’ equity
Efﬁciency ratio (TEB)1
Provision as a percentage of gross loans

Dollar Amounts
$250.8 million–$261.9 million
$7.21 per share–$7.53 per share
$19.56 billion–$20.45 billion

2013 Targets

13%–18%
13%–18%
10%–15%
20.0%
28.0%–34.0%
0.10%–0.18%

1 Refer to the deﬁnition of TEB under the Non-GAAP Measures and Glossary section of this report.

In 2012 the Company set its loans growth targets based on total on-balance loan growth. For 2013, the Company’s target is based on
loans under administration, which includes off-balance sheet loans reﬂecting the increased use of off-balance sheet transactions. The
target for provision as a percentage of gross loans has increased as the proportion of uninsured loans has increased.

2013 Overall Outlook

Supported by the stable Canadian economy and healthy real estate market in 2012, the Company continued to reposition the lending
portfolio to take advantage of the attractive returns available in the alternative mortgage space, the Company’s traditional business.
This business, which is within the Company’s risk appetite, provides superior returns on the allocated capital. In 2013, the continued
expansion of the traditional business will be accompanied by commensurate strengthening of governance, risk management and
control processes, through further investment in tools, technology and people. The Company will continue to offer insured mortgages
through the Accelerator program, supporting the Company’s “one–stop” and “ﬂexible lending solutions” strategies. The Company will
also continue to increase its presence in suitable urban and suburban markets across Canada. Additional focus will be placed on
growth of the Company’s high margin non-residential and consumer lending portfolios within the Company’s risk tolerance.

The Company expects supply and demand in the real estate market to remain balanced in 2013, with softening conditions in most
markets when compared to the activity levels of recent years. The Company believes that uncertainty in global economic conditions
will continue to pose risks to the Canadian economy. The tightening of mortgage underwriting requirements and changes in mortgage
insurance qualiﬁcation rules in 2012 can be expected to continue to dampen the level of activity in the real estate market in 2013.
The Company believes that slowing housing activity will lead to healthier real estate markets overall that are supported by continued
low interest rates, stable to improving employment, stable net immigration and good housing affordability. The Company expects
continued strong demand for its traditional mortgage and other retail products, reﬂecting balanced real estate markets and increased
market share.

In view of the continued uncertainty and risk within the global ﬁnancial environment, the Company will continue to maintain
relatively high levels of liquidity and low overall leverage, as measured by the assets to capital multiple (ACM), to provide safety
and soundness for depositors. To support this conservative approach to liquidity and leverage, the Company will continue to pursue
opportunities for revenue contributions from fees, loan sales and sales of residual interests in loan securitizations.

The Company expects that the rate of growth in the Company’s non-securitized loan portfolio in 2013 will be relatively consistent
with the growth rate experienced in 2012. The traditional mortgage business is expected to maintain strong net interest margin and
net interest income levels, while net interest margins on securitized assets continue to decline as older securitization programs reach
maturity. The decline primarily reﬂects a combination of two factors: spreads on new securitization transactions are generally lower
than the spreads earned on the maturing programs, and the assets provided as replacement assets in the CMB program are generally
lower yielding as compared to the maturing or discharging assets. While the Company actively hedges the CMB reinvestment risk, the
structure of the hedges will become less effective as the programs mature. This dynamic will tend to put pressure on the overall net
interest margin. The increased weighting of the Company’s traditional uninsured mortgages will tend to offset this downward pressure,
as the margins on these products are more favourable and risk levels are well within the Company’s tolerance.

The Company will increase its marketing and sales activities related to the development of more diversiﬁed sources of deposits,
and additional costs will be incurred in this initiative. Reductions in other areas and increases in net interest income will tend to
mitigate these increases and other costs, and the Company expects that its efﬁciency ratio for 2013 will continue to be in the target
range of 28% to 34%.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

FINANC IAL H IGHLIGHTS

Table 3: Key Performance Indicators

For the years ended December 31
(000s, except % and per share amounts)

FINANCIAL PERFORMANCE MEASURES

Total revenue

Net income

Earnings per share – Basic

Earnings per share – Diluted

Dividends per share

Return on shareholders’ equity

Return on average total assets

Net interest margin (TEB)2

Net interest margin non-securitized assets (TEB)2

Net interest margin securitized assets

Efﬁciency ratio (non-interest expense
as a % of net revenue)

Efﬁciency ratio (TEB) (non-interest expense
as a % of net revenue)2

FINANCIAL CONDITION MEASURES

2012
IFRS

2011
IFRS

2010
IFRS

2009
Cdn GAAP1

2008
Cdn GAAP1

887,685 $

790,274 $

687,249 $

489,179 $

454,695

221,983

190,080

154,752

144,493

108,687

6.40

6.38

0.90

25.5%

1.2%

2.09%

3.10%

0.93%

5.48

5.46

0.76

27.1%

1.1%

2.06%

3.04%

1.24%

4.46

4.45

0.66

27.3%

1.2%

2.07%

2.82%

1.23%

4.19

4.15

0.58

28.2%

2.2%

2.80%

–

3.15

3.13

0.50

27.8%

2.0%

2.90%

–

28.1%

28.5%

30.0%

27.2%

28.5%

27.7%

27.9%

29.3%

26.5%

28.0%

Total assets

$ 18,800,079 $ 17,696,471 $ 15,518,818 $ 7,360,874 $ 5,809,713

Total assets under administration3

19,681,750

17,696,471 15,518,818

11,508,585

8,423,971

Cash and securities-to-total assets

9.0%

7.9%

8.2%

21.5%

18.5%

Total loans4

$ 16,904,435 $ 16,089,648 $ 14,091,755 $ 5,468,540 $ 4,531,568

Securitized loans on-balance sheet

6,450,682

8,243,350

8,116,636

–

Total loans under administration5

17,786,106

16,089,648

14,091,755

9,616,251

7,145,826

Tier 1 capital ratio6

Total capital ratio6

Assets to regulatory capital multiple6

Credit quality

Provision for credit losses as a % of gross loans

Net non-performing loans as a % of gross loans

Allowance as a % of gross non-performing loans

17.01%

20.68%

13.98

0.09%

0.33%

57.0%

17.29%

20.46%

14.44

0.05%

0.25%

74.9%

18.08%

16.43%

12.86%

19.37%

18.00%

14.21%

10.50

12.70

13.70

0.07%

0.24%

88.1%

0.21%

0.85%

62.1%

0.15%

0.86%

66.7%

1 Figures prior to 2010 represent previous Canadian GAAP balances and have not been restated to IFRS. Prior to 2010, all securitizations were off-balance sheet.

2 See deﬁnition of Taxable Equivalent Basis (TEB) under Non-GAAP Measures in this report.

3 Total assets under administration include total on-balance sheet assets and off-balance sheet loans.

4 Total loans include loans held for sale.

5 Total loans under administration include total loans and off-balance sheet loans.

6 These ﬁgures relate to the Company’s operating subsidiary, Home Trust Company. The ﬁgures prior to 2011 have not been restated to IFRS.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

For the year ended December 31, 2012, the Company reported another year of increased net income at $222.0 million or $6.38 diluted
earnings per share. Return on shareholders’ equity was solid at 25.5% for the year. The efﬁciency ratio, on a taxable equivalent basis (TEB),
remained favourable at 27.7%. Loan originations in the traditional portfolio increased year over year while Accelerator (insured) mortgage
originations continued at a moderate pace and ancillary products continued to generate positive returns. The Company’s total customer
accounts, including all loan and deposit accounts, reached 587,356 at the end of 2012 compared to 524,064 last year. The Company
maintained its prudent credit proﬁle in the loan portfolio and its strong capital base. The Company’s key ﬁnancial highlights for 2012 are
summarized below.

Income Statement Highlights for 2012

> Net income of $222.0 million in 2012 increased by $31.9 million or 16.8% from net income of $190.1 million in 2011, reﬂecting higher
loan balances in the traditional mortgage portfolio, improved net interest margins, continued low credit provisions and a consistently
low efﬁciency ratio.

> Diluted earnings per share increased to $6.38, up $0.92 or 16.8% from the diluted earnings per share of $5.46 earned in 2011.

> Return on average shareholders’ equity of 25.5% for 2012 exceeded 20% for the ﬁfteenth consecutive year.

> Net interest income increased to $381.5 million, up $47.5 million or 14.2% over the $334.0 million earned in 2011, reﬂecting higher
average loan balances of $17.39 billion compared to $15.36 billion in 2011 combined with improved combined net interest margin
of 2.09% compared to 2.06% in 2011.

> Non-interest income was $55.9 million in 2012 compared to non-interest income of $34.9 million in 2011. Beginning in 2012 the
Company participated in programs where mortgages qualify for off-balance sheet accounting and recognized $8.1 million in gains on
sale of such mortgages. Fees and other income also increased $6.0 million on higher loan balances while net gains on derivatives of
$3.8 million in 2012 compared to $7.2 million in losses in 2011. In 2012, gains and losses on derivatives were reduced by charges of
$3.6 million related to reversals of derivative gains recorded on CMB interest rates swaps prior to conversion to IFRS. In 2011, losses
on derivatives included charges of $3.3 million related to the restructuring of interest rate swaps. Net realized and unrealized losses on
securities and mortgages were $0.1 million compared to $4.1 million in net gains in 2011.

> Provisions for credit losses were $14.7 million for the year, an increase over the $7.5 million recorded last year. This represents 0.09%
of gross loans, compared to 0.05% in 2011. This is well within tolerable levels and reﬂects the increased weighting of uninsured lending
and higher associated write-offs and speciﬁc allowances. This loss ratio is well supported by the interest margins associated with this
portfolio. Net write-offs were $12.4 million for 2012, representing 0.07% of gross loans compared to $10.7 million and 0.07% of
gross loans in 2011.

> Non-interest expenses, which include salaries, premises and other operating expenses, were $122.7 million in 2012, up 16.9% over
the $105.0 million recorded in 2011 and in line with business growth. The increase reﬂects the Company’s continued investment in
people, business development, infrastructure and technology to support future asset and revenue growth. The Company’s efﬁciency ratio
(TEB) remains low at 27.7% compared to 27.9% in 2011, an indication of a high level of operating efﬁciency.

Balance Sheet Highlights for 2012

> The Company’s total on-balance sheet assets reached $18.80 billion, an increase of 6.2% compared to $17.70 billion at the end
of 2011. Total assets under administration, which includes $0.88 billion of mortgages accounted for off-balance sheet, reached
$19.68 billion, an increase of 11.2% over 2011.

> The Company sold residual interests in securitization transactions of $662.2 million which reduced both the securitized mortgage
loans and securitization liabilities upon sale. The underlying mortgages continue to be included in assets used in the calculation of the
Company’s ACM. The Company is awaiting further clariﬁcation from the Ofﬁce of the Superintendent of Financial Institutions Canada
(OSFI) on the regulatory treatment of these transactions.

> Mortgage originations were $6.01 billion in 2012 compared to the $5.12 billion originated in 2011. The Company’s originations reﬂect

continued focus on the traditional mortgage portfolio which accounted for most of the increase in originations.

> While the Company increased the traditional portfolio, it maintained the credit quality of the loan portfolio within its expectations. Net
non-performing loans as a percentage of the gross loan portfolio ended the year at 0.33% compared to 0.25% one year ago reﬂecting
the relatively higher proportion of uninsured mortgages in the portfolio. At the end of 2012, 97.6% of the loan portfolio was current
compared to 97.3% at the end of 2011.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

> Liquid assets at December 31, 2012 were $771.8 million, compared to $808.2 million at December 31, 2011. The Company considers

this a prudent level of liquidity, given the current level of operations and the Company’s obligations.

> Home Trust’s capital levels were strong throughout 2012, as indicated by the Tier 1 and Total capital ratios of 17.01% and 20.68%,
respectively, at December 31, 2012, compared to 17.29% and 20.46%, at the end of 2011. Home Trust’s ACM ended 2012 at 13.98
compared to 14.44 at the end of 2011. During 2012 Home Trust increased its capital by $56 million in subordinated debentures to
further enhance its regulatory capital position and support growth objectives. This debt was sourced from Home Capital.

> Deposit and securitization liabilities at December 31, 2012 were $10.14 billion and $7.34 billion, respectively, compared to
$7.92 billion and $8.65 billion at December 31, 2011. Deposit liabilities grew more quickly than securitization liabilities as the
traditional portfolio, which is typically funded with deposits, grew at a higher rate than the Accelerator portfolio, which is typically funded
by way of securitization.

FINANC IAL PER FOR MA NCE REVIEW

Net Interest Income and Margin

Presented in Tables 4 and 5 are analyses of average rates, net interest income and net interest margin. Net interest income is the difference
between interest and dividends earned on loans and investments and the interest paid on deposits and borrowings to fund those assets.
The net interest margin is net interest income divided by the Company’s average total assets. Dividend income has been converted to TEB
(refer to the Non-GAAP Measures and Glossary section of this report for a deﬁnition of TEB), for comparison purposes.

Table 4: Net Interest Margin

Net interest margin non-securitized interest earning assets (TEB)
Net interest margin non-securitized interest earning assets (non-TEB)
Net interest margin securitized assets
Total net interest margin (TEB)
Total net interest margin (non-TEB)
Spread of non-securitized loans over deposits only

2012
3.10%
3.05%
0.93%
2.09%
2.07%
3.13%

2011
3.04%
2.96%
1.24%
2.06%
2.01%
3.09%

Total net interest margin (TEB), including the securitized portfolio, was 2.09% for 2012 compared to 2.06% in 2011, reﬂecting higher net
interest margin on non-securitized assets offset by lower net interest margins on the securitized portfolio. Additionally, the loan portfolio
composition shifted over the year as the Company continued its focus on traditional products relative to insured mortgages. As such, over
the period the portfolio weighting of securitized mortgages and pledged assets, which earn a lower net interest margin, decreased to 46.8%
at December 31, 2012 from 55.7% at December 31, 2011.

The net interest margin on non-securitized assets (TEB) improved to 3.10% from 3.04% in 2011 on higher spreads earned on this book.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Table 5: Net Interest Income

(000s, except %)

Assets
Cash resources and securities
Traditional single family residential
mortgages
Accelerator single family
residential mortgages

Multi-unit residential mortgages
Non-residential mortgages
Personal and credit card loans
Total non-securitized loans
Taxable equivalent adjustment
Total on non-securitized interest
earning assets
Securitized loans and
pledged assets
Other assets
Total Assets

Liabilities and
Shareholders’ Equity
Deposits
Securitization liabilities
Other liabilities and
shareholders’ equity
Total Liabilities and
Shareholders’ Equity

Net Interest Income (TEB)
Tax Equivalent Adjustment
Net Interest Income per
Financial Statements

Average
Balance1

Income/
Expense

2012

Average
Rate1

Average
Balance1

Income/
Expense

2011

Average
Rate1

807,022 $

18,190

2.25% $

924,386 $

23,904

2.59%

7,052,006

387,956

5.50%

4,737,363

265,881

5.61%

540,610
111,762
985,089
568,785
9,258,252
–

17,440
5,013
61,229
54,084
525,722
5,031

3.23%
4.49%
6.22%
9.51%
5.68%
–

450,364
176,303
926,388
516,086
6,806,504
–

15,398
10,736
59,083
49,899
400,997
7,212

3.42%
6.09%
6.38%
9.67%
5.89%
–

10,065,274

548,943

5.45%

7,730,890

432,113

5.59%

8,133,946
260,470
$ 18,459,690 $

287,871
–
836,814

3.54%
–

8,558,429
259,259

4.53% $ 16,548,578 $

330,491
–
762,604

$ 9,004,518 $
8,170,337

230,006
213,474

2.55% $ 6,880,506 $
2.61%

8,592,908

192,357
224,719

3.86%
–
4.61%

2.80%
2.62%

1,284,835

6,831

0.53%

1,075,164

4,364

0.41%

$ 18,459,690 $

450,311

2.44% $ 16,548,578 $

421,440

2.55%

386,503
(5,031)

381,472

341,164
(7,212)

333,952

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

Net interest income for 2012 increased 14.2% over 2011, reﬂecting an increase of $1.91 billion or 11.5% in average asset balances and
an increase in total net interest margin (TEB) of 3 basis points year over year.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

The average yield on non-securitized loans declined to 5.68% from 5.89% in 2011 as mortgage rates declined but this was more than
offset by a decline in average deposit rates to 2.55% from 2.80% in 2011. The declines in average rates primarily reﬂect lower average
Government of Canada bonds yields in 2012 upon which deposit and traditional mortgage rates are set. While the Company’s strategy is to
manage the spread of deposits to traditional mortgages in the range of 3.0%, strong, increased demand for the Company’s loan products
within its credit standards helped improve the spread of non-securitized loans over deposits to 3.13% from 3.09% last year. The impact of
lower average rates on cash and securities was reduced by the lower proportion of these assets in the portfolio.

The average rate for multi-unit residential and non-residential mortgage loans declined, reﬂecting the maturity of higher yielding loans and
originations and renewals at current lower rates.

The net interest margin on securitized assets also declined year over year, reﬂecting the maturity of higher yielding MBS and CMB pools
and the use of lower yielding assets as replacement assets in the CMB program.

The average rate earned on the consumer lending portfolio, principally comprising retail and credit card loans, declined marginally from
2011, reﬂecting a relative decline in average Equityline Visa balances which was due to uncertainty earlier in the year related to the
application of new lending guidelines. Additionally, increases in the fully secured water heater receivables in the retail lending portfolio at
lower average rates also lowered the overall rate on the portfolio. At the same time, total average assets increased over the period, leading
to higher interest income from these products.

2013 Outlook for Net Interest Income

The Company expects net interest income to grow relative to loan portfolio growth in 2013. The Company will continue to carefully
employ its growth strategy for the traditional mortgage portfolio, which should continue to favourably inﬂuence net interest income
in 2013. Tempering this inﬂuence on net interest income will be the continued high proportion of insured securitized mortgages,
which have lower interest margins.

The Company expects the net interest margin on non-securitized assets to remain relatively stable at 2012 levels but is prepared
for modest declines and slight variations quarter over quarter. The Company’s strategy is to manage the average spread between
deposits and traditional mortgages at approximately 3.0%.

The Company anticipates declines in the net interest margin on the securitized portfolio in 2013 to rates relatively consistent
with the fourth quarter of 2012, as older higher yielding pools mature and lower yielding assets are available as replacement assets.
The Company is prepared for moderate volatility in the net interest margin trend depending on the replacement assets available
and the level of interest rates.

Overall net interest margin is expected to remain stable as the relative proportion of non-securitized assets continues to increase.

The Company continually reviews pricing, funding costs and product structures to maximize spread returns, including diversiﬁcation
and growth of the consumer lending segment. The Company will continue to balance prudent liquidity with investment return options
to optimize the risk/return relationship while considering economic and credit conditions.

Non-interest Income

Table 6: Non-interest Income

(000s, except %)

Fees and other income
Securitization income
Net realized and unrealized (losses) gains on securities and mortgages
Net realized and unrealized gain (loss) on derivatives
Total non-interest income

2012
43,994 $
8,131
(71)
3,848
55,902 $

2011
37,997
–
4,088
(7,203)
34,882

Change

15.8%
–

(101.7%)
(153.4%)
60.3%

Fees and other income, which include mortgage and Visa account administration fees, net of direct servicing expenses, generally increase
as the size of the loan portfolio increases. Fee income is also inﬂuenced by the overall mix of the portfolio and has grown at a slightly faster
pace than the overall loan portfolio growth due to the focus on the Company’s traditional mortgage portfolio.

Securitization income includes gains on the securitization and sale of certain insured multi-unit residential mortgages. The underlying
loans have no prepayment privileges and the sales qualify for off-balance sheet accounting. The Company sold $233.9 million of these
mortgages for gains on sale of $3.3 million in 2012. Also included in securitization income are gains on the sale of residual interests in
certain National Housing Authority (NHA) MBS pools that also result in off-balance sheet accounting for the underlying insured mortgages.
The Company sold the residual interests of $662.2 million in insured mortgages in NHA MBS pools for gains on sale of $4.8 million in
2012. The Company did not enter into similar transactions in 2011.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

The Company recognized a net gain of $1.8 million on the sale of certain available for sale securities in 2012, compared to gains of
$7.1 million in 2011. The Company takes advantage of improvements in securities markets and will rebalance the investment portfolio as
market conditions warrant. The Company also recognized $1.8 million in impairments through proﬁt and loss on certain available for sale
equity securities in 2012 compared to $3.0 million in 2011.

Net realized and unrealized gain or loss on derivatives includes unrealized gains due to hedge ineffectiveness of $3.5 million on the
Company’s fair value and cash ﬂow interest rate hedges compared to $0.3 million in unrealized losses in 2011 (please see the Derivatives
and Hedging section of this MD&A for further discussion). In early 2011, the Company restructured certain derivative positions to achieve
hedge accounting upon adoption of IFRS. Prior to the conversion to IFRS, the Company recognized an unrealized gain on the marking to
market of its swap liabilities through derivative gains and losses. This gain amount is being charged to income as the liabilities mature. In
the current year, charges of $3.6 million reduced gains otherwise recorded on derivatives.

Net realized and unrealized gain or loss on derivatives also includes $0.3 million in unrealized gains for fair value changes in interest rate swaps
that are not designated in hedge accounting relationships compared to $3.6 million in unrealized losses last year. On an economic basis, these
losses are offset by gains in the fair value of other net assets, but such gains are not recorded through proﬁt and loss. The Company expects
that the amount and direction of fair value adjustments will vary from quarter to quarter depending on interest rate movements.

2013 Outlook for Non-interest Income

The Company anticipates that fees and other income will increase over 2012 levels in line with loan portfolio growth and some
upward adjustments for cost changes.

The Company expects to continue to securitize and sell off-balance sheet insured multi-unit residential mortgages when returns
are favourable and expects that these transactions will continue to add to proﬁtability at levels relatively consistent with 2012. The
Company also anticipates continuing to sell residual interests in insured, single family residential mortgages in 2013. The volume
of sales of residual interests and resultant gains will ultimately depend on the ﬁnal determination on the regulatory treatment of
these transactions.

Through 2013, the Company will continue to record charges to income through derivative gains and losses related to the
implementation of IFRS, as discussed above. Charges of approximately $2.6 million will be recorded in the ﬁrst quarter and
$3.2 million in the second quarter of 2013. The amounts in future periods will not be signiﬁcant.

The Company will continue to hedge its interest rate risk associated with the loan commitments and replacement assets, through the
use of bond forward contracts and interest rate swaps. The Company expects to continue to apply hedge accounting to most of such
instruments, thus reducing earnings volatility from derivatives gains and losses. The impact of hedge accounting ineffectiveness and
fair value changes on derivatives held outside of hedge accounting relationships is expected to continue to create some moderate
volatility quarter over quarter in non-interest income that is dependent on interest rate movements.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Non-interest Expenses

Table 7: Non-interest Expenses

(000s, except % and number of employees)

Salaries and employee beneﬁts
Premises and equipment
Rent – premises
Equipment rental and repairs

Other operating expenses
Consulting and professional services
Outsourced services
Computer services
Advertising and business development
General and administration
Amortization and depreciation

Total non-interest expenses
Average balance sheet assets
As a % of balance sheet assets
Efﬁciency ratio calculation
Net interest income
Other income
Total revenue, net of interest expense
TEB adjustment
Total revenue TEB, net of interest expense
As a % of total revenue, net of interest expense
As a % of total revenue TEB, net of interest expense
Target efﬁciency ratio TEB

Number of active employees

2012
58,956 $

2011
52,523

Change

12.2%

5,961
2,872
8,833

5,455
2,321
7,776

12,717
9,591
5,202
6,637
10,965
9,834
54,946
122,735 $

12,135
9,228
4,874
5,278
9,457
3,731
44,703
$
105,002
$ 18,459,690 $ 16,548,578
0.63%

0.66%

381,472 $
55,902
437,374
5,031
442,405 $
28.1%
27.7%

333,952
34,882
368,834
7,212
376,046
28.5%
27.9%
28.0%–34.0% 28.0%–34.0%

9.3%
23.7%
13.6%

4.8%
3.9%
6.7%
25.7%
15.9%
163.6%
22.9%
16.9%

14.2%
60.3%
18.6%

17.6%

611

520

17.5%

The Company continued to operate at a low efﬁciency ratio in 2012, which was below the 2012 target range, reﬂecting continued low
costs compared to revenues, net of interest expense. Non-interest expense as a percentage of balance sheet assets increased marginally
year over year, primarily due to off-balance sheet treatment of some assets and indicates continued efﬁciency in administering assets. The
Company manages expenses in a disciplined and measured manner and aligns its expense management strategy with its growth targets
and strategic objectives. While carefully managing costs, the Company continues to increase its investment in governance, risk and control
processes and resources, and added to the enterprise risk management, internal audit and compliance functions during the year.

Increased amortization and depreciation reﬂects the full year of amortization of the core banking system compared to one month in 2011.

To take advantage of the functionality and efﬁciencies of its new core banking system, the Company launched a centralized operations
group and an organizational effectiveness initiative in 2011. The initiative has resulted in improved operational and product servicing
efﬁciency. This has allowed the Company to make incremental investments in new technology and the governance, risk and control
processes with little impact on overall efﬁciency ratios.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

2013 Outlook for Non-interest Expenses

The Company expects continued low efﬁciency ratios within the Company’s target range of 28.0% to 34.0% in 2013.

One of the Company’s strategic objectives is to improve systems and processes to allow the Company’s revenue to continue growing,
without commensurate rates of growth in expenses and staff levels. Investment in technology is expected to continue in 2013 along
with some increase in headcount in business functions and continued strengthening of governance, risk and control functions in
line with business growth.

Additionally, the Company is planning for increased marketing and sales activities related to the development of more diversiﬁed
sources of deposits, and additional costs will be incurred for this initiative.

Amortization of capitalized development costs associated with the core banking system commenced in late 2011. The Company
will amortize these costs over the expected life of the system, which is 10 years.

Provision and Allowance for Credit Losses

Table 8: Provision for Credit Losses

(000s, except % and basis points (bp))

Collective provision
Individual provision
Total provision

Provision as % of gross loans
Net write-offs
Net write-offs as % of gross loans

Table 9: Net Non-performing Loans and Allowances

(000s, except % and basis points (bp))

Net non-performing loans
Gross loans (excluding allowances)
Net non-performing loans as % of gross loans
Collective allowance
Individual allowance
Total allowance

2012

560 $

14,160
14,720 $

0.09%
12,381 $
0.07%

2011
287
7,232
7,519

0.05%

10,673
0.07%

2012
56,308 $

$
16,885,233
0.33%
30,000 $
3,638
33,638 $

2011
40,297
16,091,162

0.25%

29,440
1,859
31,299

Change

95.1%
95.8%
95.8%

4 bp
16.0%
–

Change

39.7%
4.9%

8 bp

1.9%
95.7%
7.5%

The provision for credit losses is charged to the income statement by an amount that brings the individual and collective allowances for
credit losses to the level determined by management to be adequate to cover incurred losses, including losses that are not yet individually
identiﬁable. Factors that inﬂuence the provisions for credit losses include the formation of new non-performing loans, the level of individual
write-offs and management’s assessment of the level of collective and individual allowances required based on available data, including
the collateral supporting speciﬁc non-performing loans. In addition, management considers current and historical credit performance of
the portfolio, external economic factors, the composition of the portfolio, and the overall growth in the loans portfolio.

Provisions as a percentage of gross loans of 0.09% are within the target range of 0.05% to 0.15%, and up from the 0.05% recorded in
2011. The increase reﬂects increases in individual provisions due to higher net write-offs in the mortgage portfolio and an increase in the
amount of allowances set aside for speciﬁc non-performing mortgage loans. Net write-offs were up $1.7 million, but as a percentage of
gross loans remained low at 0.07%, the same as 2011. The level of individual allowances at the end of 2012 increased $1.8 million over
2011, primarily reﬂecting an increase in non-performing mortgage loans. The amount set aside for individual allowances can be inﬂuenced
by speciﬁc local real estate markets and the amount of time to sell when required.

Net non-performing loans as a percentage of gross loans increased to 0.33% at the end of 2012 from 0.25% at the end of 2011. The
increase reﬂects a larger proportion of uninsured mortgages in the portfolio compared to prior years. The amount continues to include
$4.6 million in loans with identiﬁed irregularities related to advances to three condominium corporations, as discussed in prior periods.

The collective allowance balance at December 31, 2012 increased marginally over December 31, 2011 as the Company continues to
observe strong credit performance in the loans portfolio and the Canadian economy performs well. The collective allowance represents
more than two times the current year write-offs. Please see the Credit Risk section of this MD&A for further discussion.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

2013 Outlook for Provision and Allowance for Credit Losses

The Company’s provision for credit losses in 2013 will be inﬂuenced by the strength of the Canadian economy and the resulting impact
on employment and housing markets. There remains uncertainty related to unemployment and the growth prospects for certain sectors
of the economy, reﬂecting continued uncertainty in international markets; however, the Company continues to expect housing markets
in most of the country to remain balanced in 2013. The Company also expects that Canadian consumers will continue to service and
manage debt levels. While the Company is cautiously optimistic that credit losses will remain stable, it is prepared for volatility in
this trend.

The Company’s 2013 objective for the provision for credit losses is increased for 2013 to 0.10% to 0.18% of gross loans, reﬂecting
the relatively higher proportion of traditional loans included in gross loans. Speciﬁc allowances will continue to be determined and
reviewed monthly on an account-by-account basis. The collective allowance for credit losses reﬂects an ongoing assessment of the
strength of the portfolio at any given time, and will continue to be reviewed at least on a quarterly basis.

Taxes

Table 10: Income Taxes

(000s, except %)

Current
Deferred
Total income taxes

Effective income tax rate

2012
82,176 $
(4,240)
77,936 $

2011
66,270
(37)
66,233

25.99%

25.84%

Change

24.0%
11,359.5%
17.7%

The provision for income taxes for 2012 amounted to $77.9 million with an effective tax rate of 25.99% compared to $66.2 million in
2011 with an effective rate of 25.84%. These effective rates are lower than the legislated federal and provincial rates primarily due to tax-
exempt dividend income earned during the year. The increase in the effective rate in 2012 compared to 2011 primarily reﬂects the action
by the Ontario government repealing previously announced reductions to corporate statutory rates.

The Company has capital losses of $2.8 million ($2.8 million in 2011), which are available to reduce capital gains in future years and have
no expiry date. The Company has not recognized the tax beneﬁt of these capital losses.

Note 16 to the consolidated ﬁnancial statements included in this report provides more information about the Company’s current income
taxes, deferred income taxes and provisions for income taxes.

2013 Outlook for Taxes

The Company expects the effective income tax rate in 2013 to be within the range of 25.5% to 26.5%. The expected effective tax
rate is lower than statutory rates due to tax-exempt dividend income the Company anticipates earning from its investment portfolio.

Comprehensive Income

Table 11: Comprehensive Income

(000s, except %)

Net income
Net unrealized gains (losses) on securities available for sale,
net of reclassiﬁcations to net income and taxes
Net unrealized gains (losses) on cash ﬂow hedges,
net of reclassiﬁcations to net income and taxes

Total other comprehensive income (loss)

Comprehensive income

2012
221,983 $

2011
190,080

Change

16.8%

4,573

(10,047)

(145.5%)

873

5,446

(5,050)

(15,097)

227,429 $

174,983

(117.3%)

(136.1%)

30.0%

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

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

The Company recognized transfers to net income of $0.1 million in net gains in 2012 compared to $4.8 million in net gains in 2011
related to the sale of certain available for sale securities. Additionally, the Company recognized transfers to net income of net losses
of $1.8 million in 2012 and $3.0 million in 2011 related to impairment of available for sale securities. OCI included $6.5 million in
unrealized gains in 2012 and $8.6 million in unrealized losses in 2011 associated with changes in the fair value of available for sale
securities.

OCI included $0.4 million in net losses related to cash ﬂow hedges in 2012 and $7.4 million in 2011, which are deferred from recognition
in income until the hedged cash ﬂows occur. The Company transferred $1.5 million in previously recorded losses to net interest income in
2012 and $0.6 million in 2011 related to the amortization of cash ﬂow hedges. (Please refer to the Derivatives and Hedging section of this
MD&A and Note 19 to the consolidated ﬁnancial statements for additional information about the Company’s cash ﬂow hedging programs).

FINANC IAL POS ITION R EVIEW

Table 12: Balance Sheet Accounts

(000s, except %)

Cash resources and restricted cash
Available for sale securities
Pledged securities
Total cash resources and securities
Loans held for sale
Loans
Residential mortgages1
Securitized residential mortgages2
Non-residential mortgages
Credit cards
Other consumer retail loans
Total loans
Collective allowance for credit losses

Other assets
Total assets

Deposits
Senior debt
Securitization liabilities

Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity

Cash resources and securities as a % of total assets
Loans as a % of total assets

2012

2011
$ 439,287 $ 665,806
391,754
341,588
1,399,148
–

414,344
843,547
1,697,178
21,921

8,843,923
6,450,682
988,416
327,517
271,976
16,882,514
(30,000)
16,852,514
228,466

6,339,883
8,243,350
946,222
386,912
173,281
16,089,648
(29,440)
16,060,208
237,115
$ 18,800,079 $ 17,696,471

150,684
7,335,895
17,623,178
208,688
17,831,866
968,213

$ 10,136,599 $ 7,922,124
153,336
8,649,075
16,724,535
197,151
16,921,686
774,785
$ 18,800,079 $ 17,696,471

9.0%
89.8%

7.9%
90.8%

Change

(34.0%)
5.8%
146.9%
21.3%
–

39.5%
(21.7%)
4.5%
(15.4%)
57.0%
4.9%
1.9%
4.9%
(3.6%)
6.2%

28.0%
(1.7%)
(15.2%)
5.4%
5.9%
5.4%
25.0%
6.2%

1 At December 31, 2012, residential mortgages include $154.3 million (2011 – $182.7 million) in multi-unit residential mortgages on properties with over four units and

builders’ inventory.

2 At December 31, 2012, securitized residential mortgages include $1.94 billion (2011 – $2.01 billion) in multi-unit residential mortgages on properties with over four units and

builders’ inventory.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Table 13: Liquidity Resources

(000s, except %)

Total cash resources and securities per balance sheet
Add: MBS included in residential mortgages

Less: securities held for investments
Less: restricted cash
Less: pledged assets
Eligible liquid assets at carrying value
Eligible liquid assets at fair value
Eligible liquid assets at carrying value as a % of total assets

Cash Resources and Securities

2012

2011
$ 1,697,178 $ 1,399,148
260,572
1,659,720
(378,498)
(131,412)
(341,588)
808,222
837,144
4.6%

365,078
2,062,256
(309,513)
(137,424)
(843,547)
771,772
771,993 $

4.1%

Change

21.3%
40.1%
24.3%
(18.2%)
4.6%
146.9%
(4.5%)
(7.8%)
(10.1%)

Combined cash resources and securities as at December 31, 2012 increased by $298.0 million compared to December 31, 2011. In
addition to cash and securities, the Company maintains prudent liquidity by investing a portion of the liquid assets in Company originated
MBS. Although these securities are available for liquidity purposes, they are classiﬁed as residential mortgages on the balance sheet, as
required by GAAP. Securitization activity generally requires higher balances of liquid assets to support the accumulation of assets and
subsequent exchange of cash.

Cash resources and restricted cash includes $137.4 million in restricted cash ($131.4 million in 2011). Restricted cash includes amounts
pledged as collateral for the Company’s securitization activities and interest rate swaps used in the CMB program, as well as reserve
accounts associated with the retail lending portfolio and PSiGate operations.

The securities portfolio has increased by $524.5 million since December 31, 2011. The portfolio includes $843.5 million of assets pledged
under the CMB program as replacement assets compared to $341.6 million at December 31, 2011 representing 67.1% of the Company’s
securities in 2012 (46.6% in 2011). These assets include treasury bills and insured third-party MBS.

In addition to the securities pledged under the CMB program, the securities portfolio consists of bonds, common and preferred shares and
mutual funds. At December 31, 2012, the preferred share portfolio was $299.6 million or 23.8% of the Company’s securities compared to
$368.5 million or 50.2% in 2011. The Company divested of most of its preferred shares of ﬁnancial institutions in 2012 ahead of Basel III
changes that require deductions of these investments from capital over a threshold. Investment-grade preferred shares represent 56.3%
of the preferred share portfolio (65.5% in 2011). Bonds, common shares and mutual funds combined represent 9.1% of the Company’s
securities compared to 3.2% in 2011. The entire bond portfolio of $104.8 million is investment grade.

The Company continues to invest in conservative assets while seeking appropriate returns. During the year, the Company took advantage
of market opportunities and sold certain securities, realizing a net pre-tax gain of $1.8 million compared to $7.1 million during 2011.

Additional details related to the Company’s securities portfolio can be found in Note 4 to the consolidated ﬁnancial statements included
in this report.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

2013 Outlook for Cash Resources and Securities

The Company will continue to target a conservative level of liquid assets while maintaining ﬁnancial ﬂexibility. The securities
portfolio should increase in line with growth in total assets. A signiﬁcant proportion of excess funds arising through the Company’s
retail deposits’ channel and securitization activities will be deployed into short-term, highly liquid investments while management
continues to invest the balance in securities that provide attractive returns.

Loans Portfolio

Figure 1: Portfolio Composition by Product Type
Figure 1: Portfolio Composition by Product Type

51.2%

49.6%

38.2%

37.0%

2.4%

2.8%

5.9%

1.1%

1.6%

2.4%

1.9%

Securitized Portfolio

Accelerator (Insured)

Residential

Non-residential

Retail Credit

Credit Cards

Securitized mortgages and residential mortgages include mortgages on multi-unit residential properties with over four units and builders’
inventory.

Figure 2: Insured versus Uninsured Mortgages Under Administration
Figure 2: Insured versus Uninsured Mortgages

2012

Uninsured 52.2%

2011

Uninsured 42.9%

Insured 47.8%

Insured 57.1%

2011
2012

51.2%
38.2%

2011
2012

2.4%
2.8%

2011
2012

37.0%
49.6%

2011
2012

5.9%
5.9%

Insured

Uninsured

1.1%
1.6%

2011
2012

2.4%
1.9%

2011
2012

Insured

Uninsured

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

1467 pg lending x prod 2010.eps

Figure 3: Loan Portfolio Composition by Province

Figure 3: Portfolio Composition by Province

76.2%

78.9%

7.6%

6.6%

6.7%

5.7%

6.1%

5.6%

2.1%

1.9%

1.3%

Ontario

British Columbia

Alberta

Quebec

Atlantic Provinces

Other

The Company’s loans portfolio consists of traditional uninsured residential mortgages, uninsured multi-unit residential mortgages,
Accelerator insured residential mortgages, securitized insured residential mortgages and multi-unit residential mortgages, non-residential
mortgages, credit cards and retail credit loans.

At December 31, 2012 the total on-balance sheet loans portfolio amounted to $16.90 billion, up $0.81 billion or 5.1% over the $16.09 billion
at December 31, 2011. The Company also had $0.88 billion in off-balance sheet insured mortgages under administration at the end of
2012. Much of the loans portfolio growth was in the traditional mortgage portfolio consistent with the Company’s strategy to increase focus
on this more proﬁtable residential portfolio.

As illustrated in Figure 1, the Company’s residential lending represents the most signiﬁcant component of the Company’s loans portfolio, at
49.6% of the total on-balance sheet portfolio, compared to 37.0% in 2011. Insured mortgages continued to be a signiﬁcant component
of the Company’s total on- and off-balance sheet mortgage portfolio in 2012, although the proportion declined from 2011. Loans held for
sale and on-balance sheet Accelerator mortgages are generally held for future securitization.

The on-balance sheet securitized mortgage portfolio declined by $1.79 billion in 2012 reﬂecting a net run-off of the securitized portfolio
and the sale of residual interests related to $662.2 million in securitized mortgages. Total securitized mortgages, including the off-balance
sheet portfolio, declined $911.0 million compared to 2011. The regulatory and accounting treatment of securitized insured mortgages,
upon adoption of IFRS, introduced new capital constraints and effectively increased the cost of capital allocated to securitized insured
mortgages. Consequently, the Company continued to scale back lending in this segment, optimizing the allocation of shareholders’ equity,
while remaining within the Company’s risk appetite.

2011
2012

76.2%
78.9%

2011
2012

7.6%
6.6%

2011
2012

6.7%
5.7%

2011
2012

6.1%
5.6%

2011
2012

2.1%
1.9%

2011
2012

1.3%
1.3%

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

The residential mortgage portfolio increased by $2.50 billion to $8.84 billion from $6.34 billion at the end of 2011, supported by the
Company’s strategy to increase focus on its traditional mortgage portfolio, which has been the Company’s core business. Credit losses
experienced in 2012 on the traditional portfolio are consistent with the Company’s historical experience and are well supported by the
proﬁtability of this portfolio. The Company focused the portfolio’s growth in its traditional target markets and employed additional caution
in certain geographic areas where the housing and employment markets were relatively weaker.

The non-residential mortgage portfolio increased by $42.2 million to $988.4 million from $946.2 million at the end of 2011. The Company
continues to increase the loan balances in this segment while maintaining its relative proportion of the total on-balance sheet loan
portfolio at about 6.0%. The Company will continue to manage this portfolio in a conservative manner and grow the portfolio when assets
of appropriate quality within the Company’s risk appetite are available. Included in the non-residential category are store and apartment
structures, ofﬁce buildings, residential and non-residential construction, retail stores, hotels and industrial properties.

The credit card loan portfolio declined by $59.4 million to $327.5 million from $386.9 million at the end of 2011, reﬂecting the
Company’s caution in new issuances of Equityline Visa cards while the ﬁnal implications of new underwriting guidelines were reviewed.

The Company’s retail credit portfolio continues to be an integral part of the loans portfolio generating above average returns for the
Company. The portfolio increased by 57.0% to $272.0 million from $173.3 million at the end of 2011. Water heater loans, a ﬁnancing
product introduced to the Company’s portfolio in 2010, are the largest component of the retail lending portfolio, amounting to $253.5 million
or 89.4% of the retail loans outstanding at the end of 2012. The average size of a water heater loan is approximately $1,000.

The Company, through past and continued expansion, provides mortgages and loans across Canada. The Company continues to
re-enter certain of its previous markets outside Ontario, as well as entering new markets, to facilitate expansion plans intended to grow its
geographic footprint. The Company’s lending activities remained concentrated in the Ontario market in 2012 but included expansion into
new Ontario markets through the mortgage broker channel. The reduction of loan exposures in western Canada reﬂected the Company’s
assessment of and response to weakening credit conditions that continued in 2012. The Company continues to employ strategies to
increase its geographic diversiﬁcation while remaining responsive to local economic conditions.

Table 14: Mortgage Loan Advances by Type and Province

(000s, except %)

Traditional single family residential mortgages

2012
$ 4,556,379

% of Total

2011
75.8% $ 3,514,430

% of Total

Change

68.6%

29.6%

Accelerator single family
residential mortgages

Multi-unit residential mortgages
Non-residential mortgages
Store and apartment mortgages
Warehouse commercial mortgages
Total mortgage advances during the year

(000s, except %)

British Columbia
Alberta
Ontario
Quebec
Atlantic provinces
Other
Total mortgage advances during the year

804,692

13.4% 1,103,555

286,879
210,228
118,689
28,500
$ 6,005,367

2012
269,946
144,587
5,198,703
289,970
79,081
23,080
$ 6,005,367

4.8%
3.5%
2.0%
0.5%

137,005
182,163
122,957
56,750
100.0% $ 5,116,860

% of Total

4.5% $
2.4%

2011
234,229
176,957
86.6% 4,400,136
230,474
70,800
4,264
100.0% $ 5,116,860

4.8%
1.3%
0.4%

21.6%

2.7%
3.6%
2.4%
1.1%
100.0%

% of Total

4.6%
3.5%
85.9%
4.5%
1.4%
0.1%
100.0%

(27.1%)

109.4%
15.4%
(3.5%)
(49.8%)
17.4%

Change
15.2%
(18.3%)
18.1%
25.8%
11.7%
441.3%
17.4%

New mortgage production continued its weighting to the Company’s traditional single family loans reﬂecting the focus on higher margin
products within the Company’s risk appetite. Non-residential and store and apartment originations, while a smaller proportion of overall
mortgage production, remained an important complementary source of loan assets with attractive returns in 2012. The Company increases
these portfolios when quality assets meeting the Company’s risk standards are available. Multi-unit residential originations increased year over
year as the Company began the securitization program, discussed previously, that qualiﬁed these mortgages for off-balance sheet accounting.

Mortgage production continued to favour Ontario, the Company’s core market, with gains made in speciﬁc provinces on a dollar value basis.
The Company was successful in increasing its presence in Manitoba, which is included in Other, and Quebec.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Table 15: Consumer Lending Production

(Amount in 000s)

Visa
Water heaters
Other retail lending

Number of
New Accounts

5,303 $

116,297
4,758

2012

Amount1
82,709
164,669
26,375

Number of
New Accounts

9,065 $

46,685
5,322

2011

Amount1
204,095
80,067
25,708

Number of
New Accounts

(41.5%)
149.1%
(10.6%)

Change

Amount1

(59.5%)
105.7%
2.6%

1 For Visa, the amount represents the authorized credit limits. For water heaters and other retail lending, the amount represents the loan balances outstanding.

Equityline Visa, which is fully secured by residential real estate, is the largest component of the Visa portfolio, representing 96.9% of total
credit card loans. New Equityline Visa accounts declined over 2011 as the Company slowed originations during its consideration of new
lending guidelines, as previously discussed.

Water heater loans continue to be the largest component of the consumer lending portfolio. The large growth in 2012 includes the
acquisition of a water heater portfolio in 2012.

2013 Outlook for Loan Portfolios

The Company expects that the rate of growth in the Company’s non-securitized loan portfolio in 2013 will be consistent with the
pace of growth experienced in 2012. The shift towards the traditional mortgage business is expected to continue into 2013, with
growth rates moderating in this portfolio as the Company achieves the balance in the portfolios to support sustained growth in
earnings and returns on equity. The Company will continue to offer insured mortgages through the Accelerator insured mortgage
program, supporting the “one–stop” and “ﬂexible lending solutions” lender strategies. The Company will also continue to increase
its geographic expansion, taking advantage of opportunities within its risk proﬁle in Quebec, and eastern and western Canada.

Multi-unit residential mortgages are expected to continue to offer opportunities for securitization and off-balance sheet sales at
about the same pace as in 2012.

Non-residential mortgages are expected to grow at a pace consistent with 2012 to maintain a consistent proportion in the total
portfolio, if appropriate assets with attractive returns within the Company’s risk appetite are available in the market.

Growth of the consumer loan portfolio at the current rate is expected for 2013. The Equityline Visa credit card portfolio will continue
to be the primary contributor to the credit card loan portfolio supported by the “one-stop” bundled mortgage program and other
marketing efforts. The Visa portfolio is expected to grow at a pace consistent with the overall loan portfolio. The Company anticipates
continued growth in the water heater line of business and the Company generally expects growth rates in the consumer lending
portfolio to be consistent or moderately higher when compared to 2012.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Deposits, Senior Debt and Securitization Liabilities

Table 16: Deposits, Senior Debt and Securitization Liabilities

(000s, except %)

Deposits payable on demand
High-interest savings accounts
Other deposits payable on demand

Deposits payable on ﬁxed dates
Debenture investment certiﬁcates
Short-term certiﬁcates and savings
Registered retirement savings plans
Registered retirement income funds
Tax Free Savings Accounts

Senior debt
Securitization liabilities
Mortgage-backed security liabilities
Canada Mortgage Bond liabilities

Total

2012

2011

Change

19,819 $
86,104
105,923

–
75,965
75,965

8,399,655
1,259,739
186,515
130,404
54,363
10,030,676
150,684

6,897,351
656,803
162,274
98,896
30,835
7,846,159
153,336

1,301,693
6,034,202
7,335,895

2,417,801
6,231,274
8,649,075
$ 17,623,178 $ 16,724,535

–
13.3%
39.4%

21.8%
91.8%
14.9%
31.9%
76.3%
27.8%
(1.7%)

(46.2%)
(3.2%)
(15.2%)
5.4%

Deposits increased primarily to provide the funding for the non-securitized loan portfolio. The Company’s deposit portfolio primarily
comprises ﬁxed term deposits, which represent 99.0% of all deposits, thereby reducing the risk of untimely withdrawal of funds by retail
clients. The Company does not raise deposits through the wholesale market. In 2012 the Company launched a high interest savings
account as part of its longer term strategy to diversify its sources of funding. (Please see Note 11 to the consolidated ﬁnancial statements
included in this report for a breakdown of the Company’s deposit portfolio by remaining contractual term to maturity and yield.)

Securitization liabilities decreased from 2011 due to the net run-off of securitized insured mortgages and the sale of residual interests in
NHA MBS securitizations that resulted in the derecognition of $662.2 million in securitized insured mortgages and related securitization
liabilities from the balance sheet.

2013 Outlook for Deposits and Securitization Liabilities

The Company will continue to source deposits from the public through investment dealers and deposit brokers and will place a
renewed emphasis on growing its direct channel. The Company will seek to expand this network through agreements with additional
deposit brokers, through growth of its newly launched high interest savings account, and by enhancing its direct channel sales and
service capabilities.

The rate of growth of the deposit portfolio is expected to mirror the growth of the Company’s non-securitized loan portfolio, while
securitization will continue to support the current stock of insured mortgages. New originations and renewals of insured mortgages
will continue to be funded by securitization. The Company will continue developing multiple sources of deposits to fund operations
and liquidity reserves and this will remain a key objective for the Company.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Other Assets and Liabilities

Table 17: Other Assets and Liabilities

(000s, except %)

Other assets
Derivative assets
Retained interest on securitization
Accrued interest receivable and prepaid assets
Capital assets
Intangible assets
Goodwill

Other liabilities
Derivative liabilities
Income taxes payable
Other liabilities
Deferred tax liabilities

2012

2011

Change

45,388 $
9,172
85,233
6,578
66,343
15,752
228,466 $

72,424
–
79,650
5,372
63,917
15,752
237,115

2,386 $

21,912
148,590
35,800
208,688 $

3,458
17,628
136,025
40,040
197,151

(37.3%)
–
7.0%
22.4%
3.8%
–
(3.6%)

(31.0%)
24.3%
9.2%
(10.6%)
5.9%

The decline in other assets was driven by a decline in derivative assets. Derivative assets and liabilities are discussed in the Derivatives
and Hedging section of this MD&A. The growth in intangible assets reﬂects the continued development of new software. The increased
investment is offset partially by amortization of the Company’s core banking system, which was substantially completed during the fourth
quarter of 2011. Further information on the Company’s intangible assets can be found in Note 9 to the consolidated ﬁnancial statements
included in this report.

Retained interest relates to the Company’s multi-unit residential securitization activities that qualify for off-balance sheet accounting and
represents the Company’s rights to expected future cash ﬂows.

The increase in other liabilities resulted primarily from an increase in accrued interest payable on deposits, reﬂecting the increase in
deposits outstanding.

2013 Outlook for Other Assets and Liabilities

Other assets and liabilities are expected to grow in line with growth in total loans and general business growth.

Shareholders’ Equity

Table 18: Shareholders’ Equity

(000s, except %)

Shareholders’ equity at the beginning of the year
Net income
Other comprehensive income (loss)
Amounts related to stock-based compensation
Repurchase of shares
Dividends
Shareholders’ equity at the end of the year

2012
774,785 $
221,983
5,446
7,439
(8,117)
(33,323)
968,213 $

2011
628,585
190,080
(15,097)
6,223
(7,946)
(27,060)
774,785

Change

23.3%
16.8%
(136.1%)
19.5%
2.2%
23.1%
25.0%

The increase in total shareholders’ equity was largely internally generated from net income during the year. Also contributing to the increase
were amounts related to stock-based compensation and the decrease in accumulated other comprehensive loss, primarily reﬂecting
increases in the fair value of available for sale securities. These increases were partially offset by amounts related to the repurchase of the
Company’s common shares and dividends. Details related to stock-based compensation and the repurchase of shares are provided in
Note 14 to the consolidated ﬁnancial statements included in this report.

At December 31, 2012, the book value per common share was $27.96, compared to $22.38 at December 31, 2011.

Strong earnings contributed to continuing robust returns on shareholders’ equity. Return on equity when combined with dividends of
$0.90 per common share in ﬁscal 2012 ($0.76 per common share in 2011) conﬁrms the Company’s continued commitment to total
shareholder return.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Contingencies and Contractual Obligations

During 2011, the Company became aware of alleged irregularities regarding three of its loans with a total principal amount of $4.6 million.
These loans were advanced to two residential condominium corporations. The registered security documents associated with these loans
provide the Company with secured priority claims against the condominium corporations, the condominium structures and the underlying
residential units. The borrowers are disputing the validity of the Company’s security in the Ontario Court. It is not currently possible to
reasonably determine the outcome of this matter or to estimate the amount of loss, if any. A speciﬁc provision has not been recorded for
these loans but these loans are classiﬁed as non-performing residential loans.

In the normal course of its activities, the Company enters into various types of contractual agreements. The main obligations result from the
acceptance of deposits from retail investors to ﬁnance lending activities. The Company ensures that sufﬁcient cash resources are available
to meet these contractual obligations when they become due.

In addition to the obligations related to deposits, securitization liabilities and senior debt previously discussed, the following table presents
a summary of the Company’s other contractual obligations as at December 31, 2012.

Table 19: Contractual Obligations

(000s)

Premises and
equipment

2013

2014

2015

2016

2017

Thereafter

Total

4,562 $

4,084 $

5,451 $

2,875 $

15,811 $

35,658

The Company also has outstanding commitments for future advances on mortgages and unutilized and available credit on its credit card
products. Refer to the Off-balance Sheet Arrangements section of this report and Note 18 to the consolidated ﬁnancial statements for a
description of those commitments.

Derivatives and Hedging

From time to time, the Company enters into derivative transactions primarily in order to hedge interest rate exposure resulting from
outstanding loan commitments and requirements to replace assets in the CMB program, as well as interest rate risk on ﬁxed-rate debt,
such as CMB liabilities and subordinated debt. Where appropriate, the Company will apply hedge accounting to minimize volatility in
reported earnings from interest rate changes.

Cash Flow Hedging

The Company uses Government of Canada bond forwards and interest rate swaps to hedge the impact of movements in interest rates
between the time that mortgage commitments are made and the time that those mortgages are funded and/or securitized. Hedges are
structured such that the fair value movements of the hedge instruments offset, within a reasonable range, the changes in the fair value of
the pool of ﬁxed-rate mortgages due to interest rate ﬂuctuations between commitment and funding. The term of these hedges is generally
60 to 150 days. These hedge instruments are settled or unwound at the time of funding or securitization of the underlying mortgages. The
Company applies cash ﬂow hedge accounting to the Government of Canada bond forwards and certain interest rate swaps. The intent of
hedge accounting is to recognize the effective matching of the gain or loss on the Government of Canada bond forwards and interest rate
swaps with the recognition of the related interest expense on the resulting funding.

The following table summarizes the activities related to cash ﬂow hedges included in the Company’s ﬁnancial statements:

Table 20: Cash Flow Hedging

(000s)

Notional amount outstanding at year end
Fair value losses recorded in OCI
Amounts reclassiﬁed from OCI to net interest income
Fair value losses recorded in non-interest income (ineffectiveness)

$
$

2012
–
$
(370) $

(1,462)
–

2011
–
(7,386)
(618)
(545)

The losses reﬂect a decline in bond yields over the period of the hedge and were deferred through accumulated other comprehensive
income. These losses will be recognized in income over the term of the related MBS, as part of the interest expense on the hedged secured
borrowing. These costs are generally offset by attractive interest rates on mortgage originations.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Fair Value Hedging

The Company is exposed to interest rate risk through participation in the CMB program due to reinvestment risk between the amortizing
ﬁxed-rate MBS and the bullet maturity ﬁxed-rate CMB. Additionally, the Company is exposed to interest rate risk through its ﬁxed-rate senior
debt. To hedge these risks, the Company enters into interest rate swaps and applies fair value hedge accounting. The intent of fair value
hedge accounting is to have the fair value changes in the interest rate swap offset, within a reasonable range, the changes in the fair value
of the ﬁxed-rate borrowing resulting from changes in the interest rate environment. Any unmatched fair value change is recorded in income
as hedge ineffectiveness through net realized and unrealized gain or loss on derivatives. The following table summarizes the notional
amount of derivatives outstanding, the change in the fair value of derivatives and the change in hedged ﬁxed-rate liabilities:

Table 21: Fair Value Hedging

(000s)

Notional amount outstanding at year end
Fair value changes recorded on interest rate swaps
Fair value changes of hedged ﬁxed-rate liabilities for interest rate risk
Hedge ineffectiveness gain recorded in non-interest income

Economic Hedge of Loans Held for Securitization and Sale

2012

2011
$ 1,571,514 $ 1,635,914
53,561
$
(53,326)
235

(26,923) $
30,393

3,470 $

The Company may enter into bond forwards to hedge interest rate risk on loans held for securitization and sale through NHA MBS
securitization programs. The underlying loans are classiﬁed as held for trading for accounting purposes and held at fair value on the
balance sheet. The loans are insured mortgages on multi-unit residential properties. The derivatives used to hedge these loans are not
designated in hedge accounting relationships. The fair value changes of these derivatives are mostly offset by the fair value changes related
to loans held for trading. The fair value changes reﬂect changes in interest rates. The net unrealized gain as at December 31, 2012 for fair
value changes in both the outstanding derivatives and the loans held for trading was $0.1 million. The Company did not enter into any
of these transactions in 2011. The unrealized gains or losses on the derivatives is recorded in net realized and unrealized gain or losses
on derivatives and fair value changes of loans held for sale are recorded in net realized and unrealized gains and losses on securities
and mortgages on the consolidated statement of income. When these loans held for trading are securitized and sold, the mortgages
are removed from the balance sheet and the net realized gain or loss on the derivatives and mortgages held for sale are reclassiﬁed to
securitization income on the consolidated statement of income.

Other Interest Rate Swaps

The Company also has certain interest rate swaps that are not designated in hedge accounting relationships and, therefore, are adjusted
to fair value without an offsetting hedged amount. These swaps are economic hedges of the Company’s general interest rate risk.

Table 22: Other Interest Rate Swaps

(000s)

Notional amount outstanding at year end
Unrealized gains (losses) recorded in non-interest income

Please see Note 19 of the consolidated ﬁnancial statements for further information.

Off-balance Sheet Arrangements

2012
100,000 $
318 $

2011
118,100
(3,460)

$
$

The Company offers credit products to meet the ﬁnancial needs of its customers and has outstanding commitments for future advances
on mortgage loans which amounted to $571.8 million at December 31, 2012 ($612.4 million – December 31, 2011). Included within the
outstanding commitments are unutilized non-residential loan advances of $46.0 million at December 31, 2012 ($80.7 million – December 31,
2011). Commitments for the loans remain open for various periods. As at December 31, 2012, unutilized credit card balances amounted
to $75.7 million ($89.6 million – December 31, 2011). Outstanding commitments for future advances for the Equityline Visa portfolio were
$4.8 million at December 31, 2012 ($10.5 million – December 31, 2011). These commitments are in the normal course of business and
are considered through the Company’s liquidity and capital management processes.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

OPER ATING SEG MENT R EVIEW

The following section summarizes results of the operating segments of the Company. The Company operates principally through two
segments, mortgage lending and consumer lending. These operating segments are supported by other activities, including treasury and
general corporate activities. For more detailed information, refer to Note 23 to the consolidated ﬁnancial statements in this report.

Mortgage lending remains the Company’s key segment, contributing 89.4% (81.7% in 2011) to the Company’s net income in 2012, while
consumer lending contributed 14.7% (15.8% in 2011) and the Other segment produced a loss in 2012, compared to generating income
in 2011. The Other segment includes dividend income, which is tax exempt for the Company and, therefore, tax provisions in this segment
are correspondingly reduced or reﬂect a recovery.

Mortgage Lending

Table 23: Mortgage Lending

(000s, except %)

Net interest income
Provision for credit losses
Fees and other income
Securitization income
Derivative gains (losses)
Non-interest expenses
Income before income taxes
Income taxes
Net income
Goodwill

Total assets
Additional ﬁnancial information
Total segment revenue
as a percentage of total revenue
Net segment income
as a percentage of total net income
Efﬁciency ratio (TEB)
Net interest margin (TEB)

Change

19.9%
122.5%
41.2%
–

(119.6%)
15.8%
27.2%
25.6%
27.7%
–

7.5%

2012
328,087 $
(13,164)
27,465
8,131
944
(78,573)
272,890
(74,534)
198,356 $
2,324 $

2011
273,738
(5,916)
19,457
–
(4,821)
(67,851)
214,607
(59,331)
155,276
2,324

$
$

$ 17,198,250 $ 15,997,106

796,860 $
89.8%
198,356 $
89.4%
21.5%
2.0%

695,684
88.0%
155,276
81.7%
23.5%
1.8%

The principal line of business, the mortgage lending segment, continued its strong performance, contributing $198.4 million in net income
for the year, compared to $155.3 million for 2011. Net interest income continues to grow on higher loan balances and net interest margin,
reﬂecting continued strong demand for the Company’s products through enhanced broker relationships, superior customer service and
balanced real estate markets across most of the country. The Company’s strategic shift in focus to higher-yielding traditional products has
resulted in an improvement in net interest margin.

The increase in net interest income in 2012 reﬂects higher average mortgage loan balances and higher net interest margin. Average loan
balances were $2.03 billion higher for the twelve months ending December 31, 2012 compared to 2011.

The efﬁciency ratio improved over 2011 despite higher expenses, reﬂecting improving overall efﬁciency. The increase in expenses relate to
higher costs associated with growth in mortgage loans under administration. There were accompanying increases in income tax associated with
higher income. While the provision for credit losses for the mortgage lending segment increased on higher traditional mortgages, it remains
within expected and acceptable ranges. Please see the Provision and Allowance for Credit Losses section of this MD&A for further discussion.

The Company’s focus on customer service and broker relationships, as well as the breadth of mortgage product offerings, is leading to
expanded market penetration. The Company continues to offer “one-stop” and “ﬂexible lending solutions” strategies to brokers and customers,
driving increased traditional mortgage originations.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

2013 Outlook for Mortgage Lending

The Company’s mortgage segment will continue to be the major contributor to the earnings of the Company in 2013, with additional
growth in the Company’s proﬁtable uninsured loan products within the Company’s risk tolerance.

Consumer Lending

Table 24: Consumer Lending

(000s, except %)

Net interest income
Provision for credit losses
Fees and other income
Non-interest expenses
Income before income taxes
Income taxes
Net income
Goodwill

Total assets

Additional ﬁnancial information
Total segment revenue
as a percentage of total revenue
Net segment income
as a percentage of total net income
Efﬁciency ratio (TEB)
Net interest margin (TEB)

Table 25: Consumer Lending Products

Change

4.3%
(2.9%)
(8.4%)
(13.5%)
6.0%
(0.4%)
8.6%
–

25.1%

$
$

2012
43,598 $
(1,556)
16,527
(14,056)
44,513
(11,821)

32,692 $
13,428 $

2011
41,782
(1,603)
18,051
(16,255)
41,975
(11,872)
30,103
13,428

769,098 $

614,626

70,013 $
7.9%
32,692 $
14.7%
23.4%
6.3%

67,987
8.6%
30,103
15.8%
27.2%
7.4%

(000s, except %)

2012

2011

% Change

Visa
Water heaters
Other retail lending

Number of
Accounts

Amount
Outstanding

Number of
Accounts

Amount
Outstanding

Number of
Accounts

Amount
Outstanding

26,840 $

201,124
6,743

327,517
241,896
30,080

26,560 $

145,311
7,194

386,912
145,847
27,434

1.05%
38.41%
(6.27%)

(15.35%)
65.86%
9.64%

Consumer lending, which includes Visa, retail lending and payment card services, continues to generate positive returns for the Company.
Net interest income for 2012 increased by 4.3% compared to 2011, primarily due to an increase in outstanding receivables in the retail
credit portfolio, which was partially offset by lower outstanding receivables in the Visa product line. The decrease in net interest margin is
primarily attributed to a reduction in the proportion of Visa accounts in the portfolio and reduced yield on the Equityline Visa portfolio as
the Company began to issue lower rate cards to high-quality borrowers. Additionally, the continued growth of water heater loans throughout
2012, which tend to have lower average yields, reduced average yield.

Fees and other income decreased during 2012 due to slower growth in the Visa portfolio relative to 2011.

Expenses have decreased as the Company continues to effectively manage its expenditures, reﬂected in an improving efﬁciency ratio year
over year. In order to ensure that the Company is able to support future growth initiatives, the Company continues to invest in infrastructure.

In 2012, 3,484 Equityline Visa accounts with $80.1 million in authorized credit limits were issued compared to 7,697 accounts with
$203.7 million in authorized credit limits issued in 2011, reﬂecting the Company’s caution in new issues while reviewing new underwriting
guidelines. The Equityline Visa accounts are fully secured by residential real estate. Equityline Visa represents 96.9% of the Visa portfolio.
In 2012, the Company launched a new unsecured Preferred Visa program to qualiﬁed existing customers with strong credit history.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

The largest component of retail lending, representing 88.9% of the portfolio, is water heater loans. There were 116,297 new water heater
accounts added during 2012, an increase of 149.1% compared to 2011. Water heater receivables increased by $96.0 million during the
year to $241.9 million, an increase of 65.9% compared to 2011.

Included in the operating results of the consumer lending segment are the operations of PSiGate. The Company expects PSiGate to
continue to contribute revenue growth for the consumer lending segment. For 2012, PSiGate contributed $2.0 million to the net income of
the consumer lending segment, compared to $1.9 million in 2011.

2013 Outlook for Consumer Lending

The consumer lending portfolio will contribute favourably to the Company’s proﬁtability in 2013. The Company anticipates continued
growth in the water heater line of business and other large-ticket retail lending. Equityline Visa accounts are expected to increase
modestly in 2013, while the new Preferred Visa program is anticipated to contribute modestly to the portfolio.

Other

Table 26: Other

(000s, except %)

Net interest income
Fees and other income
Net gain on securities and other
Non-interest expenses
Income before income taxes
Income tax recovery
Net (loss) income
Total assets

Additional ﬁnancial information
Total segment revenue
as a percentage of total revenue
Net interest margin (TEB)

Change

(46.9%)
(99.6%)
66.1%
44.1%
6,399.6%
69.4%
(292.8%)
(23.2%)

$
$

2012
9,787 $
2
2,833
(30,106)
(17,484)
8,419
(9,065) $

2011
18,432
489
1,706
(20,896)
(269)
4,970
4,701
832,731 $ 1,084,739

20,812 $
2.3%
1.5%

26,603
3.4%
2.2%

The Other segment includes the operating results from the Company’s securities portfolio and corporate activities. There was a loss of
$9.1 million for the year compared to a net income of $4.7 million in 2011. The decrease in income for the segment is due to lower
net interest income and an increase in expenses. Net interest income is down primarily due to a smaller securities portfolio and lower
interest yields in the liquidity portfolio, while expenses are up due to increased stafﬁng in the corporate compliance, internal audit and
risk managment functions. Included in gains and losses on securities are realized net gains on sale of securities of $1.8 million compared
to $7.1 million in 2011 and unrealized losses for impairment of available for sale securities of $1.8 million compared to $3.0 million
in 2011. Additionally, there were unrealized gains on derivatives of $0.3 million compared to $3.6 million in unrealized losses last year.
Please see the Derivatives and Hedging section of this MD&A for further discussion.

The tax amounts allocated to this segment include the beneﬁt of non-taxable dividends from Canadian companies.

2013 Outlook for Other

The Other segment primarily generates its income from the Company’s securities portfolio and bears much of the cost of the
Company’s control and corporate functions. Income from this source is highly correlated with the movement in interest rates and
performance of the Canadian capital markets. Control function costs tend to increase as the portfolio of loans grows and the
Company enters into more complex transactions.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

SUMMARY OF Q UARTER LY RESULT S

Table 27: Summary of Quarterly Results

(000s, except per share and %)

2012

2011

Net interest income (TEB1)
Less: TEB adjustment
Net interest income per
ﬁnancial statements

Non-interest income
Non-interest expense
Total revenues
Net income
Return on common shareholders’
equity
Return on average total assets
Earnings per common share
Basic
Diluted
Book value per common share
Efﬁciency ratio (TEB1)
Efﬁciency ratio
Tier 1 capital ratio2
Total capital ratio2
Net non-performing loans as a
% of gross loans
Annualized provision as
a % of gross loans

$ 101,151 $ 100,617 $ 95,109 $ 89,626 $ 90,197 $ 89,478 $ 83,121 $ 78,232
1,626

1,243

1,126

1,407

1,255

1,866

1,799

1,785

99,908
14,537
31,620
227,649
58,965

99,491
13,449
32,065
226,603
57,254

93,854
12,426
29,882
218,751
53,230

88,219
15,490
29,168
214,682
52,534

88,412
9,658
27,107
208,400
50,280

87,612
5,661
26,036
198,694
48,417

81,322
12,454
26,643
198,568
48,206

76,606
7,109
25,216
184,613
43,178

25.0%
1.2%

25.6%
1.2%

25.1%
1.2%

26.2%
1.2%

26.7%
1.2%

27.0%
1.2%

28.2%
1.2%

26.7%
1.1%

$
$
$

1.70 $
1.70 $
27.96 $
27.3%
27.6%
17.01%
20.68%

1.65 $
1.65 $

1.54 $
1.54 $
26.53 $ 25.05 $
28.1%
28.4%
16.97%
20.78%

27.8%
28.1%
17.09%
21.09%

1.52 $
1.52 $
23.83 $
27.7%
28.1%
17.49%
21.62%

1.45 $
1.45 $
22.38 $
27.1%
27.6%
17.29%
20.46%

1.40 $
1.39 $
21.10 $
27.4%
27.9%
17.67%
21.05%

1.39 $
1.38 $
20.24 $
27.9%
28.4%
18.37%
22.06%

1.24
1.24
19.14
29.5%
30.1%
18.98%
20.27%

0.33%

0.28%

0.31%

0.28%

0.25%

0.32%

0.23%

0.29%

0.09%

0.10%

0.05%

0.11%

0.07%

0.06%

0.03%

1 TEB – Taxable Equivalent Basis: see deﬁnition under the Non-GAAP Measures and Glossary section.

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 previous table. These highlights illustrate
the Company’s proﬁtability and 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, ﬁrst quarter arrears
impacted by the holiday season and the fourth quarter normally producing increased credit card activity over the holiday period.

The Company continues to achieve positive ﬁnancial results driven by revenue growth in mortgage lending, and continued low efﬁciency
ratios. Tier 1 and Total capital ratios through 2011 and 2012 reﬂect the Company’s prudent capital management strategies and the
proactive approach to maintaining a strong capital base.

Return on equity has remained at or above 25% for the last eight quarters.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

FOURT H QUARTER 201 2 PER FOR MANCE

The Company continued its strong performance in the fourth quarter of 2012. Key results for the fourth quarter of 2012 are as follows:

> Net income of $59.0 million was 17.3% higher than the $50.3 million net income recorded in the fourth quarter of 2011. Net income

in the fourth quarter of 2012 increased 3.0% over net income in the third quarter of 2012.

> Basic and diluted earnings per share were $1.70 for the fourth quarter. This represents an increase of 17.2% over the $1.45 basic and
diluted earnings per share in the fourth quarter of 2011 and an increase of 3.0% over $1.65 recorded in the third quarter of 2012.

> Return on equity was 25.0% in the quarter compared to 26.7% in the comparable quarter of 2011 and 25.6% in the third quarter of

2012.

> During the fourth quarter of 2012, the Company completed the sale of residual interests in NHA MBS loan securitizations related to
$662.2 million in existing on-balance sheet mortgages, leading to off-balance sheet accounting for the mortgages and a gain on sale
of $4.8 million. As of the date of this MD&A, the regulatory treatment for these transactions has not been conﬁrmed. For purposes of
the calculation of the ACM, the Company has included these off-balance sheet mortgages in the determination of regulatory balance
sheet assets. While the ultimate regulatory treatment will impact the Company’s volume of sales of residual interests in securitization
transactions, the Company expects to continue sales when the economic returns are favourable.

> The securitization gains were partly offset by $3.6 million in charges recorded in derivative gains and losses. These charges relate to
the reversal of gains on derivatives recorded on adoption of IFRS which are charged to income as the related CMB bonds mature. See
the Non-interest Income section of this MD&A report for a discussion of the derivative gains and losses.

> Net interest income rose to $99.9 million in the fourth quarter representing an increase of 13.0% over the $88.4 million recorded in
the fourth quarter of 2011. Net interest income increased marginally over the $99.5 million recorded in the third quarter of 2012. The
growth in total net interest income quarter over quarter was reduced by the sale of the residual interests in securitization transactions
discussed above, as the interest income associated with such securitized mortgages is no longer reﬂected in interest income. Net
interest income on non-securitized assets of $85.1 million in the fourth quarter was up 3.8% from $81.9 million in the third quarter
and 34.6% from the $63.2 million reported in the fourth quarter of 2011.

> Net interest margin (TEB) was 2.13% in the fourth quarter compared to 2.06% in the fourth quarter of 2011 and 2.14% in the third
quarter of 2012. Total net interest margin is inﬂuenced by the mix of the loan portfolio between securitized and non-securitized
mortgages and the net interest margin on each of these portfolios. Beginning in 2011 and continuing through 2012 the weighting of
lower yielding securitized mortgages in the total portfolio declined, generally leading to higher total net interest margins. The net interest
margin on the non-securitized portfolio has also generally improved over that period, with some ﬂuctuations quarter to quarter. Fourth
quarter net interest margin for non-securitized mortgages was 3.11%, a decline from 3.17% in the third quarter. This was due to a
change in the mix of the non-securitized portfolio and the spreads achieved in the quarter. The securitized net interest margin was 0.79%
in the fourth quarter compared to 0.89% in the third quarter, which reﬂects the maturity of higher yielding CMB mortgages during the
quarter and lower yielding replacement assets in the program.

> The credit performance of the loans portfolio remained strong in the fourth quarter. Net non-performing loans ended 2012 at 0.33% of
the total loans portfolio compared to 0.25% at the end of 2011 and 0.28% at the end of the third quarter of 2012 with the increase
reﬂecting the relatively higher proportion of uninsured mortgages in the total portfolio. The provision for credit losses for the fourth
quarter was 0.09% of gross loans on an annualized basis and 0.09% for the year compared to 0.07% in the comparable quarter of
2011 and 0.10% in the third quarter of 2012. This reﬂects a year-over-year increase in the proportion of uninsured mortgages. The
2012 results are within the Company’s objective of the provision being 0.05% to 0.15% of gross loans. Net write-offs were $3.3 million
for the quarter or 0.08% of gross loans, compared to $4.8 million or 0.12% in the comparable quarter of 2011 and $3.1 million or
0.07% million last quarter.

> Home Trust’s Tier 1 and Total capital ratios remained very strong at 17.01% and 20.68%, respectively, at December 31, 2012 and
well above Company and regulatory minimum targets. Home Trust’s ACM was 13.98 at December 31, 2012 compared to 14.44 at
December 31, 2011 and 14.07 at September 30, 2012.

> Total loans increased by $0.81 billion in 2012 to $16.90 billion, representing growth of 5.1% over the $16.09 billion at the end
of 2011 and decreased by 2.2% or $0.39 billion from the $17.29 billion at the end of the third quarter of 2012. Total loans
under administration (which includes all loans carried on the balance sheet plus off-balance sheet securitized loans) increased
by $1.70 billion in 2012 to $17.79 billion, representing growth of 10.5% over the $16.09 billion at the end of 2011 and 1.9% or
$0.33 billion from the $17.46 billion at the end of the third quarter of 2012. Loan growth was below the Company’s 2012 objective
of 13% to 18% while proﬁtability was within targets due to a relatively larger focus on the Company’s traditional mortgages portfolio.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

> The total value of mortgages originated in the fourth quarter of 2012 was $1.47 billion, compared to $1.25 billion in the fourth quarter
of 2011. Total originations were $1.68 billion in the third quarter of 2012. The year-over-year increase in originations reﬂects increased
focus on and demand for the Company’s traditional mortgage products. Compared to the third quarter, a decline in originations reﬂects
normal and expected seasonal factors. The Company has generally observed increased credit quality on new originations.

> The Company originated $1.16 billion of traditional mortgages in the fourth quarter, compared to $0.95 billion in the comparative

period of 2011 and $1.26 billion in the third quarter of 2012.

> Accelerator (insured) mortgage originations were $174.2 million in the fourth quarter of 2012, compared to $188.5 million in the

comparable period of 2011 and $236.7 million in the third quarter of 2012.

> Multi-unit residential originations were $57.2 million for the fourth quarter of 2012, compared to $6.5 million in the same period of
2011 and $114.3 million in the third quarter of 2012. A signiﬁcant portion of the multi-unit residential mortgages originated in 2012
are insured and securitized through programs that qualify for off-balance sheet accounting. The Company sold $64.6 million through
these programs in the fourth quarter and recognized $0.8 million in gains. The Company did not participate in this program in 2011.

> Non-residential mortgage advances were $52.4 million in the fourth quarter of 2012, compared to $41.5 million in the comparable
period of 2011 and $46.6 million in the third quarter of 2012. The Company continues to maintain a cautious approach to increases
in this portfolio.

> Store and apartment advances were $24.8 million for the quarter, compared to $35.5 million in the same period of 2011 and

$18.2 million in the third quarter of 2012.

Fourth Quarter Segment Review

Mortgage Lending

The mortgage lending segment continued its strong performance in the fourth quarter, with net income of $53.7 million, up 25.6% over the
$42.7 million in net income earned in the comparable quarter of 2011 and up 0.6% from the $53.3 million earned in the third quarter of
2012. Net interest income continues to grow on higher loan balances and strong net interest margins, reﬂecting continued strong demand
for the Company’s products through enhanced broker relationships, superior customer service and stable real estate markets in most
regions across the country.

Consumer Lending

Consumer lending continues to generate attractive returns for the Company, with net income for the fourth quarter of 2012 of $8.4 million,
up 10.3% from the $7.6 million earned in the same quarter of 2011 and up 2.6% from the $8.1 million earned in the third quarter
of 2012.

The average net interest margin earned on the Visa portfolio was 8.4% during the fourth quarter, compared to 8.2% in the same quarter
of 2011 and 8.3% in the third quarter of 2012. The average net interest margin earned in the consumer lending portfolio was 6.5% during
the quarter, compared to 7.3% in the comparable quarter of 2011 and 6.5% in the third quarter of 2012.

During the quarter, 716 Equityline Visa accounts with $13.6 million in authorized credit limits were issued, compared to 1,814 accounts
with $44.2 million in authorized credit limits issued in the comparable quarter of 2011 and 550 accounts with $11.1 million in authorized
credit limits in the third quarter of 2012.

The Company’s consumer lending portfolio also includes the results from its retail lending operations. The largest component of retail
lending, representing 88.9% of the retail credit portfolio, is water heater loans. There were 14,998 new water heater accounts added
during the quarter, a decrease of 5.2% over the 15,817 added in the third quarter of 2012. Total retail lending receivables increased by
$49.9 million during the quarter to reach $272.0 million at the end of 2012.

Consumer lending also includes the results of PSiGate which contributed $0.4 million to net income for the quarter, $0.5 million in the
comparable quarter of 2011 and $0.4 million in the third quarter of 2012.

Other

The Other segment includes the operating results from the Company’s treasury portfolio and corporate activities. Net interest income
declined from the prior year, reﬂecting lower yields on liquidity assets and lower average balances of liquid assets as the Company reduced
its securitization activity in 2011. Securitization activity generally requires higher balances of liquid assets to support the accumulation of
assets and subsequent exchange of cash.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

FOURT H QUARTER FINANC IAL INFOR MATION

Table 28: Fourth Quarter Review of Financial Performance

For the three months ended

Change

December 31
2012

September 30
2012

December 31
2011

144,310 $
3,502
949
148,761
61,873
1,825
85,063

138,271 $
3,172
1,093
142,536
58,962
1,648
81,926

111,065
4,559
1,241
116,865
51,989
1,673
63,203

64,351
49,506

14,845
99,908
3,685
96,223

11,059
5,659

70,618
53,053

17,565
99,491
4,239
95,252

11,281
1,204

81,876
56,667

25,209
88,412
2,979
85,433

11,294
–

December 31,
2012–
September 30,
2012

December 31,
2012–
December 31,
2011

4.4%
10.4%
(13.2%)
4.4%
4.9%
10.7%
3.8%

(8.9%)
(6.7%)

(15.5%)
0.4%
(13.1%)
1.0%

(2.0%)
370.0%

29.9%
(23.2%)
(23.5%)
27.3%
19.0%
9.1%
34.6%

(21.4%)
(12.6%)

(41.1%)
13.0%
23.7%
12.6%

(2.1%)
–

(883)

(1,172)

(1,306)

(24.7%)

(32.4%)

(1,298)
14,537
110,760

2,136
13,449
108,701

14,991
2,562
14,067
31,620
79,140

15,465
2,296
14,304
32,065
76,636

22,649
(2,474)
20,175
58,965 $

19,904
(522)
19,382
57,254 $

(330)
9,658
95,091

13,184
2,007
11,916
27,107
67,984

15,909
1,795
17,704
50,280

1.70 $
1.70 $

1.65 $
1.65 $

1.45
1.45

$
$

34,655
34,779
34,630

34,697
34,803
34,668

27.96 $

26.53 $

34,668
34,782
34,625
22.38

(160.8%)
8.1%
1.9%

(3.1%)
11.6%
(1.7%)
(1.4%)
3.3%

13.8%
373.9%
4.1%
3.0%

3.0%
3.0%

(0.1%)
(0.1%)
(0.1%)
5.4%

293.3%
50.5%
16.5%

13.7%
27.7%
18.1%
16.6%
16.4%

42.4%
(237.8%)
14.0%
17.3%

17.2%
17.2%

(0.0%)
(0.0%)
0.0%
24.9%

(000s, except per share amounts and %)

Net Interest Income Non-Securitized Assets
Interest from loans
Dividends from securities
Other interest

Interest on deposits
Interest on senior debt
Net interest income non-securitized assets
Net Interest Income Securitized
Loans and Assets
Interest income from securitized
loans and assets
Interest expense on securitization liabilities
Net interest income securitized
loans and assets
Total Net Interest Income
Provision for credit losses

Non-Interest Income
Fees and other income
Securitization income
Net realized and unrealized losses
on securities and mortgages
Net realized and unrealized (loss) gain
on derivatives

Non-Interest Expenses
Salaries and beneﬁts
Premises
Other operating expenses

Income Before Income Taxes
Income taxes
Current
Deferred

NET INCOME
NET INCOME PER COMMON SHARE
Basic
Diluted

AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic
Diluted
Total number of outstanding common shares
Book value per common share

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Table 29: Fourth Quarter Review of Comprehensive Income

(000s, except %)

NET INCOME

OTHER COMPREHENSIVE INCOME
Available for Sale Securities
Net unrealized gains on securities
available for sale
Net losses reclassiﬁed to net income

Income tax expense

Cash Flow Hedges
Net unrealized losses on cash ﬂow hedges
Net losses reclassiﬁed to net income

Income tax expense (recovery)

Total other comprehensive income

COMPREHENSIVE INCOME

For the three months ended

Change

December 31
2012

September 30
2012

December 31
2011

December 31,
2012–
September 30,
2012

December 31,
2012–
December 31,
2011

58,965 $

57,254 $

50,280

3.0%

17.3%

1,471
457
1,928
509
1,419

1,667
1,141
2,808
742
2,066

–
376
376
99
277
1,696 $

–
376
376
99
277
2,343 $

700
1,174
1,874
505
1,369

(639)
338
(301)
(36)
(265)
1,104

60,661 $

59,597 $

51,384

(11.8%)
(59.9%)
(31.3%)
(31.4%)
(31.3%)

–
–
–
–
–
(27.6%)

1.8%

110.1%
(61.1%)
2.9%
0.8%
3.7%

–
11.2%
(224.9%)
(375.0%)
(204.5%)
53.6%

18.1%

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Table 30: Fourth Quarter Review of Financial Position

(000s, except for %)

ASSETS
Cash Resources and Restricted Cash
Securities
Available for sale
Pledged securities

Loans Held for Sale
Loans
Residential mortgages
Securitized residential mortgages
Non-residential mortgages
Personal and credit card loans

Collective allowance for credit losses

Other
Derivative assets
Other assets
Capital assets
Intangible assets
Goodwill

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Deposits payable on demand
Deposits payable on a ﬁxed date

Senior Debt
Securitization Liabilities
Mortgage-backed security liabilities
Canada Mortgage Bond liabilities

Other
Derivative liabilities
Income taxes payable
Other liabilities
Deferred tax liabilities

Shareholders’ Equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive loss

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

As at

December 31
2012

September 30
2012

Change

439,287 $

543,825

(19.2%)

414,344
843,547
1,257,891
21,921

401,830
784,098
1,185,928
36,405

3.1%
7.6%
6.1%
(39.8%)

8,843,923
6,450,682
988,416
599,493
16,882,514
(30,000)
16,852,514

8,456,791
7,238,946
993,174
567,079
17,255,990
(29,800)
17,226,190

45,388
94,405
6,578
66,343
15,752
228,466

57,651
102,741
7,165
66,342
15,752
249,651
$ 18,800,079 $ 19,241,999

105,923 $

10,030,676
10,136,599
150,684

49,835
9,820,856
9,870,691
153,724

1,301,693
6,034,202
7,335,895

1,923,017
6,155,475
8,078,492

2,386
21,912
148,590
35,800
208,688
17,831,866

3,767
8,689
168,743
38,275
219,474
18,322,381

61,903
6,224
903,831
(3,745)
968,213

61,873
5,847
857,339
(5,441)
919,618
$ 18,800,079 $ 19,241,999

4.6%
(10.9%)
(0.5%)
5.7%
(2.2%)
0.7%
(2.2%)

(21.3%)
(8.1%)
(8.2%)
0.0%
–
(8.5%)
(2.3%)

112.5%
2.1%
2.7%
(2.0%)

(32.3%)
(2.0%)
(9.2%)

(36.7%)
152.2%
(11.9%)
(6.5%)
(4.9%)
(2.7%)

0.0%
6.4%
5.4%
(31.2%)
5.3%
(2.3%)

Table 31: Fourth Quarter Net Interest Margin

Table 32: Fourth Quarter Net Interest Income

For the three months ended

December 31
2012
3.11%
3.07%
0.79%
2.13%
2.11%
3.13%

September 30
2012
3.17%
3.13%
0.89%
2.14%
2.11%
3.16%

December 31
2011
3.03%
2.95%
1.16%
2.06%
2.02%
3.16%

December 31, 2012

For the three months ended

September 30, 2012

Average
Balance1

Income/
Expense

Average
Rate1

Average
Balance1

Income/
Expense

Average
Rate1

817,669 $

4,451

2.18% $

731,533 $

4,265

2.33%

8,017,732

109,208

5.45%

7,386,369

102,660

5.56%

582,728
107,658
981,483
578,116
10,267,717
–

4,470
1,274
15,789
13,569
144,310
1,243

3.07%
4.73%
6.43%
9.39%
5.62%
–

646,033
141,761
1,017,194
567,186
9,758,543
–

5,219
1,187
15,685
13,520
138,271
1,126

3.23%
3.35%
6.17%
9.53%
5.67%
–

11,085,386

150,004

5.41% 10,490,076

143,662

5.48%

7,627,113
294,020
$ 19,006,519 $

64,351
–
214,355

3.37%
–

8,073,588
249,064

4.51% $ 18,812,728 $

70,618
–
214,280

$ 9,944,774 $
7,661,311

61,873
49,506

2.49% $ 9,400,930 $
2.58%

8,123,804

58,962
53,053

3.50%
–
4.56%

2.51%
2.61%

1,400,434

1,825

0.52%

1,287,994

1,648

0.51%

$ 19,006,519 $

113,204

2.38% $ 18,812,728 $

113,663

2.42%

101,151
(1,243)

99,908

100,617
(1,126)

99,491

(000s, except %)

Assets
Cash resources and securities
Traditional single-family
residential mortgages
Accelerator single-family
residential mortgages
Multi-unit residential mortgages
Non-residential mortgages
Personal and credit card loans
Total non-securitized loans
Taxable equivalent adjustment
Total on non-securitized interest
earning assets
Securitized loans and
pledged assets
Other assets
Total Assets

Liabilities and
Shareholders’ Equity
Deposits
Securitization liabilities
Other liabilities and
shareholders’ equity
Total Liabilities and
Shareholders’ Equity

Net Interest Income (TEB)
Tax Equivalent Adjustment
Net Interest Income per
Financial Statements

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

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

(000s, except %)

Assets
Cash resources and securities
Traditional single-family residential mortgages
Accelerator single-family residential mortgages
Multi-unit residential mortgages
Non-residential mortgages
Personal and credit card loans
Total non-securitized loans
Taxable equivalent adjustment
Total on non-securitized interest earning assets
Securitized loans and pledged assets
Other assets
Total Assets

Liabilities and Shareholders’ Equity
Deposits
Securitization liabilities
Other liabilities and shareholders’ equity
Total Liabilities and Shareholders’ Equity
Net Interest Income (TEB)
Tax Equivalent Adjustment
Net Interest Income per Financial Statements

For the three months ended December 31, 2011

Average
Balance1

Income/
Expense

Average
Rate1

987,740 $

5,513,181
436,066
112,288
957,859
555,359
7,574,753
–
8,562,493
8,703,077
254,958
$17,520,528 $

$ 7,662,457 $
8,725,546
1,132,525
$ 17,520,528 $
$

5,800
77,933
3,304
1,562
14,998
13,268
111,065
1,785
118,650
81,876
–
200,526

51,989
56,667
1,673
110,329
90,197
(1,785)
88,412

2.35%
5.65%
3.03%
5.56%
6.26%
9.56%
5.87%
–
5.54%
3.76%
–
4.58%

2.71%
2.60%
0.59%
2.52%

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

Table 33: Fourth Quarter Mortgage Production

For the three months ended

December 31
2012

September 30
2012
$ 1,164,037 $ 1,257,379
236,673
114,279
46,624
18,175
6,000

December 31
2011
$ 948,848
188,484
6,522
41,508
35,544
27,000
$ 1,472,748 $ 1,679,130 $ 1,247,906

174,214
57,245
52,417
24,835
–

For the three months ended

December 31
2012

September 30
2012

200 $

3,485
3,685 $
0.09%
3,294 $
0.08%

December 31
2011
50
2,929
2,979
0.07%
4,843
0.12%

300 $

3,939
4,239 $
0.10%
3,075 $
0.07%

(000s)

Traditional single family residential mortgages
Accelerator single family residential mortgages
Multi-unit residential mortgages
Non-residential mortgages
Store and apartment mortgages
Warehouse commercial mortgages
Total mortgage advances

Table 34: Provision for Credit Losses

(000s, except %)

Collective provision
Individual provision
Total provision
Provision as % of gross loans
Net write-offs
Net write-offs as % of gross loans

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Table 35: Net Non-performing Loans and Allowances

(000s, except %)

Net non-performing loans
Gross loans (excluding allowances)
Net non-performing loans as % of gross loans
Collective allowance
Individual allowance
Total allowance

Table 36: Loans Allowance

(000s)

Individual allowances
Allowance on loan principal
Balance at the beginning of the period
Provision for credit losses
Write-offs
Recoveries

Allowance on accrued interest receivable
Balance at the beginning of the period
Provision for credit losses

Total individual allowance
Collective allowance
Balance at the beginning of the period
Provision for credit losses

Total allowance
Total provision

(000s)

Individual allowances
Allowance on loan principal
Balance at the beginning of the period
Provision for credit losses
Write-offs
Recoveries

Allowance on accrued interest receivable
Balance at the beginning of the period
Provision for credit losses

Total individual allowance
Collective allowance
Balance at the beginning of the period
Provision for credit losses

Total allowance
Total provision

As at

December 31
2012
56,308 $

$
16,885,233
0.33%
30,000 $
3,638
33,638 $

September 30
2012
48,817 $

17,258,569
0.28%
29,800 $
3,447
33,247 $

December 31
2011
40,297
16,091,162
0.25%
29,440
1,859
31,299

For the three months ended December 31, 2012

Residential
Mortgages

Non-
residential
Mortgages

Personal and
Credit Card
Loans

1,660 $
3,413
(2,848)
156
2,381

868
51
919
3,300

– $
–
–
–
–

–
–
–
–

919 $
21
(794)
192
338

–
–
–
338

16,659
200
16,859
20,159 $
3,664 $

9,300
–
9,300
9,300 $
– $

3,841
–
3,841
4,179 $
21

Residential
Mortgages

Non–
residential
Mortgages

Personal and
Credit Card
Loans

1,179 $
3,216
(2,898)
163
1,660

741
127
868
2,528

– $
–
–
–
–

–
–
–
–

663 $
596
(464)
124
919

–
–
–
919

16,359
300
16,659
19,187 $
3,643 $

$
$

9,300
–
9,300
9,300 $
– $

3,841
–
3,841
4,760 $
596 $

$
$

Total

2,579
3,434
(3,642)
348
2,719

868
51
919
3,638

29,800
200
30,000
33,638
3,685

Total

1,842
3,812
(3,362)
287
2,579

741
127
868
3,447

29,500
300
29,800
33,247
4,239

For the three months ended September 30, 2012

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

For the three months ended December 31, 2011

Residential
Mortgages

Non-
Residential
Mortgages

Personal and
Credit Card
Loans

1,312 $
2,108
(2,874)
196
742

33 $
45
–
–
78

1,854 $
1,005
(2,223)
58
694

574
(229)
345
1,087

–
–
–
78

–
–
–
694

16,919
(620)
16,299
17,386 $
1,259 $

8,334
966
9,300
9,378 $
1,011 $

4,137
(296)
3,841
4,535 $
709 $

Total

3,199
3,158
(5,097)
254
1,514

574
(229)
345
1,859

29,390
50
29,440
31,299
2,979

For the three months ended December 31, 2012

Mortgage
Lending
86,650 $
(3,664)
7,318
5,659
(2,557)
(20,203)
73,203
(19,532)

Consumer
Lending
11,002 $
(21)
3,739
–
–
(3,350)
11,370
(3,018)

53,671 $
$
$
2,324 $
$ 17,198,250 $

8,352 $
13,428 $
769,098 $

Other
2,256 $
–
2
–
376
(8,067)
(5,433)
2,375
(3,058) $
– $

Total
99,908
(3,685)
11,059
5,659
(2,181)
(31,620)
79,140
(20,175)
58,965
15,752
832,731 $ 18,800,079

$
$

Table 36: Loans Allowance (continued)

(000s)

Individual allowances
Allowance on loan principal
Balance at the beginning of the period
Provision for credit losses
Write-offs
Recoveries

Allowance on accrued interest receivable
Balance at the beginning of the period
Provision for credit losses

Total individual allowance
Collective allowance
Balance at the beginning of the period
Provision for credit losses

Total allowance
Total provision

Table 37: Earnings by Business Segment

(000s)

Net interest income
Provision for credit losses
Fees and other income
Securitization income
Net (loss) gain on securities and other
Non-interest expenses
Income before income taxes
Income taxes
Net income (loss)
Goodwill
Total assets

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

(000s)

Net interest income
Provision for credit losses
Fees and other income
Securitization income
Net gain (loss) on securities and other
Non-interest expenses
Income before income taxes
Income taxes
Net income (loss)
Goodwill
Total assets

(000s)

Net interest income
Provision for credit losses
Fees and other income
Net loss on securities and other
Non-interest expenses
Income before income taxes
Income taxes
Net income (loss)
Goodwill
Total assets

CAPITAL MAN AGEMENT

For the three months ended September 30, 2012

Mortgage
Lending
86,523 $
(3,644)
7,128
1,204
1,447
(20,200)
72,458
(19,110)

53,348 $
$
$
2,324 $
$ 17,623,833 $

Consumer
Lending
10,874 $
(595)
4,087
–
–
(3,277)
11,089
(2,951)

8,138 $
13,428 $
717,386 $

Other
2,094 $
–
66
–
(483)
(8,588)
(6,911)
2,679
(4,232) $
– $

Total
99,491
(4,239)
11,281
1,204
964
(32,065)
76,636
(19,382)
57,254
15,752
900,780 $ 19,241,999

For the three months ended December 31, 2011

Mortgage
Lending
74,164 $
(1,975)
6,829
(1,095)
(18,824)
59,099
(16,370)

42,729 $
$
2,324 $
$
$ 15,997,106 $

Consumer
Lending
10,639 $
(1,004)
4,343
–
(3,417)
10,561
(2,987)

Other
3,609 $
–
122
(541)
(4,866)
(1,676)
1,653

Total
88,412
(2,979)
11,294
(1,636)
(27,107)
67,984
(17,704)
50,280
15,752
614,626 $ 1,084,739 $ 17,696,471

7,574 $
13,428 $

(23) $
– $

Capital is a key factor in assessing the safety and soundness of a ﬁnancial institution. A strong capital position assists the Company in
promoting conﬁdence among depositors, creditors, regulators and shareholders. The Company’s Capital Management Policy governs the
quantity and quality of capital held. The objective of the policy is to ensure that regulatory and risk-based capital requirements are met
while also providing a sufﬁcient return to investors. Senior management reviews compliance with the policy on at least a monthly basis
while the Risk and Capital Committee and the Board of Directors review compliance with the policy on a quarterly basis.

Capital Management Framework

Two capital standards are addressed in the Company’s policy: the ACM and the risk-based capital ratios. Management reviews these ratios
on an ongoing basis and the Board of Directors reviews both ratios quarterly.

Capital adequacy for Canadian banks and trust companies is governed by the requirements of OSFI. These requirements are consistent
with the published framework to measure the adequacy of capital for international banks, issued by the Bank for International Settlements
(BIS), referred to as Basel II. Under these standards, there are two components of capital. Tier 1 consists primarily of shareholders’ equity
and non-cumulative preferred shares. Tier 2 consists primarily of subordinated debentures, cumulative preferred shares, and the collective
allowance. As Home Trust, a wholly owned subsidiary of the Company, is regulated under the Trust and Loan Companies Act (Canada), its
ability to accept deposits is limited primarily by its permitted ACM. This is deﬁned as the ratio of total regulatory assets to total regulatory
capital of Home Trust.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

The table below shows the components of capital, the risk-based capital ratios and the ACM.

Table 38: Basel II Regulatory Capital (Based only on the subsidiary, Home Trust Company)

(000s, except % and multiples)

Tier 1 capital
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive loss1
IFRS transition adjustment
Total
Tier 2 capital
Collective allowance for credit losses2
Accumulated other comprehensive income3
Subordinated debentures
Total
Total regulatory capital
Risk-weighted assets for
Credit risk
Operational risk
Total risk-weighted assets
Regulated capital to risk-weighted assets
Tier 1 capital
Tier 2 capital
Total regulatory capital ratio
Assets to regulatory capital multiple

2012

2011

23,497 $
951
909,728
–
–
934,176

23,497
951
717,223
(4,229)
49,188
786,630

30,000
337
171,000
201,337
$ 1,135,513 $

29,440
–
115,000
144,440
931,070

$ 4,870,575 $ 4,068,823
480,873
$ 5,491,513 $ 4,549,696

620,938

17.01%
3.67%
20.68%
13.98

17.29%
3.17%
20.46%
14.44

1 Accumulated other comprehensive loss relates to unrealized losses on certain available for sale equity securities, net of tax, which decrease Tier 1 capital.

2 The Company is allowed to include its collective allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2 capital. At December 31, 2012, the

Company’s collective allowance represented 0.55% of risk-weighted assets.

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

Table 39: Risk-Weighted Assets (RWA) (Based only on the subsidiary, Home Trust Company)

(000s, except %)

Cash and claims on or guaranteed by Canadian and provincial governments
(including insured mortgages)
Claims on banks and municipal governments and interest rate contracts
Conventional mortgages on owner-occupied residences
Visa secured and consumer loans
Commercial mortgages, equities and other assets
Non-performing commercial loans
Total assets subject to risk rating
Collective allowance
Total assets
Off-balance sheet items
Loan commitments
Total credit risk
Operational risk
Total

Balance
Sheet
Amounts

Risk
Weighting

2012

Risk-
weighted
Amount

$ 8,122,266
577,581
8,162,363
377,738
1,607,386
5,028
18,852,362
(30,000)
18,822,362

647,513

19,469,875
–
$ 19,469,875

–
0%
115,516
20%
35% 2,856,827
283,304
75%
100% 1,607,386
7,542
150%
4,870,575
–
–
–
4,870,575

–

4,870,575
620,938
$ 5,491,513

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

(000s, except %)

Balance
Sheet
Amounts

Risk
Weighting

2011

Risk-
weighted
Amount

$ 9,285,116
672,727
5,757,457
330,516
1,669,860
947
17,716,623
(29,440)
17,687,183

287,199
17,974,382
–
$ 17,974,382

–
0%
134,545
20%
35% 2,015,110
247,887
75%
100% 1,669,860
1,421
150%
4,068,823
–
–
–
4,068,823

–
4,068,823
480,873
$ 4,549,696

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

Risk-weighted assets are determined by applying the OSFI prescribed rules to on-balance sheet and off-balance sheet exposures. For the
purposes of calculating credit risk-weighted assets, the Company follows the Standardized Approach, and for operational risk, the Company
follows the Basic Indicator Approach. The Company’s securitization activities are not subject to the Basel II securitization framework as they
are all within the NHA MBS program and do not involve tranching of credit risk.

Over the year, risk-weighted assets increased by $941.8 million due to growth in conventional mortgages. The operational risk factor in the
calculation also increased as the Company’s gross income, on which the calculation is based, increased.

Home Trust elected to apply OSFI’s IFRS transitional relief to the IFRS opening retained earnings adjustment. Home Trust was permitted
to amortize the effect of the transition adjustment on regulatory capital over the eight quarters ending December 31, 2012. The amount
added to regulatory capital was reduced to zero by the end of 2012.

Basel III

In December 2010, the Basel Committee for Banking Supervision (BCBS) released Basel III: A global regulatory framework for more
resilient banks and banking systems with the objective of promoting ﬁnancial stability and sustainable economic growth. The Basel III
capital rules aim to raise the quality, consistency and transparency of the capital base across banks, strengthen the risk coverage of the
capital framework, limit the build-up of excessive leverage and reduce procyclicality in the banking sector. The Basel III capital rules will be
phased in over the period from 2013 to 2019. The BCBS also released non-viability contingent capital requirements in January 2011 to
ensure loss absorbency of regulatory capital instruments at the point of non-viability.

In the fourth quarter of 2012, OSFI released the ﬁnal guidance on the Canadian application of Basel III capital ratios. The Basel III capital
rules will be phased in, beginning in the ﬁrst quarter of 2013. The Company has completed an analysis of the Basel III capital requirements
and has identiﬁed the following components as applicable:

> Common Equity Tier 1 Capital (CET 1). Basel III includes a number of phased-in deductions from Common Equity Tier 1 capital. OSFI
requires that prescribed target minimum capital ratios be met on an “all-in” basis without transitional rules. The ACM is permitted to
be calculated on a transitional basis. Deductions from CET 1 capital include unconsolidated investments in ﬁnancial institutions in
excess of a prescribed portion of the Company’s capital, intangible assets (including software), and portions of AOCI. In anticipation
of Basel III, the Company divested itself of its holdings of investments in ﬁnancial institutions above the threshold. Consequently, the
principal deduction from CET 1 capital is the intangible assets.

> Non-viability Contingent Capital (NVCC). Basel III requires all Tier 1 and Tier 2 capital instruments, other than common shares, to contain
provisions that require a full and permanent conversion into common shares of the institution upon a trigger event, generally described
as a condition of non-viability, as determined by OSFI. As permitted by the guidelines, in early 2013 Home Trust will amend the terms
of all of its subordinated debt, which debt is all issued to the Company, to comply with the requirements for inclusion in Tier 2 capital.

> Capital Conservation Buffer. A capital conservation buffer of 2.5% of risk-weighted assets will be required. This is phased in as a
minimum “all-in” CET 1 ratio of 7.0% in the ﬁrst quarter of 2013 with “all-in” targets of 8.5% for total Tier 1 and 10.5% for Total capital
by the ﬁrst quarter of 2014.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Table 40: Basel III All-in Capital Ratios and ACM (Based only on the subsidiary, Home Trust Company)

Basel III Ratio
Common Equity Tier 1
Tier 1 capital
Total capital
Assets to regulatory capital multiple

Minimum
Basel III

4.50%
6.00%
8.00%

Capital
Conservation
Buffer
2.50%
2.50%
2.50%

OSFI Targets1
7.00%
8.50%
10.50%

Home Trust
Proforma

16.09%
16.11%
19.82%
14.12

1 OSFI targets are required by the ﬁrst quarter of 2013 for the Common Equity Tier 1 capital ratio and by the ﬁrst quarter of 2014 for Tier 1 and Total capital ratios.

The Company’s analysis suggests that it will be able to meet OSFI’s requirements without adjustments to its capital structure.

Capital Management Activity

To further enhance Home Trust’s regulatory capital position and support growth objectives, the Company issued $150.0 million in long-term
senior debt in the second quarter of 2011. Of the net proceeds, $100.0 million was provided to Home Trust as subordinated debt in 2011.
In the ﬁrst quarter of 2012, an additional $50.0 million was provided to Home Trust, and in the second quarter of 2012, an additional
$6.0 million was provided utilizing excess cash of the Company.

On September 12, 2012 the Company ﬁled a new Normal Course Issuer Bid through the Toronto Stock Exchange, which allows it to
purchase over a 12-month period up to 10% of the public ﬂoat outstanding on September 12, 2012. The Company believes that, from time
to time, the market price of its common shares does not fully reﬂect the value of its business and the repurchase of shares may represent
an appropriate and desirable business decision.

During 2012, the Company repurchased 163,500 common shares (2011 – 156,300 common shares) for $8.1 million, thereby reducing
retained earnings by $7.8 million and share capital by $0.3 million (2011 – $7.7 million and $0.2 million, respectively).

Internal Capital Adequacy Assessment Process (ICAAP)

Under the Company’s capital and risk management policies, and OSFI’s guidelines, periodically, but no less than annually, the Company
is required to assess the adequacy of current and projected capital resources under expected and stressed conditions. This involves
evaluating the Company’s strategy, ﬁnancial plan and risk appetite; assessing the effectiveness of its risk and capital management
practices (including Board and senior management oversight); subjecting the Company’s plans to a range of stress tests; and drawing
conclusions about its capital adequacy (including a rigorous review and challenge). Based on the Company’s ICAAP, management has
concluded that Home Trust is adequately capitalized.

Credit Ratings

The following table presents the credit ratings for the Company and its subsidiary Home Trust. These investment-grade credit ratings would
allow the Company to obtain institutional debt ﬁnancing should the need arise for additional capital.

Table 41: Credit Rating

Long-term rating
Short-term rating
Outlook

Home Capital Group Inc.

Home Trust Company

DBRS
BBB
R2 (middle)
Stable

Standard & Poor’s
BBB-
A-3
Stable

Fitch Rating
BBB
F2
Negative

DBRS
BBB (high)
R2 (high)
Stable

Standard & Poor’s
BBB
A-2
Stable

Fitch Rating
BBB
F2
Negative

Early in 2012, Standard & Poor’s and Fitch revised their outlook for Canadian ﬁnancial institutions generally, and reduced the outlook
for the Company to negative. In December 2012, Standard & Poor’s further revised its ratings of a number of the Canadian ﬁnancial
institutions and reduced its ratings of the Company by one notch and revised its outlook back to stable. These ratings reductions are
related to a view on the relative strength of the Canadian ﬁnancial system, which continues to be very highly rated, but has increased in
overall risk in the view of these rating agencies. The overall level of consumer debt has also inﬂuenced these ratings. The rating changes do
not impact the current operations of the Company.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Share Information

Table 42: Share Information

(000s)

Common shares issued and outstanding1
Employee stock options outstanding2
Employee stock options exercisable3

Number of
Shares
34,630 $
783
557

2012

Amount
61,903
n/a
19,647

Number of
Shares

34,625 $
929
594

2011

Amount
55,104
n/a
20,432

1 No shares were issued, other than through employee stock options exercised.

2 Please see Note 14(D). Amount for employee stock options is not applicable.

3 For employee stock options exercisable, the amount refers to proceeds payable to the Company upon exercise.

2013 Outlook for Capital Management

The Company remains committed to maintaining its ﬁnancial strength, strong capital ratios under Basel III and a growing capital
base throughout 2013 and beyond. The inclusion of mortgages securitized after March 31, 2010 in the ACM makes this measure
the Company’s primary capital constraint. The Company will continue to proactively monitor and assess its ACM on an ongoing basis.

RISK MAN AGEMENT

The shaded areas of this MD&A represent a discussion of risk management policies and procedures relating to credit, market and liquidity
risks that are required under IFRS 7 Financial Instruments: Disclosures which permits these speciﬁc disclosures to be included in the
MD&A. Therefore, the shaded areas presented in this Risk Management section form an integral part of the audited consolidated ﬁnancial
statements for the year ended December 31, 2012.

Risk management is an essential component of the Company’s strategy, contributing directly to the Company’s proﬁtability and consistently
high return on equity. The Company continues to invest signiﬁcantly in risk management practices.

The Company’s business strategies and operations expose the Company to a wide range of risks that could adversely affect its operations,
ﬁnancial condition, or ﬁnancial performance, and which may inﬂuence an investor to buy, hold, or sell the Company’s shares. When
evaluating risks, the Company makes decisions about which risks it accepts, which risks it mitigates, offsets or hedges, and which risks it
will avoid. These decisions are guided by the Company’s risk appetite framework.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Risk Appetite

The Company has adopted a risk appetite framework that sets out the amount and types of risk the Company will take in pursuit of its
business objectives and strategies. The Company’s risk appetite framework, which was updated in the fourth quarter of 2012, provides the
structure to link the objectives of the Company’s key stakeholders with the level of risk the Company can, and is willing to, take. The risk
appetite framework comprises ﬁve major components.

1. Clear articulation of the Company’s overall mission and objectives, given key stakeholder concerns. The level of risk inherent in these

objectives drives the level of risk the Company may accept.

Identiﬁcation of the Company’s risk capacity by identifying the supply of capital capable of supporting risk and absorbing loss. Risk
capacity is limited by other factors including regulatory constraints.

Identiﬁcation of the risks inherent in the corporate strategy supporting the mission and the governing objectives of the Company and
establishment of a risk-taking philosophy that sets out the key principles that guide how the Company may take and mitigate risk.

4. Documentation of the amount and types of risk the Company may take given its mission, risk capacity, strategy and risk-taking
philosophy. The Company explicitly articulates its Balance Sheet risk appetite (how much of the Company’s capital it will put at risk),
Earnings Volatility risk appetite, Portfolio Composition risk appetite (the types of risk the Company will take) and Non-ﬁnancial risk
appetite (expressions of risk appetite that are difﬁcult to quantify). Among others, the Company has established risk appetite statements
addressing:

> maximum capital at risk and minimum capital ratios;

> maximum leverage or assets to capital multiple;

> maximum amount of top-level individual risk types; and

reputational risk.

5. Establishment of risk limits as an expression of the Company’s risk appetite for individual risks or factors that contribute to risk levels.

Risk Governance

The Company’s strategies and management of risk are supported by an overall enterprise risk management (ERM) framework including
policies, guidelines, and procedures for each major category of risk to which it is exposed (strategic, credit, market, funding and liquidity,
operational, legislative and regulatory, and reputational). The Company deﬁnes ERM as an ongoing process involving its Board of Directors
(the “Board”), management and other personnel in the identiﬁcation, measurement, assessment and management of risks that may
positively or negatively impact the organization as a whole. ERM is applied in strategy-setting across the enterprise and is designed to
provide reasonable assurance that the Company’s objectives can be realized given its stated risk appetite. The goal of ERM is to help
maximize, within the Company’s risk appetite, the beneﬁt to the enterprise, shareholders and other stakeholders from a portfolio of risks
that the Company is willing to accept.

Supporting the Company’s ERM structure is a risk culture and a governance framework, including Board and senior management oversight
and an increasingly robust set of risk policies and guidelines reﬂective of the Company’s risk appetite, that set boundaries on acceptable
business strategies, exposures and activities. The Company’s governance structure is supported by three lines of defense. Authority is
delegated by the Board of Directors through the Chief Executive Ofﬁcer to business units that are responsible for managing the risks they
take in the pursuit of their business objectives. The ERM group, along with the Credit group and the Corporate Compliance group, represents
the second line of defense, and provides policy guidance to business units and helps ensure that all risks are identiﬁed, monitored,
measured, assessed and reported to senior management and the Board. Internal Audit, the third line of defense, provides objective and
independent reviews of the risk management process, its controls, and the effectiveness of governance, risk management and controls.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

The governance structure as depicted in the following ﬁgure ensures that there is a framework in place for risk oversight and accountability
across the organization. Risk owners are responsible for developing and executing strategies for controlling risk.

Board of Directors

Board of
Directors

Audit
Committee

Governance,
Nominating and
Conduct Review
Committee

Human Resources
and Compensation
Committee

Risk and Capital
Committee

Management

CEO and Executive
Committee

Credit Risk
Committee

Asset/Liability
Committee

Operational Risk
Committee

Governance, Risk
and Compliance
Committee

Executive Change
Advisory Board

Senior Leadership
Committee

3rd Line

2nd Line

Internal Audit

Corporate
Compliance

Credit

Enterprise Risk
Management

1st Line
(Line of Business)

Deposits

Residential
Mortgage Lending

Commercial
Mortgage Lending

Consumer Lending
and Retail Credit

Treasury

S
E
E
T
T
I
M
M
O
C

E
S
N
E
F
E
D
F
O
S
E
N
I
L

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

The Board is accountable for establishing the overall vision, mission, objectives and strategies of the Company and setting the
Company’s risk appetite and risk-bearing capacity. It challenges management’s proposals and plans to ensure that the forecasted
results and risk assessments are reasonable and in line with the Company’s capabilities, objectives and risk appetite. These risk
management responsibilities are primarily carried out through the Risk and Capital Committee of the Board. In this oversight role
the Committee is designed to ensure that all signiﬁcant risks to the Company, regardless of sources, are proactively identiﬁed and
effectively managed. This is accomplished by reviewing and approving, on at least an annual basis, all key risk policies; monitoring,
on at least a quarterly basis, the Company’s actual exposures versus Board-approved risk appetite and limits; and providing
direction to management where deemed necessary. It further ensures that the ERM function is independent of the business
activities it oversees and that an appropriate, independent monitoring and reporting framework is in place and operating effectively,
so as to deliver accurate, timely and meaningful risk information for its review and evaluation.

The Executive Committee (EC), chaired by the Chief Executive Ofﬁcer, is responsible for recommending corporate strategy to the
Board and for overseeing its execution. A critical component of this mandate is recommending to the Risk and Capital Committee
of the Board a risk appetite that aligns with the objectives and strategy of the Company. The EC is accountable for establishing an
appropriate “risk aware” culture and proactively monitoring actual exposures and business activities in comparison to risk appetite.
The EC reviews and validates the Company’s portfolio of key risk exposures through comprehensive risk reporting as well as by an
ongoing risk identiﬁcation and assessment process. Through this process, signiﬁcant risks are identiﬁed in light of current business,
market, and economic conditions, ensuring that the risks the Company manages and monitors are not static but evolving in context
with the greatest likelihood of impact on the Company at any given point in time.

The most signiﬁcant risks to the Company, described as principal risks and as reﬂected in the following diagram, are subject to
more speciﬁc review, monitoring and assessment under the mandates of supporting risk committees. These committees (Credit
Risk, Asset/Liability, Operational Risk, and Governance, Risk and Compliance) recommend policies and guidelines for approval as
proposed by the lines of business, with concurrence from the ERM group, and proactively monitor and assess the speciﬁc risks
under their mandates compared to the approved risk appetite. In addition to the Executive Committee and the supporting risk
committees, the Company’s risk governance is supported by:

> The Chief Risk Ofﬁcer and the ERM group. The ERM group is mandated to work with the executive team and the Board of Directors
of the Company to support sustainable business performance through the independent identiﬁcation, measurement, assessment
and monitoring of all signiﬁcant risks to the Company, regardless of source. Working closely with the Risk and Capital Committee,
the ERM group recommends the Company’s overall risk appetite and limits. It develops policies to address signiﬁcant risks and
recommends Board and/or management approval. ERM independently maintains a current view of the Company’s risk proﬁle
by monitoring actual exposure and practice against approved risk appetite, limits, policies and guidelines.

> The Chief Compliance Ofﬁcer (CCO) and Chief Anti-Money Laundering Ofﬁcer (CAMLO) and the Corporate Compliance group.
The CCO/Corporate Compliance group is mandated to establish and maintain an independent enterprise-wide Compliance
Framework (a set of controls and oversight processes) designed to mitigate the Company’s Legislative and Regulatory Risk.
The CCO/Corporate Compliance group is mandated to promote a sound compliance culture; report to the Company’s Senior
Management and the Board about compliance with the Company’s legislative and regulatory requirements; follow up with Senior
Management on breaches; and make recommendations related to the Compliance Framework activities. The CCO and CAMLO
are responsible for expressing an independent opinion to the Audit Committee on the status, adequacy and effectiveness of the
Company’s state of compliance on a periodic basis.

> The Senior Vice President, Internal Audit, and the Internal Audit department. Internal Audit is mandated to independently assess
and report to the Audit Committee, the Board of Directors and management on the effectiveness of governance, risk management
and internal control processes.

In order to integrate the Company’s risk and control processes, management has formed the Governance, Risk and Compliance Committee
to review and align the management structure, resources, processes and controls to match the size, complexity, scope, and risk proﬁle
of the organization. This committee makes recommendations to the Executive Committee to improve, operate and sustain all aspects of
governance, risk and compliance.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Stress Testing

In addition to the day-to-day risk management practices, a key component of the ERM framework is stress testing and scenario analysis.
Management conducts regular stress testing, including annual stress testing through its internal capital adequacy assessment process and
ad hoc stress testing to evaluate a range of extreme but plausible scenarios. Stress tests are conducted to determine the potential impact
of these events, the effectiveness of management’s contingency plans to deal with these unlikely but possible events, and management’s
ability to mitigate the potential risk. A common set of scenarios is developed to assess the impact on the Company’s ﬁnancial results,
capital position, and operational capabilities to respond to the event. In particular, management has evaluated a range of economic
scenarios, including a real estate–driven recession. Management analyzes the outcomes from stress testing and, where applicable, takes
proactive measures to mitigate potential risks to the business.

Principal Risks

The Company has identiﬁed seven principal risks that are material to the business: strategic, credit, market, funding and liquidity,
operational, legislative and regulatory, and reputational risk. In addition to these principal risks, The Company employs a risk register to
outline risk sub-categories and provide more detailed linkages to the speciﬁc risks inherent to, or taken by, the business. These risks are
identiﬁed, measured, assessed, and monitored on an ongoing basis, with regular reporting to both management and the Board of Directors.
Where appropriate, principal and sub-category risks are mitigated through various actions to reduce the inherent risk to acceptable residual
levels, as deﬁned by the Company’s risk appetite. Strategic and reputational risks are considered overarching risks, as substantial outcomes
from other principal risks could pose signiﬁcant second order impact to the Company’s reputation or ability execute strategic objectives.

Strategic Risk

k
s
i
R

t
i
d
e
r
C

k
s
i
R

t
e
k
r
a
M

d
n
a

g
n
d
n
u
F

k
s
i
R
y
t
i
d
u
q
i
L

k
s
i
R

a
n
o
i
t
a
r
e
p
O

d
n
a

e
v
i
t
a
l
s
i
g
e
L

k
s
i
R
y
r
o
t
a
u
g
e
R

Reputational Risk

Strategic Risk

Strategic and business risk is the risk of loss due to changes in the external business environment, the failure of management to adjust
its strategies and business activities for external events or business results, or the inability of the business to change its cost levels
in response to those changes. Strategic and business risk is managed by the Executive Committee. On a regular basis, the Executive
Committee reviews the current environment, the business results and the actions of the Company’s competitors and adjusts business plans
accordingly. The Board approves the Company’s strategies at least annually and reviews results against those strategies at least quarterly.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis
Management’s Discussion and Analysis

Credit Risk

Credit risk is the risk of the loss of principal and/or interest from the failure of debtors and/or counterparties to honour their ﬁnancial
or contractual obligations to the Company, for any reason. The Company’s overall exposure to credit risk is governed by credit speciﬁc
risk appetite limits and Credit Risk Policies as approved by the Board. The Credit Risk Committee establishes, implements and
monitors credit risk related policies and guidelines enterprise-wide, taking into account business objectives, risk appetite, planned
ﬁnancial performance and risk proﬁle. Credit risk limits are established for all types of credit exposures and include geographic,
product, property and security type limits over all classes of exposure. The Company’s risk management policy limits the total
aggregate exposure to any entity or connection. The lines of business are responsible for managing the Company’s credit risks in
accordance with approved policies, and assessing overall credit conditions and exposures on an ongoing basis.

The Credit Risk Committee, the ERM group, and the Risk and Capital Committee of the Board oversee the credit portfolio through
ongoing reviews of credit risk management policies, lending practices, portfolio composition and risk proﬁle, the adequacy of loan
loss reserves and credit-risk based capital.

At a transactional level, loans are independently approved by credit staff commensurate with their experience and expertise to extend credit
within the bounds of the Company’s credit risk policies. A foundation of the Company’s approach to credit is a high level of due diligence
on each individual transaction with oversight from a management team with strong industry experience. All transactions are subject to
detailed reviews of the underlying security, an assessment of the applicant’s ability to service the loan, and the application of a standard
risk rating or credit score. Enhanced due diligence is conducted on transactions deemed to be higher credit risks based on pre-deﬁned
parameters. Transactions in excess of individual authority are approved by the Credit Risk Transactional Sub-Committee of the Credit Risk
Committee and ultimately by the Risk and Capital Committee of the Board as required.

As part of credit risk management of the loan portfolio, senior management and the ERM group monitor various characteristics including
the characteristics in the following table.

Table 43: Credit Risk Portfolio Monitors

(000s, except % and number of credit cards issued)

Total loans balance (net of individual allowances)
Mortgage Portfolio1
Total mortgage portfolio balance (net of individual allowance)
Residential mortgages as a percentage of total mortgages
Non-residential mortgages as a percentage of total mortgages
Percentage of insured residential mortgages
Percentage of mortgages current
Percentage of mortgages over 90 days past due
Percentage of insured residential mortgage originations
Loan to value of residential mortgages (current uninsured)2
Credit Card Portfolio
Total credit card portfolio balance
Percentage of Equityline Visa credit cards
Percentage of secured credit cards
Percentage of credit cards current
Percentage of credit cards over 90 days past due
Loan to value of Equityline Visa (current)2
Visa card security deposits
Total authorized limits of credit cards
Total number of credit cards issued
Average balance authorized

2012

2011

$ 16,882,514 $ 16,089,648

$ 16,283,021 $ 15,529,455
93.9%
6.1%
61.0%
97.3%
0.4%
26.1%
70.0%

93.9%
6.1%
50.6%
97.6%
0.4%
19.3%
65.5%

$
$

327,517 $
96.9%
3.0%
96.6%
1.1%
69.9%
14,345 $
403,110 $
26,840

15 $

386,912
97.8%
2.2%
96.8%
1.4%
71.3%
13,219
476,576
26,560
18

1 Residential mortgages include $2.09 billion (2011 – $2.19 billion) of multi-unit residential mortgages on properties with over four units and builders’ inventory.

2 Loan to value is calculated as the current balance outstanding to the appraised value at origination.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Credit risk mitigation is a key component of the Company’s approach to credit risk management. The composition of the mortgage portfolio
is well within the policy limits.

The Company mitigates credit risk on residential mortgages through collateral in the form of real property. At December 31, 2012, the
current average loan to value ratio of the total portfolio, which includes both insured and uninsured mortgages, was 69.2% compared to
70.0% last year. These loan to value ratios reﬂect current outstanding mortgage amounts and were calculated under the assumption that,
unless the collateral related to a speciﬁc mortgage was reappraised, the value of the collateral on each mortgage would remain at the
original appraised amount.

Due to the level of activity and price appreciation in the high-rise condominium market in certain cities, the Company continues to closely
monitor market conditions and the performance of this portfolio. High-rise condominiums represent approximately 7% of the residential
portfolio and of these 46.6% are insured. The average current loan to value ratio of the portfolio is 64.9% compared to 69.2% for the
entire residential portfolio. The credit performance of the portfolio remains strong with 97.6% of the portfolio current and 0.95% over 90
days in arrears.

The level of non-residential mortgages was relatively stable over the last twelve months. As a proportion of the total portfolio, the Company
anticipates that the non-residential portfolio will remain relatively stable or exhibit modest growth in the foreseeable future. The Company
slowly began increasing its exposure to non-residential mortgage lending in 2010 through early 2012 in proportion with growth in the
overall asset portfolio. The proportion of residential to non-residential portfolios is well within the policy limits approved by the Board’s Risk
and Capital Committee and the Board of Directors.

Senior management and ERM closely monitor the credit performance of the mortgage loans portfolio. The portfolio continues to perform
well, with arrears that are well within expected levels.

Personal and credit card loans were $599.5 million or 3.5% of the total loan portfolio at December 31, 2012 compared to $560.2 million
or 3.5% at December 31, 2011. The gross credit card receivable balance was 54.6% of the personal and credit card loan portfolio, virtually
all of which is secured by either cash deposits or residential property. Within the secured credit card portfolio, Equityline Visa credit cards
represent the principal driver of receivable balances. Equityline Visa credit cards are secured by collateral residential mortgages, and this
portfolio segment amounted to $317.2 million, or 96.9% of the total credit card receivable balance at the end of 2012, compared to
97.8% at the end of 2011. Cash deposits for secured credit card accounts are included in the Company’s deposit liabilities. Additionally,
the Equityline Visa portfolio had a loan to value ratio of 69.9% at the end of 2012, compared to 71.3% at the end of 2011.

Retail credit is secured by charges on ﬁnanced assets, principally improvements to residential property or ﬁxtures, such as water heaters.
Water heater loans are guaranteed by the gas supplier, a highly rated credit risk.

Senior management and ERM closely monitor the credit performance of the credit card portfolio. The portfolio continues to perform well,
with arrears that are well within expected levels. At December 31, 2012, $3.6 million or 1.1% of the credit card portfolio was over 90
days in arrears, compared to $5.5 million or 1.4% at December 31, 2011. During the year, the Company launched its Preferred Visa card
program, which offers unsecured Visa cards with relatively low authorized limits to the Company’s mortgage customers with good credit
performance. The Preferred Visa portfolio represents 0.04% of outstanding Visa balances at December 31, 2012.

Refer to Note 5(A) of the consolidated ﬁnancial statements for a breakdown of the overall loan portfolio by geographic region. While the
Company’s overall strategy is to increase the geographic diversiﬁcation of the loan portfolio, this has been tempered by credit conditions
in some regional markets.

Additional Information: Residential Loans and Equityline Visa (Home Equity Line of Credit)

The tables below provide additional information on the composition of the Company’s residential mortgage portfolio by province and
insured status, as well as amortization periods and loan to value by province. Residential mortgages in these tables exclude multi-
unit residential mortgages on properties with over four units and builders’ inventory, which are included in residential mortgages in the
calculations in the previous table and on the balance sheet.

All mortgages originated by the Company after July 2012 have amortization periods of 30 years or less.

For 2012 the Company’s loan to value ratio for newly originated uninsured residential mortgages averaged 69.8%, with ratios varying
depending on risk assessments related to speciﬁc markets. New Equityline Visa loans are restricted at 65% loan to value, and averaged
64.2% over the year.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis

Table 44: Residential Loans by Province1

(000s, except %)
British Columbia
Alberta
Ontario
Quebec
Atlantic provinces
Other

Insured
Residential
Mortgages2
472,791
409,836
3,935,164
303,979
120,197
13,815
$ 5,255,782

Percentage
of Total
for Province

Uninsured
Residential
Mortgages
368,598
55.7% $
58.3%
269,973
35.2% 6,963,718
226,970
57.1%
52.1%
108,313
12,480
51.4%
38.9% $ 7,950,052

Percentage
of Total
for Province

43.4% $
38.4%
62.3%
42.6%
46.9%
46.4%
58.8% $

Equityline
Visa
7,821
23,539
281,545
1,531
2,214
586
317,236

As at December 31, 2012

Percentage
of Total
for Province

Total
849,210
0.9% $
3.3%
703,348
2.5% 11,180,427
532,480
0.3%
1.0%
230,724
26,881
2.2%
2.3% $ 13,523,070

1 Residential mortgages in this table are deﬁned by OSFI and exclude multi-unit residential mortgages on properties with over four units and builders’ inventory.

2 Insured mortgages include mortgages insured by CMHC or other approved insurers at origination and mortgages that are portfolio insured post origination.

Table 45: Insured and Uninsured Residential Mortgages by Amortization Period at Origination

As at December 31, 2012

(000s, except %)
Balance outstanding
Percentage of total

Less than
20 Years

83,969 $
0.6%

25 to
29 Years

30 to
20 to
24 Years
Total
35 Years
147,862 $ 1,884,491 $ 8,809,584 $ 2,279,928 $ 13,205,834
100.0%

Greater than
35 Years

66.7%

17.3%

14.3%

1.1%

Table 46: Average Loan to Value (LTV) Ratios for Uninsured Loans Originated During the Year

(000s, except %)

British Columbia
Alberta
Ontario
Quebec
Atlantic provinces
Other
Total

Table 47: Non-performing Loans

(000s, except %)

Residential mortgages
Non-residential mortgages
Personal and credit card loans
Non-performing loans
Total gross loans
Net non-performing loans
as a % of gross loans
Total allowance for credit losses
Total allowance as a % of gross loans
Total allowance as a % of
gross non-performing loans

Uninsured
Residential Mortgages
Amount
LTV
179,427
95,779
3,785,063
131,364
54,150
11,057
$ 4,256,840

61.1% $
66.0%
70.7%
63.8%
63.0%
73.5%
69.8% $

2012

Equityline Visa
LTV
55.7%
54.0%
64.7%
55.7%
49.6%
56.1%
64.2%

Amount
921
826
73,955
585
412
100
76,799

2012

Net1
52,315 $
501
3,492
56,308 $

Gross
36,845 $
822
4,144
41,811 $

2011

Net1
36,103
744
3,450
40,297

$ 16,091,162

Change

Net1
44.9%
(32.7%)
1.2%
39.7%

Gross
48.4%
(39.1%)
(7.6%)
41.2%
4.9%

Gross

54,696 $
501
3,830
59,027 $

$
$ 16,885,233

0.33%

33,638

0.20%

0.25%

31,299

0.19%

56.99%

74.86%

1 Non-performing loans are net of individual allowances as shown in Table 48, Allocation of Allowance for Credit Losses.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Net non-performing loans remain within expected and acceptable ranges. As part of the Company’s ongoing business strategy, experienced
employees, in conjunction with ERM, undertake reviews of all non-performing loans greater than 90 days to analyze patterns and drivers
and then modify, where appropriate, the Company’s lending guidelines. This analytical approach and attention to emerging trends have
resulted in continued low write-offs relative to the gross loans portfolio. Write-offs, net of recoveries, totalled $12.4 million or 0.07% of
gross loans in 2012, compared to $10.7 million or 0.07% of gross loans in 2011. The Company continually monitors arrears and write-offs
and deals effectively with non-performing loans.

Table 48: Allocation of Allowance for Credit Losses

(000s)

Individual allowances
Residential mortgages
Non–residential mortgages
Personal and credit card loans

Collective allowance
Residential mortgages
Non–residential mortgages
Personal and credit card loans

Total allowance for credit losses

(000s)

Individual allowances
Residential mortgages
Non–residential mortgages
Personal and credit card loans

Collective allowance
Residential mortgages
Non–residential mortgages
Personal and credit card loans

Total allowance for credit losses

2012
Opening
Balance

Write-offs
Net of
Recoveries

Provision for
Credit Losses

2012
Ending
Balance

1,087 $
78
694
1,859

(10,468) $

–
(1,913)
(12,381)

12,681 $
(78)
1,557
14,160

16,299
9,300
3,841
29,440
31,299 $

–
–
–
–

(12,381) $

560
–
–
560
14,720 $

2011
Opening
Balance

Write-offs
Net of
Recoveries

Provision for
Credit Losses

2,160 $
–
3,140
5,300

(7,263) $
–
(3,410)
(10,673)

16,299
9,357
3,497
29,153
34,453 $

–
–
–
–

(10,673) $

6,190 $
78
964
7,232

–
(57)
344
287
7,519 $

3,300
–
338
3,638

16,859
9,300
3,841
30,000
33,638

2011
Ending
Balance

1,087
78
694
1,859

16,299
9,300
3,841
29,440
31,299

The allowance for credit losses has been established to cover incurred losses and identiﬁed credit events in the loans portfolio.

Individual allowances represent the amount on identiﬁed non-performing loans required to reduce the carrying value of those loans to
their estimated realizable amount. The balance will ﬂuctuate from time to time and is driven by the performance of individual loans and
the realizable value of the underlying security.

The collective allowance for credit losses is established for incurred losses inherent in the portfolio that are not presently identiﬁable
on a loan-by-loan basis and reﬂects the relative risk of the various loan portfolios that the Company manages. The Company maintains
a collective allowance that, in management’s judgement, is sufﬁcient to absorb probable incurred losses in its loans portfolio.
At December 31, 2012 the Company held a collective allowance of $30.0 million, marginally higher than the $29.4 million held at
December 31, 2011. The Company monitors the adequacy of the collective allowance on a monthly basis. The Company has security in
the form of real property or cash deposits against loans, representing virtually the entire total loans portfolio. The Company’s evaluation
of the adequacy of the collective allowance takes into account asset quality, borrowers’ creditworthiness, property location, past loss
experience, current and forecasted probability of default and exposure at default based on product, risk ratings and credit scores, and
current economic conditions. The Company periodically reviews the methods utilized in assessing the collective allowance, giving due
consideration to changes in economic conditions, interest rates and local housing market conditions. The principal factors currently
impacting the Company’s assessment of the adequacy of the collective allowance are the improving employment environment in the
Company’s markets, the increased weighting of uninsured loans and the reduced loan to value ratio of the uninsured loan portfolios. For
the most part, these considerations tend to offset each other, and the collective allowance has been increased marginally and continues
to exceed two years of current year write-offs.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis

2013 Outlook for Credit Risk

Please refer to the 2013 Outlook for Provision and Allowance for Credit Losses section included in the Financial Performance Review
section of this MD&A.

Market Risk

For the Company, Market Risk consists primarily of Structural Interest Rate Risk and Investment Risk. A summary of these risks is as follows:

Structural Interest Rate Risk

Structural interest rate risk is the risk of lost earnings or capital due to sudden changes in interest rates. The objective of interest
rate risk management is to ensure that the Company is able to realize stable and predictable earnings over speciﬁc time periods
despite interest rate ﬂuctuations. The Company has adopted an approach to the management of its asset and liability positions
to prevent interest rate ﬂuctuations from materially impacting future earnings, and typically matches liabilities to assets in terms
of maturity and interest rate repricing through its actions in the deposit market in priority to accessing off-balance sheet solutions.

The Company’s market risk management framework includes interest rate risk policies, guidelines and procedures that are approved
by the Asset/Liability Committee (ALCO) and the Risk and Capital Committee of the Board of Directors. The ALCO is responsible for
deﬁning and monitoring the Company’s structural interest rate risk and reviewing signiﬁcant maturity and/or duration mismatches,
as well as developing strategies that allow the Company to operate within its overall risk appetite. In addition, the ALCO oversees
stress testing of structural interest rate risk using a number of interest rate scenarios. The Treasury group is responsible for managing
the Company’s interest rate gaps in accordance with approved policies and assesses the impact of market events on the Company’s
net interest income and economic value of shareholders’ equity. The ERM group recommends prudential policies and guidelines,
and provides independent enterprise-wide oversight to all interest rate risk.

From time to time, the Company enters into interest rate derivative transactions in order to hedge its structural interest rate risk. The
use of derivative products has been approved by the Board of Directors; however, permitted usage is governed by speciﬁc policies.
Derivatives are only permitted in circumstances in which the Company is hedging asset-liability mismatches, or loan commitments,
or as a result of hedging requirements under the terms of its participation in the CMB program. Moreover, the policy expressly
articulates that use of derivatives is not permitted for transactions that are undertaken to potentially create trading proﬁts through
speculation on interest rate movements.

The interest rate sensitivity position as at December 31, 2012 is presented under Note 21 in the consolidated ﬁnancial statements.
The table in Note 21 represents positions at a point in time, and the gap represents the difference between assets and liabilities
in each maturity category. This note summarizes assets and liabilities in terms of their contractual amounts. Over the lifetime of
certain assets, some contractual obligations such as residential mortgages will be terminated prior to their stated maturity at the
election of the borrower, by way of prepayments. Similarly, some contractual off-balance sheet mortgage commitments may be
made but may not materialize. In measuring its interest rate risk exposure, the Company makes assumptions about these factors.

To assist in matching assets and liabilities, the Company utilizes two interest rate risk sensitivity metrics that measure the relationship
between changes in interest rates and the resulting estimated impact on both the Company’s future net interest income and
economic value of shareholders’ equity. The Company measures these metrics over a number of different yield curve scenarios.

The following table provides measurements of interest rate sensitivity and the potential after-tax impact of an immediate and sustained
100 basis-point increase and decrease in interest rates on net interest income and on the economic value of shareholders’ equity.

As illustrated in the following table, an increase in interest rates will have a positive impact on net interest income after tax and the
economic value of shareholder’s equity in a 100 basis-point movement in rates without management action. A positive gap exists when
interest-sensitive assets exceed interest-sensitive liabilities in speciﬁc maturity or repricing periods. As these gaps widen the ﬂuctuation in
the sensitivity becomes more pronounced and, for this reason, the Company’s ALCO manages this to within authorized limits.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Table 49: Impact of Interest Rate Shifts

(000s)

100 basis point shift
Impact on net interest income, after tax
(for the next 12 months)
Impact on net present value of shareholders’ equity

Investment Risk

Increase in interest rates

Decrease in interest rates

December 31
2012

December 31
2011

December 31
2012

December 31
2011

12,614 $
9,746

8,142 $
4,175

(12,614) $
(11,447)

(8,142)
(5,914)

Investment risk is the risk of loss due to impairment in the fair value of investments.

The Company’s investment risk management framework includes investment policies that are approved by the ALCO and the Risk and
Capital Committee of the Board of Directors. The ALCO is responsible for deﬁning and monitoring the Company’s investment portfolio
and identifying investments that may be at risk of impairment. The Treasury group is responsible for managing the Company’s
investment portfolio in accordance with approved policies and assesses the impact of market events on potential implications
to its total value. ERM recommends prudential policies and guidelines, and provides independent enterprise-wide oversight of all
investment risk, including valuations.

Funding and Liquidity Risk

This is the risk that the Company is unable to generate or obtain cash or equivalents in a timely manner and at a reasonable cost to
meet its commitments (both on- and off-balance sheet) as they become due. This risk will arise from ﬂuctuations in the Company’s
cash ﬂows associated with lending, securitization, deposit-taking, investing and other business activities.

The Company’s liquidity risk management framework includes funding and liquidity policies, guidelines and procedures that are
approved by the ALCO and the Risk and Capital Committee of the Board of Directors. The mandate of the ALCO includes establishing
and recommending to the Board an enterprise-wide liquidity risk appetite. In addition, the ALCO reviews the composition and term
structure of assets and liabilities, reviews funding and liquidity policies and strategies and regularly monitors compliance with those
policies. The ALCO also oversees the stress testing of funding and liquidity risk and the testing of the Company’s Contingency Funding
Plan. The Treasury group is responsible for managing the Company’s funding and liquidity positions in accordance with approved
policies and assesses the impact of market events on liquidity requirements on an ongoing basis. ERM recommends liquidity policies
and guidelines, and provides independent enterprise-wide oversight of all funding and liquidity risk.

The Company’s funding and liquidity policies are designed to ensure that cash balances and the inventory of other liquid assets are
sufﬁcient to meet all cash outﬂows both in ordinary market conditions and during periods of extreme market stress. The Company’s
policies address 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; daily monitoring of the liquidity position by Treasury, senior management, and the ERM group;
monthly reporting to the ALCO; and quarterly reporting to the Risk and Capital Committee of the Board of Directors.

The Company uses a Net Cumulative Cash Flow (NCCF) liquidity horizon as its main liquidity metric. Using maturity gap analysis,
the Company projects a time horizon when its NCCF turns negative, after taking into account the market value of its stock of liquid
assets. The Company’s liquidity horizon is calculated daily and is based upon contractual and behavioural cash ﬂows. Forecasts are
made using normal market conditions and a number of stressed liquidity scenarios, including ability to fund, loan growth, liquidity
portfolio valuation, loan arrears and write-downs. In addition, the Company regularly monitors a number of other structural funding
and liquidity ratios in its overall funding and liquidity risk management framework.

The Company holds liquid assets in the form of cash, bank deposits, securities issued or guaranteed by the Government of Canada,
securities issued by provincial governments, and highly rated short-term money market securities and corporate bonds and debentures. At
December 31, 2012, eligible liquid assets amounted to $771.8 million, compared to $808.2 million at December 31, 2011.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis

The Company’s main sources of funding come from retail deposits and securitization. Retail deposits are primarily sourced through the
deposit broker network. The majority of these deposits are received through channels that are controlled by several of the major Canadian
banks. The broker network provides the Company access to a very large volume of potential deposits, which are sourced almost entirely
from individual investors or small businesses, with no reliance on wholesale funding markets. The bulk of deposits raised are ﬁxed-term
Guaranteed Investment Certiﬁcates (GICs) that are not subject to early redemption. The Company has contractual agreements with over
240 independent brokers, including most major national investment dealers. The Company continues to add new brokers in order to
diversify its sources of funds.

In 2012, Home Trust launched a high interest savings account offered only through ﬁnancial advisors and investment and mutual fund
dealers and commenced an advertising campaign aimed at building its direct deposits channel.

The Company is an approved NHA MBS issuer and an approved seller into the CMB program, which are securitization initiatives sponsored
by CMHC. Securitization funding provides the Company with long-term matched funding at very attractive interest rates. Traditionally,
the Company has used securitization markets to fund its Accelerator mortgages and insured multi-unit residential mortgages and, to a
lesser extent, its traditional mortgages that qualiﬁed for bulk portfolio insurance. On-balance sheet Accelerator mortgages and multi-unit
residential mortgages classiﬁed as held for sale are generally held for securitization and are funded with deposits until securitized. When
mortgages are securitized, the Company receives principal and interest payments on its underlying mortgage loans before the required
payments are passed-through to MBS investors. However, as a part of its servicing obligations, the Company must pass-through any
payments that are not collected due to arrears on a timely basis. In the case of defaults, the Company would make required payments to
investors and place the mortgage/property through the insurance claims process to recoup any losses. This may result in cash ﬂow timing
mismatches that may marginally increase funding and liquidity risk.

Upcoming Basel Liquidity Requirements

In December 2010 the Basel Committee on Banking Supervisions published its international framework for liquidity measurements,
standards and monitoring. The standard includes new liquidity measures, the details of which are not yet ﬁnalized. Based on the
information provided to date the Company’s conclusions about these requirements are as follows:

> Liquidity Coverage Ratio (LCR) – effective January 1, 2015. The LCR establishes a common measure of liquidity risk and requires
institutions to maintain sufﬁcient liquid assets to cover a minimum of 30 days of cash ﬂow requirements in a stress situation. As at
December 31, 2012, the Company had sufﬁcient liquid assets to meet the minimum LCR as currently described.

> Net Stable Funding Ratio (NSFR) – effective January 1, 2018. The NSFR establishes a second common measure of liquidity based
on longer term assets to longer term liabilities. As at December 31, 2012, the Company had sufﬁcient long-term funding to meet the
minimum NSFR as currently described.

2013 Outlook for Funding and Liquidity Risk

The Company will continue to source deposits from the public through investment dealers and deposit brokers while seeking to
expand this network through agreements with additional brokers that meet the Company’s selection criteria and through additional
products that meet the requirements for CDIC coverage. The Company anticipates that the overall size of available deposits in this
channel will continue to increase in the medium to long term. However, it is also anticipated that competition amongst issuers may
increase, possibly resulting in increased funding costs. The Company will place a renewed emphasis on growing its direct channel
and will continue to emphasize growth of its newly launched high interest savings account and by enhancing its direct channel sales
and service capabilities. The rate of growth in the deposit portfolio is expected to mirror the growth of the Company’s non-insured
loan portfolio, while securitization will continue to support insured mortgages. Ensuring a reliable and sufﬁcient source of deposits
to fund operations and liquidity reserves will remain a key objective for the Company.

Operational Risk

Operational risk, which is inherent in all business activities, is the risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events. Operational risk includes legal risk, but excludes strategic and reputational risk. The impact of
operational risk may include ﬁnancial loss, loss of competitive position, or regulatory enforcement actions, among others. It is an integral
and unavoidable part of the Company’s business as it is inherent in every business and support activity, product and service. While
operational risk cannot be eliminated, the Company has taken proactive steps to mitigate this risk. Strategies to manage operational risk
include avoidance, transfer, acceptance and mitigation by controls. The Company strengthened its operational risk framework during 2012,
with the addition of staff and methodologies. Key elements of the Company’s operational risk framework include:

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Governance

The Company maintains a system of comprehensive policies and an internal control framework designed to provide a sound and well-
controlled operational environment. Operational risk policies are approved by the Risk and Capital Committee of the Board. A three line
of defense model is used to manage operational risk, as described under Risk Governance. Oversight over the Company’s operational risk
exposures is also provided by the Operational Risk Committee.

Risk Identiﬁcation and Assessment

In 2012, the risk control self-assessment program was enhanced to proactively identify the Company’s exposure to key operational risks
and to assess the effectiveness of mitigating controls. Risk assessments are also performed on signiﬁcant new initiatives (e.g., products,
services and systems) by business and support areas and other internal subject matter experts to ensure that associated risks are
identiﬁed, assessed and approved and that the Company’s control infrastructure can support the initiative prior to implementation.

Risk Measurement

The Company has adopted the Basic Indicator Approach for operational risk under Basel II. In addition, scenario analysis and stress testing
are used to assess the possible impact of extreme but plausible operational risk loss events. Scenario analysis and stressing testing
provide a forward-looking basis for managing exposures beyond the Company’s risk appetite.

Risk Monitoring and Reporting

The Company monitors key risk indicators to gain assurance that it remains within its stated risk appetite and to identify early warning
signals of changes in the risk environment, control effectiveness and potential risk issues before they crystallize and result in ﬁnancial loss
or other negative impact.

Operational losses, including near misses, are collected, analyzed and reported in order to reduce the likelihood of future recurrences
and to strengthen risk management practices. The Company also proactively analyzes operational events in the industry and external
environment to understand its exposure, if any, to similar events and takes steps to prevent such occurrences.

Operational risk issues and action plans across the Company are centrally captured, classiﬁed, monitored and reported upon.

Reporting and monitoring form an integral part of the Company’s operational risk management processes, which are designed to ensure
that risks and issues are identiﬁed, escalated and managed on a timely basis. Regular reporting is in place with respect to the Company’s
current and emerging operational risks, key risk indicators, operational loss events, external event analyses, issues management, new
initiative risk assessment, crisis management preparedness and third-party risk management.

Business Continuity and Crisis Management

The Company is implementing an all-hazards-based business continuity and crisis management strategy to ensure minimal impact to the
Company’s clients and operations in the event of a disruption or other adverse event.

Corporate Insurance

The Company maintains insurance coverage through a ﬁnancial institution bond policy, which is reviewed at least annually for changes to
coverage and the Company’s operations.

Legislative and Regulatory Risk

Legislative and Regulatory Risk refers to the risk of non-compliance with an applicable legislative or regulatory requirement (law, regulation,
guideline, an undertaking to a regulatory authority or provision, section, subsection, order, term or condition). This includes requirements
that have been identiﬁed by the Governance, Risk and Compliance Committee and Senior Management that require the Company to do
certain things, including conducting its affairs in a particular manner, and where non-compliance could have an impact on the Company’s
reputation and/or safety and soundness.

While all business units of the Company (as the ﬁrst line of defense) are responsible for ensuring that Legislative and Regulatory Risk
is mitigated, the independent oversight of Legislative and Regulatory Risk is principally managed by the CCO, CAMLO and the Corporate
Compliance group as part of the Company’s Compliance Framework.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis

Reputational Risk

Reputational risk is the risk that shareholders or the public will, with or without basis, judge the Company’s operations or practices
negatively, potentially resulting in a decline in its value, brand, liquidity, or customer base.

The Company views reputational risk as an exposure to earnings and/or capital from the consequence or failure to adequately manage
any risk, regardless of the source, rather than a speciﬁc risk. Failure to effectively manage these risks can result in reduced market
capitalization, loss of client loyalty, and the inability to achieve the Company’s strategic objectives.

The most effective way for the Company to safeguard its public reputation is through the successful management of the underlying risks in
the business. The Company aims to achieve this through the adoption of its ERM framework.

Risk Factors That May Affect Future Results

In addition to the risks described in this Risk Management section, there are numerous other risk factors, in particular macroeconomic and
industry factors beyond the Company’s control, which could cause the Company’s results to differ signiﬁcantly from the Company’s plans,
objectives and estimates. All forward-looking statements, including those in this MD&A, are subject to inherent risks and uncertainties,
general and speciﬁc, which may cause the Company’s actual results to differ materially from the expectations expressed in the forward-
looking statements. Some of these external factors are discussed below.

Monetary and Fiscal Policy

The Company’s earnings are affected by the monetary policy of the Bank of Canada and the ﬁscal policy of the federal government of
Canada and other governments in Canada and abroad. Changes in the supply of money, government spending and the general level
of interest rates can affect the Company’s proﬁtability. A change in the level of interest rates affects the interest spread between the
Company’s deposits and loans and, as a result, impacts the Company’s net interest income. Changes in monetary and ﬁscal policy and in
the ﬁnancial markets are beyond the Company’s control and are difﬁcult to predict or anticipate.

Level of Competition

The Company’s performance is impacted by the level of competition in the markets in which it operates. The Company currently operates in
a highly competitive industry. Customer retention can be inﬂuenced by many factors, such as the pricing of products or services, changes
in customer service levels, changes in products or services offered, and general trends in consumer demand.

Changes in Legislation and Regulations

Changes in legislation and regulations, including interpretation or implementation, could affect the Company by limiting the scale and
scope of its products and services. Also, the Company’s failure to comply with its legislative and regulatory requirements could result in
sanctions and ﬁnancial penalties that could adversely impact the Company’s earnings and damage its reputation and ability to operate
as a regulated entity.

Information Systems and Technology

The Company is highly dependent upon its information technology systems. The Company uses third-party software and software that
it has developed or modiﬁed for its main operations and relies on third parties for credit card processing, Internet connections and
access to external networks. Should the Company experience any major disruptions in operations or connections of software, Internet or
telecommunications for voice or data, this would impair its ability to provide service to clients. The longer and more severe the disruption,
the more the Company’s ability to conduct business would be impaired.

Accounting Policies and Estimates Used by the Company

The accounting policies and estimates the Company utilizes determine how the Company reports its ﬁnancial condition and results of
operations, and they may require management to make estimates or rely on assumptions about matters that are inherently uncertain.
Such estimates and assumptions may require revisions, and changes to them may materially adversely affect the Company’s results of
operations and ﬁnancial condition. More discussion is included in the Accounting Standards and Policies section and within the notes to
the consolidated ﬁnancial statements.

Ability to Attract and Retain Employees and Executives

The Company’s future performance depends to a large extent on its ability to attract and retain key personnel. There is strong competition
for the best people in the ﬁnancial services sector. There is no assurance that the Company will be able to continue to attract and retain
key personnel, although this remains a fundamental corporate priority.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

ACCOUN TING STANDA RDS AND POLIC I ES

The signiﬁcant accounting policies are outlined in Note 2 to the consolidated ﬁnancial statements included in this report. These policies
are critical as they refer to material amounts and require management to make estimates.

Critical accounting estimates that require management to make signiﬁcant judgements, some of which are inherently uncertain, are outlined
in Note 2 to the consolidated ﬁnancial statements included in this report. These estimates are critical as they involve material amounts
and require management to make determinations that, by their very nature, include uncertainties. The preparation of 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. Key areas where management has made estimates and
applied judgement include allowance for credit losses, fair values and impairment of ﬁnancial instruments, goodwill and intangible assets,
income taxes, fair value of stock options and useful lives of capital assets and intangible assets. In addition, the Company’s management
has applied judgement in the application of its accounting policy with respect to derecognition of the loans and other assets used in current
securitization programs. Most loans and other assets are not derecognized, based on management’s judgement that the Company has not
transferred substantially all of the risks and rewards of ownership of the loans and other assets. Certain loans are recognized only to the
extent of the Company’s continuing involvement, based on management’s judgement that it cannot be determined whether substantially
all the risks and rewards of ownership have been transferred while control has been retained as deﬁned by IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39). Certain loans where residual interests in securitized transactions are sold are derecognized based
on management’s judgement that substantially all the risks and rewards of ownership have been transferred. Further information can be
found under Notes 4, 5, 6, 8, 9, 10, 14, 16, 19 and 22 to the consolidated ﬁnancial statements.

ACCOUNTIN G DEVELOPMENTS

The following new IFRS pronouncements have been issued but are not yet effective and may have a future impact on the Company:

IAS 1 Presentation of Financial Statements

Beginning with the 2013 annual ﬁnancial statements, the Company will be required to adopt amendments to IAS 1 Presentation of
Financial Statements, which may result in changes in the way OCI is presented in the consolidated statement of income. However, it is not
expected to result in material changes to the overall presentation of the Company’s consolidated ﬁnancial statements.

IFRS 9 Financial Instruments

As of January 1, 2015, the Company will be required to adopt IFRS 9, Financial Instruments (IFRS 9), which is the ﬁrst phase of the
International Accounting Standards Board’s (IASB) project to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9
will provide new requirements for the way in which an entity should classify and measure ﬁnancial assets and liabilities that are in the
scope of IAS 39. The standard requires all ﬁnancial assets to be classiﬁed on the basis of the entity’s business model for managing such
ﬁnancial assets and the contractual cash ﬂow characteristics of the ﬁnancial assets. In September 2012, the IASB issued a review draft
of the standard on general hedge accounting with a ﬁnal standard expected to be issued during the ﬁrst quarter of 2013. The general
hedge accounting standard is intended to provide better links between an entity’s risk management activities, the rationale for hedging
and the impact of hedging on the ﬁnancial statements. The standard will potentially simplify the Company’s hedge accounting strategies.
The impairment phase of the IASB’s ﬁnancial instruments project is currently under development. Management is currently evaluating the
potential impact that the adoption of IFRS 9 will have on the Company’s consolidated ﬁnancial statements.

IFRS 10 Consolidated Financial Statements

As of January 1, 2013, the Company will be required to adopt IFRS 10 Consolidated Financial Statements (IFRS 10). Under IFRS 10,
consolidated ﬁnancial statements will include all controlled entities under a single control model. Management does not anticipate any
material changes to the ﬁnancial position or operating results upon adoption of IFRS 10.

IFRS 13 Fair Value Measurement

As of January 1, 2013, the Company will be required to adopt IFRS 13 Fair Value Measurement (IFRS 13). IFRS 13 establishes a single
source of guidance for fair value measurements when fair value is required or permitted by IFRS and provides for enhanced disclosures when
fair value is applied. The adoption of IFRS 13 is not expected to be material to the results of operations or ﬁnancial position of the Company.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis

CONTR OLS OVER FINANC IAL R EPOR TING

Disclosure Controls and Internal Control over Financial Reporting

Management is responsible for establishing the integrity and fairness of ﬁnancial information presented in the consolidated ﬁnancial
statements prepared in accordance with Canadian generally accepted accounting principles. As such, management has established
disclosure controls and procedures and internal controls over ﬁnancial reporting to ensure that the Company’s consolidated ﬁnancial
statements and Management’s Discussion and Analysis present fairly, in all material respects, the ﬁnancial position of the Company and
the results of its operations.

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported
to senior management, including the Chief Executive Ofﬁcer and Chief Financial Ofﬁcer, on a timely basis so that appropriate decisions
can be made regarding public disclosure.

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted as
of December 31, 2012. Based on that evaluation, the Company’s management, including the Chief Executive Ofﬁcer and Chief Financial
Ofﬁcer, concluded that the Company’s disclosure controls and procedures, as deﬁned by National Instrument 52-109 Certiﬁcate of
Disclosure in Issuers’ Annual and Interim Filing, were effective as of December 31, 2012.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over ﬁnancial reporting to provide reasonable
assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance
with GAAP. The Company’s internal control over ﬁnancial reporting includes policies and procedures that:

> Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the

assets of the Company;

> Provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance
with GAAP, and receipts and expenditures are being made in accordance with authorizations of management and the Board of Directors
of the Company; and

> Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s

assets that could have a material effect on the ﬁnancial statements.

Due to inherent limitations, internal controls over ﬁnancial reporting can provide only reasonable assurance and may not prevent or detect
misstatements. As a result, the Company’s management acknowledges that its internal control over ﬁnancial reporting will not prevent or
detect all misstatements due to error or fraud. Furthermore, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of a change in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.

The Company has used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework and COBIT, an IT
governance framework, to evaluate the design of the Company’s internal controls over ﬁnancial reporting.

An evaluation of the design and operating effectiveness of internal controls over ﬁnancial reporting was conducted as of December 31,
2012. Based on that evaluation, the Company’s management, including the Chief Executive Ofﬁcer and Chief Financial Ofﬁcer, concluded
that the Company’s internal controls over ﬁnancial reporting were operating effectively as of December 31, 2012.

Changes in Internal Control over Financial Reporting

During the year, management identiﬁed and subsequently implemented certain changes to accounting processes and procedures.
The material changes in processes and procedures relate to accounting for the sale of residual interests (interest only strips) related to
certain securitizations.

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

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

Comparative Consolidated Financial Statements

The comparative audited consolidated ﬁnancial statements have been reclassiﬁed from statements previously presented to conform to the
presentation of the 2012 audited consolidated ﬁnancial statements.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

NON- GAAP MEAS URE S AND G LOSSARY

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 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 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 as a percentage of the capital
deployed to earn the income. The Company calculates its return on shareholders’ 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 annualized net income as a percentage of the average total assets for the
period deployed to earn the income.

Efﬁciency or Productivity Ratio

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

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 OSFI. Refer to Note 14(I) to the consolidated ﬁnancial statements included in this report.

Assets to Capital Multiple

The multiple reﬂects total assets, including speciﬁed off-balance sheet items net of other speciﬁed deductions, divided by regulatory Total
capital.

Taxable Equivalent Basis (TEB)

Most banks and trust companies analyze and discuss their ﬁnancial results on a taxable equivalent basis (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 principally from preferred and common equity securities. The adjustment to TEB used in this MD&A 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. TEB adjustments of $5.0 million for 2012 ($7.2 million in 2011) increased interest income as used in the calculation of
net interest margin. TEB does not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures
used by other companies. Net interest margin is discussed on a TEB throughout this MD&A. See Table 5 for the calculation of net interest
income on a tax equivalent basis.

Net Interest Margin (TEB)

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

Net Interest Margin (Non-TEB)

Net interest margin is calculated by taking net interest income divided by the average total assets generating the interest income.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Discussion and Analysis

Glossary of Financial Terms

Assets or Loans under Administration refer to assets or loans administered by a ﬁnancial institution that are beneﬁcially owned by clients
and therefore not reported on the balance sheet of the administering ﬁnancial institution, plus all assets or loans beneﬁcially owned by
the Company and carried on the balance sheets.

Average Earning Assets represents the monthly average balance of deposits with other banks and loans and securities over a relevant
period.

Basis Point is one-hundredth of a percentage point.

Canada Deposit Insurance Corporation (CDIC) is a Canadian federal Crown corporation created to protect deposits made with member
ﬁnancial institutions in case of their failure.

Collective Allowance (previously referred to as the General Allowance) is established for incurred losses inherent in the portfolio that are
not presently identiﬁable on a loan-by-loan basis and reﬂects the relative risk of the various loan portfolios that the Company manages.
The Company’s evaluation of the adequacy of the collective allowance takes into account asset quality, borrowers’ creditworthiness,
property location, past loss experience, current and forecasted probability of default and exposure at default based on product, risk ratings
and credit scores, and current economic conditions. The Company periodically reviews the methods utilized in assessing the collective
allowance, giving due consideration to changes in economic conditions, interest rates and local housing market conditions.

Derivatives used by the Company are contracts whose value is “derived” from movements in interest rates. Derivatives allow for the transfer,
modiﬁcation or reduction of current or expected risks from changes in rates.

Forwards used by the Company are contractual agreements to either buy or sell a speciﬁed amount of an interest-rate-sensitive ﬁnancial
instrument or security at a speciﬁc price and date in the future. Forwards are customized contracts transacted in the over-the-counter
market.

Hedging is a risk management technique used by the Company to neutralize, manage or offset interest rate, equity, or credit exposures
arising from normal banking activities.

Impaired or Non-performing Loans are loans for which there is no longer reasonable assurance of the timely collection of principal
or interest.

Individual Allowances (previously referred to as Speciﬁc Allowances) reduce the carrying value of individual credit assets to the amount
expected to be recovered if there is evidence of deterioration in credit quality.

Insured Loans are loans insured against default by CMHC or another approved insurer. The Company’s insured lending includes single
family homes and multi-residential properties.

Net Interest Income is comprised of earnings on assets, such as loans and securities, including interest and dividend income, less interest
expense paid on liabilities, such as deposits.

Notional Amount refers to the principal used to calculate interest and other payments under derivative contracts. The principal does not
change hands under the terms of a derivative contract.

Ofﬁce of the Superintendent of Financial Institutions Canada (OSFI) is the government agency responsible for regulating banks,
insurance companies, trust companies, loan companies and pension plans in Canada.

Provision for Credit Losses is a charge to income that represents an amount deemed adequate by management to fully provide for
impairment in a portfolio of loans and other credit instruments, given the composition of the portfolio, the probability that default has
occurred, the economic environment and the allowance for credit losses already established.

Securitization is the practice of selling pools of contractual debts, such as residential or commercial mortgages, to third parties.

Swaps are contractual agreements between two parties to exchange a series of cash ﬂows. The only type of swap agreements used by
the Company are interest rate swaps where counterparties generally exchange ﬁxed-rate and ﬂoating-rate interest payments based on a
notional value in a single currency.

Tier 1 Capital is primarily comprised of regulatory common equity and certain qualifying instruments.

Tier 2 Capital is primarily comprised of subordinated debentures and a portion of the collective allowance for credit losses.

Total Capital includes Tier 1 and Tier 2 capital, net of certain deductions.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Consolidated Financial Statements

CONS OLIDATE D FI NANC I AL STAT EM ENTS

Management’s Responsibility for Financial Information
Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows

NOTES TO T H E CO NS O LI DATE D FI NANC I AL STAT EME NTS

1. Corporate Information
2. Summary of Signiﬁcant Accounting Policies
3. Future Changes in Accounting Policies

4. Cash and Securities
5. Loans
6. Securitization Activity
7. Other Assets
8. Capital Assets
9. Intangible Assets
10. Goodwill
11. Deposits by Remaining Contractual Term to Maturity
12. Senior Debt
13. Other Liabilities
14. Capital
15. Accumulated Other Comprehensive Income
16. Income Taxes
17. Employee Beneﬁts
18. Commitments and Contingencies
19. Derivative Financial Instruments
20. Current and Non-current Assets and Liabilities
21. Interest Rate Sensitivity
22. Fair Value of Financial Instruments
23. Earnings by Business Segment
24. Related Party Transactions
25. Risk Management
26. Comparative Consolidated Financial Statements

74
75
76
77
78
78
79

80
80
86
87
89
92
94
94
95
95
96
96
96
96
100
100
101
101
102
105
106
108
109
110
110
110

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Management’s Responsibility for Financial Information

The consolidated ﬁnancial statements of Home Capital Group Inc. were prepared by management, which is responsible for the integrity and
fairness of the ﬁnancial information presented. The consolidated ﬁnancial statements are prepared in accordance with Canadian generally
accepted accounting principles for publicly accountable enterprises, which are International Financial Reporting Standards as issued by the
International Accounting Standards Board, including the accounting requirements speciﬁed by the Ofﬁce of the Superintendent of Financial
Institutions Canada that apply to its subsidiary Home Trust Company. The ﬁnancial statements reﬂect amounts which must, of necessity,
be based on the best estimates and judgement of management with appropriate consideration as to materiality. The ﬁnancial information
presented elsewhere in this report is consistent with that in the ﬁnancial statements.

Management is responsible for ensuring the fairness and integrity of the ﬁnancial information. It is also responsible for the implementation
of the supporting accounting systems. In discharging its responsibilities, management maintains the necessary internal control system
designed to provide assurance that the transactions are properly authorized, assets are safeguarded and proper accounting records are
held. The controls include quality standards in hiring and training of employees, written policies, authorized limits for managers, procedure
manuals, a corporate code of business conduct and ethics and appropriate management information systems.

The internal control systems are further supported by a compliance function, which ensures that the Company and its employees comply
with all regulatory requirements, as well as by an enterprise risk function that ensures proper risk control, related documentation and the
measurement of the ﬁnancial impact of risks. In addition, the internal audit function periodically assesses various aspects of the Company’s
operations and makes recommendations to management for, among other things, improvements to the control systems.

Every year, the Ofﬁce of the Superintendent of Financial Institutions Canada makes such examinations and inquiries as deemed necessary
to satisfy itself that Home Trust Company is in a sound ﬁnancial position and that it complies with the provisions of the Trust and Loan
Companies Act (Canada).

Ernst & Young LLP, independent auditors, appointed by the shareholders, perform an annual audit of the Company’s consolidated ﬁnancial
statements, and their report follows.

The internal auditors, the chief compliance ofﬁcer, the external auditors and the Ofﬁce of the Superintendent of Financial Institutions
Canada meet periodically with the Audit Committee, with management either present or absent, to discuss all aspects of their duties and
matters arising therefrom.

The Board of Directors is responsible for reviewing and approving the ﬁnancial statements and Management’s Discussion and Analysis of
results of operations and ﬁnancial condition appearing in the Annual Report. It oversees the manner in which management discharges its
responsibilities for the presentation and preparation of ﬁnancial statements, maintenance of appropriate internal controls, risk management
as well as assessment of signiﬁcant transactions and related party transactions through its Audit Committee. The Audit Committee is
composed solely of Directors who are not Ofﬁcers or employees of the Company.

Gerald M. Soloway

Chief Executive Ofﬁcer
Toronto, Canada
February 13, 2013

Robert Blowes, CPA, C.A.

Chief Financial Ofﬁcer

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Independent Auditors’ Report

To the Shareholders of Home Capital Group Inc.

We have audited the accompanying consolidated ﬁnancial statements of Home Capital Group Inc., which comprise the consolidated
balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, comprehensive income, changes in
shareholders’ equity and cash ﬂows for the years ended December 31, 2012 and 2011, and a summary of signiﬁcant accounting policies
and other explanatory information.

Management’s responsibility for the consolidated ﬁnancial statements

Management is responsible for the preparation and fair presentation of these consolidated ﬁnancial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated ﬁnancial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated ﬁnancial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁnancial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement
of the consolidated ﬁnancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal
control relevant to the entity’s preparation and fair presentation of the consolidated ﬁnancial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated ﬁnancial statements.

We believe that the audit evidence we have obtained in our audits is sufﬁcient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of Home Capital Group
Inc. as at December 31, 2012 and 2011, and its ﬁnancial performance and its cash ﬂows for the years ended December 31, 2012 and
2011 in accordance with International Financial Reporting Standards.

Toronto, Canada

February 13, 2013

Chartered Accountants

Licensed Public Accountants

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Consolidated Balance Sheets

thousands of Canadian dollars
ASSETS
Cash Resources and Restricted Cash (note 4(A))
Securities (notes 4(B) and (C))
Available for sale
Pledged securities (notes 4(B) and 6(C))

Loans Held for Sale
Loans (note 5)
Residential mortgages
Securitized residential mortgages (note 6)
Non-residential mortgages
Personal and credit card loans

Collective allowance for credit losses (note 5(E))

Other
Derivative assets (note 19)
Other assets (note 7)
Capital assets (note 8)
Intangible assets (note 9)
Goodwill (note 10)

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits (note 11)
Deposits payable on demand
Deposits payable on a ﬁxed date

Senior Debt (note 12)
Securitization Liabilities (notes 6(D) and (E))
Mortgage-backed security liabilities
Canada Mortgage Bond liabilities

Other
Derivative liabilities (note 19)
Income taxes payable
Other liabilities (note 13)
Deferred tax liabilities (note 16(C))

Shareholders’ Equity
Capital stock (note 14)
Contributed surplus
Retained earnings
Accumulated other comprehensive loss (note 15)

Commitments and Contingencies (note 18)
The accompanying notes are an integral part of these consolidated ﬁnancial statements.

On behalf of the Board:

Gerald M. Soloway

Chief Executive Ofﬁcer

Robert A. Mitchell

Chair of Audit Committee

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

December 31
2012

As at

December 31
2011

439,287

665,806

414,344
843,547
1,257,891
21,921

8,843,923
6,450,682
988,416
599,493
16,882,514
(30,000)
16,852,514

45,388
94,405
6,578
66,343
15,752
228,466
$ 18,800,079

105,923
$
10,030,676
10,136,599
150,684

1,301,693
6,034,202
7,335,895

2,386
21,912
148,590
35,800
208,688
17,831,866

61,903
6,224
903,831
(3,745)
968,213
$ 18,800,079

391,754
341,588
733,342
–

6,339,883
8,243,350
946,222
560,193
16,089,648
(29,440)
16,060,208

72,424
79,650
5,372
63,917
15,752
237,115
$ 17,696,471

75,965
7,846,159
7,922,124
153,336

2,417,801
6,231,274
8,649,075

3,458
17,628
136,025
40,040
197,151
16,921,686

55,104
5,873
722,999
(9,191)
774,785
$ 17,696,471

Consolidated Statements of Income

thousands of Canadian dollars, except per share amounts

Net Interest Income Non-Securitized Assets
Interest from loans
Dividends from securities
Other interest

Interest on deposits
Interest on senior debt
Net interest income non-securitized assets
Net Interest Income Securitized Loans and Assets
Interest income from securitized loans and assets
Interest expense on securitization liabilities
Net interest income securitized loans and assets
Total Net Interest Income
Provision for credit losses (note 5(E))

Non-interest Income
Fees and other income
Securitization income (note 6(B))
Net realized and unrealized (losses) gains on securities and mortgages
Net realized and unrealized gain (loss) on derivatives (note 19)

Non-interest Expenses
Salaries and beneﬁts
Premises
Other operating expenses

Income Before Income Taxes
Income taxes (note 16(A))
Current
Deferred

NET INCOME
NET INCOME PER COMMON SHARE (note 14(H))
Basic
Diluted

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (note 14(H))
Basic
Diluted

Total number of outstanding common shares (note 14(B))
Book value per common share

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

December 31
2012

For the year ended

December 31
2011

$
$

525,722
14,171
4,019
543,912
230,006
6,831
307,075

287,871
213,474
74,397
381,472
14,720
366,752

43,994
8,131
(71)
3,848
55,902
422,654

58,956
8,833
54,946
122,735
299,919

82,176
(4,240)
77,936
221,983

6.40
6.38

34,692
34,820

34,630
27.96

$
$

400,997
18,417
5,487
424,901
192,357
4,364
228,180

330,491
224,719
105,772
333,952
7,519
326,433

37,997
–
4,088
(7,203)
34,882
361,315

52,523
7,776
44,703
105,002
256,313

66,270
(37)
66,233
190,080

5.48
5.46

34,677
34,787

34,625
22.38

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Consolidated Statements of Comprehensive Income

thousands of Canadian dollars

NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS)
Available for Sale Securities (note 4(C))
Net unrealized gains (losses) on securities available for sale
Net gains reclassiﬁed to net income

Income tax expense (recovery)

Cash Flow Hedges (note 19)
Net unrealized losses on cash ﬂow hedges
Net losses reclassiﬁed to net income

Income tax expense (recovery)

Total other comprehensive income (loss)
COMPREHENSIVE INCOME

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

December 31
2012
221,983

For the year ended

December 31
2011
190,080

6,462
(114)
6,348
1,775
4,573

(370)
1,462
1,092
219
873
5,446
227,429

(8,602)
(4,815)
(13,417)
(3,370)
(10,047)

(7,386)
618
(6,768)
(1,718)
(5,050)
(15,097)
174,983

Consolidated Statements of Changes in Shareholders’ Equity

thousands of Canadian dollars,
except per share amounts

Capital
Stock

Contributed
Surplus

Retained
Earnings

Net Unrealized
(Losses) Gains
on Securities
Available for
Sale, After Tax

Net Unrealized
Losses on
Cash Flow
Hedges,
After Tax

Total
Accumulated
Other
Comprehensive
(Loss) Income

Total
Shareholders’
Equity

5,873 $ 722,999 $

–

221,983

(4,141) $
4,573

(5,050) $
873

(9,191) $ 774,785
227,429
5,446

–

(289)

7,088

$ 55,104 $

Balance at December 31, 2011
Comprehensive income
Stock options settled
(note 14(B))
Amortization of fair value of
employee stock options
(note 14(D))
Repurchase of shares
(note 14(C))
Dividends paid
($0.90 per share)
Balance at December 31, 2012 $ 61,903 $
Balance at December 31, 2010
$ 50,427 $
Comprehensive income
Stock options settled
(note 14(B))
Amortization of fair value of
employee stock options
(note 14(D))
Repurchase of shares
(note 14(C))
Dividends paid
($0.76 per share)
Balance at December 31, 2011

$ 55,104 $

4,921

(244)

–

5,680

–

1,759

(8,117)

(1,408)

1,759

–

(7,828)

(33,323)

6,224 $ 903,831 $
4,571 $ 567,681 $

–
432 $
5,906 $

–
(4,177) $
– $

–

(33,323)
(3,745) $ 968,213
5,906 $ 628,585
174,983

(15,097)

–

190,080

(10,047)

(5,050)

(1,098)

2,400

–

(7,702)

(27,060)

5,873 $ 722,999 $

–

3,823

–

2,400

(7,946)

–
(4,141) $

–
(5,050) $

–

(27,060)
(9,191) $ 774,785

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

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Consolidated Statements of Cash Flows

thousands of Canadian dollars

CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year
Adjustments to determine cash ﬂows relating to operating activities:
Deferred income taxes
Amortization of capital assets
Amortization of intangible assets
Amortization of net premium (discount) on securities
Amortization of securitization and senior debt transaction costs
Provision for credit losses
Change in accrued interest payable
Change in accrued interest receivable
Net realized and unrealized losses (gains) on securities and mortgages
Realized gain on securitization
Settlement of derivatives
(Gain) loss on derivatives
Net increase in mortgages
Net increase in personal and credit card loans
Net increase in deposits
Activity in securitization liabilities
Proceeds from sale of mortgage-backed securities
Proceeds from securitization of mortgage-backed security liabilities
Settlement and repayment of securitization liabilities
Amortization of fair value of employee stock options
Changes in taxes payable and other
Cash ﬂows provided by operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of shares
Exercise of employee stock options
Issuance of senior debt
Dividends paid to shareholders
Cash ﬂows (used in) provided by ﬁnancing activities
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities
Purchases
Proceeds from sales
Proceeds from maturities
Purchases of capital assets
Purchases of intangible assets
Cash ﬂows used in investing activities
Net decrease in cash resources and restricted cash during the year
Cash resources and restricted cash at beginning of the year
Cash Resources and Restricted Cash at End of the Year (note 4(A))

Supplementary Disclosure of Cash Flow Information
Dividends received on investments
Interest received
Interest paid
Income taxes paid

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

December 31
2012

For the year ended

December 31
2011

221,983

190,080

(4,240)
3,118
6,715
2,460
13,396
14,720
13,519
(5,449)
71
(8,131)
(370)
(3,848)
(1,687,717)
(40,858)
2,214,475

242,009
641,696
(1,278,521)
1,759
(6,732)
340,055

(8,117)
5,680
–
(31,244)
(33,681)

(4,291,902)
381,049
3,391,425
(4,324)
(9,141)
(532,893)
(226,519)
665,806
439,287

12,626
518,537
223,318
87,184

(37)
3,052
679
(49)
14,153
7,519
4,993
(6,686)
(4,088)
–
(7,385)
7,203
(1,897,308)
(107,817)
1,326,145

–
1,233,754
(753,085)
2,400
23,293
36,816

(7,946)
3,823
149,052
(26,371)
118,558

(1,641,985)
389,978
935,824
(3,530)
(16,679)
(336,392)
(181,018)
846,824
665,806

17,318
725,476
416,764
36,636

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

NOTE 1

CORPOR ATE INFOR MATION

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

These consolidated ﬁnancial statements for the year ended December 31, 2012 were authorized for issuance by the Board of Directors
(the Board) of the Company on February 13, 2013. The Board has the power to amend the consolidated ﬁnancial statements after their
issuance only in the case of discovery of an error.

Subsequent to the end of the year and before the date these consolidated ﬁnancial statements were authorized for issuance, the Board
declared a quarterly cash dividend of $9.0 million or $0.26 per common share payable on March 1, 2013 to shareholders of record at
the close of business on February 25, 2013.

NOTE 2

S UMMARY OF S IGNIFIC ANT A CCOUNTING P OL IC I ES

The consolidated ﬁnancial statements of the Company have been prepared in accordance with Canadian generally accepted accounting
principles (GAAP) for publicly accountable enterprises which are International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB).

The accounting policies were consistently applied to all periods presented unless otherwise noted. The signiﬁcant accounting policies used
in the preparation of these consolidated ﬁnancial statements are summarized below.

Use of Judgement and Estimates

Management has exercised judgement in the process of applying the Company’s accounting policies. In particular, the Company’s
management has applied judgement in the application of its accounting policy with respect to derecognition of the loans and other assets
used in current securitization programs. Most loans and other assets are not derecognized, based on management’s judgement that the
Company has not transferred substantially all of the risks and rewards of ownership of the loans and other assets. Certain loans are
recognized only to the extent of the Company’s continuing involvement, based on management’s judgement that it cannot be determined
whether substantially all the risks and rewards of ownership have been transferred while control has been retained as deﬁned by IAS 39
Financial Instruments: Recognition and Measurement (IAS 39). Certain loans where residual interests in securitized transactions are sold
are derecognized based on management’s judgement that substantially all the risks and rewards of ownership have been transferred.

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

Principles of Consolidation

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

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

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

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Cash Resources and Restricted Cash

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

Securities

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

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

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

At the end of each reporting period, the Company conducts a review to assess whether there is any objective evidence that an available
for sale security is impaired. Objective evidence of impairment results from one or more events that occur after the initial recognition of
the security and which event (or events) has an impact that can be reliably estimated on the estimated future cash ﬂows of the security.
Such objective evidence includes observable data that comes to the attention of the Company such as signiﬁcant ﬁnancial difﬁculty of
the issuer of the security. In the case of equity securities, objective evidence of impairment includes a signiﬁcant or prolonged decline in
the fair value of the security below its cost. The determination of what is signiﬁcant or prolonged is based on management’s judgement.
Generally, management considers a signiﬁcant decline to be 20% or more and a prolonged decline to be 12 months or more.

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

Obligations Related to Securities Sold Under Repurchase Agreements

The purchase and sale of securities under sale and repurchase agreements are accounted for as collateralized lending and borrowing
transactions and are recorded at cost. The related interest income and interest expense are recorded on an accrual basis in the
consolidated statement of income.

Loans Held for Securitization and Sale

Loans for which the Company has the intention of securitizing and derecognizing from the consolidated balance sheet in the near term are
classiﬁed as held for trading for accounting purposes and are carried at fair value. Unrealized gains and losses resulting from the change
in fair value of these loans are reported in net realized and unrealized gains or losses on securities and mortgages. Interest income earned
on these loans is included in interest from loans. The fair value of loans held for trading is determined by discounting the expected future
cash ﬂows of the loans at market rates for ﬁnancial instruments with similar terms and credit risk.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

Loans

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

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

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

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

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

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

Allowance for Credit Losses

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

Individual Allowances

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

Collective Allowances

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

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

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Securitized Loans and Securitization Liabilities

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

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

The securitization liabilities are recorded at amortized cost using the effective interest rate method. Interest expense is allocated over the
expected term of the borrowing by applying the effective interest rate to the carrying amount of the liability. The effective interest rate is
the rate that exactly discounts estimated future cash outﬂows over the expected life of the liability. Transaction costs and premiums or
discounts are applied to the carrying amount of the liability. Also included in securitization liabilities on the consolidated balance sheets
are amounts related to fair value hedge accounting that increase or decrease the carrying amount of the securitization liability. Please see
Note 19 for more information.

In certain cases, the Company’s remaining involvement is quite limited, but it has not transferred substantially all of its risks and rewards in
the underlying loans but it has retained control, as deﬁned by IAS 39. Such mortgages are securitized and sold and the Company retains
interest-only strips and servicing responsibilities for the assets sold, with very little exposure to variable cash ﬂows. The Company accounts
for its continuing involvement as retained interests and servicing liabilities on the consolidated balance sheet. Gains or losses on these
transactions are recognized as securitization income in non-interest income on the consolidated income statement and are dependent in
part on the previous carrying amount of the ﬁnancial assets involved in the transfer, allocated between the assets sold and the retained
interests, based on their relative fair value at the date of transfer and net of transaction costs. Retained interests are classiﬁed as available
for sale assets and are stated at their fair value with unrealized gains and losses reported in AOCI. The fair value of the retained interests is
estimated using discounted cash ﬂow methodology. Retained interests are revalued quarterly to assess for impairment.

In certain circumstances, the Company sells its retained interest arising from securitization transactions. When this results in the Company
transferring substantially all of the risks and rewards of ownership associated with the underlying mortgages, the mortgages are derecognized
and a resulting gain or loss is recorded. These gains or losses are recognized as securitization income in non-interest income on the
consolidated income statement and are dependent in part on the previous carrying amount of the ﬁnancial assets involved in the transfer.

Derivatives Held for Risk Management Purposes

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

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

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

Fair Value Hedges

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

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

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

Cash Flow Hedges

Cash ﬂow hedges generally use bond forwards or interest rate swaps to hedge changes in future cash ﬂows attributable to interest rate
ﬂuctuations arising on highly probable forecasted issuances of ﬁxed-rate secured borrowings.

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

Capital Assets

Capital assets, which comprise ofﬁce furniture and equipment, computer equipment and software and leasehold improvements, are
recorded at cost and amortized over their estimated useful lives on a straight-line basis. The ranges of useful lives for each asset type are
as follows:

Ofﬁce furniture and equipment

5 to 10 years

Computer equipment and software

3 to 7 years

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

The Company assesses, at each reporting period date, whether there is an indication that a capital asset may be impaired. If any indication
of impairment exists, the Company performs an impairment test to determine whether an impairment loss is required to be recognized.
The impairment tests are performed in accordance with the steps discussed in the accounting policy note below entitled “Impairment of
Capital Assets and Intangible Assets.”

Goodwill

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

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

Intangible Assets

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

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

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

The Company capitalized eligible development costs related to the development of its core banking system. Amortization of these costs
over the appropriate useful life commenced when the development of the software module was substantially completed and the software
became available for use in the manner intended by management. Eligible costs include external direct costs for materials and services,
as well as payroll and payroll-related costs for employees directly associated with the project. Overhead costs, costs incurred during the
research phase, costs to train staff to operate the asset and costs incurred after the software was substantially completed and available
for use are expensed as incurred. The Company continues to capitalize eligible development costs related to additional software projects
and will commence amortization of these costs when development of the asset is substantially complete and the asset becomes available
for use in the manner intended by management.

The Company assesses, at each reporting period date, whether there is an indication that an intangible asset may be impaired. If any
indication of impairment exists, the Company performs an impairment test to determine whether an impairment loss is required to be
recognized. In relation to development costs for software that is not yet available for use, the Company performs an impairment test on an
annual basis as well as when indications of impairment exist. Such annual impairment tests will continue until the software is available for
use. The impairment tests are performed in accordance with the steps discussed in the accounting policy note below entitled “Impairment
of Capital Assets and Intangible Assets.”

Impairment of Capital Assets and Intangible Assets

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

Deposits

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

Senior Debt

Senior debt is carried at amortized cost, including the principal amount received on issue, plus accrued interest and costs incurred on
issue, less repayments of principal and interest, amortization of issue costs and any premium or discount to the face amount of the debt.
Issue costs and premiums or discounts are amortized to income using the effective interest rate method. Also included in senior debt on
the consolidated balance sheets are amounts related to fair value hedge accounting which increase or decrease the carrying amount of
the senior debt. Please see Note 19 for more information.

Income Taxes

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

Fee Income

Fee income is accrued and recognized as income as the associated services are rendered.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

Stock-based Compensation Plans

The Company has stock-based compensation plans, which are described in Note 14.

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

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

Employee Beneﬁt Plans

Under both the Employee Share Purchase Plan and the Employee Retirement Savings Plan, the Company’s contribution is expensed when
paid (see Note 17).

Translation of Foreign Currencies

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

NOTE 3

FUTURE CHANGE S IN A CCO UNTIN G POLIC I ES

The following accounting pronouncements issued by the IASB were not effective as at December 31, 2012 and therefore have not been
applied in preparing these consolidated ﬁnancial statements.

IAS 1 Presentation of Financial Statements

In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements (IAS 1), which are effective for annual periods
beginning on or after July 1, 2012, with earlier application permitted. The amendments may result in changes in the way OCI is presented in
the consolidated statement of income. However, it is not expected to result in material changes to the overall presentation of the Company’s
consolidated ﬁnancial statements.

IFRS 9 Financial Instruments

In November 2009, the IASB issued, and subsequently revised in October 2010, IFRS 9 Financial Instruments (IFRS 9) as a ﬁrst phase
in its ongoing project to replace IAS 39. IFRS 9, which is to be applied retrospectively, is effective for annual periods beginning on or after
January 1, 2015, with earlier application permitted. IFRS 9 provides new requirements as to how an entity should classify and measure
ﬁnancial assets and liabilities that are in the scope of IAS 39. The standard requires all ﬁnancial assets to be classiﬁed on the basis
of the entity’s business model for managing such ﬁnancial assets and the contractual cash ﬂow characteristics of the ﬁnancial assets.
In September 2012, the IASB issued a review draft of the standard on general hedge accounting, with a ﬁnal standard expected to be
issued during the ﬁrst quarter of 2013. The general hedge accounting standard is intended to provide better links between an entity’s
risk management activities, the rationale for hedging and the impact of hedging on the ﬁnancial statements. The standard will potentially
simplify the Company’s hedge accounting strategies. The impairment phase of the IASB’s ﬁnancial instruments project is currently under
development. Management is currently evaluating the potential impact that the adoption of IFRS 9 will have on the Company’s consolidated
ﬁnancial statements.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

IFRS 10 Consolidated Financial Statements

In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements (IFRS 10), which is effective for annual periods beginning on
or after January 1, 2013, with earlier adoption permitted. IFRS 10 will replace portions of IAS 27 Consolidated and Separate Financial
Statements (IAS 27) and interpretation SIC-12 Consolidation – Special Purpose Entities. Under IFRS 10, consolidated ﬁnancial statements
will include all controlled entities under a single control model. Management does not anticipate any material changes to the ﬁnancial
position or operating results upon adoption of IFRS 10.

IFRS 13 Fair Value Measurement

In May 2011, the IASB issued IFRS 13 Fair Value Measurement (IFRS 13), which is effective for annual periods beginning on or after
January 1, 2013, with earlier adoption permitted. IFRS 13 establishes a single source of guidance for fair value measurements when fair
value is required or permitted by IFRS and provides for enhanced disclosures when fair value is applied. The adoption of IFRS 13 is not
expected to be material to the results of operations or ﬁnancial position of the Company.

NOTE 4

CA SH AN D S ECURITIES

(A) Cash Resources and Restricted Cash

thousands of Canadian dollars
Deposits with regulated ﬁnancial institutions
Treasury bills guaranteed by government
Cash resources unrestricted to Company use
Restricted cash – Canada Mortgage Bond program
Restricted cash – interest rate swaps
Restricted cash – other programs

December 31
2012
301,863 $

–
301,863
100,387
21,655
15,382
439,287 $

December 31
2011
534,250
144
534,394
92,963
26,176
12,273
665,806

Restricted cash – Canada Mortgage Bond program represents deposits held as collateral by CMHC in connection with the Company’s
securitization activities. To participate in the National Housing Authority (NHA) mortgage-backed security (MBS) programs, the Company
is required to maintain an amount of cash in a trust account to cover deposits of unscheduled principal prepayments (UPP) and property
taxes collected on the securitized loans. The amount represents a percentage of UPP, which is based on the Company’s average monthly
UPP rate for the last year and calculated on the basis of the year-end principal balance. The Company is allowed to invest the above
amount in eligible securities.

Restricted cash – interest rate swaps are deposits held by swap counterparties as collateral for the Company’s interest rate swap
transactions. The Company is required to provide collateral against its interest rate swap transactions as part of the agreements with the
counterparties. The terms and conditions for these collaterals are governed by International Swaps and Derivatives Association (ISDA)
agreements.

Restricted cash – other programs are reserve accounts held in trust for the water heater ﬁnancing program and for PSiGate operations.

(B) Securities at Fair Value by Type and Remaining Term to Maturity

thousands of Canadian dollars
Available for sale
Securities issued or guaranteed by
Canada
Corporations
Equity securities
Common
Preferred
Mutual funds
Pledged securities
Securities issued or guaranteed by
Canada

Within 1 Year

1 to 3 Years

3 to 5 Years

Over 5 Years

December 31
2012

December 31
2011

Total
Fair Value

5,047 $

99,785

8,836
47,581
1,119

– $
–

5,047 $

99,785

5,196
8,060

–
87,213
–

–
135,214
–

–
29,549
–

8,836
299,557
1,119

8,851
368,473
1,174

407,639
570,007 $

180,430
267,643 $

255,478
390,692 $

–

843,547

29,549 $ 1,257,891 $

341,588
733,342

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

thousands of Canadian dollars, except %

Securities issued or guaranteed by
Canada
Corporations
Equity securities
Common
Preferred
Mutual funds

thousands of Canadian dollars, except %

Securities issued or guaranteed by
Canada
Corporations
Equity securities
Common
Preferred
Mutual funds

As at December 31, 2012

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Cost

Total
Fair Value

Weighted-
average
Yield

5,023 $

99,689

24 $
96

– $
–

5,047
99,785

8,007
300,040
1,001
413,760 $

2,100
4,163
118
6,501 $

(1,271)
(4,646)
–
(5,917) $

8,836
299,557
1,119
414,344

1.5%
2.5%

4.6%
4.7%
–

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Cost

As at December 31, 2011

Total
Fair Value

Weighted-
average
Yield

5,069 $
8,060

127 $
–

– $
–

5,196
8,060

7,536
375,853
1,000
397,518 $

1,683
2,591
174
4,575 $

(368)
(9,971)
–

(10,339) $

8,851
368,473
1,174
391,754

2.5%
2.0%

7.4%
5.0%
–

Net unrealized gains and losses are included in AOCI except for impairment losses which are transferred to net income. Please see
Note 15 for more information.

The unrealized losses included above represent differences between the cost of a security and its current fair value. The Company regularly
monitors its investments and market conditions for indications of impairment.

For the year ended December 31, 2012, the Company recognized $1.8 million (2011 – $3.0 million) of impairment losses on available for
sale securities. These losses were transferred into net income. These unrealized losses are not included in the above table.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

NOTE 5

LOA NS

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

As at December 31, 2012

thousands of Canadian dollars, except %

Residential
Mortgages1

Securitized
Residential
Mortgages1

Non-
residential
Mortgages2

Personal and
Credit Card
Loans

British Columbia
Alberta
Ontario
Quebec
Atlantic provinces
Other 3

426,595 $
362,221
7,601,916
303,872
132,034
17,285

679,771 $
540,352
4,310,994
580,207
149,821
189,537

$ 8,843,923 $ 6,450,682 $

3,521 $

25,953
860,703
61,691
28,059
8,489
988,416 $

Total2
10,079 $ 1,119,966
954,375
25,849
13,331,084
557,471
947,302
1,532
313,291
3,377
216,496
1,185
599,493 $ 16,882,514

Percentage
of Portfolio

6.6%
5.7%
78.9%
5.6%
1.9%
1.3%
100.0%

As a % of portfolio

52.4%

38.2%

5.9%

3.5%

100.0%

As at December 31, 2011

thousands of Canadian dollars, except %

British Columbia
Alberta
Ontario
Quebec
Atlantic provinces
Other 3

Residential
Mortgages1

330,489 $
323,797
5,346,584
229,526
99,702
9,785

Securitized
Residential
Mortgages1
876,151 $
700,006
5,564,549
695,730
210,355
196,559

Non-
residential
Mortgages

Personal and
Credit Card
Loans

5,441 $

25,851
842,173
47,829
24,928
–

Total
12,300 $ 1,224,381
1,081,439
31,785
12,261,864
508,558
975,013
1,928
339,398
4,413
207,553
1,209
560,193 $ 16,089,648

Percentage
of Portfolio

7.6%
6.7%
76.2%
6.1%
2.1%
1.3%
100.0%

$ 6,339,883 $ 8,243,350 $

946,222 $

As a % of portfolio

39.4%

51.2%

5.9%

3.5%

100.0%

1 As at December 31, 2012, residential mortgages include $154.3 million (2011 – $182.7 million) and securitized mortgages include $1.94 billion (2011 – $2.01 billion) in

multi-unit residential properties with over four units and builders inventory.

2 Loans exclude mortgages held for sale.

3 Other includes Manitoba, Saskatchewan, Nunavut and the Northwest Territories.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

(B) Past Due Loans That Are Not Impaired

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

As at December 31, 2012

Securitized
Residential
Mortgages

Non-
residential
Mortgages

thousands of Canadian dollars

1–30 days
31–60 days
61–90 days
Over 90 days

thousands of Canadian dollars

1–30 days
31–60 days
61–90 days
Over 90 days

Residential
Mortgages

213,669 $
49,935
6,100
8,4741
278,178 $

Residential
Mortgages
208,340 $
43,809
11,707
15,3331
279,189 $

38,243 $
6,581
453
4,6791
49,956 $

72,359 $
10,169
324
10,9571
93,809 $

Securitized
Residential
Mortgages

Non-
residential
Mortgages

Personal and
Credit Card
Loans
3,958 $
1,779
1,986
8
7,731 $

9,247 $
544
–
–
9,791 $

Total
265,117
58,839
8,539
13,161
345,656

As at December 31, 2011

Personal and
Credit Card
Loans
4,809 $
1,018
1,343
1,649
8,819 $

6,237 $
264
284
–
6,785 $

Total
291,745
55,260
13,658
27,939
388,602

1 Insured residential mortgages are considered impaired when they are 365 days past due.

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

As at December 31, 2012

thousands of Canadian dollars

Gross amount of impaired loans
Individual allowances on principal
Net

thousands of Canadian dollars

Gross amount of impaired loans
Individual allowances on principal
Net

Residential
Mortgages

54,696 $
(2,381)
52,315 $

Residential
Mortgages

36,845 $
(742)
36,103 $

Securitized
Residential
Mortgages

Non-
residential
Mortgages

Personal and
Credit Card
Loans
3,830 $
(338)
3,492 $

501 $
–
501 $

Total
59,027
(2,719)
56,308

As at December 31, 2011

Personal and
Credit Card
Loans
4,144 $
(694)
3,450 $

822 $
(78)
744 $

Total
41,811
(1,514)
40,297

– $
–
– $

- $
-
- $

Securitized
Residential
Mortgages

Non-
residential
Mortgages

Included in the gross amount of impaired loans are foreclosed loans with an estimated realizable value of $1.7 million (2011 – $3.7 million).

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

(D) Collateral

The fair value of collateral held against mortgages is based on appraisals at the time a loan is originated. Appraisals are only updated should
circumstances warrant it or if a mortgage becomes impaired. At December 31, 2012, the total appraised value of the collateral held for past
due mortgages that are not impaired, as determined when the mortgages were originated, was $502.1 million (2011 – $556.9 million).
For impaired mortgages, the total appraised value of collateral at December 31, 2012 was $153.9 million (2011 – $132.0 million), which
includes $81.1 million related to the three loans associated with the alleged irregularities discussed in Note 18(D).

(E) Allowance for Credit Losses

thousands of Canadian dollars

Individual allowances
Allowance on loan principal
Balance at the beginning of the year
Provision for credit losses
Write-offs
Recoveries

Allowance on accrued interest receivable
Balance at the beginning of the year
Provision for credit losses

Total individual allowance
Collective allowance
Balance at the beginning of the year
Provision for credit losses

Total allowance
Total provision

thousands of Canadian dollars

Individual allowances
Allowance on loan principal
Balance at the beginning of the year
Provision for credit losses
Write-offs
Recoveries

Allowance on accrued interest receivable
Balance at the beginning of the year
Provision for credit losses

Total individual allowance
Collective allowance
Balance at the beginning of the year
Provision for credit losses

Total allowance
Total provision

Residential
Mortgages

Non-
residential
Mortgages

Personal and
Credit Card
Loans

742 $

78 $

694 $

12,107
(10,921)
453
2,381

345
574
919
3,300

(78)
–
–
–

–
–
–
–

1,557
(2,332)
419
338

–
–
–
338

16,299
560
16,859
20,159 $
13,241 $

9,300
–
9,300
9,300 $
(78) $

3,841
–
3,841
4,179 $
1,557 $

Residential
Mortgages

Non-
residential
Mortgages

Personal and
Credit Card
Loans

$
$

3,140 $
964
(3,574)
164
694

4,897
7,290
(11,328)
655
1,514

1,757 $
6,248
(7,754)
491
742

403
(58)
345
1,087

– $

78
–
–
78

–
–
–
78

–
–
–
694

16,299
–
16,299
17,386 $
6,190 $

$
$

9,357
(57)
9,300
9,378 $
21 $

3,497
344
3,841
4,535 $
1,308 $

2012

Total

1,514
13,586
(13,253)
872
2,719

345
574
919
3,638

29,440
560
30,000
33,638
14,720

2011

Total

403
(58)
345
1,859

29,153
287
29,440
31,299
7,519

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

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

(F) Loans by Remaining Contractual Term to Maturity

December 31
2012

December 31
2011

thousands of Canadian dollars

Residential mortgages
Securitized residential mortgages
Non-residential mortgages
Personal and credit card loans

Collective allowance for credit losses

Within 1 Year
$ 5,662,261 $ 2,637,135 $

1 to 3 Years

511,220 $

3 to 5 Years

Over 5 Years

1,253,374
580,828
342,757
7,839,220
–

3,446,116
314,583
30,778
6,428,612
–

1,085,018
92,166
118,134
1,806,538
–

$ 7,839,220 $ 6,428,612 $ 1,806,538 $

Total
Book Value

Total
Book Value
33,307 $ 8,843,923 $ 6,339,883
6,450,682
8,243,350
988,416
946,222
599,493
560,193
16,882,514
16,089,648
(29,440)
(30,000)
808,144 $ 16,852,514 $ 16,060,208

666,174
839
107,824
808,144
–

NOTE 6

SECUR ITIZ ATION AC TIVIT Y

(A) Securitized Assets

The Company’s wholly owned subsidiary, Home Trust, securitizes insured residential mortgage loans by participating in the NHA MBS
program. Through the program, the Company issues securities backed by residential mortgage loans that are insured against borrowers’
default. Once the mortgage loans are securitized, the Company assigns underlying mortgages and/or related securities to CMHC. As an
issuer of the MBS, Home Trust is responsible for advancing all scheduled principal and MBS interest payments to CMHC, whether or not the
amounts have been collected on the underlying transferred mortgages. Amounts advanced but not recovered will ultimately be recovered
from the insurer.

The securitized activity includes the Company’s participation in the Canada Mortgage Bond (CMB) program. Under the CMB program, CMHC
guarantees the bonds of a special purpose trust, Canada Housing Trust (CHT). CHT uses the proceeds of its bond issuance to ﬁnance the
purchase of NHA MBS issued by Home Trust. As the CMB is a bullet bond, the Company must provide eligible replacement assets to re-
collateralize the CMB as the underlying mortgages amortize or are prepaid.

In many securitization activities, the Company retains certain prepayment and/or interest rate risks and rewards related to the transferred
mortgages. Due to retention of these risks and rewards, transferred mortgages are not derecognized and the securitization proceeds are
accounted for as secured borrowing transactions. There are no expected credit losses on the securitized mortgage assets as the mortgages
are insured against default. Further, the investors and CMHC have no recourse to other assets of either the Company or Home Trust in the
event of failure of debtors to pay when due. In other securitization activities, derecognition or continuing involvement accounting is applied.
Please see Note 6(B).

The following table presents the gross carrying amounts of mortgages transferred during the year, which are recorded on the consolidated
balance sheets as securitized residential mortgages or recorded off-balance sheet as loans under administration. The following table also
presents the new securitization liabilities added during the year, which are secured by the mortgages and other pledged assets.

thousands of Canadian dollars

Mortgages assigned in new securitizations
Assets assigned as replacements of repaid amounts
Through repurchase agreement
Mortgage assets
Non–Home Trust MBS and treasury bills
Gross carrying amount of mortgages and other assets assigned
Mortgages assigned and qualifying for off-balance sheet treatment
Proceeds received
New securitization liabilities

2012

2011
646,785 $ 1,242,219

–
255,478
630,578
224,584
342,266
246,446
2,215,063
1,373,293
–
233,892
1,233,962
639,968
258,899 $ 1,240,236

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

(B) Securitization Income

During the year, the Company securitized and sold through the NHA MBS program insured multi-unit residential mortgages with zero
prepayment privileges. These mortgages are recognized on the Company’s consolidated balance sheet only to the extent of the Company’s
continuing involvement in the mortgages (continuing involvement accounting). The Company’s continuing involvement is limited to its
retained interest in the interest-only strip and its obligations for mortgage servicing. There is no prepayment or credit risk associated with
the retained interest or the cost of servicing. The mortgages are effectively derecognized as a result of this transaction. The retained interest
and servicing liability are recorded on the consolidated balance sheets in other assets and other liabilities, respectively.

During the year, the Company also sold residual interests in certain pools of mortgages securitized through the NHA MBS program. The
sale resulted in the Company transferring substantially all of the risks and rewards of ownership associated with the underlying mortgages,
and the mortgages were derecognized. The gain on this transaction is included in non-interest income under securitization income in the
consolidated statements of income.

The following table provides quantitative information about these securitization and sales activities.

thousands of Canadian dollars

Book value of underlying mortgages
Gains on sale of mortgages or residual interest
Retained interests recorded
Servicing liability recorded

2012

Single Family
Residential
MBS
662,153 $
4,845
–
–

Multi-unit
Residential
MBS
233,892 $
3,300
9,691
1,786

Total MBS
896,045
8,145
9,691
1,786

As a requirement of the NHA MBS program, the Company assigns to CMHC all of its interest in existing mortgage pools. If the Company
fails to make timely payment under an NHA MBS security, CMHC may enforce the assignment of the mortgages included in all the mortgage
pools as well as other assets backing the mortgage-backed securities issued.

The following table presents the principal value of the Company’s on-balance sheet mortgage loans and other assets pledged as collateral.
The mortgages are recorded as securitized residential mortgages, and assets pledged as CMB replacement assets are recorded as pledged
securities. There were no transactions in 2011 that qualiﬁed for derecognition or continuing involvement accounting.

thousands of Canadian dollars

Principal value of mortgages pledged as collateral
MBS and treasury bills pledged as collateral

(D) Securitization Liabilities

December 31
2012

December 31
2011
$ 6,418,171 $ 8,196,167
341,588

843,547

Securitization liabilities recorded on the consolidated balance sheets represent the funding received on securitization of insured mortgages
and other assets assigned under the NHA MBS and the CMB programs when the transaction does not qualify for off-balance sheet treatment
for the assets. Accrued interest on these liabilities is classiﬁed in other liabilities as accrued interest payable on securitization liabilities.

MBS securitization liabilities are repaid on a monthly basis as the principal payments are collected from securitized loans. CMB liabilities
are bullet bond liabilities with ﬁxed maturities. Any principal collected against securitized assets underlying CMB liabilities is used to
purchase replacement assets. Interest accrued on securitization liabilities is recorded in other liabilities on the consolidated balance sheets
and is based on the underlying MBS and CMB coupon.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

(E) Securitization Liabilities by Remaining Contractual Term to Maturity

December 31
2012

December 31
2011

thousands of Canadian dollars, except %

Mortgage-backed security liabilities
Effective yield
Canada Mortgage Bond liabilities
Effective yield

Within 1 Year
$

469,790 $

1 to 3 Years

3 to 5 Years

Over 5 Years

576,304 $

255,599 $

2.3%

2.1%

1.7%

912,419 $ 3,122,970 $ 1,272,600 $

3.3%

2.6%

1.9%

$ 1,382,209 $ 3,699,274 $ 1,528,199 $

Total
Book Value

Total
Book Value
– $ 1,301,693 $ 2,417,801
2.5%
2.1%
–
726,213 $ 6,034,202 $ 6,231,274
2.8%
726,213 $ 7,335,895 $ 8,649,075

2.7%

3.9%

NOTE 7

OTHER ASSETS

thousands of Canadian dollars

Accrued interest receivable
Prepaid CMB coupon
Retained interest on securitization
Other prepaid assets and deferred items

NOTE 8

CAPITAL A SSETS

thousands of Canadian dollars

Cost
Balance at the beginning of the year
Additions
Balance at the end of the year
Accumulated amortization
Balance at the beginning of the year
Amortization expense
Balance at the end of the year
Carrying amount

thousands of Canadian dollars

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

December 31
2012
61,481 $
12,486
9,172
11,266
94,405 $

December 31
2011
56,606
6,919
–
16,125
79,650

Computer
Equipment
and Software

Ofﬁce
Furniture and
Equipment

Leasehold
Improvements

2012

Total

16,502 $
2,350
18,852

6,906 $
693
7,599

3,739 $
1,281
5,020

27,147
4,324
31,471

13,376
2,192
15,568

3,284 $

5,323
386
5,709
1,890 $

3,076
540
3,616
1,404 $

21,775
3,118
24,893
6,578

Computer
Equipment
and Software

Ofﬁce
Furniture and
Equipment

Leasehold
Improvements

2011

Total

13,369 $
3,133
16,502

6,882 $
24
6,906

3,366 $
373
3,739

23,617
3,530
27,147

11,071
2,305
13,376

3,126 $

4,930
393
5,323
1,583 $

2,722
354
3,076

663 $

18,723
3,052
21,775
5,372

NOTE 9

INTANG IBLE A SSETS

Intangible assets comprise internally developed software costs, which are principally costs related to the Company’s core banking system.
These costs are amortized over 10 years, commencing December 2011. The following table presents the net carrying amount of software
costs for the core banking system and other software costs as at December 31, 2012, and 2011, along with the changes in net carrying
amount for the years ended December 31, 2012 and 2011.

Core
Banking
System

Other
Software
Costs

Software
Under
Development

2012

Total

Core
Banking
System

Other
Software
Costs

Software
Under
Development

2011

Total

$ 62,193 $

3,494 $

– $ 65,687 $ 46,410 $

2,598 $

– $ 49,008

287
62,480

2,903
6,397

5,951
5,951

9,141
74,828

15,783
62,193

896
3,494

330
6,168
6,498

1,440
547
1,987

–
–
–

1,770
6,715
8,485

–
330
330

1,091
349
1,440

–
–

–
–
–

16,679
65,687

1,091
679
1,770

$ 55,982 $

4,410 $

5,951 $ 66,343 $ 61,863 $

2,054 $

– $ 63,917

thousands of Canadian dollars

Cost
Balance at the beginning
of the year
Additions from internal
development
Balance at the end of the year
Accumulated amortization
Balance at the beginning
of the year
Amortization expense
Balance at the end of the year
Carrying amount at the end of
the year

NOTE 10 G OODWILL

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

thousands of Canadian dollars

Home Trust
PSiGate

December 31
2012
2,324 $

13,428
15,752 $

December 31
2011
2,324
13,428
15,752

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

Goodwill is allocated to cash-generating units for the purpose of impairment testing, considering the business level at which goodwill
is monitored for internal management purposes. The PSiGate goodwill is allocated to the PSiGate legal entity (the unit) and this unit
is included in the consumer lending operating segment. Management has determined that the recoverable amount of the unit exceeds
its carrying amount and that no impairment exists. The following information relates to the annual impairment test of the unit that was
conducted during the fourth quarter of 2012.

The recoverable amount of the unit was determined on the basis of its fair value less costs to sell. The fair value of the unit was determined
using a discounted cash ﬂow methodology where estimated cash ﬂows were projected to December 31, 2016 and assuming a terminal
growth rate of 3.0% thereafter. A revenue growth rate of 8.1% was assumed over the period of projections, with a stable gross margin
percentage. Operating expenses considered necessary to support the expected growth were included and increased over the period of
projections at an expected inﬂationary rate. Planned capital expenditures, also necessary to support expected growth, were incorporated.

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

The discounted cash ﬂow methodology used is most sensitive to the discount rate and revenue growth rate used. In consideration of this
sensitivity, management determined that either an increase in the discount rate from 15.5% to 21.3% or a decrease in annual revenue
growth from 8.1% to a negative growth rate of 0.9% for each year of the projection, assuming unchanged values for the other assumptions,
would have caused the recoverable amount to equal the carrying amount.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

NOTE 11

DEPOS ITS BY R EMAINING CO NTRAC TUA L TER M TO M AT UR I TY

December 31
2012

December 31
2011

thousands of Canadian dollars, except %

on Demand Within 1 Year

1 to 3 Years

Payable

Individuals
Businesses

Effective yield

105,923 $ 5,667,122 $ 3,501,020 $

–

138,897

79,982

105,923 $ 5,806,019 $ 3,581,002 $

1.7%

2.0%

2.5%

NOTE 12

S ENIOR DEB T

3 to 5 Years

Total

Total
629,601 $ 9,903,666 $ 7,738,937
14,054
183,187
232,933
643,655 $ 10,136,599 $ 7,922,124
2.4%

2.7%

2.2%

The Company issued $150.0 million principal amount of 5.20% debentures on May 4, 2011. The debentures pay interest semi-annually
on May 4 and November 4 in each year. The debentures mature on May 4, 2016 and are redeemable at the option of the Company upon
30 days written notice to the registered holder at a redemption price, equal to the greater of par and the price that would provide a yield to
maturity equal to the Government of Canada bond rate plus 0.66%, plus accrued and unpaid interest to the date of redemption.

NOTE 13

OTHER LIAB ILITIES

thousands of Canadian dollars

Accrued interest payable on deposits
Accrued interest payable on securitization liabilities
Other, including accounts payable and accrued liabilities

NOTE 14

C APITAL

(A) Authorized

December 31
2012
93,856 $
19,595
35,139
148,590 $

December 31
2011
77,737
22,195
36,093
136,025

An unlimited number of common shares with no par value
An unlimited number of preferred shares, issuable in series, to be designated as senior preferred shares
An unlimited number of preferred shares, issuable in series, to be designated as junior preferred shares

(B) Common Shares Issued and Outstanding

thousands
Outstanding at the beginning of the year
Options exercised
Repurchase of shares
Outstanding at the end of the year

Number of
Shares
34,625 $
169
(164)
34,630 $

2012

Amount
55,104
7,088
(289)
61,903

Number of
Shares

34,646 $
135
(156)
34,625 $

2011

Amount
50,427
4,921
(244)
55,104

During the year, 163,500 (2011 – 156,300) common shares were purchased for $8.1 million (2011 – $7.9 million). The purchase
price of shares acquired through the Normal Course Issuer Bid is allocated between capital stock and retained earnings. The cost of the
common shares was reduced by $0.3 million in 2012 (2011 – $0.2 million). The balance of the purchase price of $7.8 million (2011 –
$7.7 million) was charged to retained earnings.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

(D) Stock Options

The details and changes in the issued and outstanding options are as follows:

number of shares in thousands

Outstanding at the beginning of the year
Granted
Exercised
Forfeited
Outstanding at the end of the year
Exercisable at the end of the year
Weighted-average market price per share at date of exercise
Weighted-average remaining contractual life in years

2012

Weighted-
average
Exercise
Price
37.16
47.20
33.56
33.74
38.71
35.29
48.48
3.7

Number of
Shares

929 $
51
(169)
(28)
783 $
557 $
$

2011

Weighted-
average
Exercise
Price
36.07
46.35
28.33
47.92
37.16
34.40
56.17
3.9

Number of
Shares
1,066 $
5
(135)
(7)
929 $
594 $
$

The Company’s stock option plan was approved by the shareholders of the Company on December 31, 1986. The plan was amended in
2002, to conform to the Toronto Stock Exchange’s Revised Policy on Listed Company Share Incentive Arrangements. As at December 31,
2012, the maximum number of options on common shares that may be issued was 4,585,198, representing approximately 13.2% of the
aggregate number of common shares. The exercise price of the options is ﬁxed by the Board at the time of issuance at the market price
of such shares, subject to all applicable regulatory requirements. The exercise period of any option is limited to a period of seven years
from the date of grant of the option. The period within which an option or portion thereof may be exercised by a participant is determined
in each case by the Board. Stock options that are currently issued and outstanding vest at a rate of 25% per year over four years on the
condition that set earnings per share targets are achieved for each year as established by the Board at the time of the grant.

During 2010, the Company approved an amendment to the employee stock option plan to provide stock appreciation rights that allow cash
settlement of vested stock options, at the Company’s discretion. No options were settled in cash during 2012 or 2011.

As at December 31, 2012, the exercise prices for stock options outstanding to acquire common shares ranged from $16.27 to $50.23
and are presented below along with the number of options exercisable and the respective expiry date.

Stock
Options
Outstanding
20,000
175,000
165,000
15,000
10,000
22,500
10,000
314,000
10,000
1,000
40,000
782,500

Stock
Options
Exercisable

20,000 $

175,000
165,000
11,250
7,500
16,875
5,000
156,125
–
–
–

556,750 $

Exercise Price
per Share
Expiry
(Canadian
Date
Dollars)
33.761
3/7/2014
41.291 12/7/2014
16.272 12/8/2015
31.873
5/5/2016
40.703 11/3/2016
41.063 12/2/2016
44.634
8/4/2017
47.974 12/1/2017
50.235 2/13/2019
49.555
3/7/2019
46.395
8/1/2019
35.29

1 In 2007, the Company granted certain employees the right to receive stock options if certain performance criteria were met. As at December 31, 2012, four levels of

performance had been met for 195,000 options. As a result, 100% of these contingently assumable options have been included in the computation of diluted income per
common share.

2 In 2008, the Company granted certain employees the right to receive stock options if certain performance criteria were met. As at December 31, 2012, four levels of

performance had been met for 165,000 options. As a result, 100% of these contingently assumable options have been included in the computation of diluted income per
common share.

3 In 2009, the Company granted certain employees the right to receive stock options if certain performance criteria were met. As at December 31, 2012, three levels of

performance had been met for 47,500 options. As a result, 75% of these contingently assumable options have been included in the computation of diluted income per
common share.

4 In 2010, the Company granted certain employees the right to receive stock options if certain performance criteria were met. As at December 31, 2012, two levels of

performance criteria had been met for 324,000 options. As a result, 50% of these contingently assumable options have been included in the computation of diluted income
per common share.

5 In 2012, the Company granted certain employees the right to receive stock options if certain performance criteria were met. As at December 31, 2012, none of the

performance criteria had been met for 51,000 options. As a result, the contingently assumable options have not been included in the computation of diluted income per
common share.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

The Company determines the fair value of options granted using a Black-Scholes option pricing model. The weighted-average fair value of
the options granted during the year was $15.37 (2011 – $14.93).

The following assumptions were used to determine the fair value of each of the following option grants on the date of grant:

Canadian dollars, except % and years

Fair value of options granted
Share price
Exercise price
Expected share price volatility
Option life
Expected period until exercise in years
Forfeiture rate
Expected dividend yield
Risk-free rate of return

$
$
$

August
2012
14.70 $
45.32 $
46.39 $
35.9%
7.0
7.0
6.8%
2.03%
1.40%

March
2012
17.10 $
49.73 $
49.55 $
36.0%
7.0
7.0
6.8%
1.77%
1.69%

February
2012
17.87 $
51.00 $
50.23 $
36.1%
7.0
7.0
6.8%
1.73%
1.73%

November
2011
14.93
44.69
46.35
36.1%
7.0
7.0
6.8%
1.62%
2.07%

The above assumptions for expected volatility were determined on the basis of historical volatility.

The Company determines the fair value of stock options on the grant date and records this amount as compensation expense over the
period that the stock options vest, with a corresponding increase to contributed surplus. When these stock options are exercised, the
Company records the amount of proceeds, together with the amount recorded in contributed surplus, in capital stock.

(E) Deferred Share Units

The Company grants DSUs to Directors of the Company. Under the plan, the Directors may elect annually to accept remuneration in the
form of cash, cash and DSUs or DSUs prior to the beginning of the year. DSUs earn dividend equivalents in the form of additional DSUs
at the same rate as dividends on common shares. The participant is not allowed to settle the DSUs until retirement or termination of
directorship. The cash value of the DSUs is equivalent to the market value of common shares when settlement takes place. The value of the
DSU liability as at December 31, 2012 was $1.02 million (2011 – $0.53 million). As of December 31, 2012, there were 17,275 DSUs
outstanding (2011 – 10,765).

(F) Restricted Share Units

The Company grants restricted share units (RSUs) to certain key members of management. The RSUs vest at a rate of one-third each year
over a three-year period. The vested amount is settled on the vesting date. RSUs earn dividend equivalents in the form of additional RSUs
at the same rate as dividends on common shares. The cash value of the RSUs is equivalent to the market value of common shares on the
vesting date. The value of the RSU liability as at December 31, 2012 was $34 thousand. As of December 31, 2012, there were 4,986
RSUs outstanding. The Company did not issue RSUs prior to 2012.

(G) Share-based Compensation Expense

The expense recognized in the consolidated statements of income in relation to share-based compensation was as follows:

thousands of Canadian dollars

Expense arising from equity-settled share-based payment transactions
DSUs and RSUs (representing all expenses arising from
cash-settled share-based payment transactions)

2012
1,759 $

209
1,968 $

2011
2,400

50
2,450

(H) Income per Common Share

Basic income per common share is determined as net income for the year divided by the average number of common shares outstanding
of 34,692 thousand (2011 – 34,677 thousand).

Diluted income per common share is determined as net income for the year divided by the average number of common shares outstanding
of 34,692 thousand (2011 – 34,677 thousand) plus the stock options potentially exercisable, as determined under the treasury stock
method, of 128 thousand (2011 – 110 thousand) for a total of 34,820 thousand (2011– 34,787 thousand) diluted common shares.

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

(I) Capital Management

The Company has a capital management policy that governs the quantity and quality of capital held. The objective of the policy is to meet
regulatory capital requirements, while also providing a sufﬁcient return to investors. The Risk and Capital Committee and the Board annually
review the policy and monitor compliance with the policy on a quarterly basis.

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

The regulatory capital position of Home Trust was as follows:

thousands of Canadian dollars, except ratios and multiple
Tier 1 capital
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive loss1
IFRS transition adjustment
Total
Tier 2 capital
Collective allowance for credit losses2
Accumulated other comprehensive income3
Subordinated debentures
Total
Total regulatory capital
Risk-weighted assets for
Credit risk
Operational risk
Total risk-weighted assets
Regulated capital to risk-weighted assets
Tier 1 capital
Tier 2 capital
Total regulatory capital ratio
Assets to regulatory capital multiple

December 31
2012

December 31
2011

23,497 $
951
909,728
–
–
934,176

23,497
951
717,223
(4,229)
49,188
786,630

30,000
337
171,000
201,337
$ 1,135,513 $

29,440
–
115,000
144,440
931,070

$ 4,870,575 $ 4,068,823
480,873
$ 5,491,513 $ 4,549,696

620,938

17.01%
3.67%
20.68%
13.98

17.29%
3.17%
20.46%
14.44

1 Accumulated other comprehensive loss relates to unrealized losses on certain available for sale equity securities, net of tax, which decrease Tier 1 capital.

2 The Company is allowed to include its collective allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2 capital. At December 31, 2012, the

Company’s collective allowance represented 0.55% of risk-weighted assets.

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

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 is in compliance with the OSFI capital guidelines.

Under IFRS transition relief permitted by OSFI, the Company elected to amortize the December 31, 2010 IFRS retained earnings transition
adjustment over eight quarters beginning March 31, 2011. The IFRS retained earnings transition adjustment for regulatory capital
calculation purposes is the difference between retained earnings under Canadian GAAP and under IFRS at December 31, 2010. This
adjustment was fully amortized as at December 31, 2012.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

NOTE 15

A CCUMULATED OTHER COMPREH ENS IVE I NC O ME

thousands of Canadian dollars

Unrealized gains (losses) on
Available for sale securities
Income tax expense (recovery)

Unrealized losses on
Cash ﬂow hedges
Income tax recovery

Accumulated other comprehensive loss

NOTE 16

INC OME TAXES

(A) Reconciliation of Income Taxes

December 31
2012

December 31
2011

584 $
152
432

(5,764)
(1,623)
(4,141)

(5,676)
(1,499)
(4,177)
(3,745) $

(6,768)
(1,718)
(5,050)
(9,191)

The combined federal and provincial income tax rate varies each year depending on changes in the statutory tax rate imposed by the
federal and provincial governments. The effective rate of income tax in the consolidated statements of income is different from the
combined federal and provincial income tax rate of 26.43% (2011 – 28.14%).

2012

2011
$ 299,919 $ 256,313
72,126
$

79,254 $

(3,744)
495
1,906
25
77,936 $

(5,182)
743
(878)
(576)
66,233

2012
26.43%

(1.26%)
0.17%
0.64%
0.01%
25.99%

2011
28.14%

(2.02%)
0.29%
(0.34%)
(0.23%)
25.84%

thousands of Canadian dollars

Income before income taxes
Income taxes at statutory combined federal and provincial income tax rates
Increase (decrease) in income taxes at statutory income tax rates resulting from
Tax-exempt income
Non-deductible expenses
Future tax rate changes
Other
Income tax

(B) Reconciliation of Income Tax Rates

Statutory income tax rate
Increase (reduction) in income tax rate resulting from
Tax-exempt income
Non-deductible expenses
Future tax rate changes
Other
Effective income tax

100

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

thousands of Canadian dollars

Deferred tax liabilities
Commissions
Finders’ fees, net of commitment fees
Securitization transaction costs
Swaps
Development costs
Other

Deferred tax assets
Allowance for credit losses

Net deferred tax liability

December 31
2012

December 31
2011

6,921 $
7,905
5,932
5,525
16,656
304
43,243

6,058
11,855
8,419
4,046
15,855
500
46,733

7,443
7,443
35,800 $

6,693
6,693
40,040

Capital losses totalling $2.8 million are available to reduce capital gains in future years. The future tax beneﬁts arising from application of
these losses have not been reﬂected in the ﬁnancial statements.

NOTE 17

EMPLOYEE BENEFITS

(A) Employee Share Purchase Plan

Under the Employee Share Purchase Plan, every year qualifying employees can choose each year to have up to 10% of their annual base
earnings withheld to purchase common shares. The Company matches 50% of the employees’ contribution amount. During each pay
period, all contributions are used by the plan’s trustee to purchase the common shares in the open market. The Company’s contributions
are fully vested immediately. The Company’s contributions are expensed as paid and totalled $0.8 million for 2012 (2011 – $0.7 million).

(B) Employee Retirement Savings Plan

During the year, Home Trust contributed $0.8 million (2011 – $0.7 million) to the employee group registered retirement savings plan.

NOTE 18

C OMMITM ENT S A ND C ONTI NG ENC I ES

(A) Lease Commitments

The Company has entered into commercial leases on premises and property. There are no restrictions imposed by lease arrangements.
Future minimum lease payments under non-cancellable operating leases are as follows:

thousands of Canadian dollars

Within one year
After one year but not more than ﬁve years
More than ﬁve years

December 31
2012
4,562 $

15,285
15,811
35,658 $

December 31
2011
3,283
10,658
16,305
30,246

Lease payments recognized as expense in the consolidated statements of income in 2012 amounted to $8.8 million (2011 – $7.7 million).

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

101

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

(B) Credit Commitments

Outstanding commitments for funding on mortgages amounted to $571.8 million as at December 31, 2012 (2011 – $612.4 million).
Commitments for loans remain open for various periods. The average rate on mortgage commitments is 4.88% (2011 – 5.02%).

The Company also has contractual commitments to extend credit to its clients for its credit card products. The contractual commitments
for these products represent the maximum potential credit risk, assuming that all the contractual amounts are fully utilized, the clients
default and collection efforts are unsuccessful. At December 31, 2012, these contractual commitments in aggregate were $403.1 million
(2011 – $476.6 million), of which $75.7 million (2011 – $89.6 million) had not been drawn by customers. Outstanding commitments for
future advances for the Equityline Visa portfolio were $4.8 million at December 31, 2012 (2011 – $10.5 million).

These amounts in aggregate are not indicative of total future cash requirements. Management does not expect any material adverse
consequence to the Company’s ﬁnancial position to result from these commitments. Secured credit cards have spending limits restricted
by collateral held by the Company.

The Company indemniﬁes Directors and ofﬁcers, to the extent permitted by law, against certain claims that may be made against them as
a result of their being, or having been, Directors and ofﬁcers at the request of the Company. The nature of this indemniﬁcation prevents the
Company from making a reasonable estimate of the maximum potential amount the Company could be required to pay to third parties.
Management believes that the likelihood that the Company would incur a signiﬁcant liability under these indemniﬁcations is remote. The
Company has purchased Directors’ and ofﬁcers’ liability insurance.

(D) Contingencies

During 2011, the Company became aware of alleged irregularities regarding three of its loans with a total principal amount of $4.6 million.
The borrowers are disputing the validity of the Company’s loans and security in the Ontario Court. It is not currently possible to reasonably
determine the outcome of this matter or to estimate the amount of loss, if any. A speciﬁc provision has not been recorded for these loans
but these loans have been classiﬁed as non-performing residential loans.

NOTE 19

DER IVATIVE FIN ANC IAL INSTR UM ENTS

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

Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors.
Fair value for derivatives is determined from swap curves adjusted for credit risks. Swap curves are obtained directly from market sources
or calculated from market prices.

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

Cash Flow Hedging Relationships

The Company uses bond forward contracts or interest rate swaps to hedge the economic value exposure of movements in interest
rates between the time that the Company determines that it will likely incur liabilities pursuant to asset securitization, and the time the
securitization transaction is complete and the liabilities are incurred. The intent of the bond forward or interest rate swap is to manage
the change in cash ﬂows of the future interest payments on the anticipated secured borrowings through asset securitization. Fair value
changes recorded in AOCI are reclassiﬁed into net interest income over the term of the hedged item up to a maximum of the year 2016.

102

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

The following table presents gains or losses related to cash ﬂow hedges included in the Company’s ﬁnancial results:

thousands of Canadian dollars

Fair value losses recorded in OCI
Fair value losses recorded in non-interest income (ineffectiveness)
Losses reclassiﬁed from OCI to net interest income

Fair Value Hedging Relationships

2012
(370) $
–
(1,462)

2011
(7,386)
(545)
(618)

The Company uses interest rate swaps to hedge changes in the fair value of long-term ﬁxed-rate liabilities including CMB liabilities and
senior debt, which changes are associated with changes in market interest rates.

The following table presents gains or losses related to fair value hedges included in the Company’s ﬁnancial results:

thousands of Canadian dollars

Fair value changes recorded on interest rate swaps1
Fair value changes of hedged ﬁxed-rate liabilities for interest rate risk 2
Hedge ineffectiveness gain recognized in non-interest income

2012
(26,923) $
30,393

3,470 $

2011
53,561
(53,326)
235

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

2 Unrealized gains and losses on hedged items (ﬁxed-rate liabilities) for the risk being hedged are recorded as part of the associated ﬁxed-rate liability on the consolidated

balance sheets.

Other Derivative Gains and Losses

From time to time, the Company enters into derivative positions to hedge interest rate risk and such derivatives are not designated as
hedges for accounting purposes. The changes in fair value of such derivatives ﬂow directly to the consolidated statements of income. The
Company recorded unrealized gains of $0.3 million in the year on these derivatives (2011 – $3.6 million unrealized loss).

The Company may also enter into bond forwards or interest rate swaps to hedge interest rate risk on loans held for securitization. These
derivatives are not designated in hedge accounting relationships. The fair value changes of these derivatives are mostly offset by the fair
value changes related to loans classiﬁed as held for trading for accounting purposes. The net impact in the year for these derivatives and
loans outstanding was a net unrealized gain of $0.1 million. The Company did not enter into these transactions in 2011. The unrealized
gains or losses on the derivatives are recorded in net realized and unrealized gain or loss on derivatives, and the fair value change of the
loans held for sale is recorded in net realized and unrealized gains or losses on securities and mortgages on the consolidated statement
of income. When the loans are securitized and sold, the net realized gain or loss on the derivatives and mortgages held for sale are
reclassiﬁed to the gain on sale, which is recorded in fees and other income on the consolidated statement of income.

In early 2011, interest rate swaps were restructured to rebalance the interest rate hedges and to meet hedge accounting requirements. This
restructuring resulted in an unrealized loss on fair value changes of $3.7 million recorded in income through net realized and unrealized
loss on derivatives.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

103

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

As at December 31, 2012 and 2011, the outstanding interest rate swap and bond forward contract positions were as follows:

thousands of Canadian dollars

As at December 31, 2012

Year of Maturity
Swaps designated
as hedges
Maturing in 2013
Maturing in 2014
Maturing in 2015
Maturing in 2016
Maturing in 2018
Maturing in 2020

Undesignated swaps
Maturing in 2016

Bond forwards1
Maturing in 2023

Total

Notional
Amount

Current
Replacement
Cost

Credit
Equivalent
Amount

Risk-
weighted
Balance

Derivative
Asset

Derivative
Liability

Net
Fair Market
Value

265,200 $
230,500
798,914
192,200
25,700
59,000
1,571,514

4,305 $
5,851
21,522
5,954
1,671
6,015
45,318

4,305 $
7,004
25,484
6,797
2,057
6,900
52,547

100,000
100,000

–
–

861 $

1,401
5,097
1,359
411
1,380
10,509

–
–

4,305 $
5,851
21,522
5,954
1,671
6,015
45,318

– $
–
(20)
(200)
–
–
(220)

–
–

(2,156)
(2,156)

4,305
5,851
21,502
5,754
1,671
6,015
45,098

(2,156)
(2,156)

17,500
17,500
$ 1,689,014 $

70
70
45,388 $

202
202
52,749 $

40
40
10,549 $

70
70
45,388 $

(10)
(10)
(2,386) $

60
60
43,002

thousands of Canadian dollars

As at December 31, 2011

Year of Maturity
Swaps designated
as hedges
Maturing in 2012
Maturing in 2013
Maturing in 2014
Maturing in 2015
Maturing in 2016
Maturing in 2018
Maturing in 2020

Undesignated swaps
Maturing in 2012
Maturing in 2016

Total

Notional
Amount

Current
Replacement
Cost

Credit
Equivalent
Amount

Risk-
weighted
Balance

Derivative
Asset

Derivative
Liability

Net
Fair Market
Value

64,400 $

2,682 $

536 $

2,682 $

265,200
230,500
798,914
192,200
25,700
59,000
1,635,914

10,031
10,032
33,786
8,302
1,714
6,134
72,681

11,358
11,004
37,781
9,113
2,099
7,019
81,056

2,271
2,201
7,556
1,823
420
1,404
16,211

10,031
9,766
33,786
8,302
1,714
6,134
72,415

– $
–
–
–
(92)
–
–
(92)

18,100
100,000
118,100
$ 1,754,014 $

9
–
9
72,690 $

9
–
9
81,065 $

2
–
2
16,213 $

9
–
9
72,424 $

–
(3,366)
(3,366)
(3,458) $

2,682
10,031
9,766
33,786
8,210
1,714
6,134
72,323

9
(3,366)
(3,357)
68,966

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

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

104

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

NOTE 20

CU RRENT AND NON-CU RR EN T A S SET S A ND LI A BI LI TI ES

The following table presents an analysis of each asset and liability line item by amounts expected to be recovered or settled within one
year or after one year as at December 31, 2012 and 2011.

thousands of Canadian dollars

Within 1 Year

After 1 Year

Total Within 1 Year

After 1 Year

Total

As at December 31, 2012

As at December 31, 2011

Assets
Cash resources
Available for sale securities
Pledged securities
Loans held for sale
Residential mortgages
Securitized residential mortgages
Non-residential mortgages
Personal and credit card loans
Collective allowance for credit losses
Derivative assets
Other assets
Capital assets
Intangible assets
Goodwill
Total assets

Liabilities
Deposits payable on demand
Deposits payable on a ﬁxed date
Senior debt
Mortgage-backed security liabilities
Canada Mortgage Bond liabilities
Derivative liabilities
Income taxes payable
Other liabilities
Deferred tax liabilities
Total liabilities
Net

– $

439,287 $
162,368
407,639
21,921
6,113,424
1,663,961
580,828
342,757
(20,000)
4,305
94,405
–
–
–

665,806
391,754
341,588
–
6,339,883
8,243,350
946,222
560,193
(29,440)
72,424
79,650
5,372
63,917
15,752
$ 9,810,895 $ 8,989,184 $ 18,800,079 $ 7,182,032 $ 10,514,439 $ 17,696,471

439,287 $
414,344
843,547
21,921
8,843,923
6,450,682
988,416
599,493
(30,000)
45,388
94,405
6,578
66,343
15,752

665,806 $
66,769
320,535
–
3,862,265
1,333,116
472,390
398,446
(19,627)
2,682
79,650
–
–
–

251,976
435,908
–
2,730,499
4,786,721
407,588
256,736
(10,000)
41,083
–
6,578
66,343
15,752

324,985
21,053
–
2,477,618
6,910,234
473,832
161,747
(9,813)
69,742
–
5,372
63,917
15,752

– $

75,965 $

105,923 $

5,806,019
–
469,790
912,419
–
21,912
148,590
–

75,965
7,846,159
153,336
2,417,801
6,231,274
3,458
17,628
136,025
40,040
$ 7,464,653 $ 10,367,213 $ 17,831,866 $ 5,466,200 $ 11,455,486 $ 16,921,686
774,785
$ 2,346,242 $ (1,378,029) $

10,030,676
150,684
1,301,693
6,034,202
2,386
21,912
148,590
35,800

4,224,657
150,684
831,903
5,121,783
2,386
–
–
35,800

3,270,043
153,336
1,932,827
6,055,782
3,458
–
–
40,040

4,576,116
–
484,974
175,492
–
17,628
136,025
–

968,213 $ 1,715,832 $

(941,047) $

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

105

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

NOTE 21

INTEREST RATE SENS ITIVITY

The Company is exposed to interest rate risk as a result of a difference, or gap, between the maturity or repricing date of interest-sensitive
assets and liabilities. The following tables show the gap positions at December 31, 2012 and 2011 for selected period intervals. Figures
in parentheses represent an excess of liabilities over assets or a negative gap position.

This schedule reﬂects the contractual maturities of both assets and liabilities, adjusted for assumptions regarding the effective change in
the maturity date as a result of a mortgage becoming impaired and for credit commitments and derivatives.

Based on the current interest rate gap position at December 31, 2012, the Company estimates that a 100 basis point decrease in interest
rates would decrease net interest income after tax, other comprehensive income and net present value of shareholders’ equity over the
next 12 months by $12.6 million, $0.8 million and $11.4 million, respectively. A 100 basis point increase in interest rates would increase
net interest income after tax, other comprehensive income and net present value of shareholders’ equity over the next 12 months by $12.6
million, $0.8 million and $9.7 million, respectively.

thousands of Canadian dollars, except %

Assets
Cash resources
Weighted-average interest rate
Securities
Weighted-average interest rate
Loans held for sale
Weighted-average interest rate
Non-securitized mortgages
and loans
Weighted-average interest rate
Securitized residential mortgages
Weighted-average interest rate
Other assets
Weighted-average interest rate
Total
Weighted-average interest rate
Liabilities and shareholders’ equity
Deposits payable on demand
Weighted-average interest rate
Deposits payable at a ﬁxed rate
Weighted-average interest rate
Senior debt
Weighted-average interest rate
Securitization liabilities
Weighted-average interest rate
Other liabilities
Weighted-average interest rate
Shareholders’ equity
Weighted-average interest rate
Total
Weighted-average interest rate

Credit commitments
Weighted-average interest rate
Interest rate sensitivity gap

Cumulative gap

Cumulative gap as a
percentage of total assets

Floating
Rate

0 to 3
Months

3 to 6
Months

6 to 12
Months

1 to 3
Years

Over
3 Years

Non-
interest
Sensitive

Total

As at December 31, 2012

$ 133,900 $ 305,387 $

1.0%

– $

–

– $

–

– $

–

– $

–

456,578

83,592

29,837

267,643

420,241

1.3%

2.0%

2.6%

2.7%

2.9%

–

21,921

3.0%

– $ 439,287

–

1.0%

1,257,891

2.2%

21,921

3.0%

1,779,351

1,382,405

3,539,715

2,893,053

820,039

(12,731) 10,401,832

6.1%

5.3%

5.5%

5.2%

5.5%

2,488,249

248,657

743,190

1,855,921

1,114,665

2.8%

4.9%

4.0%

4.6%

–

5.5%

6,450,682

3.8%

45,388

–

183,078

228,466

–

$ 133,900 $ 5,074,953 $ 1,714,654 $ 4,312,742 $ 5,016,617 $ 2,376,866 $ 170,347 $ 18,800,079

1.0%

3.7%

5.1%

5.4%

4.6%

–

4.5%

19,825 $

1.7%

– $

–

– $

–

– $

–

– $

–

– $

86,098 $ 105,923

–

706,686

1,729,232

3,370,101

3,581,002

643,655

– 10,030,676

2.0%

2.1%

2.0%

2.5%

2.7%

–

150,684

5.2%

2,531,345

387,283

944,636

2,151,375

1,321,256

3.2%

2.9%

3.2%

–

2.2%

150,684

5.2%

7,335,895

2.6%

1.9%

2,386

–

206,302

208,688

–

968,213

–

19,825 $ 3,240,417 $ 2,116,515 $ 4,314,737 $ 5,732,377 $ 2,115,595 $ 1,260,613 $ 18,800,079

1.7%

1.9%

2.3%

2.2%

2.6%

3.2%

–

2.2%

$ 114,075 $ 1,834,536 $ (401,861) $

(1,995) $ (715,760) $ 261,271 $ (1,090,266) $

–

(567,041)

2,342

4.8%

5.5%

–

20,369

544,330

5.9%

4.8%

–

$ 114,075 $ 1,267,495 $ (399,519) $

(1,995) $ (695,391) $ 805,601 $ (1,090,266) $

$ 114,075 $ 1,381,570 $ 982,051 $ 980,056 $ 284,665 $ 1,090,266 $

– $

0.6%

7.3%

5.2%

1.5%

5.8%

–

106

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

thousands of Canadian dollars, except %

Credit commitments
Weighted-average interest rate
Interest rate sensitivity gap
Cumulative gap
Cumulative gap as a
percentage of total assets

Floating
Rate

0 to 3
Months

3 to 6
Months

6 to 12
Months

1 to 3
Years

Over
3 Years

Non-
interest
Sensitive

Total

As at December 31, 2011

–

$ 192,095 $ 473,551 $

144 $

0.8%

1.0%

1.1%

– $

–

– $

–

– $

–

362,340

13,113

11,851

185,950

160,088

1.5%

5.7%

5.0%

4.8%

4.5%

–

16 $ 665,806

–

0.9%

733,342

3.1%

–

1,363,234

693,149

2,480,044

2,536,926

747,292

(3,787)

7,816,858

6.8%

5.6%

5.5%

4.4%

5.2%

2,721,818

161,040

491,943

2,748,791

2,119,758

2.8%

5.1%

4.8%

4.5%

4.3%

–

5.4%

8,243,350

3.9%

72,424

–

164,691

237,115

–

$ 192,095 $ 4,993,367 $ 867,446 $ 2,983,838 $ 5,471,667 $ 3,027,138 $ 160,920 $17,696,471

0.8%

3.6%

5.5%

5.4%

4.5%

–

4.4%

6 $

– $

–

– $

–

– $

–

– $

–

– $

75,959 $

75,965

422,920

1,074,219

3,078,977

2,853,969

416,074

2.4%

2.1%

2.7%

3.2%

–

153,336

5.3%

2,581,640

154,101

468,760

3,128,642

2,315,932

3.3%

2.9%

3.2%

1.9%

3,458

–

193,693

197,151

–

774,785

–

7,846,159

2.4%

153,336

5.3%

8,649,075

2.7%

6 $ 3,008,018 $ 1,228,320 $ 3,547,737 $ 5,982,611 $ 2,885,342 $ 1,044,437 $17,696,471

–

2.0%

2.5%

2.2%

2.8%

3.3%

–

2.4%

$ 192,089 $ 1,985,349 $ (360,874) $ (563,899) $ (510,944) $ 141,796 $ (883,517) $

–

(521,051)

186,562

17,772

231,460

85,257

4.8%

5.2%

5.1%

4.1%

–

$ 192,089 $ 1,464,298 $ (174,312) $ (546,127) $ (279,484) $ 227,053 $ (883,517)

$ 192,089 $ 1,656,387 $ 1,482,075 $ 935,948 $ 656,464 $ 883,517 $

– $

1.1%

9.4%

8.4%

5.3%

3.7%

5.0%

–

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

107

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

NOTE 22

FAIR VALUE OF FIN ANC IAL INSTR UM EN TS

The amounts set out in the following table represent the fair values of the Company’s ﬁnancial instruments. The valuation methods and
assumptions are described below.

The estimated fair value amounts approximate amounts at which the ﬁnancial instruments could be exchanged in a current transaction
between willing parties that are under no compulsion to act. For ﬁnancial instruments that lack an available trading market, the Company
applies present value and valuation techniques that use observable market inputs. Because of the estimation process and the need to
use judgement, the aggregate fair value amounts should not be interpreted as being necessarily realizable in an immediate settlement of
the instruments.

As at December 31, 2012

As at December 31, 2011

Carrying
Value

Fair
Value

Fair Value
Over (Under)
Carrying
Value

Carrying
Value

Fair
Value

Fair Value
Over (Under)
Carrying
Value

439,287 $

1,257,891
21,921

– $
–
–

665,806 $
733,342
–

–
–
–

10,401,832
6,450,682
45,388
183,078

10,534,681
7,320,756
45,388
183,078

132,849
870,074
–
–

7,816,858
8,243,350
72,424
164,691

7,976,732
8,908,502
72,424
164,691

10,136,599
150,684
7,335,895
2,386
206,302

10,331,151
167,307
7,207,578
2,386
206,302

194,552
16,623
(128,317)
–
–

7,922,124
153,336
8,649,075
3,458
193,693

8,128,223
156,615
8,585,033
3,458
193,693

159,874
665,152
–
–

206,099
3,279
(64,042)
–
–

thousands of Canadian dollars

Assets
Cash resources
Securities
Loans held for sale
Non-securitized mortgages
and loans
Securitized residential mortgages
Derivative assets
Other
Liabilities
Deposits
Senior debt
Securitization liabilities
Derivative liabilities
Other

The following methods and assumptions were used to estimate the fair values of ﬁnancial instruments:

> Cash resources approximate their carrying values due to their short-term nature. The fair value of treasury bills is determined using

rates from the Bank of Canada.

> Securities are valued based on the quoted bid price as described in Note 4.

> Fair value of loans is determined by discounting the expected future cash ﬂows of the loans at market rates for loans with similar terms

and credit risks.

> Other assets approximate their carrying values due to their short-term nature.

> Fair value of deposits payable on demand approximates their carrying value; the fair value of ﬁxed-rate deposits is determined by
discounting the contractual cash ﬂows using the market interest rates currently offered for deposits with similar terms and risks.

> Fair value of senior debt is based on quoted bid price.

> Fair value of securitization liabilities is determined by reference to the quoted price of the liability in the market.

> Other liabilities approximate their carrying values due to their short-term nature.

> Fair value of derivative ﬁnancial instruments is calculated as described in Note 19.

The Company uses the following hierarchy for determining and disclosing the fair value of ﬁnancial instruments by valuation technique:

Level 1: Quoted (Unadjusted) Prices in Active Markets for Identical Assets or Liabilities: This level includes equity securities traded on the
Toronto Stock Exchange and quoted corporate and government-backed debt instruments.

Level 2: Valuation Techniques with Observable Parameters: This level includes loans, commitments, interest rate swaps and bond forwards
and certain corporate debt instruments.

Level 3: Valuation Techniques with Signiﬁcant Unobservable Parameters: Instruments classiﬁed in this category have a parameter input or
inputs that are unobservable and have more than insigniﬁcant impact on either the fair value of the instrument or the proﬁt or loss of the
instrument. The Company did not have any Level 3 ﬁnancial instruments in 2012 or 2011.

108

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

The following table presents the carrying value of ﬁnancial instruments carried at fair value across the levels of the fair value hierarchy.

thousands of Canadian dollars

Financial assets held for trading
Interest rate swaps (hedge swaps)
Financial instruments available for sale
Securities issued or guaranteed by
Canada
Corporations
Equity securities
Common
Preferred
Mutual funds
Pledged securities
Retained interest
Total
Financial liabilities at fair value
Interest rate swaps
Total

thousands of Canadian dollars

Financial assets held for trading
Interest rate swaps (hedge swaps)
Financial instruments available for sale
Securities issued or guaranteed by
Canada
Corporations
Equity Securities
Common
Preferred
Mutual funds
Pledged securities
Total
Financial liabilities at fair value
Interest rate swaps
Total

As at December 31, 2012

Level 1

Level 2

Total

– $

45,388 $

45,388

5,047
99,785

8,836
299,557
–
369,717
–

782,942 $

–
–

5,047
99,785

–
–
1,119
473,830
9,172

8,836
299,557
1,119
843,547
9,172
529,509 $ 1,312,451

–
– $

2,386
2,386 $

2,386
2,386

As at December 31, 2011

Level 1

Level 2

Total

– $

72,424 $

72,424

5,196
–

–
8,060

5,196
8,060

8,851
368,473
–
319,981
702,501 $

–
–
1,174
21,607
103,265 $

8,851
368,473
1,174
341,588
805,766

–
– $

3,458
3,458 $

3,458
3,458

As at December 31, 2012 and 2011, the Company did not have any Level 3 ﬁnancial instruments nor did the Company transfer any
ﬁnancial instrument from Level 1 or Level 2 to Level 3 of the fair value hierarchy during 2012 or 2011.

NOTE 23

EAR NINGS BY BUS INES S SEG M ENT

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

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

109

Notes to the Consolidated Financial Statements
(unless otherwise stated, all amounts are in Canadian dollars)

The following table details the earnings of the Company by business segment.

thousands of Canadian dollars

Net interest income
Provision for credit losses
Fees and other income
Securitization income
Net gain on securities and other
Non-interest expenses
Income before income taxes
Income taxes
Net income (loss)
Goodwill
Total assets

thousands of Canadian dollars

Net interest income
Provision for credit losses
Fees and other income
Net (loss) gain on securities and other
Non-interest expenses
Income before income taxes
Income taxes
Net income
Goodwill
Total assets

Mortgage
Lending
328,087 $
(13,164)
27,465
8,131
944
(78,573)
272,890
(74,534)
198,356 $
$
2,324 $
$
$ 17,198,250 $

Consumer
Lending
43,598 $
(1,556)
16,527
–
–
(14,056)
44,513
(11,821)
32,692 $
13,428 $
769,098 $

2012

Other
9,787 $
–
2
–
2,833
(30,106)
(17,484)
8,419
(9,065) $
– $

Total
381,472
(14,720)
43,994
8,131
3,777
(122,735)
299,919
(77,936)
221,983
15,752
832,731 $ 18,800,079

2011

Mortgage
Lending
273,738 $
(5,916)
19,457
(4,821)
(67,851)
214,607
(59,331)
155,276 $
$
$
2,324 $
$ 15,997,106 $

Other
18,432 $

Consumer
Lending
41,782 $
(1,603)
18,051
–
(16,255)
41,975
(11,872)
30,103 $
13,428 $

Total
333,952
(7,519)
37,997
(3,115)
(105,002)
256,313
(66,233)
190,080
15,752
614,626 $ 1,084,739 $ 17,696,471

–
489
1,706
(20,896)
(269)
4,970
4,701 $
– $

NOTE 24

R ELATED PARTY TR ANS AC TIONS

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

thousands of Canadian dollars
Short-term employee beneﬁts
Share-based payment
Other long-term beneﬁts

NOTE 25

RISK MANAGEMEN T

2012
6,646 $
2,147
203
8,996 $

2011
6,969
503
154
7,626

The Company is exposed to various types of risk owing to the nature of the business activities it carries on. Types of risk to which the
Company is subject include credit, liquidity, interest rate and other price risks. The Company has adopted enterprise risk management
(ERM) as a discipline for managing risk. The Company’s ERM structure is supported by a governance framework that includes policies,
management standards, guidelines and procedures appropriate to each business activity. The policies are reviewed and approved annually
by the Board of Directors.

A description of the Company’s risk management policies and procedures is included in the shaded text of the Risk Management section
of the MD&A. Signiﬁcant exposures to credit, liquidity and interest rate risks are described in Notes 4, 5, 19 and 21.

NOTE 26

C OMPAR ATIV E C ONS OLIDATED FINANC I AL S TATEM EN TS

110

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Corporate Directory

HOME CAP ITAL GR OUP INC.

Directors:

Kevin P.D. Smith 3, 4
Chair of the Board
Chief Executive Ofﬁcer
St. Joseph’s Health System
Hamilton, Ontario

James C. Baillie 2, 3
Counsel
Torys LLP
Toronto, Ontario

Hon. William G. Davis
P.C., C.C., Q.C.3, 4
Counsel
Davis Webb LLP
Brampton, Ontario

William Falk 2, 3
Corporate Director
Grand Valley, Ontario

John M.E. Marsh1, 4
Corporate Director
Port Colborne, Ontario

Robert A. Mitchell, C.A.1, 2, 3
Corporate Director
Oakville, Ontario

Gerald M. Soloway
Chief Executive Ofﬁcer
Home Capital Group Inc.
Toronto, Ontario

Bonita Then1, 2
Corporate Director
Toronto, Ontario

Leslie Thompson2, 4
President
LESRISK, Debt and Risk
Management Inc.
Toronto, Ontario

Committees:

Ofﬁcers:

Audit Committee
Robert A. Mitchell, C.A.
Chair

Bonita Then
Vice Chair

Risk and Capital Committee
Bonita Then
Chair

Governance, Nominating and
Conduct Review Committee
Hon. William G. Davis
Chair

Human Resources and
Compensation Committee
Kevin P.D. Smith
Chair

John M.E. Marsh
Vice Chair

Gerald M. Soloway
Chief Executive Ofﬁcer

Martin Reid
President

Brian R. Mosko
Chief Operating Ofﬁcer and
Executive Vice President

Robert Blowes, C.A., C.P.A.
Chief Financial Ofﬁcer and
Executive Vice President

Pino Decina
Executive Vice President,
Residential Mortgage Lending

John R.K. Harry
Senior Vice President,
Commercial Mortgage Lending

Chris Ahlvik, LL.B
Senior Vice President,
Corporate Counsel and
Corporate Secretary

Marie Holland, C.A.
Senior Vice President,
Internal Audit

1 Member of the Audit Committee
2 Member of the Risk and Capital
Committee
3 Member of the Governance,
Nominating and Conduct Review
Committee
4 Member of the Human Resources
and Compensation Committee

Chair Emeritus:

William A. Dimma

John Hong
Senior Vice President,
Chief Compliance Ofﬁcer and
Chief Anti-Money Laundering
Ofﬁcer

Stephen Copperthwaite,
CMA, ORMP
Senior Vice President,
Relationship Manager

Greg Parker
Senior Vice President,
Treasurer

Sanjiv Purba
Senior Vice President,
Chief Information Ofﬁcer

Annual Meeting Notice

The Annual Meeting of Shareholders of Home Capital Group Inc.
will be held at the Design Exchange, Trading Floor, Second Floor,
234 Bay Street, Toronto, Ontario, on Wednesday, May 15, 2013 at
11:00 a.m. local time. Shareholders and guests are invited to join
Directors and Management for lunch and refreshments following
the Annual Meeting. All shareholders are encouraged to attend.

HOME CAPITAL GROUP INC. ANNUAL REPORT 2012

111

Sales and Service
Domenic Cosentino
Director

Direct Client Services
Frank Lee
Asst. Vice President

Visa Operations
Raymond St. Aubin
Asst. Vice President

PSiGate
Paul Birkness
Vice President

Angela Weidner
Manager, Operations

Equityline Visa
Armando Diseri
Senior Vice President

Retail Credit Services
Cathy Boon
Senior Vice President

Wayne Dickie
Asst. Vice President

Deposits
Benjy Katchen
Vice President

Chandran Devan
Asst. Vice President,
Deposits

Melonie Dixon
Nicole Kotsifas
Business Development
Managers

Commercial Mortgage
Lending
Shaun Gonsalves
Asst. Vice President

Residential Mortgage
Lending
Michael Forshee
James Hill
Marguerite Ryan
Agostino Tuzi
Vice Presidents

Ron Cuadra
Vice President, National
Sales

Laurie Chalabardo
Bobby Ramgoolam
Greg Schultz
Directors

Brendon Callender
Jean-Pierre Vico
Asst. Vice Presidents

Frank Femia
Aman Gill
Joseph Kumar
Ivano Metallo
Tim Nason
Paul Onorati
Scott Smith
Julie Soragnese
Frank Tuzi
Senior Managers

Massimo DeNigris
Monica Gairola
Michael Hewitt
Michael Pagliocca
Vince Santacroce
Managers

Corporate Directory

HO ME TRUST COMPANY

Directors:

Hon. William G. Davis
P.C., C.C., Q.C.
Chairman of the Board

James C. Baillie

William Falk

John M.E. Marsh

Robert A. Mitchell, C.A.

Martin Reid

Kevin P.D. Smith

Gerald M. Soloway

Bonita Then

Leslie Thompson

Ofﬁcers:

Gerald M. Soloway
Chief Executive Ofﬁcer

Martin Reid
President

Brian R. Mosko
Chief Operating Ofﬁcer and
Executive Vice President

Robert Blowes, C.A., C.P.A.
Chief Financial Ofﬁcer and
Executive Vice President

Pino Decina
Executive Vice President,
Residential Mortgage
Lending

John R.K. Harry
Senior Vice President,
Commercial Mortgage
Lending

Chris Ahlvik, LL.B
Senior Vice President,
Corporate Counsel and
Corporate Secretary

Marie Holland, C.A.
Senior Vice President,
Internal Audit

John Hong
Senior Vice President,
Chief Compliance Ofﬁcer
and Chief Anti-Money
Laundering Ofﬁcer

Stephen Copperthwaite,
CMA, ORMP
Senior Vice President,
Relationship Manager

Greg Parker
Senior Vice President,
Treasurer

Sanjiv Purba
Senior Vice President, Chief
Information Ofﬁcer

Branches:

Toronto:
145 King Street West
Suite 2300
Toronto, Ontario M5H 1J8
Tel: 416-360-4663

1-800-990-7881

Fax: 416-363-7611

1-888-470-2092

Corporate
Donald Correia
Vice President, Chief Credit
Ofﬁcer

Dinah Henderson, CGA
Senior Vice President,
Operations

Marissa Lauder, C.A.
Vice President, Finance

Shawn Lyons, C.A.
Vice President, Financial
Operations and Corporate
Accounting

Samar Smith
Vice President, Internal Audit

Johannes Tekle
Asst. Vice President,
Operational Risk

David Cluff
Asst. Vice President,
Credit Risk Governance

Credit
Nick McIlveen
Vice President, Credit and
Risk

Jeff Barbour
Alex Godfrey
Asst. Vice Presidents, Credit
and Risk

112

HOME CAPITAL GROUP INC. ANNUAL REPOR T 2012

Financial Highlights
Summary of Data for 10 Year Review

For the years ended December 31 (000s, except per share amounts)

Total assets

Total assets under administration

Total loans

Total loans under administration

Securitized residential mortgages

Deposits

Shareholders’ equity

Revenue

Net income

Book value of common shares

Earnings per share – basic

Earnings per share – diluted

2012

18,800,079

19,681,750

16,904,435

17,786,106

6,450,682

10,136,599

968,213

887,685

221,983

27.96

6.40

6.38

2011

2010 IFRS

2010 GAAP

2009

2008

2007

2006

2005

2004

2003

17,696,471

15,518,818

7,712,239

7,360,874

5,809,713

4,975,093

3,902,316

3,284,829

2,568,513

1,897,176

17,696,471

15,518,818

15,878,772

11,508,585

8,423,971

6,434,548

5,009,878

4,085,013

3,069,253

2,212,307

16,089,648

14,091,755

5,861,722

5,468,540

4,531,568

4,045,571

3,328,858

2,813,459

2,257,740

1,618,601

16,089,648

14,091,755

14,028,255

9,616,251

7,145,826

5,505,026

4,436,420

3,613,643

2,758,480

1,933,732

8,243,350

8,116,636

–

7,922,124

6,595,979

6,522,850

6,409,822

5,102,781

4,413,984

3,443,640

2,901,515

2,269,157

1,666,788

774,785

790,274

190,080

22.38

5.48

5.46

628,585

687,249

154,752

18.14

4.46

4.45

742,280

533,937

180,944

21.42

5.21

5.20

590,288

489,179

144,493

17.00

4.19

4.15

432,753

454,695

108,687

12.57

3.15

3.13

348,040

368,881

90,241

10.08

2.62

2.59

276,866

282,549

67,815

8.10

1.99

1.95

218,885

234,704

60,861

6.44

1.80

1.72

162,207

181,839

44,551

4.80

1.33

1.27

121,166

141,365

29,507

3.61

0.88

0.86

25.5%

Return on equity was 25.5%,
exceeding 20% for the 15th
consecutive year

$222.0million

Net income for 2012 was
$222.0 million, an increase
of 16.8% over 2011

Ten-year Cumulative Total Return on $100 Investment
Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG)
December 31, 2002–December 31, 2012

COMPOUNDED ANNUAL
GROWTH OVER 10 YEARS

25%

1,500

1,200

900

600

300

HCG
25%

S&P/TSX
9%

HCG Stock Price
Performance

Closing Price as of
December 31

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$16.63

$31.25

$34.75

$34.05

$41.90

$19.80

$41.85

$51.79

$49.10

$59.07

Share prices have been restated to reflect two-for-one stock split on January 29, 2004.

$16.90billion

Total loans grew by 5.1%
over 2011 to reach
$16.90 billion at the
end of 2012

$6.38

Diluted earnings per share
were $6.38 for the year,
an increase of 16.8%
over 2011

Net Income
($ millions)

222

1500

190

181

155

144

1200

109

Earnings per Share
(basic in dollars)

6.40

5.48

5.21

4.46

4.19

3.15

Return on Equity
(percentage)

27.8 28.2

27.2 27.3

27.1

25.5

199.800007

177.600006

155.400005

133.200005

111.000004

88.800003

66.600002

44.400002

22.200001

0.000000

2500

2000

1500

1000

500

6.40

5.76

5.12

4.48

3.84

3.20

2.56

1.92

1.28

0.64

1999
0.00

2000

2001

2002

900

600

300

10
08

16.8%

Home Capital reported a 16.8% increase
in net income over the $190.1 million
“2002”
attained in 2011, reaching $222.0 million
for the year ended 2012.

“2004”

“2003”

“2005”

“2006”

Basic earnings per share rose to $6.40
for the year ended December 31, 2012,
“2007”
a 16.8% increase over the $5.48 reported
for 2011.

“2010”

“2009”

“2008”

“2011”

25.5%

“08” . . . . . . . . . 3.15
“09” . . . . . . . . . 4.19
“10” . . . . . . . . . 5.21
“10” . . . . . . . . . 4.46
“11” . . . . . . . . . 5.48
“12” . . . . . . . . . 6.40

Corporate Directory

For Shareholder
Information, Please
Contact:
Chris Ahlvik
Senior Vice President,
Corporate Counsel

Home Capital Group Inc.
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663

1-800-990-7881

Fax: 416-363-7611

1-888-470-2092
www.homecapital.com
www.hometrust.ca

Montreal:
2020 Rue University
Suite 2420
Montreal, Quebec
H3A 2A5
Tel: 514-843-0129

1-866-542-0129

Fax: 514-843-7620

1-866-620-7620

Danny Antoniazzi
Senior Branch Manager

Carlo Vignone
Team Leader

Winnipeg:
201 Portage Avenue
18th Floor
Winnipeg, Manitoba
R3B 3K6
Tel: 204-942-1619
Fax: 204-942-1638
Darryl Bazylo
Business Development
Manager

Auditors:
Ernst & Young LLP
Chartered Accountants
Toronto, Ontario

Principal Bankers:
Bank of Montreal
Bank of Nova Scotia

Transfer Agent:
Computershare Investor
Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
Tel: 1-800-564-6253

Stock Listing:
Toronto Stock Exchange
Ticker Symbol: HCG

Capital Stock:
As at December 31, 2012,
there were 34,630,440
Common Shares outstanding

Memberships:
Canada Deposit Insurance
Corporation
Trust Companies Association
of Canada

Calgary:
10655 Southport Road SW
Suite 920
Calgary, Alberta T2W 4Y1
Tel: 403-244-2432

1-866-235-3081

Fax: 403-244-6542

1-866-544-3081

Jim Edwards
Branch Manager

Corbin Raison
Senior Mortgage Underwriter

Vancouver:
200 Granville Street
Suite 1288
Vancouver, British Columbia
V6C 1S4
Tel: 604-484-4663

1-866-235-3080

Fax: 604-484-4664

1-866-564-3524

Jim Bearman
Branch Manager

Renu Paruthi
Team Leader

Halifax:
5251 Duke Street
Suite 1205, Duke Tower
Halifax, Nova Scotia B3J 1P3
Tel: 902-422-4387

1-888-306-2421

Fax: 902-422-8891

1-888-306-2435

Scott Congdon
Asst. Vice President,
Mortgages

David Neville
Senior Business
Development Manager
28.8

25.6

22.4

19.2

16.0

12.8

9.6

6.4

2003

3.2
2004
0.0

2005

2006

2007

2008

2009

“08” . . . . . . . . 27.8
“09” . . . . . . . . 28.2
“10” . . . . . . . . 27.2
“10” . . . . . . . . 27.3
“11” . . . . . . . . 27.1
“12” . . . . . . . . 25.5

m
o
c

m
b
.

w
w
w

o
s

s
e
d
a

n
a

m
b

y
b

d
e
n
g

s
e
D

1500

1200

900

600

300

“2002”

“2003”

“2004”

“2005”

“2006”

“2007”

“2008”

“2009”

“2010”

“2011”

“2012”

“2002” . . . . . . . 100.00 . . . . . . . 100.00

“2003” . . . . . . . 126.72 . . . . . . . 230.78

“2004” . . . . . . . 145.07 . . . . . . . 435.97

“2005” . . . . . . . 180.08 . . . . . . . 487.09

“2006” . . . . . . . 211.16 . . . . . . . 481.38

“2007” . . . . . . . 231.92 . . . . . . . 598.84

“2008” . . . . . . . 155.38 . . . . . . . 287.81

“2009” . . . . . . . 209.84 . . . . . . . 620.42

“2010” . . . . . . . 246.79 . . . . . . . 779.40

“2011” . . . . . . . 225.29 . . . . . . . 749.73

“2012” . . . . . . . 241.49 . . . . . . . 918.64

Former Canadian GAAP Basis

IFRS Basis

1185 bgf earnings.eps

1185 bgf earnings per share.eps

1185 bgf return on equity.eps

in the 2008 book the graff title was “Earnings”

CANADA’S ONE-STOP MORTGAGE LENDER

Business Proﬁ le

Home Capital Group Inc.
Suite 2300
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663
Toll Free: 1-800-990-7881

H
O
M
E

C
A
P
I

T
A
L

G
R
O
U
P

N
C

A
N
N
U
A
L

R
E
P
O
R
T

2
0
1
2

RESPONSIBLE LEADERSHIP
SUPERIOR RESULTS

ANNUAL REPORT 2012

MORTGAGE
LENDING

CONSUMER
LENDING

DEPOSIT
INVESTMENTS

Home Trust Branches
Home Trust Branches

MISSION STATEMENT

CANADA’S ONE-STOP MORTGAGE LENDER