Home Capital Group
Annual Report 2015

Download report
Get a demo

More annual reports from Home Capital Group:

2018 Report
2017 Report
2016 Report
2015 Report
2014 Report

Peers and competitors of Home Capital Group:

Investors Bancorp, Inc.
Lake Shore Bancorp, Inc.
Provident Financial
Northwest Bancshares, Inc.
Pathward Financial

Plain-text annual report

CANADA’S ONE-STOP MORTGAGE LENDER AnnuAL REPORT 2015 Business Profile 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 I n C . A n n u A L R E P O R T 2 0 1 5 Moving Forward CANADA’S ONE-STOP MORTGAGE LENDER Front Panel Home Capital Group Inc. is a public company, traded on the Toronto Stock Exchange (HCG), operating through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of insured residential fi rst mortgage products, consumer lending and credit card services. In addition, Home Trust offers deposits via brokers and fi nancial planners, and through its direct -to -consumer deposit brand, Oaken Financial. Home Trust also conducts business through its wholly owned subsidiary, CFF Bank. Licensed to conduct business across Canada, Home Trust has offi ces in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba. VISIOn, MISSIOn AnD VALuES In 2015, the Company relaunched its Vision, Mission and Values in concert with its evolving service delivery commitments to its stakeholders. Our Vision The Company’s vision is to be the market leader in alternative-based fi nancial services solutions to Canadians. Our Mission We believe every Canadian deserves a home and the opportunity to prosper. Our Corporate Values (PROSPER) Passion Risk awareness Optimism Service Professionalism Ethics Respect Home Trust Branches MORTGAGE LEnDInG 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. COnSuMER LEnDInG 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, as well as unsecured cards under Home Trust’s brand name. 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. DEPOSIT InVESTMEnTS Home Trust provides a broad range of deposit investment services through its extensive deposit broker network. In addition, Home Trust’s direct-to-consumer brand, Oaken Financial, offers a suite of consumer deposit products and provides customers with a secure alternative to manage their savings independently. With effi cient, personal service and competitive rates, Home Trust and Oaken Financial offer a number of solutions to meet the long -term and short -term needs of investors looking to diversify their portfolios. COnTEnTS 1 Chairman’s Letter 2 Letter to Shareholders 4 Q&A with Martin Reid 6 Proven Results 7 Performance vs. Target 8 Corporate Governance at Home Capital 11 Corporate Social Responsibility 12 Management’s Discussion and Analysis 7 5 Consolidated Financial Statements 82 Notes to the Consolidated Financial Statements 114 Corporate Directory CANADA’S ONE-STOP MORTGAGE LENDER AnnuAL REPORT 2015 Business Profile 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 I n C . A n n u A L R E P O R T 2 0 1 5 Moving Forward CANADA’S ONE-STOP MORTGAGE LENDER Front Panel Home Capital Group Inc. is a public company, traded on the Toronto Stock Exchange (HCG), operating through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of insured residential fi rst mortgage products, consumer lending and credit card services. In addition, Home Trust offers deposits via brokers and fi nancial planners, and through its direct -to -consumer deposit brand, Oaken Financial. Home Trust also conducts business through its wholly owned subsidiary, CFF Bank. Licensed to conduct business across Canada, Home Trust has offi ces in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba. VISIOn, MISSIOn AnD VALuES In 2015, the Company relaunched its Vision, Mission and Values in concert with its evolving service delivery commitments to its stakeholders. Our Vision The Company’s vision is to be the market leader in alternative-based fi nancial services solutions to Canadians. Our Mission We believe every Canadian deserves a home and the opportunity to prosper. Our Corporate Values (PROSPER) Passion Risk awareness Optimism Service Professionalism Ethics Respect Home Trust Branches MORTGAGE LEnDInG 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. COnSuMER LEnDInG 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, as well as unsecured cards under Home Trust’s brand name. 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. DEPOSIT InVESTMEnTS Home Trust provides a broad range of deposit investment services through its extensive deposit broker network. In addition, Home Trust’s direct-to-consumer brand, Oaken Financial, offers a suite of consumer deposit products and provides customers with a secure alternative to manage their savings independently. With effi cient, personal service and competitive rates, Home Trust and Oaken Financial offer a number of solutions to meet the long -term and short -term needs of investors looking to diversify their portfolios. COnTEnTS 1 Chairman’s Letter 2 Letter to Shareholders 4 Q&A with Martin Reid 6 Proven Results 7 Performance vs. Target 8 Corporate Governance at Home Capital 11 Corporate Social Responsibility 12 Management’s Discussion and Analysis 7 5 Consolidated Financial Statements 82 Notes to the Consolidated Financial Statements 114 Corporate Directory Corporate Directory HOME TR uST COMPAny Directors: Kevin P. D. Smith Chairman of the Board Jacqueline Beaurivage Robert J. Blowes William Falk Diana Graham John M. E. Marsh Robert A. Mitchell, CPA, CA Martin Reid Gerald M. Soloway Bonita Then William J. Walker Chair Emeritus: Hon. William G. Davis P.C., C.C., Q.C. Officers: Gerald M. Soloway Chief Executive Officer Martin Reid President Brian R. Mosko Chief Operating Officer and Executive Vice President Robert Morton, CPA, CMA Chief Financial Officer and Executive Vice President Pino Decina Executive Vice President, Residential Mortgage Lending John R. K. Harry Executive Vice President, Commercial Mortgage Lending Chris Ahlvik, LL.B. Executive Vice President, Corporate Counsel and Corporate Secretary Greg Parker Chief Risk Officer and Executive Vice President Fariba Rawhani Executive Vice President and Chief Information Officer Dinah Henderson Executive Vice President, Operations Gary Wilson Executive Vice President, Underwriting Marie Holland, CPA, CA Senior Vice President, Internal Audit John Hong Senior Vice President, Chief Compliance Officer and Chief Anti-Money Laundering Officer Stock Listing: Toronto Stock Exchange Ticker Symbol: HCG Options Listing: Montreal Stock Exchange Ticker Symbol: HCG Capital Stock: As at December 31, 2015, there were 69,977,980 Common Shares outstanding Memberships: Canada Deposit Insurance Corporation Canadian Payments Association Trust Companies Association of Canada Carol Ferguson Senior Vice President, Human Resources Benjy Katchen Senior Vice President, Deposits and Credit Cards Branches: Toronto: 145 King Street West Suite 2300 Toronto, Ontario M5H 1J8 Tel: 416-360-4663 1-800-990-7881 Fax: 416-363-7611 Halifax: 1949 Upper Water Street, Suite 101 Halifax, Nova Scotia B3J 3N3 Tel: 902-422-4387 1-888-306-2421 Fax: 902-422-8891 1-888-306-2435 Montreal: 2020 Boul. Robert-Bourassa Suite 2420 Montreal, Quebec H3A 2A5 Tel: 514-843-0129 1-866-542-0129 1-888-470-2092 Fax: 514-843-7620 1-866-620-7620 Winnipeg: 201 Portage Avenue Suite 830 Winnipeg, Manitoba R3B 3K6 Tel: 204-220-3400 Fax: 204-942-1638 Calgary: 517 – 10th Avenue SW Calgary, Alberta T2R 0A8 Tel: 403-244-2432 1-866-235-3081 Fax: 403-244-6542 1-866-544-3081 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 For Shareholder Information, Please Contact: Chris Ahlvik Executive Vice President, Corporate Counsel and Corporate Secretary Home Capital Group Inc. 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 www.homecapital.com www.hometrust.ca Financial Highlights Summary of Data for 10 Year Review For the years ended December 31 (000s, except per share amounts) 2015 – Adjusted 2014 – Adjusted 2013 2012 2011 2010 IFRS 2010 CGAAP 2009 2008 2007 2006 Total assets Total assets under administration Total loans Total loans under administration Securitized residential mortgages Deposits Shareholders’ equity Revenue1 Net income1 Book value of common shares2 Earnings per share – basic1,2 Earnings per share – fully diluted1,2 $ $ $ $ $ $ $ $ $ $ $ $ 20,512,019 20,082,744 27,301,433 24,281,366 18,268,708 25,058,122 2,674,475 15,665,958 1,621,106 993,711 288,857 23.17 4.12 4.11 18,364,910 22,563,532 3,945,654 13,939,971 1,448,633 1,010,311 289,153 20.67 4.14 4.11 20,075,850 21,997,781 18,019,901 19,941,832 5,210,021 12,765,954 1,177,697 949,547 256,542 16.95 3.70 3.66 18,800,079 19,681,750 17,159,913 18,041,584 6,706,160 10,136,599 968,213 887,685 221,983 13.98 3.20 3.19 17,696,471 17,696,471 16,089,648 16,089,648 8,243,350 7,922,124 774,785 790,274 190,080 11.19 2.74 2.73 15,518,818 7,712,239 7,360,874 15,518,818 15,878,772 11,508,585 14,091,755 5,861,722 14,091,755 14,028,255 5,468,540 9,616,251 5,809,713 8,423,971 4,531,568 7,145,826 4,975,093 6,434,548 4,045,571 4,505,026 3,902,316 5,009,878 3,328,858 4,436,420 8,116,636 6,595,979 628,585 687,249 154,752 9.07 2.23 2.22 — — — — — 6,522,850 6,409,822 5,102,781 4,413,984 3,443,640 742,280 533,937 180,944 10.71 2.61 2.60 590,288 489,179 144,493 8.50 2.10 2.08 432,753 454,695 108,687 6.28 1.57 1.57 348,040 368,881 90,241 5.04 1.31 1.29 276,866 282,549 67,815 4.05 0.99 0.97 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. 18.8 % Return on equity1 was 18.8% on an adjusted basis, reflecting a strong balance sheet and accumulated earnings $288.9 million net income1 for 2015 remained strong at $288.9 million on an adjusted basis $25.06 billion $993.7 million Total loans under administration grew by 11.1% over 2014 to reach $25.06 billion at the end of 2015 Total Revenue1 remained healthy in 2015 at $993.7 million on an adjusted basis Net Income1 ($ millions) Diluted Earnings per Share1,2 ($) After-tax Return on Equity1 (percentage) Ten-year Cumulative Total Return on $100 Investment Ten-year Cumulative Total Return on $100 Investment Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) December 31, 2005–December 31, 2015 December 31, 2005–December 31, 2015 289 289 257 222 190 4.11 4.11 3.66 3.19 2.73 27.1 25.5 23.9 22.0 18.8 11 12 13 14* 15* 11 12 13 14* 15* 11 12 13 14* 15* $288.9M $4.11 5 18.8% 30 Home Capital reported adjusted net income of $288.9 million in 2015 compared to $289.2 million in 2014. 4 Adjusted diluted earnings per share were $4.11 for the year ended December 31, 2015, consistent with the prior year. 3 24 Home Capital reported adjusted return on equity of 18.8%, representing the Company’s continued strong financial position. 18 See definition of Adjusted Net Income, Total Adjusted Revenue, Adjusted Earnings per Share and Adjusted Return on Equity in the Non-GAAP Measures and Glossary section of this report and the Reconciliation of Net Income to Adjusted Net Income in Table 2 of this report. 2 12 Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. 1 * 2014 and 2015 figures are adjusted. 0 6 0 11 12 13 14 Adjusted 15 Adjusted 11 12 13 14 Adjusted 15 Adjusted 11 12 13 14 Adjusted 15 Adjusted 350 280 210 140 70 0 1 2 400 400 300 300 200 100 200 0 HCG Stock Price Performance 100 0 400 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $17.03 $20.95 $9.90 $20.93 $25.90 $24.55 $29.54 $40.47 $47.99 $26.92 Closing Price as of December 31 Closing Price as of December 31 Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. * Compounded Annual Growth over 10 years. * Compounded annual growth over 10 years. HCG 6%* S&P/TSX 4%* 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 m o c . r i m b . w w w o s s e d a r I s l l i M n a y r B r i m b y b d e n g i s e D HCG 6%* S&P/TSX 4%* Inside Panel 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $17.03 $20.95 $9.90 $20.93 $25.90 $24.55 $29.54 $40.47 $47.99 $26.92 200 Closing Price as of December 31 * Compounded Annual Growth over 10 years. Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 HCG Stock Price 300 Performance 100 400 0 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Corporate Directory HOME TR uST COMPAny Directors: Kevin P. D. Smith Chairman of the Board Jacqueline Beaurivage Robert J. Blowes William Falk Diana Graham John M. E. Marsh Robert A. Mitchell, CPA, CA Martin Reid Gerald M. Soloway Bonita Then William J. Walker Chair Emeritus: Hon. William G. Davis P.C., C.C., Q.C. Officers: Gerald M. Soloway Chief Executive Officer Martin Reid President Brian R. Mosko Chief Operating Officer and Executive Vice President Robert Morton, CPA, CMA Chief Financial Officer and Executive Vice President Pino Decina Executive Vice President, Residential Mortgage Lending John R. K. Harry Executive Vice President, Commercial Mortgage Lending Chris Ahlvik, LL.B. Executive Vice President, Corporate Counsel and Corporate Secretary Greg Parker Chief Risk Officer and Executive Vice President Fariba Rawhani Executive Vice President and Chief Information Officer Dinah Henderson Executive Vice President, Operations Gary Wilson Executive Vice President, Underwriting Marie Holland, CPA, CA Senior Vice President, Internal Audit John Hong Senior Vice President, Chief Compliance Officer and Chief Anti-Money Laundering Officer Stock Listing: Toronto Stock Exchange Ticker Symbol: HCG Options Listing: Montreal Stock Exchange Ticker Symbol: HCG Capital Stock: As at December 31, 2015, there were 69,977,980 Common Shares outstanding Memberships: Canada Deposit Insurance Corporation Canadian Payments Association Trust Companies Association of Canada Carol Ferguson Senior Vice President, Human Resources Benjy Katchen Senior Vice President, Deposits and Credit Cards Branches: Toronto: 145 King Street West Suite 2300 Toronto, Ontario M5H 1J8 Tel: 416-360-4663 1-800-990-7881 Fax: 416-363-7611 Halifax: 1949 Upper Water Street, Suite 101 Halifax, Nova Scotia B3J 3N3 Tel: 902-422-4387 1-888-306-2421 Fax: 902-422-8891 1-888-306-2435 Montreal: 2020 Boul. Robert-Bourassa Suite 2420 Montreal, Quebec H3A 2A5 Tel: 514-843-0129 1-866-542-0129 1-888-470-2092 Fax: 514-843-7620 1-866-620-7620 Winnipeg: 201 Portage Avenue Suite 830 Winnipeg, Manitoba R3B 3K6 Tel: 204-220-3400 Fax: 204-942-1638 Calgary: 517 – 10th Avenue SW Calgary, Alberta T2R 0A8 Tel: 403-244-2432 1-866-235-3081 Fax: 403-244-6542 1-866-544-3081 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 For Shareholder Information, Please Contact: Chris Ahlvik Executive Vice President, Corporate Counsel and Corporate Secretary Home Capital Group Inc. 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 www.homecapital.com www.hometrust.ca Financial Highlights Summary of Data for 10 Year Review For the years ended December 31 (000s, except per share amounts) 2015 – Adjusted 2014 – Adjusted 2013 2012 2011 2010 IFRS 2010 CGAAP 2009 2008 2007 2006 Total assets Total assets under administration Total loans Total loans under administration Securitized residential mortgages Deposits Shareholders’ equity Revenue1 Net income1 Book value of common shares2 Earnings per share – basic1,2 Earnings per share – fully diluted1,2 $ $ $ $ $ $ $ $ $ $ $ $ 20,512,019 20,082,744 27,301,433 24,281,366 18,268,708 25,058,122 2,674,475 15,665,958 1,621,106 993,711 288,857 23.17 4.12 4.11 18,364,910 22,563,532 3,945,654 13,939,971 1,448,633 1,010,311 289,153 20.67 4.14 4.11 20,075,850 21,997,781 18,019,901 19,941,832 5,210,021 12,765,954 1,177,697 949,547 256,542 16.95 3.70 3.66 18,800,079 19,681,750 17,159,913 18,041,584 6,706,160 10,136,599 968,213 887,685 221,983 13.98 3.20 3.19 17,696,471 17,696,471 16,089,648 16,089,648 8,243,350 7,922,124 774,785 790,274 190,080 11.19 2.74 2.73 15,518,818 7,712,239 7,360,874 15,518,818 15,878,772 11,508,585 14,091,755 5,861,722 14,091,755 14,028,255 5,468,540 9,616,251 5,809,713 8,423,971 4,531,568 7,145,826 4,975,093 6,434,548 4,045,571 4,505,026 3,902,316 5,009,878 3,328,858 4,436,420 8,116,636 6,595,979 628,585 687,249 154,752 9.07 2.23 2.22 — — — — — 6,522,850 6,409,822 5,102,781 4,413,984 3,443,640 742,280 533,937 180,944 10.71 2.61 2.60 590,288 489,179 144,493 8.50 2.10 2.08 432,753 454,695 108,687 6.28 1.57 1.57 348,040 368,881 90,241 5.04 1.31 1.29 276,866 282,549 67,815 4.05 0.99 0.97 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. 18.8 % Return on equity1 was 18.8% on an adjusted basis, reflecting a strong balance sheet and accumulated earnings $288.9 million net income1 for 2015 remained strong at $288.9 million on an adjusted basis $25.06 billion $993.7 million Total loans under administration grew by 11.1% over 2014 to reach $25.06 billion at the end of 2015 Total Revenue1 remained healthy in 2015 at $993.7 million on an adjusted basis Net Income1 ($ millions) Diluted Earnings per Share1,2 ($) After-tax Return on Equity1 (percentage) Ten-year Cumulative Total Return on $100 Investment Ten-year Cumulative Total Return on $100 Investment Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) December 31, 2005–December 31, 2015 December 31, 2005–December 31, 2015 289 289 257 222 190 4.11 4.11 3.66 3.19 2.73 27.1 25.5 23.9 22.0 18.8 11 12 13 14* 15* 11 12 13 14* 15* 11 12 13 14* 15* $288.9M $4.11 5 18.8% 30 Home Capital reported adjusted net income of $288.9 million in 2015 compared to $289.2 million in 2014. 4 Adjusted diluted earnings per share were $4.11 for the year ended December 31, 2015, consistent with the prior year. 3 24 Home Capital reported adjusted return on equity of 18.8%, representing the Company’s continued strong financial position. 18 See definition of Adjusted Net Income, Total Adjusted Revenue, Adjusted Earnings per Share and Adjusted Return on Equity in the Non-GAAP Measures and Glossary section of this report and the Reconciliation of Net Income to Adjusted Net Income in Table 2 of this report. 2 12 Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. 1 * 2014 and 2015 figures are adjusted. 0 6 0 11 12 13 14 Adjusted 15 Adjusted 11 12 13 14 Adjusted 15 Adjusted 11 12 13 14 Adjusted 15 Adjusted 350 280 210 140 70 0 1 2 400 400 300 300 200 100 200 0 HCG Stock Price Performance 100 0 400 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $17.03 $20.95 $9.90 $20.93 $25.90 $24.55 $29.54 $40.47 $47.99 $26.92 Closing Price as of December 31 Closing Price as of December 31 Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. * Compounded Annual Growth over 10 years. * Compounded annual growth over 10 years. HCG 6%* S&P/TSX 4%* 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 m o c . r i m b . w w w o s s e d a r I s l l i M n a y r B r i m b y b d e n g i s e D HCG 6%* S&P/TSX 4%* Inside Panel 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $17.03 $20.95 $9.90 $20.93 $25.90 $24.55 $29.54 $40.47 $47.99 $26.92 200 Closing Price as of December 31 * Compounded Annual Growth over 10 years. Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 HCG Stock Price 300 Performance 100 400 0 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Chairman’s Letter Dr. Kevin P.D. Smith, Chairman Three Decades of Leadership A Tribute to Jerry Soloway Thirty years ago Home Capital Group was a small company with a big ambition – to take on the Canadian financial industry and create an alternative for customers who didn’t fit the mould at traditional banks and share the Canadian dream of home ownership. Thanks in large part to the leadership of Gerald (Jerry) Soloway, Home Capital has today achieved that goal and stands poised to build its business to even greater heights, all while remaining true to that original idea. Jerry is a true pioneer, having recognized the potential for a business serving Canadians who are dependable borrowers but who don’t meet the criteria of the major financial institutions as they may not have the credit history, or are self-employed or have recently arrived in Canada. It was a remarkable insight, and having seen the opportunity, Jerry tirelessly worked to build the business. In doing so, Jerry built a major financial institution. Under Jerry’s stewardship, Home Capital has delivered truly outstanding performance, with the Company’s shares returning approximately 19% each year since 1988. Home’s success is not only measured by the bottom line and the stock chart, but also by the culture of entrepreneurship and family feel of Home Capital. True to form, Jerry thought about continuing the legacy through thoughtful recruitment and succession planning. It’s a credit to Jerry as well that the next generation of leaders at Home Capital is ready and able to take this Company forward. Following this year’s Annual Meeting, we will welcome Martin Reid as Home’s next CEO. Martin is an outstanding executive with a strong track record at Home Capital. For the past six years in his role as president, your Board has observed his development and contributions. In recent years, Martin has taken on an increasingly important and visible role, running many aspects of the business from day to day and leading the Company’s outreach to investors. He has also played a key role in strengthening and safeguarding the quality of our business. The Board is very confident that he will build on the strong foundations and strategic vision set by Jerry, while bringing his own insights and style to the role. I’m delighted that we will continue to benefit from Jerry’s wisdom and entrepreneurial zeal as a member of our Board. On behalf of the Board, the employees, and the shareholders of Home Capital, I would like to extend a heartfelt “thank you” to Jerry for his dedication to this Company for so long and to wish him well in his retirement from the role of Chief Executive Officer. Dr. Kevin P.D. Smith Chairman of the Board Home Capital Group Inc. Home CaPital GrouP inC. AnnUAL REPORT 2015 1 Dear fellow shareholders, Gerald M. Soloway, Chief Executive Officer On the cover of Home Capital Group’s first-ever annual report, I wrote that the Company was established in 1986 to “pursue a strategy of occupying profitable niches in the financial services industry that have been vacated by large financial conglomerates.” Many things have changed in the intervening three decades, but that underlying strategy remains the same, and it is as relevant as ever. Our results bear that out. We finished our first year with less than $50 million of mortgage loans and a net loss of $373,000. There were about a dozen employees. Thirty years later, we have more than 875 employees, $25 billion in loans under administration and we reported adjusted net income for 2015 of $288.9 million. That’s just shy of a record profit for our Company. In Good Hands This growth has created tremendous value for our shareholders. Early this year we increased our dividend for the 18th time in the past 10 years, and our stock closed at $34.00 as of February 29, 2016, a big difference from the less than 12 cents our shares fetched on a pre-split basis in the 1990s as Canada emerged from a recession. Our shareholders have enjoyed a return of approximately 19% each year since 1988. Those numbers tell only part of the story of the many successes that have come from the outstanding teamwork, dedication and entrepreneurial spirit of the unmatched Home Capital team. Home Capital has enabled hundreds of thousands of deserving Canadians to buy homes where they can raise families, celebrate milestones and enjoy their lives. That is perhaps the most gratifying fulfillment of the strategy we laid out in 1986. It has been a true privilege to be a part of building such an outstanding organization and to be able to work with such an excellent team. I am very pleased to say that, as we move into 2016 under the new leadership of Martin Reid, I am incredibly optimistic about the future of Home Capital. As always, Home Capital will seek to grow by doing what this Company does best – finding innovative ways to help Canadians meet their financial needs. We will do that in the tried and true way that we have developed over the past 30 years, which we have proven delivers sustainable results for our shareholders. That means sticking to our core strategy – maintaining a strong and conservative financial position; generating good returns over the long term; and investing to ensure we deliver the excellent products and services our clients expect, all while managing our risks. Building our Business In 2015, we made progress on many fronts. We sought opportunities to build and diversify our business, both to deliver more value to existing customers and to reach new ones. We invested to grow both organically and by acquisition. We opened our first two Oaken Financial stores in the downtown cores of Toronto and Calgary, complementing our online presence. Oaken is a key part of our strategy to diversify deposits, and it’s working. Deposits have now topped $1 billion at Oaken. 2 Home CaPital GrouP inC. AnnUAL REPORT 2015 Letter to Shareholders (continued) We achieved another strategic priority in 2015, gaining ownership of a chartered bank with the purchase of CFF Bank. This was a relatively small purchase that we believe will pay big dividends. Our research shows that for many Canadians, knowing that their money is in a licensed bank is a big draw. CFF Bank also brings new assets, new customers and new relationships with owner- managed Canadian First Financial Centres across Canada which will help to drive new business. In 2015, we took steps to drive growth in other lines of business. We expanded the commercial mortgage lending business, which is an important source of diversification and yield. We did so with our eye always on risk management, ensuring that these assets are in line with our risk appetite. We also demonstrated good success in adding to our consumer lending business, which includes retail credit services and Visa credit cards. These businesses are becoming an increasingly larger part of our assets and produce excellent interest income. on the right track Of course, Home Capital is first and foremost a provider of residential mortgages to individuals and families seeking to buy homes. In 2015, our mortgage business showed its strength and resiliency in the face of some challenges. We learned some important lessons from this experience, and we acted on them. For example, we further enhanced our income verification procedures to ensure new loans continue to reflect our risk appetite. We are seeing continued progress in rebuilding our originations pipeline. In the fourth quarter, we reported a surge in originations of our Accelerator mortgages, and we demonstrated more success in generating originations in our traditional uninsured mortgage business. We are confident that we are on the right track. great partners I would be remiss if we did not recognize the excellent work done every day by the more than 4,400 mortgage brokers that we continue to do business with. These are hard-working, honest and driven individuals and Home Capital would not be the great success it is without their help. For that reason, we redoubled our efforts in 2015 to ensure that we support them in their business. We introduced Spire, a new broker loyalty program, to reward partners who generate high-quality business. We also unveiled Loft, a new broker portal, which enables brokers to connect with us electronically more quickly and easily. Moving Forward During 2015, we had many accomplishments to be proud of, such as our near-record adjusted net income and book value per share, yet another dividend increase, the continued strong credit quality of our loan portfolio and our performance in delivering on our strategic priorities. The moments of adversity we faced in 2015 also revealed another reason to be proud. As we built this Company, we wanted to ensure that no matter how big we got, we would always feel like family. A family looks after one another, in good times and bad. That’s exactly what I saw in 2015. So I must say thank you, yet again, to the members of the Home Capital family for another year of hard work and dedication. At Home Capital, we have always believed that the proper measure of success is over the long term. As I look back at what we have accomplished and forward at the opportunities, I am confident that Home Capital, under the leadership of Martin Reid, will deliver many more successes for our shareholders, our customers, and our employees in the years ahead. Gerald m. Soloway Chief Executive Officer Home Capital Group Inc. Home CaPital GrouP inC. AnnUAL REPORT 2015 3 Q&a with martin reid You spent almost 10 years in senior roles at home capital and home trust before being named the new ceo. tell us about your impressions of the company and why you are excited about what’s to come. Home Capital and Home Trust in many respects pioneered the alternative mortgage lending business in Canada and we remain the leader. The Company’s growth is incredible. We have tripled net income in the time I’ve been here. That’s driven a lot of success for shareholders, including the 18th increase to our dividend in the last 10 years, which we announced in February. We have managed that growth while being very careful with risks and while strengthening our balance sheet. We also continue to experience strong credit performance in our loan portfolio with near-record low losses. Thanks to the hard work of Jerry Soloway and all the people at Home over the past 30 years, we have the right people, the right platform and the right strategy. All of us at Home take great pride in these accomplishments. However, we also know there is much more we can achieve. That’s where my focus is now, and I’m really optimistic about the opportunities for future growth. Looking forward, I believe we will continue to deliver strong growth in our core mortgage lending business, as well as our ancillary businesses, such as credit cards and retail credit. We will continue to diversify our product offerings, building on the success we’ve already experienced. And we will leverage our expertise to grow our business through opportunities that balance attractive returns with acceptable risk and a continued strong capital position. But beyond Home’s growth and success, what has struck me most in my time here is Home’s culture – the integrity of our people, their entrepreneurial spirit, and their dedication to doing the right thing. As we look to grow the business, it’s our people who are the most important asset of all. For home capital, 2015 was an eventful year. what were the highlights? Part of the reason I’m so optimistic about Home’s future is because in 2015 we took many important steps to push the business to new heights. At the end of 2015, we began piloting Spire, our new broker partnership program, and Loft, our new broker portal, to select partners. I expect Loft will really gain traction in 2016 because we believe it is an industry- leading tool that is easy to use and gives the mortgage brokers what they want. We also made huge strides in diversifying our deposit base away from term deposits that come in through brokers to include more direct deposits from our clients. This is crucial because a more diverse deposit base is much less risky from a funding perspective, and we are always looking for ways to reduce risk. So it was great to see our Oaken Financial business really come into its own last year, with deposits topping $1 billion. In fact, we now generate more than 23% of our funding through a number of new deposit initiatives that we have introduced over the past several years. Our acquisition of CFF Bank, although small, was significant. With CFF, Home has a trust company and a bank, and we can generate deposits in both entities. CFF also gives us another platform for new products. We also launched some white label credit cards such as Giant Tiger. Credit cards are a very profitable business, and we’re pleased with the growth. We foresee new products in cards, but we will always keep a careful eye on risk. We continued to transform, in particular in our mortgage lending business, to strengthen the organization and better manage risk. For example, we have separated the mortgage sales and underwriting roles. We’ve also realigned our rewards and compensation program to ensure that risks and rewards are aligned with our longer-term corporate objectives. That transformation work continues, with our teams always looking for innovative ways to improve our business. Finally, I’m very proud of the resilience the Company showed in dealing with the situation we faced involving the suspended brokers. It wasn’t easy, but we handled it the right way. I’m pleased to say that by year-end we were showing solid momentum entering 2016. 4 Home CaPital GrouP inC. AnnUAL REPORT 2015 what did you learn from 2015? Managing the situation regarding the suspended brokers was undoubtedly one of our biggest challenges. We have now intensively reviewed approximately half of the files that may be impacted and, based on that review, there is no indication that this will translate into any material losses from a financial perspective. Our investigation did not identify any issues with the underlying collateral of the mortgages or the validity of the credit bureau scores, and the value of those houses is sound. The investigation of the nature and extent of the issue is complete, and remediation related to suspended brokers will be done by year-end. We’ve worked very hard to ensure this doesn’t happen again by instituting a number of changes to our mortgage lending processes. To give you one example, we are in the process of changing broker compensation to better align it with the risk profile and quality of the deals they bring us. 2015 presented a number of challenges for Home, and in 2016 we will be back on track with a much stronger organization that generates quality business for years to come. the company put a big focus last year on “reigniting the culture.” why was that so important? We put a lot of effort in 2015 into redefining and communicating who Home is, who we want to be, and what we stand for. In recent years, Home has grown tremendously, with hundreds of new employees. It’s key that we all have a clear picture of our vision, mission and values. Home has always had a very strong entrepreneurial and risk-aware culture. We want to build on that strong culture, but a larger organization needs different tools to manage the business and manage risk. One of the benefits of Home is that we are much more agile than the big banks. That is what we’ve always been about: helping hardworking, dependable Canadians find solutions that they couldn’t with the big banks. We want to ensure we remain nimble. Finally, what’s your vision and outlook for the company in 2016 and beyond? My vision for the Company is built on what Home has always done so well – serving the under-serviced part of the financial market, and being very entrepreneurial and agile in how we do that. We will continue to improve our tools and skill sets to make us even stronger, ensuring we are well positioned for the next 30 years. Looking ahead, our core mortgage business has solid momentum and we expect to see continued growth in our residential and commercial mortgage business lines. We are pleased with the direction of our complementary businesses, including retail credit and credit cards. We are excited by the potential that the acquisition of CFF Bank provides as an additional platform for growth. And the Oaken brand will continue to be a key driver in our deposit diversification strategy. All of this growth will be accompanied by a strong risk management culture and infrastructure, which we continue to enhance. Indeed, the future looks bright for Home. What’s so exciting is that we have a great opportunity to further expand and diversify while keeping our focus on that under-serviced part of the market. And we have the right team in place to deliver on our future success – our people are committed, enthusiastic and diligent. That’s where we have the strengths that set us apart and that have made us so successful for the past 30 years. It’s those same strengths that will carry us forward, delivering the best products and services for our customers and the prudent, profitable and sustainable growth that our shareholders have come to expect. executive team From left to right John Hong Senior Vice President, Chief Compliance Officer & Chief Anti-money Laundering Officer Gary Wilson Executive Vice President, Underwriting Fariba rawhani Executive Vice President & Chief Information Officer Pino Decina Executive Vice President, Residential Mortgage Lending Carol Ferguson Senior Vice President, Human Resources robert morton Chief Financial Officer & Executive Vice President Benjy Katchen Senior Vice President, Deposits & Credit Cards marie Holland Senior Vice President, Internal Audit Chris ahlvik Executive Vice President, Corporate Counsel & Corporate Secretary Dinah Henderson Executive Vice President, Operations Greg Parker Chief Risk Officer & Executive Vice President John Harry Executive Vice President, Commercial Mortgage Lending Proven results GroWtH Home Capital sustained its strength in key financial measurements. the Company’s core business activities generated strong results, contributing to growth in assets under administration of 12.4% year over year and revenue remaining healthy at $993.7 million on an adjusted basis. returnS the Company recorded pre-tax return on assets of 1.9% and after-tax return on assets of 1.4%, both on an adjusted basis, while shareholders’ equity increased to $1.62 billion, an 11.9% increase over 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. 11 12 13 14 15 12 13 14 15 11 12 13 14 Adj 15 Adj 21000 16800 12600 8400 4200 0 2.0 1.5 1.0 0.5 0.0 20 15 10 5 0 25000 20000 15000 10000 5000 0 1.5 1.2 0.9 0.6 0.3 0.0 22.0 16.5 11.0 5.5 0.0 1200 960 720 480 240 0 2000 1500 1000 500 0 0.6 0.4 0.2 0.0 11 12 13 14 Adj 15 Adj 11 12 13 14 Adj 15 Adj 11 12 13 14 15 1 See definition of Adjusted Revenue and Adjusted net Income in the non-GAAP Measures and Glossary section of this report. 2 These figures are calculated under Basel III for 2013 and after and Basel II for 2012 and earlier. * 2014 and 2015 figures are adjusted. 6 Home CaPital GrouP inC. AnnUAL REPORT 2015 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 Performance vs. target Management believes that by focusing on medium-term objectives in the Company’s decision-making, we will be well positioned to provide sustainable earnings growth and solid returns to shareholders. This approach allows management the flexibility to take actions in the short-term to maximize mid-term and long-term value for the Company’s shareholders. return on eQ uitY (roe) In the fourth quarter 2015, Home Capital revised its return on equity target to achieve, on average, annual ROE in excess of 16%. The decision to adjust the ROE target reflects the effect of the Company’s substantial equity cushion, which is indicative of a strong balance sheet and accumulated earnings. DiluteD earninGS Per SHare Diluted earnings per share were $4.11 on an adjusted basis at December 31, 2015, consistent with diluted earnings per share of $4.11 one year prior. The mid-term target for growth in EPS continues to reflect the Company’s cautious approach to growth. miD-term tarGet: Achieve, on average, annual adjusted return on equity greater than 20%1 miD-term tarGet: Achieve, on average, annual growth in adjusted diluted earnings per share of 8% to 13%1 Adjusted return on equity at 18.8% for the year ended December 31, 2015 Adjusted diluted earnings per share were $4.11 for 2015 CaPital ratioS The Company aligns capital with the risk profile of the business through an understanding of the nature and level of risks being taken. The Company consistently maintains high levels of regulatory capital. DiviDenD Pa Yout ratio Management is committed to returning a superior total return to the Company’s shareholders. The target dividend payout range is subject to quarterly review by the Company’s Board of Directors. miD-term tarGet: Maintain strong capital ratios that exceed regulatory minimums by a safe margin, commensurate with the Company’s risk profile miD-term tarGet: Payout, on average, 19% to 26% of earnings to shareholders Tier 1 capital ratio of Dividend payout ratio of 18.30% well in excess of regulatory minimums 22.0% of earnings to shareholders 1 See definition of Adjusted net Income, Adjusted Earnings per Share and Adjusted Return on Equity in the non-GAAP Measures and Glossary section of this report and the Reconciliation of net Income to Adjusted net Income in Table 2 of this report. Home CaPital GrouP inC. AnnUAL REPORT 2015 7 Corporate Governance at Home Capital Home Capital recognizes the importance of strong and effective corporate governance. As a reporting issuer and publicly accountable entity, Home Capital has governance standards that 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 is responsible for the stewardship of Home Capital and for supervising the management of the business affairs of the Company. This includes creating a culture of integrity throughout the Company. All employees, officers and directors are subject to Home Capital’s Code of Conduct and Ethics Policy, which requires the highest standards of ethical behaviour in all dealings on behalf of the Company. The Board 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. A straightforward, proven business model and comparatively simple products afford a thorough understanding of risk and opportunity. new product initiatives are subjected to a formal evaluation process to ensure they are both well understood and consistent with the Company’s risk appetite. Home Capital uses a Board-driven, strategic planning process that links strategic analysis and insight with financial forecasting, stress testing and capital adequacy. The Company aligns employee incentives with long-term value creation through a compensation process that includes the engagement of expert third-party compensation advice. In addition to regularly scheduled meetings, the Board and its committees hold ad hoc meetings as the need arises and directors attend education sessions for emerging trends, industry developments and best practices. 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 at least annually. The Board reviews and approves Home Capital’s strategic and financial plans and risk appetite at least annually. The Board receives strategic updates throughout the year from each of the principal business groups and receives regular risk updates from the control functions. Effective Oversight Risk Appetite Strategic Planning S t r P l a a t e n g i c n i n g G a o n v Effective Governance Structure Robust Policy Frameworks Timely and Transparent Reporting d e r n O v a e n r c s i g e h t C F u o n Enterprise Risk Management Compliance Credit Audit Finance n c t r ti o o l n s B O u Lines of Business Operations Human Resources Information Technology 8 Home CaPital GrouP inC. AnnUAL REPORT 2015 p e s i n r a e ti o s s n s Highlights of Home Capital’s corporate governance framework include: > the Board and its committees function under charters that specify their roles, accountabilities and responsibilities. > eight of ten 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 Board is responsible for adopting and approving the company’s risk appetite and strategic and financial plans annually. > the Board reviews and approves all critical risk policies, delegations of authority, and company-wide limits. > the Board holds in-camera meetings of the independent directors at every Board meeting, and meets independently with the chief Financial officer, chief risk officer, chief credit officer, senior vice president of internal audit, chief compliance officer and chief anti-Money laundering officer, and external auditors no less than quarterly. > home capital provides an orientation program for new directors and conducts ongoing education sessions. > the company maintains a minimum share ownership requirement for directors, the chief executive officer, the president, executive vice presidents and senior vice presidents 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 chair of the governance, nominating and conduct review committee conducts an annual Board evaluation to assess the effectiveness of the Board and its committees, as well as the effectiveness of each director through self-evaluation and one-on-one meetings with the chairman of the Board. 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 financial reporting to shareholders; > the external auditor’s performance, qualifications and independence; > complaints with respect to accounting, internal accounting control or auditing matters; and > the effectiveness of the company’s internal controls, including the effectiveness and independence of the company’s finance, internal audit and compliance functions. The Chief Financial Officer, Chief Compliance Officer and Chief Anti-Money Laundering Officer, and the Senior Vice President of Internal Audit each report to the Audit Committee independently and meet in camera at least quarterly. The Committee meets with the external auditors at least quarterly. risk and Capital Committee The Risk and Capital Committee assists the Board in its oversight role with respect to: > reviewing and recommending Board approval of the company’s overall risk appetite framework, including risk limits; > identifying, assessing and managing the company’s risk profile; > reviewing and approving the company’s risk and capital policies; > reviewing the effectiveness of the company’s risk and capital practices; and > reviewing the company’s adherence to internal risk and capital policies and procedures through timely management reporting. The Chief Risk Officer and the Chief Credit Officer each report to the Risk and Capital Committee independently and meet in camera at least quarterly. Governance, nominating and Conduct review Committee The Governance, nominating and Conduct Review Committee assists the Board in its oversight role with respect to: > identifying individuals qualified and suitable to become members of the Board of directors and recommending nominees to the Board for each annual meeting of shareholders; > the development of the company’s corporate governance policies, practices and processes; > the effectiveness of the Board, its committees and the chairs of those committees; Home CaPital GrouP inC. AnnUAL REPORT 2015 9 Corporate Governance at Home Capital (continued) > evaluating the contributions of individual directors; > reviewing conflicts of interest, confidential information, transactions involving related parties of the company, and disclosure of information; and > director orientation, education and development policy and programs. 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 strategy, policies and programs; > all matters relating to proper utilization of human resources within the company, with special focus on management succession, development and compensation; > management of compensation-related risk; and > the compliance of directors, officers and employees with the company’s code of conduct and ethics policy. The Senior Vice President, Human Resources meets in camera with the Human Resources and Compensation Committee at least quarterly. Board of directors shareholders shareholders’ auditors appoint elect report human resources and compensation committee governance, nominating and conduct review committee appoint Board oF directors appoint audit committee risk and capital committee appoint report report credit enterprise risk Management ceo Finance corporate compliance internal audit Home Capital views 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 Independence Standards, Code of Conduct and Ethics Policy, Disclosure Policy, Whistleblower Policy and Shareholder Rights Plan. 10 Home CaPital GrouP inC. AnnUAL REPORT 2015 Volunteering at Camp Oochigeas, Summer 2015 Corporate Social responsibility a commitment to our communities Home Capital invests in our neighbourhoods and communities through a wide range of corporate initiatives, sponsorships and employee fundraising efforts. We are proud to partner with organizations whose focus aligns with our principles – financial literacy, an entrepreneurial culture, serving the underserved and our belief in every Canadian’s right to shelter. In 2015, employee volunteers participated in a number of events including Junior Achievement of Canada programs for Grade 7 and 8 students in Toronto, a Habitat for Humanity construction project, delivering a day of assistance and support to homeless youth at Covenant House and a soup-making session with Soup Sisters Toronto to provide soup to local women’s shelters and youth programs. Employees also supported Camp Oochigeas for children with cancer by participating in a fundraising barbeque and taking part in readying camp facilities in Muskoka. a commitment to our employees We invest in our employees by creating a workplace where people feel engaged, inspired, challenged, proud and respected. To that end, we focus on all facets of the employee experience and work to foster employee engagement through the promotion of a climate of trust and encouragement. We support our employees and their commitment to their communities through sponsorships of local sports teams, neighbourhood events and little league squads. We are proud of our more than 300 employees who volunteered for numerous events organized over the year by the Company’s Corporate Social Responsibility Committee, demonstrating a high level of interest and enthusiasm. In 2015, Home Capital launched its new vision, mission and values with a company-wide event, Reigniting our Culture. This event promoted deeper employee engagement and involvement in helping to shape what our values look like in action and create an environment where employees can grow and prosper. a commitment to our environment Home Capital is committed to implementing environmentally sustainable business practices that reduce our impact to the environment. We achieve this through employee awareness programs, encouraging employees to make green choices, and supporting business practices and participating in initiatives that benefit the environment in practical and meaningful ways. In 2015, a number of employees took part in an initiative with nature Conservancy Canada, a non-profit organization that focuses on conservation and protection of natural areas that sustain Canada’s plants and wildlife. Through this program, volunteers helped clear invasive species in the niagara Escarpment, supporting the preservation of this area of natural diversity in southern Ontario. In further efforts to support the environment, the Company donated one tree for each employee to Tree Canada’s national Greening Program, helping reforest areas of British Columbia hit hardest by devastating wildfires in 2015. Home CaPital GrouP inC. AnnUAL REPORT 2015 11 management’s Discussion and analysis Quarterly Fi na nCia l HiGHliG HtS FourtH Q uarter 20 15 Items of note Income Statement Highlights Financial position Highlights FourtH Q uarter FinanCial inFor mation Cap ital m ana Gem ent Capital Management Activity Internal Capital Adequacy Assessment process (ICAAp) Credit Ratings Share Information riSk m ana Gem ent Risk Appetite Risk Governance Stress testing principal Risks Strategic Risk Credit Risk Market Risk Funding and liquidity Risk operational Risk Compliance Risk Capital Adequacy Risk Reputational Risk Risk Factors that May Affect Future Results aCCountinG StanD arDS anD poliCieS Future Change in Accounting Standards ControlS o Ver FinanCial re portinG 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-Ga ap m eaSureS anD GloSSary non-GAAp Measures Glossary of terms Acronyms 39 40 40 40 41 42 49 51 52 52 52 52 52 53 55 56 56 56 62 66 68 69 69 69 69 70 70 70 70 71 71 71 71 71 71 74 74 14 14 15 15 16 17 17 18 19 19 19 19 20 20 20 20 20 21 21 22 23 23 24 25 25 26 27 28 28 28 28 29 30 30 31 31 31 32 33 35 35 36 36 37 38 38 38 BuSin eSS p roFile Business portfolios ViSion, miSSion anD ValueS Risk-taking philosophy 2015 Strat eGieS anD a CHieVe men tS miD- term FinanCial t arGetS 2015 perFormanCe Summary 2016 StrateGieS 2016 oVerall o utlook Market Conditions traditional Single-family Mortgage lending Insured Securitized Mortgage lending Commercial Mortgage lending Credit Cards and line of Credit lending Consumer lending Deposits Credit performance and losses non-interest expenses liquidity and Capital FinanCial HiGHliGHtS Items of note Income Statement Highlights for 2015 Balance Sheet Highlights for 2015 FinanCial perFormanCe reVie w Acquisition of CFF Bank net Interest Income and Margin non-interest Income Derivatives and Hedging Cash Flow Hedging Fair Value Hedging economic Hedge of loans Held for Securitization and Sale other Interest Rate Swaps non-interest expenses taxes Comprehensive Income FinanCial poSition reView Assets loans under Administration Mortgage lending other lending Cash Resources and Securities liabilities Deposits, Senior Debt and Securitization liabilities Shareholders’ equity Contingencies and Contractual obligations off-balance Sheet Arrangements Related party transactions 12 Home Capital Group inC. AnnuAl RepoRt 2015 mana Gement’S DiSCuSSion anD analySiS 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, 2015. The discussion and analysis relates principally to the Company’s subsidiary Home Trust Company (Home Trust), which provides residential mortgage lending, non-residential commercial mortgage lending, consumer and credit card lending and deposit-taking services. Home Trust includes its wholly owned subsidiary, CFF Bank. This MD&A should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2015 included in this report. This MD&A has been prepared with reference to the audited consolidated financial statements which are prepared in accordance with International Financial Reporting Standards (IFRS or GAAP) and all amounts are presented in Canadian dollars. This MD&A is current as of February 10, 2016. As in prior years, the Company’s Audit Committee reviewed this document, and prior to its release the Company’s Board of Directors (Board) approved it, on the Audit Committee’s recommendation. The Non-GAAP measures used in this MD&A and a glossary of terms used in this MD&A and the financial statements are presented in the last section of this MD&A. 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, compliance risk, and capital adequacy 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 and general economic conditions, legislative and regulatory developments, competition and technological change. the preceding list is not exhaustive of possible factors. these and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. the Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws. Assumptions about the performance of the Canadian economy in 2016 and its effect on Home Capital’s business are material factors the Company considers when setting its objectives, targets 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 its targets, objectives and outlook for 2016, management’s expectations assume: > the Canadian economy is expected to be relatively stable in 2016; however, it will continue to be impacted by adverse effects related to the drop and fluctuations in oil prices and other commodities. the Company has limited exposure in energy producing regions. > Generally the Company expects stable employment conditions in its established regions; however, unemployment rates in energy producing regions are expected to continue to increase in 2016. Also, the Company expects inflation will generally be within the Bank of Canada’s target of 1% to 3%, leading to stable credit losses and consistent demand for the Company’s lending products in its established regions. Credit losses and delinquencies in the energy producing regions may increase, but given the Company’s limited exposure, this is not expected to be significant. > the Canadian economy will continue to be influenced by the economic conditions in the united States and global markets and further adjustments in commodity prices; as such, the Company is prepared for the variability to plan that may result. > the Company is assuming that overnight interest rates will remain at the current very low rate for 2016. this is expected to continue to support relatively low mortgage interest rates for the foreseeable future. Home Capital Group inC. AnnuAl RepoRt 2015 13 management’s Discussion and analysis management’s Discussion and analysis > In the Company’s established regions, the Company expects that the housing market will remain stable with reduced, but balanced supply supported by continued low interest rates, and relatively stable employment, depending on location and immigration. there will be moderately easing housing starts and resale activity with relatively stable prices throughout most of Canada, with continued regional disparities. this supports continued stable credit losses and stable demand for the Company’s lending products in its established regions. > the Company expects that consumer debt levels, while elevated, will remain serviceable by Canadian households. > the Company will have access to the mortgage and deposit markets through broker networks. BuSineSS proFile Home Capital is a holding company that operates primarily through its principal, federally regulated subsidiary, Home trust, which offers insured and uninsured deposits, residential and non-residential commercial mortgage lending and consumer lending. Home trust also conducts business through its wholly owned subsidiary, CFF Bank. 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 is primarily conducted in Canadian dollars. Business portfolios the Company’s management views the business as a single business with separately identified lending portfolios, deposits and other activities, as described below. mortgage lending Traditional Single-family Lending – $11.71 billion in loans under administration the traditional single-family residential portfolio is the Company’s “Classic” mortgage portfolio which consists of primarily uninsured mortgages with loan-to-value ratios of 80% or less, serving selected segments of the Canadian financial services marketplace that are not the focus of the major financial institutions. these mortgages are funded by the Company’s deposit products. Insured Residential Lending – $10.73 billion in loans under administration Insured residential lending includes the Company’s insured single-family “Accelerator” mortgages and insured securitized multi-unit residential mortgages. these mortgages are generally funded through Canada Mortgage and Housing Corporation (CMHC) sponsored mortgage-backed security (MBS) and Canada Mortgage Bond (CMB) securitization programs. In some cases these mortgage portfolios may be sold off-balance sheet resulting in recognition of gains on sale. the Company remains responsible for the administration of these mortgages and includes them in loans under administration. Residential Commercial Lending (including loans held for sale) – $456.5 million in loans under administration this portfolio comprises insured and uninsured residential commercial lending, which includes commercial mortgages that are secured by residential property such as non-securitized multi-unit residential mortgages and builders’ inventory. Insured multi-unit residential mortgages are included in this portfolio until they are securitized. these loans are funded by deposits. Non-residential Commercial Lending – $1.49 billion in loans under administration non-residential commercial lending includes store and apartment mortgages and commercial mortgages. these loans are funded by deposits. Credit Cards and lines of Credit – $370.8 million the Company’s equityline Visa product, secured by residential property, currently represents almost all of the credit card portfolio. the Company also offers cash-secured Visa products and unsecured Visa cards. the Company’s easyone line of credit product allows customers access to both an unsecured line of credit and high interest savings through one account. Credit card loans and lines of credit are funded by deposits. Consumer lending – $296.9 million this portfolio primarily includes consumer retail lending for durable household goods, such as water heaters and larger-ticket home improvement items. Consumer loans are supported by holdbacks or guarantees from the distributors of such items and/or collateral charges on real property. Consumer loans are funded with deposits. Deposits – $15.67 billion the Company’s uninsured assets are largely funded by its deposit activities. Deposits are generally taken for fixed terms, varying from 14 Home Capital Group inC. AnnuAl RepoRt 2015 90 days to five years, and carry fixed rates of interest over the full term of the deposit. the Company also has certain deposit diversification strategies, including a high-interest savings account, oaken Financial direct-to-consumer deposit brand and an institutional deposit program. the Company is a member of the Canada Deposit Insurance Corporation (CDIC) and its retail deposit products are eligible for CDIC coverage, up to the applicable limits. other activities In addition to its lending portfolios, the Company manages a treasury portfolio to support liquidity requirements and invest excess capital. the Company’s operations also include pSiGate, the Company’s subsidiary involved in payment processing. In addition, Home trust’s subsidiary CFF Bank, a Canadian retail bank, offers deposit, mortgage and personal banking products. As management views its business as a single segment with a variety of product and service activities, the financial statements and the MD&A are prepared on that basis. ViSion, miSSion a nD ValueS In 2015, the Company relaunched its Vision, Mission and Values in concert with its evolving service delivery commitments to its stakeholders. Our Vision the Company’s vision is to be the market leader in alternative-based financial services solutions to Canadians. Our Mis sion We believe every Canadian deserves a home and the opportunity to prosper. Our Corporate Values (PROSPER) passion, risk awareness, optimism, Service, professionalism, ethics, respect risk-taking philosophy the Company’s core strategy focuses on serving segments of the Canadian financial services market that traditionally have not been adequately served by larger financial institutions. the Company’s strategy provides the 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, risk appetite and risk mitigation activities; > promotion of a sound risk and compliance culture; > Adoption of a conservative financial risk profile, comprising 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; > Implementation of a three lines of defence model; 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 and businesses that are well understood, including, but not limited to, confirmation of identity, credit profile, employment and willingness and ability to repay debts; > new products and initiatives are subject to a new initiative review process and undertaken after risk identification and analysis. All acquisitions are subject to a due diligence process that ensures alignment with the Company’s risk appetite and strategy; > 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 locations 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 geographic pricing; > the Company will not pursue profits through trading activities and will limit the use of derivatives to hedging purposes only; and > the Company will manage interest rate gaps within its risk appetite. Home Capital Group inC. AnnuAl RepoRt 2015 15 management’s Discussion and analysis management’s Discussion and analysis 201 5 StrateGieS anD aCHieVementS the Company consistently employs three value enhancing strategic priorities to achieve its long-term objectives: Strategic priority 2015 Strategies and achievements Build and maintain Canada’s leading alternative financial institution maintain a strong, conservative financial position Serving an established and growing market niche > Continued to offer “one-stop” convenience to borrowers and brokers, offering both traditional alternative residential lending and prime lending, generating solid net interest margins > expanded the footprint of its commercial lending products with 2015 originations increasing 102% year over year > Continued offering ancillary consumer lending products, rebuilding the retail credit origination pipeline after the sale of the waterheater portfolio in 2014 > established Visa co-branding initiatives with the launch of three new programs: union plus Canada, optimax Credit and Giant tiger > Continued to build oaken Financial, increasing balances by 42.2% over 2014, to over $1 billion > enhanced oaken Financial’s presence through the launch of two oaken stores in Calgary and toronto > Finalized the acquisition of CFF Bank, a Schedule 1 Bank under the Bank Act (Canada), on october 1, 2015 Generating strong shareholder returns in good times and bad > Maintained a strong capital position, with a Common equity tier 1 capital ratio of 18.31% at the end of 2015 and increased total capital of Home trust, through the increase in retained earnings of $221.4 million > Generated an adjusted Roe of 18.8% > Increased dividends paid to shareholders by 25.7% over 2014 > Maintained a prudent credit risk profile of the loan portfolio, with a net non-performing loans as a percentage of gross loans ratio (npl ratio) of 0.28% and low write-offs at 0.04% of gross loans > Maintained and managed strong liquidity positions, ending the year with $2.13 billion in liquid assets > Maintained a flexible supply of funding through the deposit broker network, oaken Financial and securitization markets Build on our operational excellence Investing to ensure our growth is managed and prudent > Continued to invest in customer experience including oaken Financial and the loans origination platform, as well as It security commensurate with operating in an increasingly digital marketplace > Continued to enhance risk and compliance framework, including enhancing income verification procedures to ensure new lending continues to reflect the Company’s risk appetite > the adjusted efficiency ratio ended the year at 31.8%, which includes a full quarter of CFF Bank operating expenses 16 Home Capital Group inC. AnnuAl RepoRt 2015 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. miD-term FinanCial t arGetS Management believes that by focusing on medium-term objectives in our decision-making, we will be well positioned to provide sustainable earnings growth and solid returns to our shareholders. this approach allows management the flexibility to take actions in the short-term to maximize mid-term and long-term value for the Company’s shareholders. the Company will continue to measure its long term objective of superior shareholder value through mid-term, three- to five-year financial targets as follows: measure mid-term target (3–5 years) Diluted earnings per Share Achieve, on average, annual growth in diluted earnings per share (adjusted) of 8% to 13% Return on Shareholders’ equity (Roe) Achieve, on average, annual Roe >16% Capital Ratios Maintain strong capital ratios that exceed regulatory minimums by a safe margin commensurate with our risk profile Dividend payout Ratio payout, on average, 19% to 26% of earnings to shareholders the Company’s mid-term targets for growth in diluted earnings per share continue to reflect the Company’s cautious approach to growth in the current economic environment in Canada and abroad and the potential range of outcomes for income growth that may result. the Company revised its return on equity target in Q4 2015, to seek to achieve a return on shareholders’ equity of greater than 16%. the decision to adjust the return on shareholders’ equity target reflects in large part the effect of the substantial equity cushion the Company has accumulated, reflective of a strong balance sheet and accumulated earnings. Management also seeks to align the Company’s capital with the risk profile of the business through an understanding of the nature and level of risks being taken and how these risks attract regulatory and risk-based capital. the Company consistently maintains high levels of regulatory capital as compared to other financial institutions. Management is committed to returning a superior total return to the Company’s shareholders. the Company’s dividend payout target range is subject to the review by the Company’s Board of Directors on a quarterly basis and modified in accordance with the performance of the Company and prevailing market conditions. 2015 perFormanCe Summary Below is a summary of the Company’s performance for 2015 against the mid-term targets highlighted above. the Company will continue to focus on its medium-term objectives to guide the Company’s decision-making and describe its accomplishments. > Diluted earnings per share (adjusted) were $4.11 for 2015. the Company’s goal is to achieve, on average, annualized growth in diluted earnings (adjusted) per share of 8% to 13% in the three- to five-year medium term. > Return on shareholders’ equity (adjusted) was 18.8% for 2015, with the goal to achieve, on average, annualized return on equity of greater than 16% in the three- to five-year medium term. this objective was revised during the fourth quarter of 2015. > Common equity tier 1 and tier 1 capital ratios of 18.31% and 18.30%, respectively, and total capital ratio of 20.70% continue to be well in excess of regulatory minimums. > Dividend payout ratio of 22.0%, with a targeted payout on average of 19% to 26% of earnings to shareholders in the three- to five-year medium term. on annual basis, the Company will update its three-year financial plan and evaluate targets as part of its year-end process, or as required. Home Capital Group inC. AnnuAl RepoRt 2015 17 management’s Discussion and analysis management’s Discussion and analysis 201 6 StrateGieS the Company’s key long-term objective is to deliver superior shareholder value. the Company believes long term shareholder value can be achieved through consistent focus on its three value-enhancing strategic priorities as follows: Strategic priority 2016 Strategies Build and maintain Canada’s leading alternative financial institution maintain a strong, conservative financial position Serving an established and growing market niche > Continue to offer a full suite of mortgage lending products while maintaining a high level of service to business partners and customers > Successfully launch the broker partnership program and broker portal to further strengthen business partnerships > Continue to build complementary and innovative product offerings > Continue to grow direct-to-consumer deposits through oaken Financial Generating strong shareholder returns in good times and bad > Maintain a strong capital position with capital ratios and leverage ratios exceeding the regulatory minimums by a safe margin and sensitive to our risk position and appetite > Maintain prudent levels of liquidity that meet regulatory requirements and our own conservative assessments > Maintain the prudent credit risk profile of the loan portfolios > Deliver superior shareholder returns as measured by return on equity and deliver a dividend payout ratio within the mid-term target range > Continue to build on the Company’s risk and compliance infrastructure to support sustainable future growth > Continue review and where appropriate, validation of the income documentation submitted in respect of mortgages referred by the 45 individual mortgage brokers suspended between September 2014 and March 2015, with plans to complete the review by the end of 2016 Build on our operational excellence Investing to ensure our growth is managed and prudent > Continue to invest in technology and processes that enhance the customer experience, improve efficiencies and support a strong risk management and compliance infrastructure > Maintain a relatively low cost structure as measured by the efficiency ratio > Integrate and streamline the operations, distribution channels and product suites of CFF Bank 18 Home Capital Group inC. AnnuAl RepoRt 2015 2016 oVerall outlook looking ahead, the Board of Directors and management expect that Home Capital will continue generating solid shareholder returns in 2016 and beyond. market Conditions Supply and demand in the Company’s key established real estate markets is expected to remain balanced in 2016, with relatively stable prices and sales volumes, with regional disparities, as demand for new homes and resale activity eases moderately. the Company believes that the current and expected levels of housing activity indicate a healthy real estate market overall. the Company expects to see the impact of certain positive economic forces on its established markets through 2016, including a generally positive outlook for the uS economy, the comparatively weaker Canadian dollar, the continued low interest rate environment and the expected beneficial impact of lower oil prices on economic growth in Central Canada. Adverse effects related to the drop in oil prices and other commodity prices continue to negatively impact the economies of energy producing regions. traditional Single-family mortgage lending the Company expects to see continued strengthening of its origination volumes through 2016, when compared to 2015 originations. the Company will look to rebuild its market share lost during 2015 through the Company’s proven business model and service levels. In addition, the Company expects that recently announced tightening in mortgage lending regulations may lead to increased demand for its traditional product. the Company is enhancing the broker experience through its broker portal technology, and launching a new broker partnership program at the beginning of the year. the Company expects that these initiatives, among others, will allow the Company to continue to improve origination volumes leveraging the demand for its traditional mortgages within its established regions. In addition, the Company launched its new uninsured product, Ace plus, which is a lower margin mortgage product directed toward lower risk borrowers. the Company will look to grow this product in 2016, which may lower the overall traditional single-family reported net interest margin. net interest margins in the traditional portfolio through 2015 reflect both improved credit quality of borrowers and lower relative cost of funds driven by lower rates and the shift to a higher proportion of lower cost demand deposit products. the Company expects 2016 net interest margins to remain relatively stable to margins experienced on new loans originated in Q4 2015, but is prepared for modest volatility. insured Securitized mortgage lending the Company will continue to originate and securitize prime insured single-family and insured multi-unit residential mortgages and will generally sell these off-balance sheet, generating gains on sale. the market for both of these products remains very competitive and the Company expects that new origination levels, seasonality, spreads and gains on sale will be similar to levels experienced in the second half of 2015 but this is dependent on market conditions. the Company remains committed to offering a range of mortgage products through its distribution channels to support its “one-stop” initiative. the Company will continue to actively renew its maturing portfolio of insured prime mortgages as renewed mortgages offer enhanced profitability. net interest income on the on-balance sheet securitized portfolio will continue to decline as older, higher-yielding pools reach maturity and are replaced with pools that qualify for off-balance sheet accounting. the Company expects sufficient securitization funding will be available to meet its planned volumes. Home Capital Group inC. AnnuAl RepoRt 2015 19 management’s Discussion and analysis management’s Discussion and analysis Commercial mortgage lending Commercial mortgage lending will remain an important portfolio for the Company, generating high levels of return and providing asset diversification. the Company has been a prudent and conservative lender in this segment, experiencing very low levels of losses and delinquencies. the Company plans to continue to grow the non-residential commercial portfolio in 2016 at a higher rate, similar to the rate in 2015, if market conditions remain favourable. Credit Cards and line of Credit lending equityline Visa credit cards are an important component of the “one-stop” lending strategy, allowing customers the flexibility of a home equity line of credit with the convenience of a credit card. the Company will continue to focus marketing and cross selling in this product offering and expects growth to improve in line with the Company’s residential lending business. the Company also has additional co- branding and expansion initiatives in unsecured credit card lending underway. While these initiatives are not expected to be material to the Company’s results in 2016 they are important strategies for mid- to long-term growth. Consumer lending Consumer lending remains an important ancillary business for the Company, with high rates of return for the allocated capital. origination volumes are expected to be consistent with 2015, with similar levels of spreads. Deposits the Company will continue to source deposits from the public through investment dealers and deposit brokers and will continue to emphasize growth of its direct-to-consumer business, oaken Financial. the Company will continue to strengthen its funding capability through agreements with additional deposit brokers and the enhancement of its direct-to-consumer sales and service capabilities. the relative cost of deposits is expected to remain stable to slightly lower when compared to 2015. the acquisition of CFF Bank supports the Company’s long-term strategy to diversify its funding sources. through 2016, the Company will integrate the technology platform of CFF Bank into the Company’s infrastructure in order to facilitate growth in deposit funding generated through CFF Bank, which issues deposits that would be eligible for deposit insurance in an efficient and effective manner. the Company will continue to issue institutional deposits when appropriate, given market conditions. Credit performance and losses the Company’s prudent underwriting and collection practices are reflected in low levels of credit losses and delinquencies. Credit losses and delinquencies are expected to remain low in 2016; however, the Company is prepared for volatility in this performance that may result from uncertainty in the macroeconomic environment. Credit performance in the energy producing regions is expected to deteriorate, but given the Company’s limited exposure in these geographic areas, the effect on credit losses is not expected to be material for the Company. 20 Home Capital Group inC. AnnuAl RepoRt 2015 non-interest expenses the Company’s continued focus on the growth of its business will be accompanied by commensurate strengthening of risk and compliance oversight, along with customer service platforms, involving increased spending on people and technology. Increased spending to support oaken Financial and loans origination initiatives, and the Company’s enterprise information security as well as increasing costs associated with regulatory requirements can also be expected. through 2016, the Company expects to continue to incur integration costs, specifically to integrate CFF Bank’s operations with those of Home trust. upon completion of one-time integration activities, the Company expects CFF Bank to be operating with a significantly more efficient ongoing cost structure. While there will be continued upward pressure on expenses from these sources, the Company will continue to focus on deriving savings from cost management and efficiency programs and, on an overall basis, expects its efficiency ratio to remain relatively consistent with the levels experienced at the end of 2015. the Company expects that the effective income tax rate in 2016 will remain within the range of 26.2% to 26.8%, excluding the impact of any Scientific Research and experimental Development (SR&eD) investment tax credits that may be realized and the recognition of dividends from Canadian corporations. the Company expects to submit claims for SR&eD in 2016 that may result in a reduction to the effective tax rate of the Company. In the event that claims are submitted, the effective tax rate will decrease accordingly. liquidity and Capital the Company continues to hold high levels of capital as measured by regulatory risk-based capital ratios and leverage ratios. Further, the Company has been accumulating capital more rapidly through retained earnings than would be required to support the lending activity. the Company will continue to employ robust capital adequacy stress testing techniques to ensure that its conservative capital position is maintained and to provide for the flexibility to take advantage of appropriate market opportunities, as they arise, and to pay its shareholders an appropriate return. the Company will continue to diversify its funding and maintain a strong liquidity position by holding a sufficient stock of unencumbered high-quality liquid assets. the Company complies with the office of the Superintendent of Financial Institutions Canada (oSFI)’s liquidity Adequacy Requirements Guideline. Strong levels of capital and liquidity provide additional safety and soundness to depositors. this outlook section contains forward-looking statements. please see the Caution regarding Forward-looking Statements in this report. Home Capital Group inC. AnnuAl RepoRt 2015 21 management’s Discussion and analysis management’s Discussion and analysis Fin anCial HiGHliGHtS table 1: key performance indicators For the years ended December 31 (000s, except %, multiples and per share amounts) FinanCial perFormanCe meaSureS total adjusted revenue1 net income Adjusted net income1 net interest income earnings per share – basic2 Adjusted earnings per share – basic1, 2 earnings per share – diluted2 Adjusted earnings per share – diluted1, 2 Dividends per share2 Return on shareholders’ equity Adjusted return on shareholders’ equity1 Return on average assets net interest margin (teB)3 net interest margin non-securitized assets (teB)3 net interest margin securitized assets efficiency ratio (teB)3 Adjusted efficiency ratio (teB)1,3 FinanCial ConDition meaSureS 2015 2014 2013 2012 2011 $ 993,711 $ 1,010,311 $ 949,547 $ 887,685 $ 790,274 287,285 313,172 256,542 221,983 190,080 288,857 289,153 256,542 221,983 190,080 481,090 459,529 421,979 381,472 333,952 4.09 4.12 4.09 4.11 0.88 18.7% 18.8% 1.4% 2.36% 2.83% 0.49% 32.4% 31.8% 4.48 4.14 4.45 4.11 0.70 23.8% 22.0% 1.6% 2.25% 2.83% 0.67% 27.2% 28.8% 3.70 3.70 3.66 3.66 0.54 23.9% 23.9% 1.3% 2.17% 3.01% 0.73% 28.7% 28.7% 3.20 3.20 3.19 3.19 0.45 25.5% 25.5% 1.2% 2.09% 3.10% 0.93% 27.7% 27.7% 2.74 2.74 2.73 2.73 0.38 27.1% 27.1% 1.1% 2.06% 3.04% 1.24% 27.9% 27.9% total assets $ 20,512,019 $ 20,082,744 $ 20,075,850 $ 18,800,079 $ 17,696,471 total assets under administration4 Cash and securities-to-total assets total loans5 27,301,433 24,281,366 21,997,781 19,681,750 17,696,471 7.8% 4.7% 5.8% 3.8% 5.2% $ 18,268,708 $ 18,364,910 $ 18,019,901 $ 17,159,913 $ 16,089,648 total loans under administration4,5 25,058,122 22,563,532 19,941,832 18,041,584 16,089,648 Common equity tier 1 capital ratio6 tier 1 capital ratio6 total capital ratio6 Assets to regulatory capital multiple6,7 leverage Ratio6, 8 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 18.31% 18.30% 20.70% n/a 7.36% 0.05% 0.28% 74.0% 18.30% 18.30% 20.94% 12.47 n/A 0.07% 0.30% 64.4% 16.80% 16.80% 19.69% 13.19 n/A 0.09% 0.35% 52.4% n/A 17.01% 20.68% 13.39 n/A 0.09% 0.33% 57.0% n/A 17.29% 20.46% 14.44 n/A 0.05% 0.25% 74.9% 1 See definition of total Adjusted Revenue, Adjusted net Income, Adjusted Basic and Diluted earnings per Share, Adjusted Return on Shareholders’ equity and Adjusted efficiency Ratio under non-GAAp Measures in this report and the reconciliation of net income to adjusted net income in table 2. 2 During Q1 2014, the Company paid a stock dividend of one common share per each issued and outstanding common share. Accordingly, diluted earnings per share is reduced to half and the number of shares disclosed is doubled for all periods prior to the dividend presented for comparative purposes. 3 See definition of taxable equivalent Basis (teB) under non-GAAp Measures in this report. 4 total assets and loans under administration include both on- and off-balance sheet amounts. 5 total loans include loans held for sale. 6 these figures relate to the Company’s operating subsidiary, Home trust Company. For 2013 through 2015, figures are calculated under Basel III, and for 2012 and earlier, under Basel II. 7 Commencing in Q3 2013, the Company excluded from its assets, for the purpose of calculating the assets to regulatory capital multiple, mortgages that are off-balance sheet as a result of sales of residual interests in light of regulatory communications confirming this treatment. the comparative multiple for 2012 was restated to reflect this treatment. the Company did not enter into these transactions prior to 2012. 8 effective Q1 2015, the Assets to Regulatory Capital Multiple has been replaced with the Basel III leverage ratio. See definition of leverage ratio under non-GAAp Measures in this report. 22 Home Capital Group inC. AnnuAl RepoRt 2015 items of note the Company’s results were affected by the following items of note that aggregated to a negative impact on net income of $1.6 million or $0.02 diluted earnings per share in 2015: > $0.7 million in acquisition costs and $3.5 million in integration costs, less $2.1 million in relation to a bargain purchase gain, for a net of $2.1 million related to the acquisition of CFF Bank in 2015 ($1.6 million after tax and $0.02 diluted earnings per share). the Company’s results were affected by the following items of note in 2014: > $32.7 million prepayment income in Q4 2014 ($24.0 million after tax and $0.34 diluted earnings per share) related to the sale of $234.9 million of water heater loans. income Statement Highlights for 2015 > Reported net income of $287.3 million in 2015, a decrease of $25.9 million or 8.3% from net income of $313.2 million in 2014. > Adjusted net income of $288.9 million in 2015, as defined in table 2, decreased $0.3 million or 0.1% from adjusted net income of $289.2 million in 2014, supported by a healthy loan portfolio evidenced by low non-performing loans and credit losses, solid net interest margins and a strong capital position. > Adjusted diluted earnings per share of $4.11 was unchanged from the adjusted diluted earnings per share of $4.11 in 2014. > Return on average shareholders’ equity was 18.7% for 2015 (adjusted return on average shareholders’ equity of 18.8%) as compared to 23.8% for 2014 (adjusted return on average shareholders’ equity of 22.0%). In the fourth quarter of 2015, the Company adjusted its return on equity target to greater than 16% over the medium term, reflecting in large part the Company’s substantial accumulated equity. > total net interest income increased to $481.1 million, up $21.6 million or 4.7% over the $459.5 million earned in 2014, reflecting higher total net interest margin (teB) of 2.36% compared to 2.25% in 2014. > net interest income on non-securitized assets was $463.1 million in 2015, increasing 8.9% over 2014 on higher average asset balances of $16.53 billion, compared to $15.17 billion in 2014. net interest margin (teB) on this portfolio was 2.83% for 2015, flat compared to 2014. > total income earned from securitization, which includes net interest income on the on-balance sheet portfolio and securitization income from off-balance sheet sales was $44.2 million for the year, compared to $61.1 million in 2014. Securitization income was $26.2 million in 2015 on $1.90 billion in notional sales compared to securitization income of $26.8 million on $2.53 billion of notional sales in 2014. Relative gains vary based on market opportunities and reflect the highly competitive market for prime insured mortgages. net interest income on the on-balance sheet securitized portfolio declined to $18.0 million for the year from $34.3 million in 2014. the decline reflects both a decline in net interest margin on the maturity of higher yielding portfolios along with a net run-off of the portfolio as the Company has sold the residual interests of most newly originated insured mortgages. > Fees and other income increased $11.4 million or 16.0% as a result of portfolio mix and changes in the fee structure year over year. > on october 1, 2015, the Company’s subsidiary, Home trust, acquired 100% of the outstanding shares of CFF Bank, a Schedule 1 bank under the Bank Act (Canada), for cash consideration of $19.6 million, subject to final adjustments. CFF Bank is a Canadian retail bank offering deposit, mortgage and personal banking products through a number of channels. the Company recognized a gain on acquisition in the income statement of $2.1 million, representing a bargain purchase. the acquisition supports the Company’s long-term strategy to develop deposit diversification and expand the broker network to build relationships and drive mortgage and loan origination volumes. > the credit quality of the loan portfolio remains strong with continued low non-performing loans and credit losses. provisions for credit losses were $8.9 million for the year, a decrease from the $13.1 million recorded last year. this represents 0.06% of gross uninsured loans down from 0.10% in 2014. net non-performing loans as a percentage of gross loans ended the year at 0.28% compared to 0.30% at the end of last year. net write-offs were $6.9 million for 2015, representing 0.04% of gross loans compared to $10.3 million and 0.06% of gross loans in 2014. > non-interest expenses, which include salaries, premises and other operating expenses, were $190.7 million in 2015, up 17.5% over the $162.3 million recorded in 2014. the increase in non-interest expenses represents the continued investment by the Company to grow its business including, among other things, technology related to moving toward operating as a digital enterprise and updating the Company’s loan origination platform. the increase in non-interest expenses also includes costs related to the day-to-day operations of the newly acquired CFF Bank. Costs to acquire and integrate CFF Bank have been excluded from the adjusted efficiency ratio. In addition, non-interest expenses include $2.9 million in relation to the ongoing efforts to realign some of its business partnerships following the suspension of the 45 individual mortgage brokers. the Company’s adjusted efficiency ratio (teB) is 31.8% compared to 28.8% in 2014. Home Capital Group inC. AnnuAl RepoRt 2015 23 management’s Discussion and analysis management’s Discussion and analysis Balance Sheet Highlights for 2015 > total assets under administration, which includes $6.79 billion of mortgages accounted for off-balance sheet, of which $1.45 billion relate to the acquisition of CFF Bank, reached $27.30 billion, an increase of 12.4% over $24.28 billion last year. > the Company sold residual interests in securitization transactions of $1.18 billion, compared with $1.75 billion last year, which, combined with amortization of MBS liabilities and maturity of CMB liabilities, reduced both the securitized mortgage loans and securitization liabilities. > Mortgage originations were $8.06 billion in 2015, compared to the $8.85 billion originated in 2014. the decrease in originations reflects decreases in both the traditional and Accelerator mortgage portfolios partially offset by an increase in commercial mortgage originations. Despite the current year decrease, single-family residential mortgage originations continue to represent the Company’s primary focus with the traditional mortgage portfolio accounting for 63.0% of originations and Accelerator (insured) residential mortgage originations accounting for 17.3% of originations. Residential commercial and non-residential commercial mortgage originations make up the remaining 19.7% of the originations. > traditional mortgage originations were $5.07 billion, down 13.5% over originations of $5.86 billion in 2014. Accelerator (insured) residential mortgage originations were $1.39 billion, down 22.0% compared to 2014 originations of $1.79 billion. the year-over-year decrease in originations reflects the impact of, among other things, the Company’s ongoing review of its business partners (including the suspension of approximately 45 individual mortgage brokers through the period of September 2014 to March 2015), its conservative approach to growing its residential mortgage business and the competitive market for prime insured mortgages. > the credit quality of the loan portfolio remains strong with continued low non-performing loans. net non-performing loans as a percentage of the gross loan portfolio ended the year at 0.28% down from 0.30% one year ago. At the end of 2015, 98.2% of the loan portfolio was current, as compared with 97.9% at the end of 2014. > liquid assets at December 31, 2015 were $2.13 billion, compared to $1.06 billion at December 31, 2014. the Company maintains a prudent level of liquidity, given the current level of operations and the Company’s obligations. Higher liquidity at the end of 2015 reflects securitization proceeds from participation in a CMB issuance and additional liquidity held to support relatively higher demand deposit balances. > Home trust’s capital levels were strong throughout 2015, as indicated by the Common equity tier 1 ratio of 18.31% and the tier 1 and total capital ratios of 18.30% and 20.70%, respectively, at December 31, 2015. Home trust’s leverage ratio ended 2015 at 7.36%. > Subsequent to the end of the year, the Company’s Board authorized a share repurchase of up to $150 million, which is anticipated to take place through a Substantial Issuer Bid by way of an issuer bid circular that would be provided to the shareholders of Home Capital. the terms and conditions of the bid remain to be determined, and are subject to approval by the Board of Directors. > Deposits reached $15.67 billion, up from $13.94 billion at December 31, 2014. total deposits raised through the Company’s deposit diversification initiatives, oaken Financial, high-interest savings accounts and institutional deposits now total $3.65 billion, an increase of $1.23 billion or 50.6% over last year. > Securitization liabilities were $2.78 billion at the end of 2015, down from $4.30 billion last year. originations in the Accelerator portfolio, which is typically funded by way of securitization, were exceeded by the amortization of MBS liabilities and maturities of CMB liabilities combined with loans removed from the balance sheet on the sale of residual securitization interests, resulting in the overall decline in the securitization liabilities. 24 Home Capital Group inC. AnnuAl RepoRt 2015 FinanCial perForm anCe reView table 2: income Statement Highlights (000s, except % and per share amounts) net interest income non-securitized assets net interest income securitized loans and assets total net interest income provision for credit losses non-interest income non-interest expenses Income before income taxes Income taxes net income Basic earnings per share Diluted earnings per share Reconciliation of net Income to Adjusted net Income net income per above Adjustment for acquisition and integration costs, net of gain recognized on acquisition of CFF Bank (net of tax) Adjustment for prepayment income on portfolio sale (net of tax) Adjusted net Income1 Adjusted Basic earnings per Share1 Adjusted Diluted earnings per Share1 2015 463,140 $ 17,950 481,090 8,933 472,157 103,793 190,673 385,277 97,992 287,285 $ 4.09 $ 4.09 $ $ $ $ $ 2014 425,250 34,279 459,529 13,134 446,395 133,359 162,252 417,502 104,330 313,172 4.48 4.45 Change 8.9% (47.6)% 4.7% (32.0)% 5.8% (22.2)% 17.5% (7.7)% (6.1)% (8.3)% (8.7)% (8.1)% $ 287,285 $ 313,172 (8.3)% 1,572 – $ $ $ 288,857 $ 4.12 $ 4.11 $ – (24,019) 289,153 4.14 4.11 – (100.0)% (0.1)% (0.5)% – 1 Adjusted net income and adjusted earnings per share are defined in the non-GAAp Measures section of this MD&A. acquisition of CFF Bank on october 1, 2015, the Company, through its subsidiary Home trust, acquired all of the issued and outstanding shares of CFF Bank, a Schedule 1 bank under the Bank Act (Canada) for a purchase price of $19.6 million subject to final adjustments. the Company acquired assets of $251.8 million and $1.49 billion of loans that are accounted for off-balance sheet, and assumed liabilities of $228.2 million. Included in the Company’s results for 2015 are three months of operating results of CFF Bank, which include a contribution to revenue of $2.0 million and a net loss before taxes of $5.7 million. the Company has calculated a preliminary bargain purchase gain of $2.1 million, recognized in the consolidated statements of income, representing primarily the recognition of a deferred tax asset in the amount of $13.5 million. For illustrative purposes, the following table shows the income statement of the Company for the year ended 2015, as if it had not purchased CFF Bank. the table below excludes the operating results of CFF Bank, acquisition and integration costs for CFF Bank and the gain on bargain purchase related to CFF Bank. the comparative income statement for 2014 excludes the prepayment income related to the sale of the water heater loan portfolio. table 3: income Statement excluding impact of CFF Bank and prepayment income from Sale of waterheater loan portfolio (000s, except per share amounts) net interest income non-securitized assets net interest income securitized loans and assets total net interest income provision for credit losses non-interest income non-interest expenses Income before income taxes Income taxes net income Basic earnings per share Diluted earnings per share 2015 actual $ 463,140 $ 2015 excluding CFF Bank 461,867 $ 2014 Actual 17,950 481,090 8,933 472,157 103,793 190,673 385,277 97,992 17,914 479,781 8,648 471,133 101,372 184,052 388,453 98,592 $ $ $ 287,285 $ 4.09 $ 4.09 $ 289,861 $ 4.13 $ 4.12 $ 2014 excluding prepayment Income 425,250 34,279 459,529 13,134 446,395 100,684 162,252 384,827 95,674 289,153 4.14 4.11 425,250 $ 34,279 459,529 13,134 446,395 133,359 162,252 417,502 104,330 313,172 $ 4.48 $ 4.45 $ Home Capital Group inC. AnnuAl RepoRt 2015 25 management’s Discussion and analysis management’s Discussion and analysis 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 (non-teB) net interest margin non-securitized interest earning assets (teB) net interest margin securitized assets total net interest margin (non-teB) total net interest margin (teB) Spread of non-securitized loans over deposits and other 2015 2.80% 2.83% 0.49% 2.34% 2.36% 2.91% 2014 2.80% 2.83% 0.67% 2.23% 2.25% 2.93% total net interest margin (teB), including the securitized portfolio, was 2.36% for 2015 compared to 2.25% in 2014, reflecting a greater proportion of higher-yielding, non-securitized assets in the on-balance sheet portfolio. the Company sold a higher proportion of its newly insured originations off-balance sheet which has reduced the relative proportion on-balance sheet. Average non-securitized assets of $16.53 billion for the year represent 80.2% of average total assets compared to 73.6% last year while average securitized assets of $3.64 billion for the year represent 17.6% of average total assets compared to 24.9% last year. the continued decline in average on- balance sheet securitized assets reflects maturities in the on-balance sheet portfolio and the sales of residual interests in securitized single-family residential mortgages. table 5: net interest income by product and average rate (000s, except %) interest-bearing assets Cash resources and securities traditional single-family residential mortgages Accelerator single-family residential mortgages Residential commercial mortgages2 non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total non-securitized loans taxable equivalent adjustment total on non-securitized interest earning assets Securitized single-family residential mortgages Securitized multi-unit residential mortgages Assets pledged as collateral for securitization total securitized residential mortgages other assets total interest-bearing assets interest-bearing liabilities Deposits and other Senior debt Securitization liabilities other liabilities and shareholders’ equity total interest-bearing liabilities net interest income (teB) tax equivalent adjustment net interest income per Financial Statements average Balance1 income/ expense 2015 average rate1 Average Balance1 Income/ expense 2014 Average Rate1 $ 1,291,955 $ 18,571 1.44% $ 1,398,544 $ 25,338 11,808,777 588,854 4.99% 10,826,314 552,112 1,113,847 409,718 1,319,640 346,965 237,024 15,235,971 – 28,777 17,053 80,032 31,427 23,419 769,562 3,830 2.58% 4.16% 6.06% 9.06% 9.88% 5.05% – 956,519 306,915 1,033,519 310,941 338,777 13,772,985 – 26,746 14,355 64,852 28,529 31,204 717,798 4,117 16,527,926 791,963 4.79% 15,171,529 747,253 2,252,930 62,891 2.79% 3,285,467 105,393 865,228 36,625 4.23% 1,291,643 54,634 517,273 3,635,431 435,311 $ 20,598,668 $ 4,325 103,841 – 895,804 0.84% 2.86% – 548,401 5,125,511 308,848 4.35% $ 20,605,888 $ 6,464 166,491 – 913,744 $ 14,901,524 $ 153,089 3,698,669 318,597 6,396 85,891 2.14% $ 13,677,719 $ 4.18% 2.32% 146,877 5,194,504 311,494 6,392 132,212 1,845,386 $20,598,668 $ $ – 410,884 484,920 (3,830) – 1,586,788 1.99% $ 20,605,888 $ $ – 450,098 463,646 (4,117) $ 481,090 $ 459,529 1.81% 5.10% 2.80% 4.68% 6.27% 9.18% 9.21% 5.21% – 4.93% 3.21% 4.23% 1.18% 3.25% – 4.43% 2.28% 4.35% 2.55% – 2.18% 1 the average is calculated with reference to opening and closing monthly asset and liability balances. 2 Residential commercial mortgages include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential property types. 26 Home Capital Group inC. AnnuAl RepoRt 2015 total net interest income of $481.1 million increased 4.7% year over year, reflecting increases in the non-securitized portfolio offset by declines in the securitized portfolio. net interest income on the non-securitized portfolio of $463.1 million in 2015 increased by $37.9 million or 8.9% over 2014, reflecting an increase of $1.36 billion or 8.9% in average asset balances while net interest margin (teB) remained flat year over year at 2.83%. the flat net interest margin reflects a decrease of 14 basis points in the average rates earned on the non-securitized portfolio to 4.79% in 2015 from 4.93% in 2014, offset by a decrease of 14 basis points in the average rate of interest expense on deposits and other to 2.14% in 2015 from 2.28% last year. the decrease in rates earned reflects a decline in market mortgage rates and improving credit quality in the traditional mortgage portfolio. Additionally, there was some lowering of total asset yield due to an increase in the average level of insured Accelerator mortgages held prior to securitization funding. In addition to a decline in market rates on deposits, the decrease in the average rate on deposits and other reflects a higher proportion of lower-rate deposits payable on demand combined with the use of the lower-cost insured mortgage purchase facility (see Cash Resources and Securities note in the consolidated financial statements included in this report for further information on this facility). Deposits payable on demand represented 12.7% of total deposits at the end of 2015 compared to 7.6% at the end of 2014. the Company expects net interest margin on the non-securitized portfolio to remain relatively stable to the margins experienced on new loans originated in Q4 2015. the net interest income and net interest margin on securitized assets declined year over year, reflecting net run-off and the maturity of higher-yielding MBS and CMB pools and the use of lower-yielding assets as replacement assets in the CMB program. In addition, there was higher prepayment penalty income in 2014. the decrease in net interest margin was partially offset by a decrease in interest expense resulting from CMB maturities during the year which reduced interest expense on the portfolio. the average assets in the securitized portfolio declined by $1.49 billion in 2015, reflecting the sale of residual interests and maturities. As such, this portfolio has had a lower impact on the Company’s net interest margin and the relative impact can be expected to continue to decline through 2016. non-interest income table 6: non-interest income (000s, except %) Fees and other income Securitization income prepayment income on portfolio sale Gain on acquisition of CFF Bank net realized and unrealized gains on securities net realized and unrealized loss on derivatives table 7: Securitization income (000s, except %) net gain on sale of mortgages and residual interest net change in unrealized gain or loss on hedging activities Servicing income total securitization income 2015 82,632 $ 26,208 – 2,056 836 (7,939) 103,793 $ 2014 71,241 26,845 32,675 – 3,425 (827) 133,359 Change 16.0% (2.4)% (100.0)% – (75.6)% (860.0)% (22.2)% 2015 2014 Change 21,412 $ (313) 5,109 26,208 $ 23,712 (177) 3,310 26,845 (9.7)% (76.8)% 54.4% (2.4)% $ $ $ $ Fees and other income, which include mortgage and Visa account administration fees, net of direct servicing expenses, generally increases proportionate to the size of the portfolio. Fee income is also influenced by the overall mix of the portfolio. Fees and other income were up 16.0% over last year, reflecting changes in the portfolio mix and in the fee structure year over year. the Company expects fee income to increase in line with the growth in the loan portfolio in 2016. Securitization income during the year resulted primarily from gains recognized on the sale of residual interests in single-family residential mortgage securitizations and the sale of insured multi-unit residential mortgages. Securitization income primarily includes sales of underlying mortgages either newly originated or renewed during the period along with insured mortgages held in inventory from prior periods. In the case of single-family residential mortgage sales, the Company will service the loans and record related fee revenue over the remaining term of the underlying mortgages. In the case of multi-unit residential mortgages, the Company outsources the servicing activity and no further servicing revenue or fees will be recorded. Servicing income increases as the size of the single-family residential mortgage portfolio under administration increases. the decrease in securitization income reflects decreased sales of residual interests in insured single-family residential mortgage pools and sales of insured multi-unit residential mortgages, offset by an increase in servicing income. Sales of residual interests during the year led to gains of $15.5 million on the derecognition of $1.18 billion of insured single-family residential mortgages compared to gains of $18.7 million on the derecognition of $1.75 billion of underlying mortgages last year. During the year, the Company recognized gains of $5.9 million on sales of $713.6 million of insured multi-unit residential mortgages compared to gains of $5.0 million recognized last year on the sales of $784.0 million of insured multi-unit residential mortgages. the Company expects gains on sales in 2016 to be relatively consistent with the volumes experienced in the second half of 2015 depending on the level of insured mortgage originations. Home Capital Group inC. AnnuAl RepoRt 2015 27 management’s Discussion and analysis management’s Discussion and analysis As a result of the acquisition of CFF Bank on october 1, 2015, the Company recognized an acquisition gain of $2.1 million representing the excess fair value of net assets acquired over the purchase consideration. the Company is in the process of finalizing the assessment of the fair values of the tangible and intangible assets acquired and liabilities assumed. Accordingly, the fair value of the assets and liabilities acquired and assumed may be adjusted pending the completion of final valuation and post-closing adjustments. In 2014, the Company recognized prepayment income of $32.7 million in relation to the sale of $234.9 million of water heater loans. this was a non-recurring item. the Company recognized a net gain of $1.7 million on the sale of certain available for sale securities in 2015, compared to a net gain of $3.5 million in 2014. the Company takes advantage of improvements in the market price of certain securities and will rebalance the investment portfolio as market conditions warrant. the Company also recognized $0.9 million in impairments through profit and loss on certain available for sale equity securities in 2015 compared to $0.1 million in 2014. please see the discussion below on Derivatives and Hedging related to net realized and unrealized loss on derivatives. Derivatives and Hedging From time to time, the Company enters into derivative transactions primarily 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 mortgages, debt and deposits, such as CMB liabilities and senior debt. Where appropriate, the Company will apply hedge accounting to minimize volatility in reported earnings from interest rate changes. All derivative contracts are over-the-counter contracts with highly-rated Canadian financial institutions. please see note 19, Derivative Financial Instruments, to the consolidated financial statements included in this report for further information. table 8 below summarizes the impact of derivatives and hedge accounting on the Company’s financial results. table 8: Derivatives Gains and losses (000s) Fair value hedging ineffectiveness1 Derivative instruments marked to market2 net realized and unrealized loss on derivatives ¹ Included in fair value hedging ineffectiveness are amounts related to derivative restructuring upon adoption of IFRS. ² Included in derivative instruments marked to market are swaps and bond forwards. Cash Flow Hedging 2015 (7,797) $ (142) (7,939) $ 2014 1,168 (1,995) (827) $ $ 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. the intent of hedge accounting is to recognize the effective matching of the gain or loss on the Government of Canada bond forwards with the recognition of the related interest expense on the resulting funding. Fair Value Hedging the Company is exposed to interest rate risk through fixed-rate financial assets and liabilities and its participation in the CMB program due to reinvestment risk between the amortizing fixed-rate MBS and the bullet maturity fixed-rate CMB. 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 and assets 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. economic Hedge of loans Held for Securitization and Sale At times the Company may enter into bond forwards to hedge interest rate risk on loans held for securitization and sale through national Housing Authority Mortgage-Backed Securities (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 loss as at December 31, 2015 for fair value changes in both the outstanding derivatives and the loans held for trading was $313 thousand (2014 – unrealized loss of $177 thousand) and was recorded in securitization income. 28 Home Capital Group inC. AnnuAl RepoRt 2015 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. please see note 19 of the consolidated financial statements for further information. table 9: provision for Credit losses and net write-offs as a percentage of Gross loans (000s, except %) provision2 Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans Securitized single-family residential mortgages Securitized multi-unit residential mortgages total individual provision total collective provision total provision net write-offs2 Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans Securitized single-family residential mortgages Securitized multi-unit residential mortgages net write-offs 2015 % of Gross loans1 amount $ $ $ $ 5,415 4 720 798 171 – – 7,108 1,825 8,933 5,292 4 435 969 168 – – 6,868 0.04% $ 0.00% 0.05% 0.22% 0.06% – – 0.04% 0.01% 0.05% $ 0.04% $ 0.00% 0.03% 0.26% 0.06% – – 0.04% $ 2014 % of Gross loans1 0.08% (0.00)% 0.02% 0.17% 0.10% – – 0.06% 0.01% 0.07% 0.07% 0.01% 0.02% 0.21% 0.15% – – 0.06% Amount 9,507 (1) 270 571 187 – – 10,534 2,600 13,134 9,099 24 202 692 272 – – 10,289 1 Gross loans used in the calculation of total Company ratio include securitized on-balance sheet loans. 2 there were no specific provisions, allowances or net write-offs on securitized mortgages. the provision for credit losses is charged to the statement of income 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 and identified credit events in the portfolio, including losses that are not yet individually identifiable. Factors which 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. Strong credit performance continued through 2015. the provision for credit losses was $8.9 million, as compared with $13.1 million in 2014. provisions as a percentage of gross uninsured loans of 0.06% for 2015 decreased from 0.10% in 2014. the Company continues to actively monitor the credit performance of the mortgages related to the suspended brokers, described in the Mortgage lending section of this MD&A. no unusual credit issues have been identified in this portfolio. the Company continues to observe strong credit profiles and stable loan-to-value ratios across its portfolio, which continues to support low delinquency and non-performing rates and ultimately low net write-offs. net write-offs were low at $6.9 million and represented 0.04% of gross loans compared to 0.06% in 2014. net non-performing loans as a percentage of gross loans decreased to 0.28% at the end of 2015 from 0.30% at the end of 2014. the Company remains satisfied with the credit performance of the portfolio, but is prepared for moderate volatility in the trend. the collective allowance balance at December 31, 2015 increased by $2.1 million in 2015 to $36.2 million. the current collective allowance exceeds the cumulative net write-offs experienced over the last 36 months. please see the Credit Risk section of this MD&A for further discussion. the level of individual allowances at the end of 2015 decreased by $3.4 million over 2014, while gross non-performing loans decreased by $3.7 million to $53.5 million from $57.2 million. the amount set aside for individual allowances can be influenced by specific local real estate markets and the amount of time needed to sell when required. Home Capital Group inC. AnnuAl RepoRt 2015 29 management’s Discussion and analysis management’s Discussion and analysis Individual 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 giving consideration to current economic conditions. non-interest expenses table 10: non-interest expenses (000s, except % and number of employees) Salaries and benefits premises other operating expenses Adjusted efficiency ratio (teB) Active employees at end of period $ $ 2015 88,873 $ 12,274 89,526 190,673 $ 31.8% 877 2014 80,769 11,866 69,617 162,252 28.8% 783 Change 10.0% 3.4% 28.6% 17.5% 3.0% 12.0% In 2015, the Company’s efficiency ratio saw an increase, reflecting contributions to the longer-term health of the business, acquisition and integration costs related to CFF Bank and certain expenses related to the effort to realign some of the Company’s business partnerships following the suspension of approximately 45 individual mortgage brokers. through 2016, the Company will continue to manage expenses in a disciplined and measured manner and align its expense management strategy with its growth targets and strategic objectives. Maintaining and enhancing the Company’s operational effectiveness and efficiency, combined with cost management, remains a strategic priority for the Company. Salaries and employee benefits increased over last year due to the increase in active employees and certain severance and other termination payments incurred related to the acquisition of CFF Bank. Active employees have increased to support longer-term business growth, broader skill sets in the mix of staff, the risk and compliance culture, and the acquisition of CFF Bank in the fourth quarter of 2015. the Company continues to invest in technology which includes initiatives such as investment in the digitization of operating processes, ongoing investment in the Company’s It security platform, and those costs associated with operating in an increasingly digital marketplace. Depreciation and amortization expense increased over 2014, as a result of new systems becoming live. In addition, last year, the Company changed the estimated useful life of the Company’s core banking system which reduced the amortization expense of deferred software development costs by $4.0 million in 2014. through 2015, the Company incurred additional expenses related to its efforts to realign some of its business partnerships following the suspension of approximately 45 individual mortgage brokers and recognized approximately $2.9 million in expenses in 2015. In addition, in the fourth quarter of 2015, the Company completed the acquisition of CFF Bank. the Company incurred $0.7 million in acquisition costs and $3.5 million in integration costs in 2015. through 2016, the Company will continue to incur costs in relation to the integration of CFF’s operations with its own. When these costs, along with the gain on acquisition, are excluded from the Company’s efficiency ratio, the adjusted efficiency ratio is 31.8%. taxes table 11: income taxes (000s, except %) Current Deferred total income taxes effective income tax rate $ $ 2015 98,481 $ (489) 97,992 $ 25.43% 2014 102,201 2,129 104,330 24.99% Change (3.6)% (123.0)% (6.1)% the provision for income taxes for the year ended December 31, 2015 amounted to $98.0 million, reflecting an effective tax rate of 25.43% ($104.3 million and 24.99% in 2014). the effective tax rate of the Company is lower than the statutory rate primarily due to the tax-exempt dividend income from securities and the benefits recorded in the accounts attributed to SR&eD credits recognized throughout the year. the Company has claimed $2.5 million in SR&eD credits in 2015 ($5.3 million in 2014). note 17 to the consolidated financial statements included in this report provides more information about the Company’s current income taxes, deferred income taxes and provision for income taxes. the Company expects that the effective income tax rate in 2016 will remain within the range of 26.2% to 26.8%, excluding the impact of any SR&eD credits that may be realized and the receipt of dividends from taxable Canadian corporations. the Company expects to submit claims for SR&eD in 2016 that may result in a reduction to the effective tax rate of the Company. In the event that claims are submitted, the effective tax rate will decrease accordingly. 30 Home Capital Group inC. AnnuAl RepoRt 2015 Comprehensive income table 12: Comprehensive income (000s, except %) net income net unrealized losses on securities and retained interests available for sale, net of reclassifications to net income and taxes net unrealized (losses) gains on cash flow hedges, net of reclassifications to net income and taxes total other comprehensive loss Comprehensive income 2015 287,285 $ 2014 313,172 $ Change (8.3)% (46,224) (419) (10,932.0)% (715) (46,939) 240,346 $ 293 (126) 313,046 (344.0)% (37,153.2)% (23.2)% $ Comprehensive income is the aggregate of net income and other comprehensive income (oCI). Comprehensive income for the year was $240.3 million compared to $313.0 million in 2014. oCI for the year was a loss of $46.9 million compared to a loss of $0.1 million in 2014. the increased loss in oCI from 2014 reflects the decline in the fair value of the Company’s preferred share holdings included in available for sale securities, which is due primarily to the current interest rate environment and prevailing market sentiment relating to preferred shares. the Company has not identified any new credit events in relation to its preferred share holdings (Refer to note 4(C) of the consolidated financial statements). Included in the transfer to net income for the year was $0.9 million in impairment losses on available for sale securities, compared to $0.1 million in 2014. FinanCial poSition reView assets table 13: loans portfolio (000s, except % and number of loans) Securitized single-family residential mortgages Securitized multi-unit residential mortgages traditional single-family residential mortgages Accelerator single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total loan portfolio loans held for sale total on-balance sheet loans off-balance sheet loans Single-family residential mortgages Multi-unit residential mortgages total off-balance sheet loans total loans under administration number of loans outstanding Mortgages Credit card loans and lines of credit other consumer retail loans total number of loans outstanding 2015 2014 $ 1,948,110 $ 2,990,119 955,535 11,726,970 723,558 243,318 1,106,878 330,327 186,111 18,262,816 102,094 $ 18,268,708 $ 18,364,910 726,365 11,714,710 1,264,708 321,442 1,490,648 370,825 296,857 18,133,665 135,043 $ 4,567,155 $ 2,613,481 1,585,141 4,198,622 $ 25,058,122 $ 22,563,532 2,222,259 6,789,414 68,710 40,355 88,226 197,291 64,456 33,853 57,412 155,721 Change (34.8)% (24.0)% (0.1)% 74.8% 32.1% 34.7% 12.3% 59.5% (0.7)% 32.3% (0.5)% 74.8% 40.2% 61.7% 11.1% 6.6% 19.2% 53.7% 26.7% Home Capital Group inC. AnnuAl RepoRt 2015 31 management’s Discussion and analysis management’s Discussion and analysis loans under administration Figure 1: Portfolio Composition by Product Type Figure 1: portfolio Composition by product type 52.0% 46.8% 24.8% 26.0% 11.3% 11.8% 3.2% 5.0% 1.5% 1.8% 4.9% 5.9% 1.5% 1.5% 0.8% 1.2% 14 15 14 15 14 15 14 15 14 15 14 15 14 15 14 15 Securitized Single-Family Residential Mortgages Securitized Multi-Unit Residential Mortgages Traditional Single-Family Residential Mortgages Accelerator Single-Family Residential Mortgages Residential Commercial Mortgages Non-Residential Commercial Mortgages Credit Card Loans and Lines of Credit Other Consumer Retail Loans Figure 2: insured versus uninsured mortgages under administration Figure 2: Insured versus Uninsured Mortgages 2015 Uninsured 54.7% 2014 Uninsured 58.6% Insured 45.3% Insured 41.4% Figure 3: Portfolio Composition by Province Figure 3: loans under administration Composition by province 79.2% 75.2% 6.3% 6.5% 5.1% 7.4% 5.7% 5.6% 3.7% 5.1% 14 15 14 15 14 15 14 15 14 15 British Columbia Alberta Ontario Quebec Other 32 Home Capital Group inC. AnnuAl RepoRt 2015 1467 pg lending x prod 2010.eps table 14: mortgage advances by type and province (000s, except %) Single-family residential mortgages traditional Accelerator Residential commercial mortgages Multi-unit uninsured residential mortgages Multi-unit insured residential mortgages other1 non-residential commercial mortgages Stores and apartments Commercial total mortgage advances (000s, except %) British Columbia Alberta ontario Quebec other total mortgage advances 2015 % of total 2014 % of total Change $ 5,074,723 1,391,740 63.0% $ 5,864,562 1,785,032 17.3% 105,098 688,743 43,957 1.3% 8.5% 0.5% 93,476 624,879 45,615 109,115 646,033 $ 8,059,409 1.4% 8.0% 118,272 319,459 100.0% $ 8,851,295 2015 % of total $ 580,832 321,925 6,541,893 328,485 286,274 $ 8,059,409 2014 458,917 436,787 7,382,637 282,089 290,865 100.0% $ 8,851,295 7.2% $ 4.0% 81.1% 4.1% 3.6% 66.2% 20.2% 1.1% 7.1% 0.5% 1.3% 3.6% 100.0% (13.5)% (22.0)% 12.4% 10.2% (3.6)% (7.7)% 102.2% (8.9)% % of total Change 5.2% 4.9% 83.4% 3.2% 3.3% 100.0% 26.6% (26.3)% (11.4)% 16.4% (1.6)% (8.9)% 1 other residential commercial mortgages include mortgages such as builders’ inventory. total loans under administration were $25.06 billion at the end of 2015, an increase of $2.49 billion or 11.1% from the end of 2014. on-balance sheet loans were relatively flat when compared to 2014, while off-balance sheet loans were up 61.7% from the end of 2014, driving the growth in total loans under administration. off-balance sheet growth arose from the sale of residual interests in single- family residential mortgages (resulting in removal of securitized mortgages from the balance sheet) and securitization of multi-unit residential mortgages qualifying for off-balance sheet accounting. the increase in total loans under administration was supported by mortgage production, as well as consumer retail, credit card loans and lines of credit production. In addition, the Company acquired $1.49 billion in loans under administration upon the purchase of CFF Bank. mortgage lending Mortgage Originations and Broker Suspensions the Company continues to monitor the uninsured and insured single-family residential mortgages referred by the 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers, suspended during the period of September 2014 to March 2015. the total value of the outstanding mortgages that were referred by these mortgage brokers included in the loans portfolio at the end of 2015 totalled $1.55 billion, as compared to $1.72 billion at the end of Q3 2015. the Company continues to actively monitor the subject mortgages and notes that there have been no unusual credit issues. the Company is in the process of completing its review and, where appropriate, validation of the income documentation submitted in respect of the mortgages referred by the 45 suspended individual mortgage brokers. the Company is taking action as appropriate. the Company is over 40% of the way through its review process, with plans to complete these efforts by the end of 2016. of the accounts reviewed, the Company has determined that approximately 90% of the mortgages reviewed to date could be eligible for renewal. on an ongoing basis, the Company revises its underwriting procedures to ensure best practices. Following the suspension of brokers, the Company further enhanced its income verification procedures to ensure new loans continue to reflect Home Capital’s risk appetite, which remains unchanged. Uninsured Residential Mortgages – “Traditional Mortgages” traditional mortgages of $11.71 billion represent the largest portfolio within loans under administration and on-balance sheet loans at 46.8% and 64.1%, respectively. the portfolio was relatively flat compared to the end of 2014. traditional originations have been impacted on a year-over-year basis by, among other things, the Company’s ongoing review of its business partners (including the suspension of 45 individual mortgage brokers through the period of September 2014 to March 2015) and its conservative approach to growing its residential mortgage business. the Company continues to take a prudent approach to growing its traditional residential mortgage business in the current Canadian economic environment. the Company continued to observe strong credit profiles and stable loan-to-value (ltV) ratios across the traditional portfolio. Home Capital Group inC. AnnuAl RepoRt 2015 33 management’s Discussion and analysis management’s Discussion and analysis Insured Residential Mortgages Insured residential loans under administration, which include both insured single-family and multi-unit residential mortgages, were $11.06 billion at the end of 2015, reflecting an increase of 21.3% over the balance of $9.12 billion at the end of 2014. of this total, $6.79 billion were accounted for off-balance sheet, up $2.6 billion or 61.7% from the end of 2014. Included in the off-balance sheet loans is $1.45 billion of single-family residential mortgages acquired as part of the purchase of CFF Bank. the Company originated $1.39 billion in single-family Accelerator mortgages in 2015, down 22.0% from the same period in 2014. Insured residential mortgage originations, when compared year over year, were impacted by, among other things, the Company’s ongoing review of its business partners (including the suspension of 45 individual mortgage brokers through the period of September 2014 to March 2015), its conservative approach to growing its residential mortgage business and the competitive market for prime insured mortgages. the year-over-year decrease in origination volumes was offset by the purchase of $102.8 million in loans from a third party, as part of the effort to expand the Company’s origination channels. In addition, as the market for insured prime mortgages continues to be highly competitive, the Company continues to view its Accelerator product offering as complementary to its traditional portfolio. the Company sold residual interests in insured fixed-rate single-family nHA MBS of $1.18 billion in underlying outstanding principal amounts in 2015, generating gains of $15.5 million. the nHA MBS market spread widened throughout 2015, increasing the funding cost on nHA MBS sold in the market. the underlying mortgages included mortgages newly originated or renewed during the year along with insured mortgages held in inventory from the prior year. In 2015, the Company originated $688.7 million of insured multi-unit residential mortgages and sold $713.6 million that qualified for off- balance sheet treatment. the sales included mortgages that were renewed from the on-balance sheet portfolio. this resulted in $5.9 million in gains on sale in 2015 compared to $5.0 million of gains on sale in 2014. the multi-unit residential mortgage market is relatively limited and the Company participates in appropriate transactions as they become available through various origination channels. As a result, origination volumes, sales and resultant securitization gains can vary significantly through the year. Most of the Company’s newly insured multi-unit residential originations qualify for off-balance sheet treatment, and the on-balance sheet securitized multi-unit residential portfolio is declining through amortization and maturities. From time to time, the Company pools mortgages and may hold the related MBS as liquid assets or inventory for replacement assets for the CMB program. these MBS are carried on the balance sheet at amortized cost as part of residential mortgage loans (see table 45: liquidity Resources). Residential Commercial Mortgages Residential commercial mortgages include commercial mortgages that are secured by residential property such as non-securitized multi- unit residential mortgages and builders’ inventory. Insured multi-unit residential mortgages are included in this portfolio until they are securitized. the Company increases these portfolios selectively, when appropriate assets are available. Non-residential Commercial Mortgages non-residential commercial mortgages originations were $755.1 million in 2015, an increase of 72.5% over 2014. non-residential commercial mortgages, which include store and apartment mortgages and commercial mortgages, are an important complementary source of loan assets and revenue. non-residential mortgage production is affected by the availability of appropriate assets and production trends are variable. through 2016, the Company will continue to focus on expanding its commercial lending products, allocating additional resources to expand its footprint and participate in appropriate opportunities as they arise. the portfolio will continue to be managed conservatively by the Company. Geographic Concentration Mortgage production continued to favour ontario, and in particular the greater toronto area (GtA), through 2015. the Company will continue to cautiously increase business within other markets in ontario and the rest of Canada to the extent that market conditions remain stable. the concentration of new originations is influenced, in part, by the Company’s credit experience. please see note 5(A) of the consolidated financial statements for the geographic distribution of the portfolio. 34 Home Capital Group inC. AnnuAl RepoRt 2015 table 15: Credit Card, lines of Credit and other Consumer retail loan production (Amount in 000s) 2015 2014 number of new accounts amount1 number of new Accounts Amount1 number of new Accounts Change Amount1 Credit card loans and lines of credit equityline Visa credit cards other credit cards and lines of credit other consumer retail loans Water heaters other retail lending 3,282 $ 10,728 139,963 16,858 4,374 $ 7,549 159,714 11,587 (25.0)% 42.1% (12.4)% 45.5% 32,927 7,641 137,204 49,082 45,918 6,028 125,886 33,720 (28.3)% 26.8% 9.0% 45.6% 1 For credit cards and lines of credit, the amount represents the authorized credit limits. For water heaters and other retail lending, the amount represents the advanced amount. other lending other lending, comprising credit cards, lines of credit and other consumer loans, continues to be an important source of loan assets with attractive returns. While representing 3.7% of the total on-balance sheet loan portfolio, these assets generated 6.3% of the interest income from loans for the year. Credit card and lines of credit balances increased to $370.8 million from $330.3 million in 2014. overall credit card and lines of credit balances increased in part due to the acquisition of CFF Bank, adding $28.2 million at the end of 2015 related to the easyone line of credit product, which allows customers to access both an unsecured line of credit and high-interest savings through one account. equityline Visa accounts (Home equity line of Credit) represent 86.6% of the total credit card and lines of credit balance. equityline Visa originations of $140.0 million decreased 12.4% in 2015 as compared to 2014 originations of $159.7 million. In general, equityline Visa account originations trend with single-family residential mortgage origination volumes. the decrease in equityline Visa originations is in line with the decrease in single-family mortgage originations. other consumer retail loans experienced strong growth in the year with originations of $186.3 million, an increase of $26.7 million or 16.7% over 2014. In 2014, $234.9 million of water heater loans were prepaid as a result of the sale of a customer’s business. the Company recorded $32.7 million in prepayment income as a result of the transaction. Cash resources and Securities Combined cash resources and securities as at December 31, 2015 increased by $659.5 million from December 31, 2014 reflecting an increase in cash of $789.1 million offset by a decrease in securities of $129.6 million. the increase in liquidity at the end of the year reflects securitization proceeds from participation in a CMB issuance and additional liquidity held to support relatively higher demand deposit balances. the Company maintains sufficient liquidity to meet its future commitments and expected business volumes. the Company has a term credit facility and a committed and uncommitted insured mortgage purchase facility with a Canadian chartered bank. the details of these facilities are disclosed in note 4 to the consolidated financial statements included in this report. In addition to holding 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. the securities portfolio consists of bonds, residual interests of underlying securitized insured fixed-rate residential mortgages, and common and preferred shares. At December 31, 2015, the preferred share portfolio was $190.7 million or 42.0% of the Company’s securities compared to $248.0 million or 42.6% in 2014. Investment-grade preferred shares represent 40.4% of the preferred share portfolio (51.4% in 2014). Corporate and government bonds represent 55.9% of the securities portfolio compared to 55.0% in 2014. the entire bond portfolio of $253.2 million ($320.7 million in 2014) is investment grade. Residual interests represent 2.1% (2014 – 2.4%) of the securities portfolio and common shares represent less than 0.1% of the securities portfolio compared to 0.1% in 2014. 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 $1.7 million compared to $3.5 million during 2014. the Company recognized $0.9 million in impairment losses on securities in 2015 compared to $0.1 million in 2014. 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 2015 35 management’s Discussion and analysis table 16: other assets (000s, except %) Restricted assets Restricted cash non-Home trust MBS and treasury bills assigned as replacement assets Derivative assets other assets Accrued interest receivable prepaid CMB coupon Securitization receivable and retained interest Capital assets Income taxes recoverable other prepaid assets and deferred items Goodwill and intangible assets Goodwill Intangible assets 2015 2014 Change $ 139,046 $ 56,875 64,796 63,532 3,544 142,243 14,468 35,953 27,677 119,093 301,990 38,534 65,132 4,506 128,522 12,052 – 25,404 15,752 112,595 676,481 $ 15,752 97,384 808,369 $ 16.8% (81.2)% 68.2% (2.5)% (21.3)% 10.7% 20.0% – 8.9% – 15.6% (16.3)% the decrease in other assets over 2014 primarily reflects the decrease in non-Home trust MBS and treasury bills assigned as replacement assets in the CMB program reflecting maturities in the program. In general, as CMB maturities approach, the Company has been replacing maturing securitized mortgages with non-Home trust MBS and treasury bills. Further information on the Company’s securitization activity can be found in note 6 to the consolidated financial statements included in this report. the decrease is partially offset by increases in securitization receivables and retained interest, reflecting the Company’s securitization and sale of insured multi-unit residential mortgages and sales of residual interests in insured single-family residential mortgages, an income taxes recoverable position, and an increase in intangible assets commensurate with the Company’s continued investment in software development. Derivative assets and liabilities are discussed in the Derivatives and Hedging section of this MD&A. liabilities Deposits, Senior Debt and Securitization liabilities table 17: Deposits, Senior Debt and Securitization liabilities (000s, except % and number of accounts) Deposits payable on demand High-interest savings account oaken savings account other deposits payable on demand Deposits payable on fixed dates Brokered GICs oaken GICs Institutional deposit notes Senior debt Securitization liabilities Mortgage-backed security liabilities Canada Mortgage Bond liabilities total total number of deposit accounts 2015 2014 Change $ 1,576,536 $ 242,124 167,476 1,986,136 854,501 44,409 165,242 1,064,152 11,850,238 846,085 983,499 13,679,822 151,480 11,352,182 720,887 802,750 12,875,819 152,026 531,326 2,249,230 2,780,556 471,551 3,831,912 4,303,463 $ 18,597,994 $ 18,395,460 395,600 433,373 84.5% 445.2% 1.4% 86.6% 4.4% 17.4% 22.5% 6.2% (0.4)% 12.7% (41.3)% (35.4)% 1.1% 9.5% the Company’s deposit portfolio primarily provides funding for the non-securitized loan portfolio. the Company’s deposit portfolio principally comprises fixed-term deposits, which represent 87.3% of all deposits, thereby reducing the risk of untimely withdrawal of funds by retail clients. the Company generally matches the terms of its deposits with its assets. please see the Structural Interest Rate Risk and the Funding and liquidity Risk sections of this MD&A for more information. 36 Home Capital Group inC. AnnuAl RepoRt 2015 the Company continued to source deposits primarily through deposit brokers and investment dealers. other deposits payable on demand include amounts collected for real estate tax accounts which are generally paid out in accordance with each municipality’s payment frequency requirements. 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. total deposits of $15.67 billion increased 12.4% over 2014. the Company continues to invest in its longer-term strategy to diversify its sources of funding, including its direct-to-consumer business, oaken Financial. the balance of oaken deposits at the end of the year exceeded $1 billion at $1.09 billion, reflecting an increase in the balance over last year of 42.2%. Home trust high-interest savings accounts, distributed through investment brokers and financial planners, continued to grow, reaching a balance of $1.58 billion at the end of the year, an increase of 84.5% over the balance of $854.5 million in 2014. In addition, the Company has outstanding institutional deposit notes of $983.5 million at the end of 2015, compared to $802.8 million at the end of last year. In Q4 2015, the Company completed the acquisition of CFF Bank, which will also support the Company’s deposit diversification strategy. Securitization liabilities, including MBS and CMB liabilities, declined $1.52 billion from the end of 2014 due to the amortization of MBS liabilities, the maturity of CMB liabilities and planned changes in the asset mix. CMB liabilities are bullet bonds and only decline when the underlying bonds mature. new securitization transactions have been primarily off-balance sheet transactions. table 18: other liabilities (000s, except %) Derivative liabilities other liabilities Accrued interest payable Securitization servicing liability Income taxes payable other, including accounts payable and accrued liabilities Deferred tax liabilities 2015 5,447 $ 2014 2,266 $ Change 140.4% 131,534 15,234 – 118,173 22,531 $ 292,919 $ 127,135 11,216 11,317 50,163 36,554 238,651 3.5% 35.8% (100.0)% 135.6% (38.4)% 22.7% the increase in other liabilities resulted primarily from an increase in accounts payable and accrued liabilities, which fluctuate between quarters based on timing of the payment of associated liabilities. Shareholders’ equity table 19: Shareholders’ equity (000s, except %) Shareholders’ equity at the beginning of the year net income other comprehensive loss Amounts related to stock-based compensation Repurchase of shares Dividends Shareholders’ equity at the end of the year 2015 2014 $ 1,448,633 $ 1,177,697 313,172 (126) 12,493 (1,390) (53,213) $ 1,621,106 $ 1,448,633 287,285 (46,939) 5,978 (10,712) (63,139) Change 23.0% (8.3)% 37,153.2% (52.1)% 670.6% 18.7% 11.9% the increase of $172.5 million in total shareholders’ equity since December 31, 2014 was primarily internally generated from net income, net of $63.1 million for dividends to shareholders, $46.9 million of other comprehensive losses related primarily to the decline in fair value of the preferred share portfolio and $10.7 million related to the repurchase of shares. the amounts related to stock based compensation are due to the exercise of vested employee stock options. Details related to the repurchase of shares and stock-based compensation are provided in notes 14 and 15 to the consolidated financial statements included in this report. At December 31, 2015, the book value per common share was $23.17, compared to $20.67 at December 31, 2014. the Company increased the net book value per share through earnings. Home Capital Group inC. AnnuAl RepoRt 2015 37 management’s Discussion and analysis management’s Discussion and analysis Contingencies and Contractual obligations 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, 2015. table 20: Contractual obligations (000s) premises and equipment 2016 2017 2018 2019 2020 thereafter total $ 18,846 $ 12,396 $ 10,576 $ 8,150 $ 5,366 $ 11,220 $ 66,554 the Company has recorded a liability for the fair value of contingent consideration in the amount $1.9 million related to the acquisition of CFF Bank. the Company could be required to transfer additional consideration to the seller in relation to future sublease revenue to a maximum of $4.4 million. the Company had no material contingencies in 2014. the Company also has outstanding commitments for future advances on mortgages and unutilized and available credit on its credit card and lines of credit 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. off-balance Sheet arrangements the Company offers credit products to meet the financial needs of its customers and has outstanding amounts for future advances on mortgage loans which were $1.14 billion at December 31, 2015 ($850.1 million – December 31, 2014). these amounts include offers made but not yet accepted by the customer as of the reporting date. Also included within the outstanding amounts are unutilized non-residential commercial loan advances of $303.9 million at December 31, 2015 ($233.8 million – December 31, 2014). offers for the loans remain open for various periods. As at December 31, 2015, unutilized credit card balances amounted to $118.8 million ($100.9 million – December 31, 2014). In addition, other lines of credit have unutilized balances in the amount of $21.5 million ($nil – December 31, 2014). Included in the outstanding amounts for future advances of mortgage loans are outstanding future advances for the equityline Visa portfolio of $11.6 million at December 31, 2015 ($5.6 million – December 31, 2014). the unutilized credit and offers to extend credit are in the normal course of business and are considered through the Company’s liquidity and capital management processes. the Company has $6.79 billion (2014 – $4.20 billion) of loans under administration that are accounted for off-balance sheet (see table 13). please refer to note 2 and note 6 of the consolidated financial statements for details of the Company’s securitization activities. related party transactions the Company has no material related party transactions in the years ended December 31, 2015 and December 31, 2014, other than the compensation of key management personnel, as disclosed in note 22 of the consolidated financial statements. 38 Home Capital Group inC. AnnuAl RepoRt 2015 Quarterly FinanCial HiGHliGHtS table 21: Summary of Quarterly results (000s, except per share and %) 941 17.6% 126,658 24,255 54,681 248,462 246,406 70,239 71,811 net interest income (teB1) less: teB adjustment net interest income per financial statements non-interest income non-interest expense total revenue total adjusted revenue2 net income Adjusted net income2 Return on shareholders’ equity Adjusted return on shareholders’ equity2 18.0% Return on average total assets 1.4% total assets under administration $27,301,433 total loans under administration 25,058,122 earnings per common share Basic Diluted Adjusted earnings per common share2 Basic Diluted Book value per common share efficiency ratio (teB1) Adjusted efficiency ratio (teB1,2) Common equity tier 1 ratio3 tier 1 capital ratio3 total capital ratio3 net non-performing loans as a % of gross loans Annualized provision as a % of gross uninsured loans Annualized provision as a % of gross loans $ $ $ $ $ 0.04% 0.03% 0.28% 1.02 $ 1.02 $ 23.17 $ 36.0% 33.7% 18.31% 18.30% 20.70% 1.00 $ 1.00 $ Q4 2014 Q1 $ 127,599 $ 122,635 $ 118,175 $ 116,511 $ 117,440 $ 118,648 $ 116,187 $ 111,371 984 1,044 1,065 1,024 2015 965 937 987 Q2 Q3 Q4 Q2 Q1 Q3 121,698 23,385 44,955 247,194 247,194 72,443 72,443 117,210 29,061 47,374 250,879 250,879 72,317 72,317 115,524 27,092 43,633 249,232 249,232 72,286 72,286 116,416 56,437 39,889 284,592 251,917 95,936 71,917 117,583 24,972 42,901 255,046 255,046 73,755 73,755 115,143 26,765 40,522 255,448 255,448 73,745 73,745 110,387 25,185 38,940 247,900 247,900 69,736 69,736 18.7% 19.1% 19.7% 27.2% 22.0% 23.1% 23.1% 18.7% 1.4% $25,404,219 23,426,735 19.1% 1.4% $25,456,212 22,922,440 19.7% 1.4% $25,066,234 22,742,462 20.4% 1.9% $24,281,366 22,563,532 22.0% 1.4% $24,226,114 22,153,408 23.1% 1.4% $23,716,585 21,235,234 23.1% 1.4% $22,871,407 20,475,143 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.03 $ 1.37 $ 1.36 $ 1.05 $ 1.05 $ 1.06 $ 1.05 $ 1.00 1.00 1.03 $ 1.03 $ 22.37 $ 30.8% 30.8% 18.06% 18.06% 20.51% 1.03 $ 1.03 $ 21.87 $ 32.2% 32.2% 18.03% 18.03% 20.53% 1.03 $ 1.03 $ 21.18 $ 30.4% 30.4% 17.95% 17.94% 20.50% 1.03 $ 1.02 $ 20.67 $ 22.9% 28.2% 18.30% 18.30% 20.94% 1.05 $ 1.05 $ 19.57 $ 29.9% 29.9% 17.58% 17.58% 20.24% 1.06 $ 1.05 $ 18.74 $ 28.3% 28.3% 17.45% 17.45% 20.20% 1.00 1.00 17.82 28.5% 28.5% 17.22% 17.22% 20.06% 0.30% 0.33% 0.25% 0.30% 0.27% 0.32% 0.33% 0.08% 0.07% 0.07% 0.09% 0.11% 0.10% 0.11% 0.06% 0.05% 0.05% 0.07% 0.08% 0.07% 0.07% 1 teB – taxable equivalent Basis: see definition under non-GAAp Measures in this report. 2 See definition of total Adjusted Revenue, Adjusted net Income, Adjusted Return on Shareholders’ equity, Adjusted earnings per Common Share, and Adjusted efficiency Ratio, under non-GAAp Measures in this report and the reconciliation of net income to adjusted net income in table 2 in this report. 3 these figures relate to the Company’s operating subsidiary, Home trust Company. the Company’s key financial measures for each of the last eight quarters are summarized in the table above. these highlights illustrate the Company’s profitability, return on equity, 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, while the second and third quarters have traditionally experienced higher levels of advances. First quarter credit statistics may experience a decline reflecting post-holiday arrears increases. non-interest expenses and the efficiency ratio generally tend to increase in the third quarter, reflecting increased lending activity through the summer period. (please see the non-interest expense section of this MD&A for discussion on the increase in non-interest expenses in Q4 2015.) the Company continues to achieve positive financial results driven by strong net interest margins, continued low operating expenses and favourable non-interest income. Capital ratios over the last eight quarters reflect the Company’s prudent capital management strategies and the proactive approach to maintaining a strong capital base. Home Capital Group inC. AnnuAl RepoRt 2015 39 management’s Discussion and analysis management’s Discussion and analysis FourtH Q uarter 201 5 items of note the Company’s results were affected by the following items of note that aggregated to a negative impact of $1.6 million or $0.02 diluted earnings per share in Q4 2015: > $0.7 million in acquisition costs and $3.5 million in integration costs, less of $2.1 million in relation to a bargain purchase gain for a net of $2.1 million related to the acquisition of CFF Bank in 2015 ($1.6 million after tax and $0.02 diluted earnings per share). the Company’s results were also affected by the following items of note in Q4 2014: > $32.7 million prepayment income in Q4 2014 ($24.0 million after tax and $0.34 diluted earnings per share) related to the sale of $234.9 million of water heater loans. income Statement Highlights > Reported net income of $70.2 million was 26.8% lower than the $95.9 million net income recorded in Q4 2014 and 3.0% lower compared to $72.4 million in Q3 2015. > Adjusted net income, as defined in the non-GAAp Measures and Glossary section, was $71.8 million in Q4 2015, flat compared to adjusted net income in Q4 2014 and 0.9% lower than Q3 2015. > Adjusted basic and diluted earnings per share for the fourth quarter were both $1.02, compared to adjusted basic and diluted earnings per share of $1.03 and $1.02, respectively in Q4 2014. Adjusted basic and diluted earnings per share were $1.03 in Q3 2015. > Adjusted return on equity was 18.0% in Q4 2015, compared to 20.4% in Q4 2014, and 18.7% in Q3 2015. > total net interest margin (teB) was 2.46% in the quarter, up from 2.27% Q4 2014 and up from 2.38% in Q3 2015. net interest margin (teB) continues to be favourably influenced by the overall shift to higher yielding mortgages on balance sheet, combined with a higher relative proportion of lower rate deposits payable on demand. > net interest income on non-securitized assets was $121.8 million in the fourth quarter, increasing 11.1% over Q4 2014 and 3.9% over Q3 2015. net interest margin (teB) on this portfolio was 2.89% in Q4 2015, up from 2.79% in Q4 2014 and up from 2.83% in Q3 2015. the increases reflect the higher relative proportion of lower rate deposits payable on demand. > total income earned from securitization, which includes net interest income on the on-balance sheet portfolio and securitization income from off-balance sheet sales, was $10.7 million in Q4 2015, down from $11.8 million in Q4 2014 and up from $10.3 million in Q3 2015. Securitization income included gains of $4.7 million in the quarter on $533.2 million in notional sales. this compares to gains in Q4 2014 of $4.4 million on $612.8 million of notional sales and $4.5 million on $365.9 million in notional sales in Q3 2015. Relative gains vary in the highly competitive market for prime insured mortgages. net interest income on the on-balance sheet securitized portfolio declined to $4.9 million in the quarter from $6.8 million in Q4 2014 and up from $4.5 million in Q3 2015. the decline reflects net run-off of the portfolio as the Company has sold the residual interests of most newly originated insured mortgages. > Fees and other income of $19.9 million in Q4 2015 were up 9.1% from the $18.3 million recorded in Q4 2014 as a result of portfolio mix and changes in the fee structure year over year. Fees and other income were down 0.8% from the $20.1 million recorded in Q3 2015. > During the quarter, the Company recognized additional impairment losses of $66 thousand resulting in a net loss on securities of $66 thousand compared to net gains of $965 thousand in Q4 2014 and a loss of $542 thousand in Q3 2015. > the credit quality of the loan portfolio remained strong in the quarter and for the year, with continued low non-performing loans and credit losses. net non-performing loans as a percentage of gross loans ended 2015 at 0.28% of the total loans portfolio compared to 0.30% at the end of 2014 and 0.30% at the end Q3 2015. the annualized credit provision as a percentage of gross uninsured loans for the quarter of 0.04% has decreased from 0.09% in the same quarter last year, and from 0.08% in Q3 2015. > non-interest expenses were $54.7 million in the fourth quarter, up from $39.9 million in Q4 2014 and from $45.0 million last quarter. the adjusted efficiency ratio was 33.7% in the fourth quarter, up from 28.2% in Q4 2014 and 30.8% in Q3 2015. the increase in non-interest expenses represents the continued investment by the Company to grow its business including, among other things, technology related to operating in an increasingly digital marketplace and updating the Company’s loan origination platform. the increase in non-interest expenses also includes costs related to the day-to-day operations of the newly acquired CFF Bank. Costs to acquire and integrate CFF Bank have been excluded from the adjusted efficiency ratio. through 2016, as the Company’s integration efforts continue, it expects to be able to decrease the operating cost model of CFF Bank. In addition, non-interest expenses include $1.6 million in relation to the ongoing efforts to realign some of its business partnerships following the suspension of approximately 45 individual mortgage brokers. 40 Home Capital Group inC. AnnuAl RepoRt 2015 Financial position Highlights > Home trust’s Common equity tier 1 (Cet 1) and total capital ratios remained very strong at 18.31% and 20.70%, respectively, at December 31, 2015, and well above Company and regulatory minimum targets. Home trust’s leverage ratio was 7.36% at December 31, 2015, compared to 7.17% at September 30, 2015, well above regulatory minimums. > total loans under administration, which includes securitized mortgages that qualify for off-balance sheet accounting, increased by $2.49 billion in 2015 to $25.06 billion, representing growth of 11.1% over the $22.56 billion at the end of 2014 and 7.0% or $1.63 billion from the $23.43 billion at the end of Q3 2015. > total loans were $18.27 billion at Q4 2015, reflecting a decrease of 0.5% from $18.36 billion at the end of 2014 and a decrease of 0.4% or $68.0 million from the $18.34 billion at the end of Q3 2015. > the total value of mortgages originated in Q4 2015 was $2.15 billion, compared to $2.29 billion in Q4 2014 and $2.50 billion in Q3 2015. the year-over-year decrease in originations reflects, among other things, the Company’s ongoing review of its business partners (including the suspension of 45 individual mortgage brokers through the period of September 2015 to March 2015), its conservative approach to growing its residential mortgage business and the competitive market for prime insured mortgages. Compared to the third quarter, the decline in originations reflects normal and expected seasonal factors. > the Company originated $1.30 billion of traditional mortgages in Q4 2015, compared to $1.48 billion in Q4 2014 and $1.51 billion in Q3 2015. > Accelerator (insured) residential mortgage originations were up 46.1% to $515.9 million in Q4 2015, compared to $353.0 million in Q4 2014. originations were up 23.9% compared to $416.3 million in Q3 2015. the Company has continued to focus through the second half of the year on rebuilding this channel. In addition, the increase in Accelerator originations during the quarter includes $59.9 million of mortgages purchased from a third party (Q3 2015 – $42.9 million, Q4 2014 – $nil). > Multi-unit residential originations were $125.2 million in the quarter, compared to $299.5 million in the same period of 2014 and $329.5 million last quarter. Multi-unit residential mortgage originations are mostly insured and subsequently securitized through programs that qualify for off-balance sheet accounting resulting in a portion of the securitization gains discussed above. > Commercial mortgage and other loan advances were $182.4 million in Q4 2015, compared to $129.3 million in the comparable period of 2014 and $205.1 million in Q3 2015. Store and apartment advances were $26.5 million for the fourth quarter, compared to $24.1 million in the same period of 2014 and $32.7 million in the third quarter of 2015. > the consumer retail portfolio, which includes durable household goods, such as water heaters and larger-ticket home improvement items, was $296.9 million in Q4 2015, up 59.5% from $186.1 million one year ago and 10.9% from $267.7 million in Q3 2015. the Company continues to focus its efforts on rebuilding this portfolio after the prepayment of $234.9 million of water heater loans during Q4 2014. > total deposits reached $15.67 billion in Q4 2014, increasing 12.4% year over year, and up 4.8% from last quarter, with oaken Financial deposits exceeding $1 billion for the first time in Q4 2015. total deposits raised through the Company’s deposit diversification initiatives, oaken Financial, high-interest savings accounts and institutional deposits were $3.65 billion, an increase of $0.33 billion or 9.9% over Q3 2015, and $1.23 billion or 50.6% over the end of 2014. Home Capital Group inC. AnnuAl RepoRt 2015 41 management’s Discussion and analysis management’s Discussion and analysis FourtH Q uarter Fina nCial inFormation table 22: Fourth Quarter review of Financial performance For the three months ended Change December 31 2015 September 30 2015 December 31 2014 December 31, 2015– September 30, 2015 December 31, 2015– December 31, 2014 $ 197,052 $ 2,608 1,694 201,354 77,762 1,824 121,768 195,051 $ 2,597 1,846 199,494 80,771 1,512 117,211 22,853 17,963 4,890 126,658 1,415 125,243 19,927 5,760 – 2,056 (66) (3,422) 24,255 149,498 25,874 2,731 26,076 54,681 94,817 24,315 19,828 4,487 121,698 2,849 118,849 20,096 5,788 – – (542) (1,957) 23,385 142,234 19,382 3,149 22,424 44,955 97,279 187,272 2,842 2,482 192,596 81,326 1,660 109,610 35,559 28,753 6,806 116,416 3,186 113,230 18,272 4,956 32,675 – 965 (431) 56,437 169,667 20,156 3,213 16,520 39,889 129,778 1.0% 0.4% (8.2)% 0.9% (3.7)% 20.6% 3.9% (6.0)% (9.4)% 9.0% 4.1% (50.3)% 5.4% (0.8)% (0.5)% – – (87.8)% 74.9% 3.7% 5.1% 33.5% (13.3)% 16.3% 21.6% (2.5)% 25,548 (970) 24,578 70,239 $ 23,189 1,647 24,836 72,443 $ 32,539 1,303 33,842 95,936 10.2% (158.9)% (1.0)% (3.0)% 5.2% (8.2)% (31.7)% 4.5% (4.4)% 9.9% 11.1% (35.7)% (37.5)% (28.2)% 8.8% (55.6)% 10.6% 9.1% 16.2% (100.0)% – (106.8)% 694.0% (57.0)% (11.9)% 28.4% (15.0)% 57.8% 37.1% (26.9)% (21.5)% (174.4)% (27.4)% (26.8)% 1.00 $ 1.00 $ 1.03 $ 1.03 $ 1.37 1.36 (2.9)% (2.9)% (27.0)% (26.5)% 70,157 70,237 69,978 70,218 70,380 70,160 $ 23.17 $ 22.37 $ 70,101 70,462 70,096 20.67 (0.1)% (0.2)% (0.3)% 3.6% 0.1% (0.3)% (0.2)% 12.1% (000s, except per share amounts and %) net interest income non-Securitized assets Interest from loans Dividends from securities other interest Interest on deposits and other 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 prepayment income on portfolio sale Gain on acquisition of CFF Bank net realized and unrealized (losses) gains on securities net realized and unrealized loss 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 42 Home Capital Group inC. AnnuAl RepoRt 2015 $ $ $ table 23: Fourth Quarter review of Comprehensive income For the three months ended Change December 31 2015 70,239 $ September 30 2015 72,443 $ December 31 2014 95,936 $ December 31, 2015– September 30, 2015 (3.0)% December 31, 2015– December 31, 2014 (26.8)% (000s except %) net inCome otHer CompreHenSiVe inCome (loSS) available for Sale Securities and retained interests net unrealized gains (losses) net losses (gains) reclassified to net income Income tax expense (recovery) Cash Flow Hedges net unrealized (losses) gains net losses reclassified to net income Income tax (recovery) expense total other comprehensive income (loss) CompreHenSiVe inCome $ $ 6,171 66 6,237 1,654 4,583 (29,730) 460 (29,270) (7,760) (21,510) (2,110) 369 (1,741) (462) (1,279) 3,304 $ 73,543 $ 130 369 499 133 366 (21,144) $ 51,299 $ (3,862) (965) (4,827) (1,279) (3,548) (608) 365 (243) (64) (179) (3,727) 92,209 (120.8)% (85.7)% (121.3)% (121.3)% (121.3)% (1,723.1)% – (448.9)% (447.4)% (449.5)% (115.6)% 43.4% (259.8)% (106.8)% (229.2)% (229.3)% (229.2)% 247.0% 1.1% 616.5% 621.9% 614.5% (188.7)% (20.2)% Home Capital Group inC. AnnuAl RepoRt 2015 43 As at December 31 2015 September 30 2015 Change $ 1,149,849 $ 453,230 135,043 612,218 413,381 162,432 2,674,475 15,459,190 18,133,665 (36,249) 18,097,416 2,900,586 15,273,718 18,174,304 (35,900) 18,138,404 195,921 64,796 287,417 128,347 676,481 494,133 77,875 292,331 123,446 987,785 $ 20,512,019 $ 20,314,220 $ 1,986,136 $ 1,562,081 13,387,761 14,949,842 153,652 13,679,822 15,665,958 151,480 531,326 2,249,230 2,780,556 327,837 2,990,281 3,318,118 5,447 264,941 22,531 292,919 18,890,913 2,922 283,421 37,035 323,378 18,744,990 90,247 3,965 1,592,438 (65,544) 1,621,106 89,683 3,775 1,544,620 (68,848) 1,569,230 $ 20,512,019 $ 20,314,220 87.8% 9.6% (16.9)% (7.8)% 1.2% (0.2)% 1.0% (0.2)% (60.4)% (16.8)% (1.7)% 4.0% (31.5)% 1.0% 27.1% 2.2% 4.8% (1.4)% 62.1% (24.8)% (16.2)% 86.4% (6.5)% (39.2)% (9.4)% 0.8% 0.6% 5.0% 3.1% (4.8)% 3.3% 1.0% management’s Discussion and analysis management’s Discussion and analysis table 24: Fo urth Quarter review of Financial position (000s, except for %) aSSetS Cash and Cash equivalents available for Sale Securities loans Held for Sale loans Securitized mortgages non-securitized mortgages and loans Collective allowance for credit losses other Restricted assets Derivative assets other assets Goodwill and intangible assets 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 other liabilities Deferred tax liabilities Shareholders’ equity Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss 44 Home Capital Group inC. AnnuAl RepoRt 2015 table 25: Fourth Quarter net interest margin net interest margin non-securitized interest earning assets (non-teB) net interest margin non-securitized interest earning assets (teB) net interest margin securitized assets total net interest margin (non-teB) total net interest margin (teB) Spread of non-securitized loans over deposits and other table 26: Fourth Quarter net interest income December 31 2015 2.87% 2.89% 0.60% 2.45% 2.46% 2.97% For the three months ended September 30 2015 2.80% 2.83% 0.52% 2.36% 2.38% 2.93% December 31 2014 2.77% 2.79% 0.60% 2.25% 2.27% 2.83% December 31 2015 September 30 2015 December 31 2014 income/ expense average rate1 Income/ expense Average Rate1 Income/ expense Average Rate1 For the three months ended $ 4,302 1.39% $ 4,443 1.33% $ 5,324 145,867 4.95% 148,945 5.02% 144,496 8,651 5,036 22,205 8,388 6,905 197,052 941 2.63% 3.97% 5.95% 9.05% 9.81% 5.00% – 6,879 4,121 21,067 7,823 6,216 195,051 937 2.47% 3.85% 6.09% 9.14% 9.96% 5.07% – 7,518 3,959 16,566 7,552 7,181 187,272 1,024 202,295 4.76% 200,431 4.79% 193,620 13,549 2.74% 14,524 2.85% 22,875 8,580 4.28% 8,879 4.29% 10,969 724 22,853 225,148 77,762 1,824 17,963 97,549 127,599 (941) $ $ $ $ 0.63% 2.82% 4.35% $ 912 24,315 224,746 0.62% 2.81% 4.36% $ 1,715 35,559 229,179 2.03% $ 4.78% 2.20% 1.89% $ $ 80,771 1,512 19,828 102,111 122,635 (937) 2.14% $ 3.96% 2.26% 1.98% $ $ 81,326 1,660 28,753 111,739 117,440 (1,024) $ 126,658 $ 121,698 $ 116,416 1.80% 4.98% 2.90% 4.79% 6.16% 9.21% 10.07% 5.11% – 4.89% 3.12% 4.09% 1.22% 3.11% 4.42% 2.28% 4.55% 2.48% 2.15% (000s, except %) interest-bearing assets Cash resources and securities traditional single-family residential mortgages Accelerator single-family residential mortgages Residential commercial mortgages2 non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total non-securitized loans taxable equivalent adjustment total on non-securitized interest earning assets Securitized single-family residential mortgages Securitized multi-unit residential mortgages Assets pledged as collateral for securitization total securitized residential mortgages total interest-bearing assets interest-bearing liabilities Deposits and other Senior debt Securitization liabilities total interest-bearing liabilities net interest income (teB) taxable equivalent adjustment net interest income per Financial Statements 1 the average is calculated with reference to opening and closing monthly asset and liability balances. 2 Residential commercial mortgages include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential property types. Home Capital Group inC. AnnuAl RepoRt 2015 45 management’s Discussion and analysis table 27: Fourth Quarter mortgage advances (000s) Single-family residential mortgages traditional Accelerator Residential commercial mortgages Multi-unit uninsured residential mortgages Multi-unit insured residential mortgages other1 non-residential commercial mortgages Stores and apartments Commercial total mortgage advances For the three months ended December 31 2015 September 30 2015 December 31 2014 $ 1,304,268 $ 1,514,429 $ 1,484,475 353,002 515,891 416,273 23,503 101,683 8,535 31,031 298,438 18,460 38,519 261,016 14,296 26,462 173,825 24,144 114,999 $ 2,154,167 $ 2,497,957 $ 2,290,451 32,728 186,598 1 other residential commercial mortgages include mortgages such as builders’ inventory. table 28: provision for Credit losses and net write-offs as a percentage of Gross loans on an annualized Basis For the three months ended (000s, except %) provision2 Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans Securitized single-family residential mortgages Securitized multi-unit residential mortgages total individual provision total collective provision total provision net write-offs2 Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans Securitized single-family residential mortgages Securitized multi-unit residential mortgages net write-offs December 31 2015 amount % of Gross loans1 $ $ $ 986 – (40) 343 101 – – 1,390 25 1,415 1,415 – 127 502 94 – – 0.03% $ – (0.01)% 0.37% 0.14% – – 0.03% 0.00% 0.03% $ 0.04% $ – 0.03% 0.54% 0.13% – – Amount 1,805 – 237 163 44 – – 2,249 600 2,849 1,128 – 303 163 29 – – September 30 2015 % of Gross loans1 0.06% $ – 0.06% 0.19% 0.07% – – 0.05% 0.01% 0.06% $ 0.03% $ – 0.08% 0.19% 0.04% – – December 31 2014 % of Gross loans1 0.07% 0.04% 0.03% 0.15% 0.19% – – 0.06% 0.01% 0.07% 0.10% 0.04% 0.02% 0.14% 0.10% – – Amount 2,263 24 81 128 90 – – 2,586 600 3,186 3,054 24 56 114 48 – – $ 2,138 0.05% $ 1,623 0.04% $ 3,296 0.07% 1 Gross loans used in the calculation of total Company ratio include securitized on-balance sheet loans. 2 there were no specific provisions, allowances or net write-offs on securitized mortgages. 46 Home Capital Group inC. AnnuAl RepoRt 2015 table 29: Fourth Quarter allowance for Credit losses (000s) Individual allowances Allowance on loan principal Balance at the beginning of the period Allowance assumed on purchase of CFF Bank 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 Allowance assumed on purchase of CFF Bank 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 For the three months ended December 31, 2015 Single-family residential mortgages residential Commercial mortgages non-residential Commercial mortgages Credit Card loans and lines of Credit other Consumer retail loans total $ 1,952 $ – $ 405 $ 68 $ 155 $ 2,580 – 1,115 (1,531) 116 1,652 968 (129) 839 2,491 – – – – – – – – – – 62 (167) 40 340 159 (102) 57 397 420 343 (519) 17 329 – – – 329 – 100 (123) 29 161 4 1 5 166 420 1,620 (2,340) 202 2,482 1,131 (230) 901 3,383 22,232 327 9,500 3,541 300 35,900 – – 22,232 24,723 $ 986 $ $ $ – – 327 327 $ – $ – – 9,500 9,897 $ (40) $ 324 25 3,890 4,219 $ 368 $ – – 300 466 $ 101 $ 324 25 36,249 39,632 1,415 For the three months ended September 30, 2015 Single-family Residential Mortgages Residential Commercial Mortgages non-residential Commercial Mortgages Credit Card loans and lines of Credit other Consumer Retail loans $ 1,463 $ 1,617 (1,417) 289 1,952 – $ – – – – 480 $ 228 (309) 6 405 780 188 968 2,920 – – – – 150 9 159 564 68 $ 142 $ 163 (166) 3 68 – – – 68 42 (78) 49 155 2 2 4 159 total 2,153 2,050 (1,970) 347 2,580 932 199 1,131 3,711 21,632 600 22,232 25,152 $ 2,405 $ $ $ 327 – 327 327 $ – $ 9,500 – 9,500 10,064 $ 237 $ 3,541 – 3,541 3,609 $ 163 $ 300 – 300 459 $ 44 $ 35,300 600 35,900 39,611 2,849 Home Capital Group inC. AnnuAl RepoRt 2015 47 management’s Discussion and analysis management’s Discussion and analysis table 29: Fourth Quarter allowance for Credit losses (continued) For the three months ended December 31, 2014 (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 Single-family Residential Mortgages Residential Commercial Mortgages non-residential Commercial Mortgages Credit Card loans and lines of Credit other Consumer Retail loans $ 2,399 $ 2,463 (3,125) 71 1,808 – $ 24 (24) – – 55 $ 56 (56) – 55 760 (200) 560 2,368 – – – – 32 25 57 112 66 $ 118 $ 128 (134) 20 80 – – – 80 90 (123) 75 160 3 – 3 163 total 2,638 2,761 (3,462) 166 2,103 795 (175) 620 2,723 20,032 600 20,632 23,000 $ 2,863 $ $ $ 327 – 327 327 $ 24 $ 9,300 – 9,300 9,412 $ 81 $ 3,541 – 3,541 3,621 $ 128 $ 300 – 300 463 $ 90 $ 33,500 600 34,100 36,823 3,186 there were no specific provisions, allowances, or net write-offs on securitized residential mortgages. table 30: Securitization income $ December 31 2015 4,728 $ (232) 1,264 5,760 $ $ For the three months ended December 31 2014 4,362 (591) 1,185 4,956 September 30 2015 4,453 $ (39) 1,374 5,788 $ (thousands of Canadian dollars) net gain on sale of mortgages or residual interest1 net change in unrealized gain or loss on hedging activities Servicing income total securitization income 1 Gains on sale of mortgages or residual interest are net of hedging impact. 48 Home Capital Group inC. AnnuAl RepoRt 2015 table 31: Securitization activity (000s) Carrying value of underlying mortgages derecognized net gains on sale of mortgages or residual interest1 Retained interests recorded Servicing liability recorded December 31, 2015 For the three months ended September 30, 2015 Single-family residential mBS multi-unit residential mBS Single-family Residential MBS Multi-unit Residential MBS total mBS total MBS $ 371,473 $ 161,757 $ 533,230 $ 210,881 $ 154,986 $ 365,867 3,362 – – 1,366 5,933 1,278 4,728 5,933 1,278 3,183 – – 1,270 8,910 1,686 4,453 8,910 1,686 (000s) Carrying value of underlying mortgages derecognized net gains on sale of mortgages or residual interest1 Retained interests recorded Servicing liability recorded 1 Gains on sale of mortgages or residual interest are net of hedging impact. Capital man a Gement For the three months ended December 31, 2014 $ Single-family Residential MBS 371,782 $ 2,549 – – Multi-unit Residential MBS 241,023 $ 1,813 9,289 2,257 total MBS 612,805 4,362 9,289 2,257 Capital is a key factor in 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 Capital Management policy is to ensure that adequate capital is available to the Company to support its strategic and business objectives, absorb potential unexpected losses, meet minimum regulatory capital requirements as stipulated by the office of the Superintendent of Financial Institutions Canada (oSFI), and to enable the allocation of capital for maximum economic benefit. the Capital Management Committee reviews compliance with the policy at minimum on a monthly basis while the Risk and Capital Committee and the Board of Directors review compliance with the policy on a quarterly basis. two regulatory capital requirements are addressed in the Company’s policy: the leverage ratio and the risk-based capital ratios. the Capital Management Committee reviews these ratios on a regular basis while the Board of Directors reviews them quarterly. the Company’s principal consolidated subsidiary, Home trust, which includes its subsidiary CFF Bank, calculates capital ratios and regulatory capital based on the capital adequacy requirements issued by oSFI, which are based on International Convergence of Capital Measurement and Capital Standards – A Revised Framework (Basel II) and Basel III: A global regulatory framework for more resilient banks and banking systems – A Revised Framework (Basel III). As Home trust, a wholly owned subsidiary of the Company, is regulated under the trust and loan Companies Act (Canada) and the Bank Act (Canada), Home trust’s ability to accept deposits is limited primarily by its permitted leverage ratio. this is defined as the Capital Measure divided by the exposure Measure, with the ratio expressed as a percentage. the Capital Measure is the all-in tier 1 capital of Home trust. the exposure Measure consists of on-balance sheet, derivatives, securities financing transactions and off-balance sheet exposures. the leverage ratio has replaced the Assets to Capital Multiple and is effective for Home trust as of January 1, 2015. under Basel II and Basel III, Home trust calculates risk-weighted assets for credit risk using the Standardized Approach and for operational risk using the Basic Indicator Approach. Home trust’s capital structure and risk-weighted assets were as follows: Home Capital Group inC. AnnuAl RepoRt 2015 49 management’s Discussion and analysis management’s Discussion and analysis table 32: Basel iii regulatory Capital (Based only on the consolidated subsidiary, Home trust Company) (000s, except ratios) Common equity tier 1 capital (Cet 1) Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Cash flow hedge reserves Regulatory deductions from Cet 11 total Cet 1 capital Additional tier 1 capital total tier 1 capital tier 2 capital Collective allowance for credit losses2 Subordinated debentures total tier 2 capital total regulatory capital Risk-weighted assets for Credit risk operational risk total risk-weighted assets, before CVA3 CVA adjustment for Cet 1 capital total Cet 1 capital risk-weighted assets CVA adjustment for tier 1 capital total tier 1 capital risk-weighted assets CVA adjustment for total capital total risk-weighted assets Regulated capital to risk-weighted assets Cet 1 ratio tier 1 capital ratio total regulatory capital ratio leverage Ratio national regulatory minimum Cet 1 ratio tier 1 capital ratio total regulatory capital ratio leverage Ratio4 December 31 2015 all-in Basis December 31 2014 All-In Basis $ 38,497 $ 951 1,614,491 (65,851) 3,078 (130,163) 1,461,003 – 1,461,003 38,497 951 1,393,117 (18,571) 2,362 (101,976) 1,314,380 – 1,314,380 36,249 156,000 192,249 34,100 156,000 190,100 $ 1,653,252 $ 1,504,480 996,488 $ 6,962,984 $ 6,267,400 904,438 $ 7,959,472 $ 7,171,838 10,581 7,182,419 12,066 7,183,904 14,294 $ 7,985,498 $ 7,186,132 21,632 7,981,104 23,998 7,983,470 26,026 18.31% 18.30% 20.70% 7.36% 7.00% 8.50% 10.50% 3.00% 18.30% 18.30% 20.94% n/A 7.00% 8.50% 10.50% n/A 1 Regulatory deductions on the all-in basis include intangible assets related to software development and unrealized multi-unit residential mortgage securitization gains, net of deferred taxes. 2 the Company is allowed to include its collective allowance for credit losses up to a prescribed percentage of 1.25% of total credit risk-weighted assets, inclusive of total CVA, before transitional phase-in adjustments in tier 2 capital. At December 31, 2015, the Company’s collective allowance represented 0.52% of total credit risk-weighted assets, inclusive of total CVA. 3 CVA – Credit Valuation Adjustment. 4 effective Q1 2015, the Assets to Capital Multiple (ACM) has been replaced with the Basel III leverage ratio. See definition of the leverage ratio under non-GAAp Measures in this report. Home trust’s regulatory “all-in” total Capital ratio has decreased from the end of 2014 as capital increased at a slower rate than risk-weighted assets. Capital increased principally from an increase in retained earnings of $221.4 million, offset by the increase in accumulated other comprehensive loss. Risk-weighted assets increased in line with increases in the Company’s uninsured loan portfolio. the Assets to Capital Multiple (ACM) was replaced with the Basel III leverage ratio measure effective January 1, 2015. the Company has disclosed the leverage ratio and its components under “Regulatory Disclosures” on the Home trust website. like the ACM, the leverage ratio is a non-risk adjusted view of a company’s leverage. Compared to the ACM, the leverage ratio has a narrower view of capital, and only includes tier 1 capital. the leverage ratio also includes some off-balance sheet exposures, including potential future exposure amounts on derivatives, credit equivalent amounts of certain commitments and securities financing transactions. the leverage ratio of 7.36% is in excess of oSFI’s established minimum target of 3%, as well as the minimum ratio assigned to the Company by oSFI and the Company’s internal targets. the implementation of the leverage ratio has not affected the Company’s business plans. 50 Home Capital Group inC. AnnuAl RepoRt 2015 Home trust’s Common equity tier 1, total tier 1 and total capital ratios continue to exceed internal capital targets. Home trust adopted certain Basel III capital requirements beginning January 1, 2013, as required by oSFI. the transitional basis allows for the transition of certain capital deductions over a period ending January 1, 2018, whereas the all-in basis includes all applicable deductions immediately. For Home trust, the transitional basis is applied to the deduction from capital of intangible assets related to development costs. Deductions for transitional calculations commenced in 2014. For purposes of meeting minimum regulatory capital ratios prescribed by oSFI, the all-in basis is required. table 33: risk-weighted assets (rwa) (Based only on the consolidated subsidiary, Home trust) Balance Sheet amounts $ 1,118,630 195,921 443,831 4,270,243 (000s, except %) 268,263 11,571,872 Cash and cash equivalents Restricted assets Available for sale securities Insured residential mortgages uninsured single-family residential mortgages uninsured residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans other assets total assets subject to risk rating Intangible assets Collective allowance for credit losses total assets off-balance sheet items 918,343 loan commitments 21,372,785 total credit risk operational risk – total risk-weighted assets, before CVA $ 21,372,785 1,490,648 370,825 296,857 351,006 20,378,096 112,595 (36,249) 20,454,442 effective risk weight1 20.0% $ 14.2% 43.0% 0.7% 2015 risk- weighted amount 223,726 $ 27,809 190,647 31,438 Balance Sheet Amounts 338,461 421,083 568,687 4,921,451 effective Risk Weight1 20.0% $ 5.7% 44.1% 0.5% 2014 Risk- weighted Amount 67,692 23,818 251,018 26,549 35.3% 4,082,400 11,603,298 35.3% 4,096,045 100.0% 268,263 216,845 100.0% 216,871 100.1% 1,491,757 164,346 44.3% 222,643 75.0% 56.0% 196,648 33.9% 6,899,677 – – 33.7% 6,899,677 – – 1,106,878 330,327 186,111 272,437 19,965,578 97,384 (34,100) 20,028,862 6.9% 63,307 6,962,984 996,488 1,037,225 21,066,087 – $ 7,959,472 $ 21,066,087 100.1% 1,108,107 137,602 41.7% 139,583 75.0% 57.9% 157,830 31.2% 6,225,115 – – 31.1% 6,225,115 – – 4.1% 42,285 6,267,400 904,438 $ 7,171,838 1 the effective risk weight represents the weighted average of the risk weights for each asset category prescribed by oSFI, weighted based on the Company’s balance sheet classification. Risk-weighted assets are determined by applying the oSFI-prescribed rules to on-balance sheet and off-balance sheet exposures. 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. Capital management activity During the third quarter of 2015, 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 5.0% of its issued and outstanding common shares as of September 9, 2015. 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 2015, the Company repurchased 344,700 common shares (2014 – 28,000 common shares) for $10.7 million, thereby reducing retained earnings by $10.3 million and share capital by $442 thousand (2014 – $1.4 million and $34 thousand, respectively). Subsequent to the end of the year, the Company’s Board authorized a share repurchase of up to $150 million, which is anticipated to take place through a Substantial Issuer Bid by way of an issuer bid circular that would be provided to the shareholders of Home Capital. the terms and conditions of the bid remain to be determined, and are subject to approval by the Board of Directors. Home Capital Group inC. AnnuAl RepoRt 2015 51 management’s Discussion and analysis management’s Discussion and analysis internal Capital adequacy assessment process (iCaap) under the Company’s capital and risk management policies, and oSFI’s guidelines, 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 34: Credit ratings long-term rating Short-term rating outlook Share information table 35: Share information (000s) Common shares issued and outstanding1 employee stock options outstanding2 employee stock options exercisable2,3 Home Capital Group Inc. Standard & poor’s BBB– A–3 Stable DBRS BBB R2 (middle) Stable DBRS BBB (high) R2 (high) Stable Home trust Company Standard & poor’s BBB A–2 Stable number of Shares 69,978 $ 1,208 511 2015 amount 90,247 n/a 14,866 number of Shares 70,096 $ 1,235 634 2014 Amount 84,687 n/A 14,866 1 no shares were issued, other than through employee stock options exercised. 2 please see note 15(C). 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. riSk mana Gement the shaded areas of this section of the MD&A represent a discussion of risk management policies and procedures relating to certain 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, 2015. 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 and resources. 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 will accept, which risks it will mitigate, offset or hedge, and which risks it will avoid. these decisions are guided by the Company’s risk appetite framework and risk appetite statement. the types of risk to which the Company is subject include, among others, credit, market, funding and liquidity, operational, capital adequacy, compliance, reputation and strategic risks. risk appetite the Company’s risk appetite framework sets out the aggregate level and types of risk that the Company is willing to accept in order to achieve its business objectives. It considers the maximum level of risk that the Company can assume before breaching constraints determined by regulatory capital and liquidity needs, as well as the Company’s conduct with respect to depositors, customers, investors and other stakeholders. the risk appetite statement articulates the following major enterprise principles: 52 Home Capital Group inC. AnnuAl RepoRt 2015 the Company will: 1. Maintain adequate capital and liquidity at all times. 2. only take risks that are transparent, manageable and that fit the Company’s business strategy. 3. not expose itself to any significant single loss events on any single transaction or acquisition. 4. not take risks that are expected to result in significant volatility in earnings or shareholder returns. 5. Conduct business with honesty, integrity, respect and high ethical standards. 6. Strive to protect the Company’s reputation at all times, with all key stakeholders. 7. Adopt a risk-based approach for identifying, assessing, managing, mitigating and monitoring risk that meets regulatory requirements and expectations. 8. not tolerate business activities that are not supported by appropriate processes and internal controls that are designed to detect, deter and prevent activity associated with financial crime or maintain relationships with persons or entities believed to be engaged in illegal or illicit activities. 9. Incorporate risk and compliance measures into performance and reward measurement programs. 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. 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 and compliance 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 sets boundaries for acceptable business strategies, exposures and activities. Home Capital Group inC. AnnuAl RepoRt 2015 53 management’s Discussion and analysis management’s Discussion and analysis the Company’s risk governance is based on a three lines of defence model: > 1st line of Defence – consists of the business units and support areas. As risk owners, management is accountable for identifying, assessing, monitoring, reporting and managing the risks generated within their respective areas of responsibility. Business Risk Management and Analytics is a risk management team embedded within the first line of defence to assist management in ensuring effective controls are in place to support short- and long-term revenue generation. > 2nd line of Defence – consists of enterprise Risk Management (including Credit) and Corporate Compliance which are responsible for the establishment of the Company’s risk management framework and the independent oversight of their implementation. together with Finance, the 2nd line of Defence is also responsible for the independent assessment, monitoring and reporting of risk taking activities. > 3rd line of Defence – Internal Audit is responsible for providing independent, objective assurance to the Board of Directors and the executive Committee by assessing the effectiveness of governance, risk management and control processes. the governance structure depicted below 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 Executive Project Review Committee Capital Management Committee Corporate Social Responsibility Committee Disclosure Committee 3rd Line Internal Audit 2nd Line 1st Line Corporate Compliance Finance Credit Enterprise Risk Management Deposits Residential Mortgage Lending Commercial Mortgage Lending Retail Credit Treasury PSiGate Support Functions Credit Card Products S E E T T I M M O C E C N E F E D F O S E N I L 54 Home Capital Group inC. AnnuAl RepoRt 2015 the Board is accountable for establishing the overall vision, mission, values, objectives and strategies of the Company and setting the Company’s overall risk appetite. the Board challenges management’s recommendations 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 (RCC) of the Board. In this oversight role the RCC is mandated to ensure that all significant risks to the Company, regardless of source, 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 risk profile against Board-approved risk appetite and limits; and providing direction to management when necessary. the RCC also ensures that the Company’s 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 monitoring the Company’s risk profile and business activities. the most significant risks to the Company are subject to more specific review, monitoring and assessment under the mandates of supporting management risk committees. these committees (Credit Risk Management, Asset/liability, Capital Management, operational Risk Management, Corporate Social Responsibility, Disclosure, and executive project Review) recommend policies and guidelines for approval as proposed by the lines of business, with review by the eRM group, and proactively monitor and assess the specific risks under their mandates compared to the Board approved risk appetite and risk limits. In addition to the executive Committee and supporting management risk committees, the Company’s risk governance is supported by a robust risk management framework. > the eRM group is mandated to work with the eC and the Board of Directors 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 eC and the Risk and Capital Committee of the Board, 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 against approved risk appetite, limits, policies and guidelines. > the Chief Compliance officer (CCo), the Chief Anti Money laundering officer (CAMlo) and the Corporate Compliance group are 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 Corporate Compliance group promotes a sound compliance culture; provides regular reports to senior management and the Board about compliance with the Company’s legislative and regulatory requirements; follows up with senior management on breaches; and makes 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. > Internal Audit is mandated to independently assess and report to the Audit Committee, the Board and management on the effectiveness of governance, risk management and internal control processes. > the Finance group compiles the Company’s financial statements, budget and capital plan for recommendation to the executive Committee and Board, and reports to the Board, shareholders and regulators on the performance of the Company. the Finance group also updates the Company’s financial and capital plans with periodic forecasts, advises the Board of anticipated outcomes, and recommends revisions to capital plans and structures as appropriate. Stress testing In addition to 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 stress testing through the Company’s ICAAp, liquidity and funding planning 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 enterprise scenarios is developed to assess the impact on the Company’s financial results, capital position, operational capabilities and the Company’s ability to respond to the event. In particular, management has evaluated a range of stress scenarios, including a real estate-driven recession, information security breach, appraisal fraud, and a reverse stress scenario. Management analyzes the outcomes from stress testing and, where applicable, takes proactive measures to mitigate potential risks to the business. Home Capital Group inC. AnnuAl RepoRt 2015 55 management’s Discussion and analysis management’s Discussion and analysis principal risks the Company has identified eight principal risks that are material to the business: strategic, credit, market, funding and liquidity, operational, compliance, capital adequacy 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 to execute strategic objectives. principal risks 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 i g n d n u F k s i R y t i d u q i L i k s i R l a n o i t a r e p O k s i R e c n a i l p m o C y c a u q e d A l a t i p a C 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 eC. on a regular basis, the eC 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. 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 a defined credit-specific risk appetite, limits and a Board-approved Credit Risk policy and regular independent monitoring and reporting. 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, with geographic, product, property and security type limits established to cover all material classes of exposure. the Company’s Credit Risk 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 guidelines, 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 credit loss allowances and the allocation of credit risk-based capital. At a transactional level, loans are independently approved by credit and/or underwriting 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 carry 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. 56 Home Capital Group inC. AnnuAl RepoRt 2015 table 36: Credit risk portfolio metrics (000s, except % and number of credit cards and lines of credit 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 mortgages2 percentage of mortgages current percentage of mortgages over 90 days past due percentage of insured residential mortgage originations loan-to-value ratio of residential mortgages (current uninsured)3 Credit Card and lines of Credit portfolio total credit card and lines of credit portfolio balance percentage of equityline Visa credit cards percentage of secured credit cards percentage of credit cards and lines of credit current percentage of credit cards and lines of credit over 90 days past due loan-to-value ratio of equityline Visa (current)3 Visa card security deposits total authorized limits of credit cards and lines of credit total number of credit cards and lines of credit issued Average balance authorized 2015 2013 $18,133,665 $18,262,816 $17,881,926 2014 $ 17,465,983 $ 17,746,378 $ 17,248,478 91.5% 8.5% 23.7% 98.2% 0.3% 22.1% 66.4% 93.8% 6.2% 27.7% 97.9% 0.3% 23.7% 66.7% 94.2% 5.8% 36.8% 97.6% 0.5% 25.1% 65.9% $ $ $ $ 370,825 $ 86.6% 3.9% 98.5% 0.4% 62.9% 20,646 $ 511,283 $ 330,327 $ 95.3% 3.8% 97.8% 0.6% 62.4% 18,787 $ 430,906 $ 40,355 33,853 13 $ 13 $ 293,485 95.7% 3.8% 97.8% 0.9% 66.1% 15,997 373,702 28,892 13 1 Residential mortgages include multi-unit residential and other residential commercial mortgages. 2 Insured loans are loans insured against default by CMHC or another approved insurer either individually at origination or by portfolio. 3 loan-to-value ratio is calculated as the current balance outstanding to the appraised value at origination. Mortgage Lending 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. Senior management and the eRM group closely monitor credit metrics and the performance of the mortgage loan portfolio. the portfolio continues to perform well, with arrears and net write-offs that are well within expected levels. the Company mitigates credit risk by ensuring borrowers have the capacity and willingness to pay and through collateral in the form of real property. ltV is a key credit metric. please see tables 41 and 42 for further information. the Company continues to actively monitor the mortgages associated with the suspended individual mortgage brokers and there have been no unusual credit issues. Due to the level of activity in the condominium market in certain cities, the Company continues to closely monitor market conditions and the performance of this portfolio. Condominiums represent 9.1% of the residential mortgage portfolio and, of these, 22.3% are insured. the average current ltV of the condominium portfolio was 66.4% at the end of 2015. the credit performance of the condominium portfolio is strong and within the Company’s expectations, with 98.6% of the portfolio current and 0.3% over 90 days. the Company continues to closely monitor its exposure and the credit performance of mortgages in energy-producing regions, including in Alberta, Saskatchewan, and newfoundland and labrador. At December 31, 2015, 3.0% of the uninsured mortgage portfolio was in these regions, with an average ltV of 62.2% and 97.0% current. the level of non-residential mortgages increased over the last 12 months and the Company anticipates that the non-residential portfolio will continue to grow. the proportion is well within the policy limits. Home Capital Group inC. AnnuAl RepoRt 2015 57 management’s Discussion and analysis management’s Discussion and analysis Other Lending Credit card and lines of credit balances were $370.8 million at the end of the year, most of which are secured by either cash deposits or residential property. Within the credit card and lines of credit portfolio, equityline Visa accounts, which are secured by residential property, represent the principal driver of receivable balances. the equityline Visa portfolio had a weighted-average ltV at origination of 62.9% at the end of the year compared to 62.4% at the end of 2014. the ltV includes both the first mortgage and the secured equityline Visa balance. Senior management and the eRM group closely monitor the credit performance of the credit card and lines of credit portfolio. the portfolio continues to perform well, with arrears well within expected levels. As of December 31, 2015, $1.6 million or 0.4% of the credit card and lines of credit portfolio was over 90 days in arrears, compared to $1.9 million or 0.6% at December 31, 2014. Retail credit is secured by charges on financed assets, primarily improvements to residential property or fixtures, such as water heaters. Water heater loans are also guaranteed by the gas supplier. Refer to note 5(A) in the consolidated financial statements included in this report for a breakdown of the overall loan portfolio by geographic region. While the Company’s strategy is to increase the geographic diversification of the loan portfolio, this has been tempered by credit and economic conditions in local markets. table 37: non-performing loans and allowances (000s, except %) Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail 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 net write-offs as a % of gross loans $ Gross 49,285 $ – 2015 net1 47,633 $ – Gross 52,551 $ 54 2,558 1,518 161 53,522 $ 18,136,147 2,218 1,189 – 51,040 2,516 1,938 160 57,219 $ 18,264,919 2014 net1 50,743 54 2,461 1,858 – 55,116 Gross (6.2)% (100.0)% 1.7% (21.7)% 0.6% (6.5)% (0.7)% Change net1 (6.1)% (100.0)% (9.9)% (36.0)% – (7.4)% – 0.28% $ 39,632 0.30% $ 36,823 0.22% 74.05% 0.04% 0.20% 64.35% 0.06% 1 non-performing loans are net of individual allowances as shown in table 38, Allocation of Allowance for Credit losses. net non-performing loans remain within expected and acceptable ranges. As part of the Company’s ongoing business strategy, experienced employees undertake reviews of delinquent and non-performing loans 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-off rates relative to the gross loans portfolio. Write-offs, net of recoveries, totalled $6.9 million or 0.04% of gross loans in 2015, compared to $10.3 million or 0.06% of gross loans in 2014. the Company continually monitors arrears and write-offs and deals effectively with non-performing loans. 58 Home Capital Group inC. AnnuAl RepoRt 2015 table 38: allocation of allowance for Credit losses (000s) Individual allowances Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total individual allowance Collective allowance Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total collective allowance total allowances (000s) Individual allowances Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total individual allowance Collective allowance Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total collective allowance total allowances 2015 opening Balance write-offs net of recoveries provision for Credit losses 2015 ending Balance $ $ $ $ 2,368 $ – 112 5001 163 3,143 20,632 327 9,300 3,8651 300 34,424 37,567 $ (5,292) $ (4) (435) (969) (168) (6,868) – – – – – – (6,868) $ 5,415 $ 4 720 798 171 7,108 1,600 – 200 25 – 1,825 8,933 $ 2014 opening Balance Write-offs net of Recoveries provision for Credit losses 1,960 $ 25 44 201 248 2,478 (9,099) $ (24) (202) (692) (272) (10,289) 9,507 $ (1) 270 571 187 10,534 18,032 327 9,300 3,541 300 31,500 33,978 $ – – – – – – 2,600 – – – – 2,600 (10,289) $ 13,134 $ 2,491 – 397 329 166 3,383 22,232 327 9,500 3,890 300 36,249 39,632 2014 ending Balance 2,368 – 112 80 163 2,723 20,632 327 9,300 3,541 300 34,100 36,823 1 the opening balance of credit card loans and lines of credit includes the individual and collective allowances assumed on the purchase of CFF Bank on october 1, 2015. the Company maintains credit allowances that, in management’s judgement, are sufficient to cover incurred losses and identified credit events in the loans portfolio. expected and unexpected future losses are mitigated by a combination of risk-sensitive pricing, solid earnings and a strong capital position. 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. Home Capital Group inC. AnnuAl RepoRt 2015 59 management’s Discussion and analysis management’s Discussion and analysis 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. At December 31, 2015, the Company held a collective allowance of $36.2 million, compared to $34.1 million held at December 31, 2014. the Company has security in the form of real property or cash deposits for virtually the entire loans portfolio. the Company’s evaluation of the adequacy of the collective allowance takes into account asset quality, borrower creditworthiness, property location, past loss experience, current and forecasted default rate and exposure at default based on product, risk ratings and credit scores. the Company periodically reviews and performs back-testing on the methods utilized in assessing the collective allowance. the principal factors impacting the assessment of the adequacy of the collective allowance are the quality of new accounts, the low loan to value of the uninsured mortgage portfolio, historical default and loss rates as well as the impact of external factors impacting the portfolio. the collective allowance has been increased marginally over the course of the year and currently exceeds the net write-offs experienced over the past 36 months. Additional Information: Residential Loans and Equityline Visa Home Equity Line of Credit (HELOC) the tables below provide additional information on the composition of the Company’s single-family residential mortgage portfolio by province and insured status, as well as by remaining effective amortization periods and loan-to-value ratios by province. table 39: Single-family residential loans by province $ insured residential mortgages1 294,117 270,146 2,467,766 149,504 174,123 $ 3,355,656 percentage of total for province uninsured residential mortgages 537,677 35.2% $ 41.4% 370,645 19.1% 10,152,664 350,833 29.8% 51.7% 160,053 22.0% $ 11,571,872 percentage of total for province 64.4% $ 56.8% 78.6% 69.9% 47.6% 75.9% $ $ Insured Residential Mortgages1 301,557 248,418 2,993,336 166,704 127,333 $ 3,837,348 percentage of total for province uninsured Residential Mortgages 579,031 34.1% $ 38.7% 379,769 22.3% 10,121,442 31.9% 354,293 168,764 42.7% 24.4% $ 11,603,299 percentage of total for province 65.4% $ 59.0% 75.5% 67.8% 56.5% 73.6% $ 2015 percentage of total for province total 835,202 0.4% $ 1.8% 652,615 2.3% 12,922,299 501,806 0.3% 0.7% 336,556 2.1% $ 15,248,478 2014 percentage of total for province total 884,911 0.5% $ 2.3% 642,699 2.2% 13,406,876 0.3% 522,474 298,405 0.8% 2.0% $ 15,755,365 equityline Visa2 3,408 11,824 301,869 1,469 2,380 320,950 equityline Visa2 4,323 14,512 292,098 1,477 2,308 314,718 (000s, except %) British Columbia Alberta ontario Quebec other (000s, except %) British Columbia Alberta ontario Quebec other 1 See definition of insured loans under the Glossary of terms in this report. 2 equityline Visa is an uninsured product. 60 Home Capital Group inC. AnnuAl RepoRt 2015 table 40: insured and uninsured Single-family residential mortgages by effective remaining amortization period (000s, except %) Balance outstanding percentage of total $ ≤ 20 years > 20 and ≤ 25 years > 25 and ≤ 30 years > 30 and ≤ 35 years 704,369 $ 2,312,993 $ 11,379,663 $ 15.5% 76.3% 4.7% 525,518 $ 2015 > 35 years total 4,985 $ 14,927,528 3.5% 0.0% 100.0% 2014 (000s, except %) Balance outstanding percentage of total ≤ 20 Years > 20 and ≤ 25 Years > 25 and ≤ 30 Years > 30 and ≤ 35 Years $ 677,965 $ 2,220,655 $ 10,905,290 $ 1,621,133 $ > 35 Years total 15,604 $ 15,440,647 4.4% 14.4% 70.6% 10.5% 0.1% 100.0% table 41: weighted-average loan-to-Value (ltV) ratios for uninsured Single-family residential mortgages originated During the year British Columbia Alberta ontario Quebec other total uninsured residential mortgages1 67.6% 74.5% 73.9% 70.0% 70.7% 73.3% 2015 equityline Visa1 56.0% 48.0% 63.4% 58.2% 58.2% 63.3% uninsured Residential Mortgages1 68.2% 72.3% 74.3% 68.2% 67.4% 73.7% 2014 equityline Visa1 53.5% 54.5% 56.3% 57.3% 51.7% 56.3% 1 Weighted-average ltV is calculated by dividing the sum of the products of ltVs and loan balances by the sum of the loan balances. the Company actively manages the entire mortgage portfolio and performs both standardized and ad-hoc stress testing. Stress testing includes scenarios that are based on a combination of increasing unemployment, rising interest rates, and a downturn in real estate markets, as well as specific operational, market and single-factor stress tests. the probability of delinquency in the residential mortgage portfolio is most closely correlated with changes in employment. Consequently, during an economic downturn, either regionally or nationally, the Company would expect an increased rate of delinquency and also an increase in credit losses. the Company’s stress tests related to either regional or national economic downturns, which include declining housing prices and increased unemployment, indicate that the Company has sufficient capital to absorb such an event, albeit with increases to credit losses. the total single-family residential mortgage portfolio including HeloC was $15.25 billion as of December 31, 2015, of which $3.25 billion was insured against credit losses. the Company would expect to recover any lost principal, interest and direct collection costs associated with this insured portion of the portfolio. Management monitors these risks carefully on an ongoing basis, including stress testing of the portfolio. the Company’s key mitigant against credit losses in the event of default in the uninsured portfolio is the excess of the value of the collateral over the outstanding loan amount (expressed as ltV ratio). As at December 31, 2015, the weighted-average ltV of the uninsured portfolio against the estimated current market value was 66.0% compared to 67.8% at the end of 2014. these ltVs were estimated using the teranet-national Bank national Composite House price Index. If an economic downturn involved reduced real estate values, the margin of value over loan amounts would be eroded and the extent of loan losses could increase. the distribution of ltV around the mean for each significant market is indicated below. Home Capital Group inC. AnnuAl RepoRt 2015 61 management’s Discussion and analysis table 42: weighted-average loan-to-Value ratios for uninsured residential mortgages 2015 2014 weighted- average Current ltV1 percentage of total Value of outstanding mortgages with Current ltV less than or equal to Weighted- average Current ltV1 percent of total Value of outstanding Mortgages with Current ltV less than or equal to 62.8% 65.4% 66.3% 65.6% 64.5% 66.0% 75% 91.5% 81.6% 75.0% 88.9% 87.3% 76.6% 65% 57.8% 45.6% 39.6% 43.5% 52.0% 40.9% 65.7% 64.9% 68.1% 65.1% 64.9% 67.8% 75% 84.7% 80.6% 72.3% 91.3% 85.3% 73.9% 65% 44.8% 47.7% 32.9% 45.7% 49.3% 34.6% British Columbia Alberta ontario Quebec other total 1 Weighted-average ltV is calculated by dividing the sum of the products of ltVs and loan balances by the sum of the loan balances. market risk For the Company, Market Risk consists primarily of Investment Risk and Structural Interest Rate Risk. A summary of these risks is as follows: Investment Risk Investment risk is the risk of loss due to impairment in the fair value of investments. the Company’s investment portfolio consists primarily of preferred shares at 42.0% of the portfolio, and corporate and government bonds at 55.9% of the portfolio. the total balance was $453.2 million at December 31, 2015 compared to $582.8 million at the end of 2014. the Company’s investment risk management framework includes investment policies that are approved by the Asset/liability Committee (AlCo) and the Risk and Capital Committee of the Board. 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, reviews procedures and guidelines, and provides enterprise-wide oversight of investment risk, including valuations. 62 Home Capital Group inC. AnnuAl RepoRt 2015 Structural Interest Rate Risk Structural interest rate risk is the risk of lost earnings or capital due to 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 seeks to organically match 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 that are approved by the AlCo and the Risk and Capital Committee of the Board. 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 prudent policies and guidelines, and provides independent enterprise-wide oversight of all interest rate risk. From time to time, the Company enters into derivative transactions 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 mortgages, debt and deposits, such as CMB liabilities and senior debt. Where appropriate, the Company will apply hedge accounting to minimize volatility in reported earnings from interest rate changes. All derivative contracts are over-the-counter contracts with highly-rated Canadian financial institutions. the use of derivative products has been approved by the Board; 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 the use of derivatives is not permitted for transactions that are undertaken to potentially create trading profits through speculation on interest rate movements. 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 table shows the gap positions at December 31, 2015 and December 31, 2014 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. 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 and monitors these against actual experience. Variable rate assets and liabilities are allocated to a maturity category based on their interest repricing date. Home Capital Group inC. AnnuAl RepoRt 2015 63 management’s Discussion and analysis table 43: interest rate Sensitivity (thousands of Canadian dollars, except %) Assets Cash and cash equivalents Weighted-average interest rate Available for sale securities Weighted-average interest rate loans held for sale Weighted-average interest rate Securitized mortgages Weighted-average interest rate non-securitized mortgages and loans Weighted-average interest rate other assets Weighted-average interest rate total Weighted-average interest rate Floating rate 0 to 3 months 3 to 6 months 6 to 12 months 1 to 5 years over 5 years non-interest Sensitive total as at December 31, 2015 $ 252,122 $ 897,727 $ – $ – $ – $ – $ – $ 1,149,849 1.0% 0.7% – – – – 59,469 12,136 8,468 337,791 35,307 4.1% – 4.7% – 4.4% – 2.1% – 2.4% 135,043 – 1,243,393 – 137,772 – 147,377 – 1,124,894 2.7% 21,039 2.4% 3.8% 3.8% 4.1% 2.7% – 59 – – – – – 0.8% 453,230 2.5% 135,043 2.7% 2,674,475 3.3% 3,356,721 2,196,396 6,038,115 3,715,771 123,731 (7,793) 15,422,941 – 14,645 5.1% 237,883 5.0% 4,719 4.9% 3,470 0.5% 0.5% 1.9% 2.0% 4.7% – – 6.9% – – – 415,764 4.9% 676,481 – 0.2% $ 266,767 $ 5,795,193 $ 2,351,023 $ 6,197,430 $ 5,178,456 $ 315,120 $ 408,030 $ 20,512,019 0.9% 3.6% 4.9% 4.9% 4.4% 4.3% – 4.3% $ 1,819,881 $ – $ – $ – $ – $ – $ 166,255 $ 1,986,136 1.4% 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 – – – – 1,170,250 1,992,516 4,074,166 6,442,890 1.8% – – 1.9% 151,480 5.2% 1.9% – – 2.3% – – 1,209,382 331,025 97,598 1,142,551 1.1% 5,447 – – – 2.8% – – – – 1.9% – – – – 3.2% – – – – – – – – – – – – – – – – – – – – 1.3% 13,679,822 2.1% 151,480 5.2% 2,780,556 – 287,472 2.2% 292,919 – 1,621,106 – 1,621,106 – – – – $ 2,074,833 $ 20,512,019 $ 1,819,881 $ 2,385,079 $ 2,475,021 $ 4,171,764 $ 7,585,441 $ 1.4% 1.4% 2.2% 1.9% 2.4% – – Credit commitments Weighted-average interest rate Interest rate sensitivity gap $ (1,553,114) $ 3,410,114 $ (123,998) $ 2,025,666 $ (2,406,985) $ 315,120 $ (1,666,803) $ 46,307 (1,121,096) 1,054,070 20,549 170 – – – 4.2% 6.0% 5.7% 4.2% 2.7% – $ (1,553,114) $ 2,289,018 $ (103,449) $ 2,071,973 $ (1,352,915) $ 315,290 $ (1,666,803) $ Cumulative gap $ (1,553,114) $ 735,904 $ 632,455 $ 2,704,428 $ 1,351,513 $ 1,666,803 $ – $ Cumulative gap as a percentage of total assets (7.6)% 3.6% 3.1% 13.2% 6.6% 8.1% – 64 Home Capital Group inC. AnnuAl RepoRt 2015 1.8% – – – – – – – – – – – – – – – – – – – – – – – table 43: interest rate Sensitivity (continued) (thousands of Canadian dollars, except %) Assets Cash and cash equivalents Weighted-average interest rate Available for sale securities Weighted-average interest rate loans held for sale Weighted-average interest rate Securitized mortgages Weighted-average interest rate non-securitized mortgages and loans 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 5 Years over 5 Years non-interest Sensitive total As at December 31, 2014 $ 105,750 $ 254,996 $ – $ – $ – $ – $ – $ 360,746 1.0% 1.0% – – – – 87,430 15,595 9,853 467,836 2,041 2.1% – 4.2% – 4.9% – 2.6% 1.2% 1,200 100,894 – 1,877,406 – 240,434 – 299,317 2.6% 2.9% 1,167,159 361,338 3.0% 3.9% 3.7% 3.9% 4.7% – 64 – – – – – 1.0% 582,819 2.6% 102,094 2.9% 3,945,654 3.5% 2,715,260 2,050,234 5,774,695 3,634,279 115,797 (7,203) 14,283,062 118,888 336,183 5.5% 5.0% 4,547 0.9% 1.2% 1.6% 5.0% 5.0% 9.7% – 5.1% – – – – – – 348,751 808,369 – 0.7% $ 224,638 $ 5,271,275 $ 2,310,810 $ 6,083,865 $ 5,270,474 $ 580,070 $ 341,612 $ 20,082,744 0.9% 4.0% 4.8% 4.9% 4.6% 5.4% – 4.5% $ 898,909 $ – $ – $ – $ – $ – $ 165,243 $ 1,064,152 1.5% – – – – 1,484,448 1,765,946 3,627,058 5,998,367 1.9% – – 2.1% – – 2.1% – – 2.4% 152,026 5.2% – – – – – 2,447,794 294,520 165,740 900,652 494,757 – – – – – – 1.5% 12,875,819 2.2% 152,026 5.2% 4,303,463 2.0% 2,266 3.2% – 2.6% – 2.8% – 2.8% – – 236,385 2.5% 238,651 – – – – – – – – – – – – – – – – 1,448,633 – 1,448,633 – – $ 898,909 $ 3,934,508 $ 2,060,466 $ 3,792,798 $ 7,051,045 $ 494,757 $ 1,850,261 $ 20,082,744 1.5% 1.9% 2.3% 2.1% 2.5% 3.7% – (674,271) $ 1,336,767 $ 250,344 $ 2,291,067 $ (1,780,571) $ 12,440 (842,992) 621,638 31,448 – 177,466 85,313 $ (1,508,649) $ – 5.9% 6.1% 6.2% 5.1% 2.9% – – (674,271) $ 493,775 $ 262,784 $ 2,322,515 $ (1,158,933) $ 262,779 $ (1,508,649) $ (674,271) $ (180,496) $ 82,288 $ 2,404,803 $ 1,245,870 $ 1,508,649 $ – $ (3.4)% (0.9)% 0.4% 12.0% 6.2% 7.5% – 2.1% – – – – – – Home Capital Group inC. AnnuAl RepoRt 2015 65 management’s Discussion and analysis to assist in matching assets and liabilities, the Company utilizes a variety of metrics, including 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 the 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 and oCI. table 44: 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 Impact on other comprehensive income Increase in interest rates Decrease in interest rates December 31 2015 December 31 2014 December 31 2015 December 31 2014 $ 11,052 $ 25,913 2,571 8,642 $ (9,525) $ 13,953 2,114 (29,092) (2,007) (8,642) (14,694) (2,114) As illustrated in the above table, an increase in interest rates will have a positive impact on net interest income after tax and the economic value of shareholders’ equity in the event of a 100 basis-point movement in rates without management action. A positive gap exists when interest-sensitive assets exceed interest-sensitive liabilities on 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. 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 risk policies, and a Contingency Funding plan that are approved by the AlCo and the Risk and Capital Committee of the Board. 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 risk 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 risk positions in accordance with approved policies and assesses the impact of market events on liquidity requirements on an ongoing basis. the eRM group recommends liquidity policies and guidelines, and provides independent oversight of all funding and liquidity risk. the Company’s funding and liquidity risk 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. the Company uses a liquidity horizon as its main liquidity metric. using maturity gap analysis, the Company projects a time horizon when its net cumulative cash flow 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, deposit runoff, 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. 66 Home Capital Group inC. AnnuAl RepoRt 2015 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, corporate bonds and debentures. the Company’s liquid assets are presented in the table below: table 45: liquidity resources (000s, except %) Cash and cash equivalents per balance sheet Available for sale securities per balance sheet Add: MBS included in residential mortgages less: securities held for investments liquid assets at carrying value liquid assets at fair value liquid assets at carrying value as a % of total assets 2015 $ 1,149,849 $ 453,230 682,772 2,285,851 (190,706) 2014 360,746 582,819 362,801 1,306,366 (248,069) $ 2,095,145 $ 1,058,297 $ 2,092,390 $ 1,059,821 10.2% 5.3% Change 218.7% (22.2)% 97.6% 77.6% (23.1)% 101.2% 100.6% 5.1% Certain Company-originated MBS are held as liquid assets, but are classified in residential mortgages on the balance sheet, as required by IFRS. the underlying mortgages are insured and the securities are stamped by the CMHC. on an overall basis, liquidity resources fluctuate as the Company’s future cash requirements change. the Company’s main sources of funding come from retail deposits and securitization. Retail deposits are primarily sourced through the deposit broker network and the Company relies heavily on this channel. 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 with access to a very large volume of potential deposits, which are sourced almost entirely from individual investors or small businesses. the bulk of deposits raised are CDIC- insured fixed-term GICs that are not subject to early redemption. the Company has contractual agreements with most major national investment dealers and a large number of independent brokers. the Company continues to add new investment dealers and independent brokers in order to diversify its sources of funds. the Company continues its longer-term strategy to diversify its sources of funding through its direct-to-consumer brand, oaken Financial, Home trust high-interest savings account offerings, and the issuance of institutional fixed-term deposit notes. the successful acquisition of CFF Bank in Q4 2015 presents further opportunities for future deposit funding diversification. 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 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 or lines of credit 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 on a timely basis any payments that are not collected due to arrears. 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 could result in cash flow timing mismatches that could marginally increase funding and liquidity risk. OSFI Liquidity Requirements As required by oSFI’s liquidity Adequacy Requirements (lAR), effective January 1, 2015, the Company reports its liquidity Coverage Ratio (lCR) to oSFI, which is a minimum regulatory liquidity standard adopted by oSFI. the lCR requires net cumulative cash flow requirements in a stressed environment. As well, the Company reports the oSFI-designed net Cumulative Cash Flow (nCCF), which measures detailed cash flows to capture the risk posed by funding mismatches over and up to a 12-month time horizon. the Company complies with these requirements. Home Capital Group inC. AnnuAl RepoRt 2015 67 management’s Discussion and analysis 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. 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. 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 continues to strengthen its operational risk framework, introducing enhanced risk tools and methodologies, including event data monitoring, line-of-business risk and control self-assessments, measurement and monitoring of key risk/performance indicators, a new initiatives risk assessment framework and stress testing and scenario analytics. the financial services sector, including the Company, remains exposed to cyber-crime risk. threats are increasing in scale, scope and complexity. the Company continues to enhance and strengthen its information security program. In addition to cyber-crime, the Company is continuously exposed to other various types of fraud stemming from the nature of the Company’s business. For example, the Company must often rely on information provided by customers and other third parties in its decisions to enter into transactions such as extending credit. the recent increasing pace of advancement in available technology has increased the sophistication and complexity of potential fraud crimes to which the Company is exposed. the Company continues to introduce and enhance processes to defend against more sophisticated and complex fraud. Despite the Company’s commitment to information and cyber security and fraud prevention, the Company and its third-party service providers may not be able to fully mitigate all risks associated with the increased complexity and high rate of change in the threat landscape. Furthermore, to the extent that the Company encounters events that impact its relationships with its third- party service providers, the Company may be exposed to service disruptions, regulatory action, financial loss, litigation or reputational damage. these complex relationships continue to receive increased oversight from regulators and attention from the media. As part of the Company’s ongoing reviews of its operating procedures, the Company evaluates the alignment of all of its business partners’ processes and controls with the Company’s own processes and controls, and change relationships as appropriate. As part of its process, the Company actively maintains a list of third party service providers whose use is prohibited. Key elements of the Company’s operational risk framework include: 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 operational Risk Committee and the Risk and Capital Committee of the Board. A three lines of defence 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 A risk and control self-assessment program proactively identifies the Company’s exposure to key operational risks and assesses the effectiveness of mitigating controls. Risk assessments are also performed on significant new initiatives (e.g., products, services and systems) by business and support groups 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 stress testing provide a forward-looking basis for managing exposures within and potentially 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 forms 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. 68 Home Capital Group inC. AnnuAl RepoRt 2015 Business Continuity and Crisis Management the Company has implemented an all hazards-based business continuity and crisis management strategy to minimize the impact on its 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. Compliance risk Compliance 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 eC 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 defence) are responsible for ensuring that compliance risk is mitigated, the independent oversight of compliance risk is principally managed by the CCo, CAMlo and the Corporate Compliance group as part of the Company’s Compliance Framework. Capital adequacy risk Capital adequacy is a key requirement in the safety and soundness of any financial institution. Capital is the difference between the Company’s assets and liabilities, and acts as a financial cushion to absorb unexpected losses. Capital adequacy risk is the risk that the Company does not hold sufficient capital to meet its regulatory requirements and those which the Company believes are required to manage enterprise-wide risks as a going concern, even in periods of severe but plausible stress. not maintaining sufficient capital adequacy may lead to insolvency and creditor (depositor) losses. please refer to the Capital Management section for further information. 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 or business partners, and the inability to achieve the Company’s strategic objectives. the Company aims to safeguard its public reputation through its governance, compliance and risk management processes. 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. Home Capital Group inC. AnnuAl RepoRt 2015 69 management’s Discussion and analysis 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. While the Company has well-designed and tested business continuity plans, should the Company experience significant disruptions outside its control 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. While there is no assurance that the Company will be able to continue to attract and retain key personnel, this remains a fundamental corporate priority. aCCountinG StanD arDS anD poliCieS 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, 9, 10, 14, 17, 19 and 21 to the consolidated financial statements. Future Changes in accounting Standards the new IFRS pronouncements that have been issued but are not yet effective and may have a future impact on the Company are discussed in note 3 of the consolidated financial statements. Con trolS o Ver FinanCial reportinG 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. 70 Home Capital Group inC. AnnuAl RepoRt 2015 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, 2015. 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 Certification of Disclosure in Issuers’ Annual and Interim Filings, were effective as of December 31, 2015. As permitted by national Instrument 52-109, section 5.3, the certifying officers have limited the scope of design of disclosure controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures of CFF Bank, acquired on october 1, 2015. Summary financial information about CFF Bank has been included in the Financial performance Review section of this MD&A. 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) 1992 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, 2015. 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, 2015. Changes in internal Control over Financial reporting the Company acquired CFF Bank on october 1, 2015. the scope of the design of Disclosure Controls and procedures and Internal Control over Financial Reporting excludes the controls, policies and procedures of CFF Bank. there were no other significant changes in 2015 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 2015 audited consolidated financial statements. please see note 2 for further information. non-Gaa p meaSureS anD GloSSary 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: Home Capital Group inC. AnnuAl RepoRt 2015 71 management’s Discussion and analysis adjusted revenue, adjusted net income, and adjusted earnings per Share the Company presents adjusted revenue, adjusted net income and adjusted earnings per share. the adjusted results remove items of note, net of income taxes, from reported results for items which management does not believe are indicative of future results. the items of note for 2015 are for the after-tax acquisition and integration costs, net of gain recognized on CFF Bank acquisition in Q4 2015. the 2014 item of note relates to prepayment income associated with the sale of the water heater loans portfolio in Q4 2014. Return on shareholders’ equity and efficiency ratios are also presented on an adjusted basis. reconciliation of net income to adjusted net income (000s, except % and per share amounts) net income Adjustment for acquisition and integration costs, net of gain recognized on acquisition of CFF Bank (net of tax) Adjustment for prepayment income on portfolio sale (net of tax) Adjusted net Income Adjusted Basic earnings per Share Adjusted Diluted earnings per Share allowance as a percentage of Gross loans $ $ $ $ Q4 2015 70,239 $ Q3 2015 72,443 $ Q4 2014 95,936 $ 2015 287,285 $ 2014 313,172 1,572 – – 1,572 – – 71,811 $ 1.02 $ 1.02 $ – 72,443 $ 1.03 $ 1.03 $ (24,019) 71,917 $ 1.03 $ 1.02 $ – 288,857 $ 4.12 $ 4.11 $ (24,019) 289,153 4.14 4.11 Allowance as a percentage of gross loans is calculated as the total allowance divided by the gross on-balance sheet loans outstanding, which includes all on-balance sheet loans except for loans held for sale. assets to Capital multiple (aCm) the ACM provided in this MD&A is that of the Company’s wholly owned subsidiary Home trust Company. the calculations are in accordance with guidelines issued by oSFI. the multiple reflects total regulatory assets, including specified off-balance sheet items net of other specified deductions, divided by total regulatory capital. For periods beginning on or after January 1, 2015, the ACM has been replaced by the leverage ratio (see definition below). Common equity tier 1, 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. the calculations are in accordance with guidelines issued by oSFI. Refer to note 14(e) to the consolidated financial statements included in this report. efficiency or productivity ratio and adjusted 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. In addition, the Company uses the adjusted efficiency ratio calculated using adjusted revenue. A lower ratio indicates better efficiency. leverage ratio the leverage ratio provided in this MD&A is that of the Company’s wholly owned subsidiary Home trust Company. the calculations are in accordance with guidelines issued by oSFI. the leverage ratio is defined as the Capital Measure divided by the exposure Measure, with the ratio expressed as percentage. the Capital Measure is the all-in tier 1 capital of Home trust. the exposure Measure consists of on-balance sheet, derivative, securities financing transactions and off-balance sheet exposures. the leverage ratio has replaced the ACM (defined above) and is effective for Home trust as of January 1, 2015. liquid assets liquid assets are unencumbered high-quality assets for which there is a broad and active secondary market available to the Company to sell these assets without incurring a substantial discount. liquid assets are a dependable source of cash used by the Company when it experiences short-term funding shortfalls. 72 Home Capital Group inC. AnnuAl RepoRt 2015 market Capitalization Market capitalization is calculated as the closing price of the Company’s common shares multiplied by the number of common shares of the Company outstanding. net interest margin (non-teB) net interest margin is a measure of profitability of assets. net interest margin is calculated by taking net interest income divided by the average total assets generating the interest income. net interest margin (teB) net interest margin is a measure of profitability of assets. net interest margin (teB) is calculated by taking net interest income, on a taxable equivalent basis, divided by the average total assets generating the interest income. net non-performing loans as a percentage of Gross loans (npl ratio) the npl ratio is calculated as the total net non-performing loans divided by the gross on-balance sheet loans, which includes all on- balance sheet loans except for loans held for sale. provision as a percentage of Gross loans (pCl ratio) the pCl ratio is calculated as the total individual and collective provision expense divided by the gross on-balance sheet loans outstanding, which includes all on-balance sheet loans except for loans held for sale. provision as a percentage of Gross uninsured loans the provision as a percentage of gross uninsured loans ratio is calculated as the total individual and collective provision expense divided by the gross on-balance sheet uninsured loans outstanding. return on assets (roa) 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. return on Shareholders’ equity (roe) and adjusted 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. to calculate adjusted return on shareholders’ equity, the Company uses adjusted net income. risk-weighted assets (rwa) the risk-weighted assets reported in this MD&A are those of the Company’s wholly owned subsidiary Home trust. the calculations are in accordance with guidelines issued by oSFI. Refer to note 14(e) to the consolidated financial statements included in this report. 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 $3.8 million for 2015 ($4.1 million – 2014) increased interest income as used in the calculation of net interest margin. 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. total assets under administration (aua) total assets under administration refers to all on-balance sheet assets plus all off-balance sheet loans that qualify for derecognition under IFRS. total loans under administration (lua) total loans under administration refers to all on-balance sheet loans plus all off-balance sheet loans that qualify for derecognition under IFRS. Home Capital Group inC. AnnuAl RepoRt 2015 73 management’s Discussion and analysis Glossary of 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 represent 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 qualifying 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. 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 either individually at origination or by portfolio. the Company’s insured lending includes single-family homes and multi-unit 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 regulation and supervision of 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. acronyms alCo Asset /liability Committee iaSB International Accounting Standards Board aoCi Accumulated other Comprehensive Income iFrS International Financial Reporting Standards CDiC Canada Deposit Insurance Corporation ltV loan to Value (ratio expressed as a percentage) CmB Canada Mortgage Bond mBS Mortgage-Backed Security CmHC Canada Mortgage and Housing Corporation mD&a Management’s Discussion and Analysis CoSo Committee of Sponsoring organizations of the treadway Commission CVa Credit Valuation Adjustment erm enterprise Risk Management Gaap Generally Accepted Accounting principles GiC Guaranteed Investment Certificate HeloC Home equity line of Credit 74 Home Capital Group inC. AnnuAl RepoRt 2015 nCCF net Cumulative Cash Flow nHa national Housing Authority oCi other Comprehensive Income oSFi office of the Superintendent of Financial Institutions Canada teB taxable equivalent Basis Consolidated Financial Statements Management’s Responsibility for Financial Information Independent Auditors’ Report ConSoliD ateD Fi nanCial S tatem en tS 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 tHe Co nSoliD ateD Fi na nCi a l S tat em entS 1. Corporate Information 2. Summary of Significant Accounting policies 3. Future Changes in Accounting policies 4. Cash Resources and Securities 5. loans 6. Securitization Activity 7. Restricted Assets 8. other Assets 9. Intangible Assets 10. Goodwill 11. Deposits by Remaining Contractual term to Maturity 12. Senior Debt 13. other liabilities 14. Capital 15. employee Benefits 16. Accumulated other Comprehensive Income 17. Income taxes 18. Commitments and Contingencies 19. Derivative Financial Instruments 20. Current and non-Current Assets and liabilities 21. Fair Value of Financial Instruments 22. Related party transactions 23. Business Acquisition 24. Risk Management p. 76 p. 77 p. 78 p. 79 p. 80 p. 80 p. 81 p. 82 p. 82 p. 89 p. 89 p. 91 p. 95 p. 97 p. 97 p. 98 p. 98 p. 99 p. 99 p. 99 p. 99 p. 101 p. 103 p. 104 p. 105 p. 105 p. 108 p. 108 p. 111 p. 112 p. 113 Home Capital Group inC. AnnuAl RepoRt 2015 75 management’s responsibility for Financial information the consolidated financial statements and Management’s Discussion and Analysis (MD&A) 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 subsidiaries Home trust Company and CFF Bank. the consolidated financial statements reflect amounts which must, of necessity, be based on the best estimates and judgement of management with appropriate consideration as to materiality. the financial information presented elsewhere in this report is consistent with that in the consolidated financial statements. the MD&A has been prepared according to the requirements of securities regulators. 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 systems 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 conduct and ethics, and appropriate management information systems. Management has formed a disclosure committee, chaired by the Chief Financial officer, which reviews all of the Company’s financial disclosures for fairness before release to the Board of Directors or shareholders. the internal control systems are further supported by a compliance framework, which ensures that the Company and its employees comply with all regulatory requirements, as well as by an enterprise risk management function that monitors 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. As at December 31, 2015, the Company’s Chief executive officer and Chief Financial officer, have determined that the Company’s internal control over financial reporting is effective. 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) and Bank 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 and/or the Board of Directors, 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 consolidated 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, and risk management as well as assessment of significant transactions and related party transactions through its Audit Committee, and in the case of risk management, through the Risk and Capital Committee. the Audit Committee is composed solely of independent Directors. the Audit Committee is responsible for selecting the Shareholders’ Auditors. Gerald m. Soloway Chief Executive Officer toronto, Canada February 10, 2016 robert morton, Cpa, Cma, C. Dir Chief Financial Officer 76 Home Capital Group inC. AnnuAl RepoRt 2015 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, 2015 and 2014, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, 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’ judgement, 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, 2015 and 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. toronto, Canada February 10, 2016 Chartered Professional Accountants Licensed Public Accountants Home Capital Group inC. AnnuAl RepoRt 2015 77 Consolidated Balance Sheets thousands of Canadian dollars aSSetS Cash and Cash equivalents (note 4(A)) available for Sale Securities (notes 4(B) and (C)) loans Held for Sale loans (note 5) Securitized mortgages (note 6(A)) non-securitized mortgages and loans Collective allowance for credit losses (note 5(e)) other Restricted assets (note 7) Derivative assets (note 19) other assets (note 8) Goodwill and intangible assets (notes 9 and 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 (note 6(B)) Mortgage-backed security liabilities Canada Mortgage Bond liabilities other Derivative liabilities (note 19) other liabilities (note 13) Deferred tax liabilities (note 17(C)) Shareholders’ equity Capital stock (note 14) Contributed surplus Retained earnings Accumulated other comprehensive loss (note 16) December 31 2015 $ 1,149,849 453,230 135,043 2,674,475 15,459,190 18,133,665 (36,249) 18,097,416 195,921 64,796 287,417 128,347 676,481 $ 20,512,019 $ 1,986,136 13,679,822 15,665,958 151,480 531,326 2,249,230 2,780,556 5,447 264,941 22,531 292,919 18,890,913 90,247 3,965 1,592,438 (65,544) 1,621,106 $ 20,512,019 As at December 31 2014 $ 360,746 582,819 102,094 3,945,654 14,317,162 18,262,816 (34,100) 18,228,716 421,083 38,534 235,616 113,136 808,369 $ 20,082,744 $ 1,064,152 12,875,819 13,939,971 152,026 471,551 3,831,912 4,303,463 2,266 199,831 36,554 238,651 18,634,111 84,687 3,989 1,378,562 (18,605) 1,448,633 $ 20,082,744 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 78 Home Capital Group inC. AnnuAl RepoRt 2015 Consolidated Statements of income thousands of Canadian dollars, except per share amounts net interest income non-Securitized assets Interest from loans (note 5(F)) Dividends from securities other interest Interest on deposits and other Interest on senior debt net interest income non-securitized assets net interest income Securitized loans and assets Interest income from securitized loans and assets (note 5(F)) 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(C)) prepayment income on portfolio sale (note 5(H)) Gain on acquisition of CFF Bank (note 23) net realized and unrealized gains on securities net realized and unrealized loss on derivatives (note 19) non-interest expenses Salaries and benefits premises other operating expenses income Before income taxes Income taxes (note 17(A)) Current Deferred net inCome net inCome per Common SHare (note 14(D)) Basic Diluted aVeraGe numBer oF Common SHareS outStanDinG (note 14(D)) 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 2015 For the year ended December 31 2014 $ $ $ $ $ 769,562 10,620 7,951 788,133 318,597 6,396 463,140 103,841 85,891 17,950 481,090 8,933 472,157 82,632 26,208 – 2,056 836 (7,939) 103,793 575,950 88,873 12,274 89,526 190,673 385,277 98,481 (489) 97,992 287,285 4.09 4.09 70,170 70,323 69,978 23.17 $ $ $ $ $ 717,798 11,426 13,912 743,136 311,494 6,392 425,250 166,491 132,212 34,279 459,529 13,134 446,395 71,241 26,845 32,675 – 3,425 (827) 133,359 579,754 80,769 11,866 69,617 162,252 417,502 102,201 2,129 104,330 313,172 4.48 4.45 69,857 70,432 70,096 20.67 Home Capital Group inC. AnnuAl RepoRt 2015 79 Consolidated Statements of Comprehensive income thousands of Canadian dollars net inCome otHer CompreHenSiVe inCome (loSS) available for Sale Securities and retained interests net unrealized (losses) gains net gains reclassified to net income Income tax recovery Cash Flow Hedges (note 19) net unrealized losses net losses reclassified to net income Income tax (recovery) expense total other comprehensive loss CompreHenSiVe inCome December 31 2015 287,285 $ (61,991) (917) (62,908) (16,684) (46,224) (2,449) 1,474 (975) (260) (715) (46,939) 240,346 $ For the year ended December 31 2014 313,172 $ 2,854 (3,425) (571) (152) (419) (1,061) 1,461 400 107 293 (126) 313,046 $ the accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Shareholders’ equity thousands of Canadian dollars, except per share amounts Capital Stock Contributed Surplus retained earnings net unrealized losses on Securities and retained interests available for Sale, after tax net unrealized losses on Cash Flow Hedges, after tax total accumulated other Comprehensive loss total Shareholders’ equity Balance at December 31, 2014 Comprehensive income Stock options settled (notes 14(B), 15(C)) Amortization of fair value of employee stock options Repurchase of shares (note 14(C)) Dividends ($0.88 per share) Balance at December 31, 2015 Balance at December 31, 2013 Comprehensive income Stock options settled (notes 14(B), 15(C)) Amortization of fair value of employee stock options Repurchase of shares (note 14(C)) Dividends ($0.70 per share) Balance at December 31, 2014 $ 84,687 $ 3,989 $ 1,378,562 $ (16,242) $ – – 287,285 (46,224) (2,363) $ (18,605) $ 1,448,633 240,346 (46,939) (715) 6,002 (1,605) – – (442) – 1,581 – – – (10,270) (63,139) – – – – $ 90,247 $ $ 70,233 $ 3,965 $ 1,592,438 $ (62,466) $ 5,984 $ 1,119,959 $ (15,823) $ – – 313,172 (419) 14,488 (3,895) – – (34) – 1,900 – – – (1,356) (53,213) – – – – $ 84,687 $ 3,989 $ 1,378,562 $ (16,242) $ – – 4,397 – – – – – – 1,581 (10,712) (63,139) (3,078) $ (65,544) $ 1,621,106 (2,656) $ (18,479) $ 1,177,697 313,046 (126) 293 – – 10,593 – – – 1,900 (1,390) (53,213) (2,363) $ (18,605) $ 1,448,633 – – – the accompanying notes are an integral part of these consolidated financial statements. 80 Home Capital Group inC. AnnuAl RepoRt 2015 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: Amortization of net (discount) premium on securities provision for credit losses prepayment income on portfolio sale Gain on acquisition of CFF Bank Gain on sale of mortgages or residual interest net realized and unrealized gains on securities Amortization of capital and intangible assets Amortization of fair value of employee stock options Deferred income taxes Changes in operating assets and liabilities loans, net of securitization and sales Restricted assets Derivative assets and liabilities Accrued interest receivable Accrued interest payable Deposits Securitization liabilities taxes receivable or payable and other Cash flows provided by (used in) operating activities CaSH FlowS From FinanCinG aCtiVitieS Repurchase of shares exercise of employee stock options Dividends paid to shareholders Cash flows used in financing activities CaSH FlowS From inVeStinG aCtiVitieS Activity in securities purchases proceeds from sales proceeds from maturities Acquisition of CFF Bank, net of cash acquired purchases of capital assets Capitalized intangible development costs Cash flows provided by (used in) investing activities net increase (decrease) in cash and cash equivalents during the year Cash and cash equivalents at beginning of the year Cash and Cash equivalents 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 2015 For the year ended December 31 2014 $ 287,285 $ 313,172 (169) 8,933 – (2,056) (21,412) (836) 12,922 1,581 (489) 205,412 229,833 (24,075) 1,319 4,399 1,524,232 (1,542,653) 20,358 704,584 (10,712) 4,397 (61,763) (68,078) (35,020) 76,924 25,350 115,892 (5,302) (25,247) 152,597 789,103 360,746 $ 1,149,849 $ 11,656 881,749 406,485 128,763 1,001 13,134 (32,675) – (23,712) (3,425) 10,387 1,900 2,129 (299,376) 227,200 (9,791) (1,951) 60 1,174,017 (1,469,601) (41,867) (139,398) (1,390) 10,593 (48,922) (39,719) (542,558) 206,020 178,772 – (3,080) (32,463) (193,309) (372,426) 733,172 360,746 9,750 895,851 450,038 81,320 $ $ Home Capital Group inC. AnnuAl RepoRt 2015 81 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) note 1 Corporate inForm ation 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 residential and non-residential mortgage lending, securitization of insured residential first mortgage products, consumer lending and credit card products. Home trust also offers deposits via brokers and financial planners, and through its direct to consumer deposit brand, oaken Financial. In addition, on october 1, 2015, Home trust acquired CFF Bank, which is a federally regulated retail bank offering mortgage, deposit and personal banking products, as a wholly-owned subsidiary. 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, 2015 were authorized for issuance by the Board of Directors (the Board) of the Company on February 10, 2016. 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 of Directors declared a quarterly cash dividend of $16.8 million or $0.24 per common share payable on March 1, 2016 to shareholders of record at the close of business on February 23, 2016. not e 2 Summary oF SiGniFiCant aCCountinG p ol iCieS 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. Comparative Consolidated Financial Statements the comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2015 consolidated financial statements. 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. Certain securitized 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). In other cases, when residual interests in securitized transactions are sold, the underlying securitized loans are derecognized based on management’s judgement that substantially all the risks and rewards of ownership have been transferred through the two transactions. the remaining loans and other assets that have been securitized 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. the preparation of consolidated financial statements in accordance with GAAp 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 dates and the reported amounts of revenue and expenses during the reporting periods. 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 power over the entity, has exposure or rights to variable returns from its involvement and has the ability to use its power over the entity to affect returns. the subsidiaries included in the consolidated financial statements are Home trust, CFF Bank and pSiGate. Home trust and pSiGate are wholly owned subsidiaries of Home Capital Group. CFF Bank is a wholly owned subsidiary of Home trust. 82 Home Capital Group inC. AnnuAl RepoRt 2015 Cash and Cash equivalents 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, which approximates fair value due to the short-term nature of the instruments. Interest income is recognized using the effective interest rate method and, to the extent not received at year-end, is 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, nor does the Company have any securities classified 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 where market value is readily available, as at the consolidated balance sheet dates. 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, indication that the issuer will enter bankruptcy or the lack of an active market for a 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 statements of income. loans Held for Securitization and Sale When identifiable, loans which the Company has the intention of securitizing and derecognizing from the consolidated balance sheets 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 as securitized income in non-interest income on the consolidated statements of income. 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 2015 83 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, an uninsured mortgage, consumer retail loan, equityline Visa loan or line of credit 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. Single-family and multi-unit residential mortgages (including securitized mortgages) guaranteed by the Government of Canada are not considered impaired until payment is contractually 365 days past due. Material credit losses are generally not anticipated on insured mortgages. 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. line of credit balances that have a payment that is contractually 90 days in arrears are individually provided for, and those that have a payment that is 180 days in arrears are written off. 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 of 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 total 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 allowances are provided for arrears over 120 days. line of credit receivables are provided for arrears over 90 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 takes into account asset quality, borrower creditworthiness, property location, past loss experience, current and forecasted probability of default and exposure at default based on product, risk ratings, credit scores, current economic conditions, 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 provision for credit losses that is charged to the consolidated statements of income is the amount required to establish a balance in the allowance for credit losses account that the Company’s management considers adequate to absorb all credit-related losses in its portfolio of balance sheet items after charging amounts written off during the year, net of any recoveries, to the allowance for credit losses account. Securitized loans and Securitization liabilities the Company periodically securitizes mortgages and sells the securities to investors or Canada Mortgage and Housing Corporation (CMHC)- sponsored entities. Mortgage loan securitization is part of the Company’s funding and liquidity strategy. In the absence of sales of retained interests (see below), 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. 84 Home Capital Group inC. AnnuAl RepoRt 2015 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, although it has not transferred substantially all of its risks and rewards in the underlying loans and it has retained control, as defined by IAS 39. Such mortgages are securitized and sold and the Company has residual interest 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 sheets. Gains or losses on these transactions are recognized as securitization income in non-interest income on the consolidated statements of income 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 statements of income and are dependent in part on the previous carrying amount of the financial assets involved in the transfer. restricted assets Restricted assets include cash or cash equivalents and securities that are contractually restricted, such as collateral associated with derivative transactions and participation in securitization programs. Restricted assets also include cash, non-Home trust mortgage-backed securities (MBS) or treasury bills pledged as Canada Mortgage Bond (CMB) replacement assets. the accounting treatment for cash and securities is described above. 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 accordance with 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 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 assets or liabilities (the hedged items) attributable to interest rate risk. Changes in fair value of the hedged items are recorded as part of the carrying value of the hedged items and are recognized in “net realized and unrealized gain (loss) on derivatives”. Changes in fair value of the hedging item (interest rate swap) are also recognized in “net realized and unrealized gain or loss on derivatives”. 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 fair value adjustment on the hedged item is then amortized over the remaining term of the hedged item. If the hedged item is settled, the unamortized fair value adjustment is recognized in income immediately. Home Capital Group inC. AnnuAl RepoRt 2015 85 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 liabilities. 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 liabilities is no longer expected to occur, the related cumulative gain or 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 purchased 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. intangible assets (internally developed software costs) the Company’s intangible assets comprise internally developed software costs. 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. In addition, the Company capitalizes borrowing costs directly attributable to the intangible assets flowing to the Company by applying a capitalization rate to the expenditures on the intangible assets. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. 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, with the exception of the core banking system which has a useful life of 15 years. the amortization period and the amortization method are reviewed at least at each financial year end. Changes in the expected useful lives 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 statements of income. the Company capitalizes eligible development costs related to software projects. eligible costs include external direct costs for materials and services, as well as payroll and payroll-related costs for employees directly associated with development. the Company commences amortization of these costs over the appropriate useful life when development of the asset is substantially complete and the asset becomes available for use in the manner intended by management. 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 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. 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. 86 Home Capital Group inC. AnnuAl RepoRt 2015 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 of disposal 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. 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 of disposal 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 amortized 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 that increases or decreases 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 consolidated 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. Fair Value Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is measured using the principal market or most advantageous market that is accessible to the Company for the asset or liability. Valuation techniques used to determine fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs. If the asset or liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure the fair value. please see note 21 for more information on the specific valuation techniques used to determine fair value and the related inputs for each class of assets or liabilities where fair value is disclosed. Inputs for valuation techniques used to measure fair value are categorized into three levels. level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. level 3 inputs are unobservable inputs for the asset or liability. please see note 21 for more information. When inputs used to measure the fair value of an asset or liability are categorized within different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Fee income Fee income is accrued and recognized as income as the associated services are rendered. Home Capital Group inC. AnnuAl RepoRt 2015 87 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 15. 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. each reporting period, the obligations are 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. the Company grants restricted share units (RSus) to certain key members of management. RSus are settled in cash equivalents of common shares. RSus earn dividend equivalents in the form of additional RSus at the same rate as dividends on common shares. Changes in the obligation resulting from changes in the market price of common shares are recognized in the consolidated statements of income as compensation expense, proportionally to the amount of the reward recognized. the Company grants performance share units (pSus) to certain key members of management. pSus are settled in cash equivalents of common shares. pSus earn dividend equivalents in the form of additional pSus at the same rate as dividends on common shares. Changes in the obligation resulting from changes in the market price of common shares are multiplied by a performance factor ranging from 0% to 200% and are recognized in the consolidated statements of income as compensation expense, proportionally to the amount of the reward recognized. employee Benefit plans under both the employee Share purchase plan and the employee Retirement Savings plan, the Company’s contribution is expensed when paid. please see note 15 for more information. earnings per Share Both basic and diluted earnings per share (epS) are presented for the Company’s common shares. Basic income per common share is determined as net income for the year divided by the average number of common shares outstanding for the year. Diluted income per common share is determined as net income for the year divided by the average number of common shares outstanding plus the stock options potentially exercisable for the year, as determined under the treasury stock method. the treasury stock method determines the net number of incremental common shares that could be purchased with the assumption that all in-the-money stock options are exercised and the proceeds are used to purchase common shares at the average market price during the year. acquisitions the consideration transferred related to an acquisition is measured at the fair value of the consideration transferred, which would include the fair value of any contingent consideration. Direct transaction costs of acquisition are recognized as an expense in the period in which they are incurred. Identifiable assets and liabilities acquired are measured at their fair value and recognized on the Company’s balance sheet. Goodwill is measured as the excess of the consideration transferred over the net of the fair value amounts of identifiable assets acquired and liabilities assumed. to the extent the net fair value of the purchased assets and assumed liabilities exceeds the consideration transferred, the excess is recognized as a gain on acquisition in the consolidated statements of income. the results of operations of acquired businesses are included in the Company’s consolidated financial statements beginning on the date of acquisition. 88 Home Capital Group inC. AnnuAl RepoRt 2015 note 3 Future CHanGeS in aCCo un tinG p ol iCieS the following accounting pronouncements issued by the IASB were not effective as at December 31, 2015 and therefore have not been applied in preparing these consolidated financial statements. iFrS 9 Financial Instruments the Company will be required to adopt IFRS 9, Financial Instruments (IFRS 9), including classification and measurement, impairment and hedge accounting for annual periods beginning on or after January 1, 2018. Management is currently evaluating the potential impact that the adoption of IFRS 9 will have on the Company’s consolidated financial statements. iFrS 15 Revenue from Contracts with Customers the Company will be required to adopt IFRS 15, Revenue from Contracts with Customers (IFRS 15), which provides a single-principle based framework that applies to contracts with customers, for annual periods beginning on or after January 1, 2018. Management is currently evaluating the potential impact that the adoption of IFRS 15 will have on the Company’s consolidated financial statements. iFrS 16 Leases the Company will be required to adopt IFRS 16, Leases (IFRS 16), which will require companies to report all leases on its balance sheet as assets and liabilities for annual periods beginning on or after January 1, 2019. Management is currently evaluating the potential impact that the adoption of IFRS 16 will have on the Company’s consolidated financial statements. amendments to iaS 1 Presentation of Financial Statements the Company will be required to adopt amendments to IAS 1, Presentation of Financial Statements, which includes amendments to further encourage companies to apply professional judgement in determining what information to disclose in their financial statements, for annual periods beginning on or after January 1, 2016. Management has concluded that the amendments to IAS 1 will have no impact on the Company’s consolidated financial statements. amendments to iFrS 7 Financial Instruments: Disclosures the Company will be required to adopt amendments to IFRS 7, Financial Instruments: Disclosures, requiring increased disclosure regarding derecognition of financial assets and continuing involvement accounting, for annual periods beginning on or after January 1, 2016. Management has concluded that the amendments to IFRS 7 will have no impact on the Company’s consolidated financial statements. note 4 CaS H reSourCeS anD SeCur i ti eS (a) Cash resources thousands of Canadian dollars Cash and Cash equivalents Deposits with regulated financial institutions Cash resources unrestricted to Company use December 31 2015 December 31 2014 $ 1,149,849 $ $ 1,149,849 $ 360,746 360,746 the Company has a revolving term credit facility with a Canadian chartered bank in the amount of $50 million, which is available to the Company subject to meeting certain financial ratio requirements. As at December 31, 2015, all ratio requirements have been met and no amounts have been drawn against the borrowing facility. In addition, the Company has an uncommitted credit facility with a Canadian chartered bank in the amount of $20 million, which is undrawn. the Company also has two insured mortgage purchase facilities, one committed and one uncommitted, with a Canadian chartered bank in the amounts of $300 million and $200 million, respectively at December 31, 2015 ($300 million and $nil, respectively at December 31, 2014). Both facilities are used by the Company to fund insured mortgage loans until such time as they can be securitized. proceeds from securitized loans are used to pay down the facility. As at December 31, 2015, these facilities are undrawn. Home Capital Group inC. AnnuAl RepoRt 2015 89 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) (B) available for Sale Securities at Fair Value by type and remaining term to maturity and rate reset Date thousands of Canadian dollars Debt securities equity securities 1 to 3 years 3 to 5 years over 5 years December 31 2015 total Fair Value 84,220 $ 68,977 153,282 $ 31,312 153,197 $ 184,594 $ 25,022 $ 10,285 35,307 $ 262,524 $ 190,706 453,230 $ December 31 2014 total Fair Value 334,750 248,069 582,819 within 1 year $ – $ 80,132 80,132 $ $ (C) available for Sale Securities – net unrealized Gains and losses thousands of Canadian dollars, except % Debt securities equity securities thousands of Canadian dollars, except % Debt securities equity securities as at December 31, 2015 Gross unrealized Gains 565 $ 481 1,046 $ Gross unrealized losses (1,197) $ (86,232) (87,429) $ total Fair Value 262,524 190,706 453,230 Cost 263,156 $ 276,457 539,613 $ weighted- average yield 1.3% 4.1% As at December 31, 2014 Gross unrealized Gains 1,521 $ 565 2,086 $ Gross unrealized losses (256) $ (24,876) (25,132) $ total Fair Value 334,750 248,069 582,819 Cost 333,485 $ 272,380 605,865 $ Weighted- average Yield 1.8% 3.8% $ $ $ $ net unrealized gains and losses (excluding impairment losses which are transferred to net income) are included in accumulated other comprehensive income and presented in the table above. these unrealized gains and losses are not included in net income. please see note 16 for more information. the unrealized gains or losses included above represent the 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. As of December 31, 2015, the Company assessed its securities portfolio for evidence of impairment and has not identified any credit events in relation to its preferred share holdings. For the year ended December 31, 2015, the Company recognized $0.9 million (2014 – $0.1 million) of impairment losses on available for sale securities. 90 Home Capital Group inC. AnnuAl RepoRt 2015 note 5 loanS (a) loans by Geographic region and type (net of individual allowances for credit losses) thousands of Canadian dollars, except % Securitized single-family residential mortgages Securitized multi-unit residential mortgages total securitized mortgages Single-family residential mortgages Residential commercial mortgages1 non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total non-securitized mortgages and loans2 British Columbia alberta ontario Quebec other total as at December 31, 2015 $ 125,239 $ 114,807 $ 1,559,536 $ 81,262 $ 67,266 $ 1,948,110 94,676 219,915 706,555 21,128 25,157 9,598 783 46,848 161,655 525,984 14,215 59,861 22,709 11,090 372,141 1,931,677 11,060,894 216,407 1,358,295 330,188 284,231 51,309 132,571 419,075 27,265 14,505 1,489 – 161,391 228,657 266,910 42,427 32,830 6,841 753 726,365 2,674,475 12,979,418 321,442 1,490,648 370,825 296,857 763,221 983,136 $ 633,859 795,514 $ 15,181,692 $ 13,250,015 462,334 594,905 $ 349,761 15,459,190 578,418 $ 18,133,665 $ As a % of portfolio 5.4% 4.4% 83.7% 3.3% 3.2% 100.0% thousands of Canadian dollars, except % Securitized single-family residential mortgages Securitized multi-unit residential mortgages total securitized mortgages Single-family residential mortgages Residential commercial mortgages1 non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total non-securitized mortgages and loans2 British Columbia Alberta ontario Quebec other total As at December 31, 2014 $ 218,927 $ 182,797 $ 2,376,966 $ 127,999 $ 83,430 $ 2,990,119 133,838 352,765 661,661 7,972 9,956 5,829 826 72,615 255,412 445,390 36,869 45,263 16,505 2,204 480,693 2,857,659 10,737,812 147,697 1,001,141 302,699 182,576 79,128 207,127 392,998 22,645 10,422 1,477 – 189,261 272,691 212,667 28,135 40,096 3,817 505 955,535 3,945,654 12,450,528 243,318 1,106,878 330,327 186,111 686,244 546,231 12,371,925 427,542 285,220 14,317,162 $ 1,039,009 $ 801,643 $ 15,229,584 $ 634,669 $ 557,911 $ 18,262,816 As a % of portfolio 5.7% 4.4% 83.4% 3.5% 3.0% 100.0% 1 Residential commercial mortgages include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential property types. 2 loans exclude mortgages held for sale. Home Capital Group inC. AnnuAl RepoRt 2015 91 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, an uninsured residential or commercial mortgage, or retail loan, or equityline Visa loan (included in credit card loans) 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. Single-family and multi-unit residential mortgages (including securitized mortgages) guaranteed by the Government of Canada are not considered impaired until payment is contractually 365 days past due. Cash 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. lines of credit that have a payment that is contractually 90 days in arrears are individually provided for, and those that have a payment that is contractually 180 days in arrears are written off. thousands of Canadian dollars Securitized single-family residential mortgages Securitized multi-unit residential mortgages Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans thousands of Canadian dollars Securitized single-family residential mortgages Securitized multi-unit residential mortgages Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans as at December 31, 2015 61 to 90 Days over 90 Days 336 $ – 3,969 – 286 814 65 5,470 $ 3461 $ – 5,6461 – – 49 – 6,041 $ total 7,133 – 235,962 4,000 18,445 3,998 211 269,749 As at December 31, 2014 61 to 90 Days 375 $ – 3,842 – – 502 46 4,765 $ over 90 Days 2,0871 $ – 9,2221 – – 24 – 11,333 $ total 23,189 – 278,085 910 12,344 5,080 206 319,814 31 to 60 Days 672 $ – 43,350 4,000 5,379 889 42 54,332 $ 31 to 60 Days 1,645 $ – 44,959 – 3,304 1,067 41 51,016 $ 1 to 30 Days $ 5,779 $ – 182,997 – 12,780 2,246 104 203,906 $ $ $ 1 to 30 Days $ 19,082 $ – 220,062 910 9,040 3,487 119 252,700 $ 1 Insured residential mortgages are considered impaired when they are 365 days past due. (C) impaired loans and individual allowances for Credit losses 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 insured, credit losses are generally not anticipated. as at December 31, 2015 thousands of Canadian dollars Single-family residential mortgages residential Commercial mortgages non-residential Commercial mortgages Credit Card loans and lines of Credit other Consumer retail loans Gross amount of impaired loans Individual allowances on principal net amount of impaired loans $ $ 49,285 $ (1,652) 47,633 $ – $ – – $ 2,558 $ (340) 2,218 $ 1,518 $ (329) 1,189 $ 161 $ (161) – $ total 53,522 (2,482) 51,040 thousands of Canadian dollars Single-family Residential Mortgages Residential Commercial Mortgages non-residential Commercial Mortgages Credit Card loans and lines of Credit other Consumer Retail loans Gross amount of impaired loans Individual allowances on principal net amount of impaired loans $ $ 52,551 $ (1,808) 50,743 $ 54 $ – 54 $ 2,516 $ (55) 2,461 $ 1,938 $ (80) 1,858 $ 160 $ (160) – $ total 57,219 (2,103) 55,116 Included in the gross amount of impaired loans are foreclosed loans with an estimated realizable value of $2.4 million (2014 – $1.8 million). As at December 31, 2014 92 Home Capital Group inC. AnnuAl RepoRt 2015 (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. At December 31, 2015, the total appraised value of the collateral held for mortgages past due that are not impaired, as determined when the mortgages were originated, was $458.3 million (2014 – $490.1 million). For impaired mortgages, the total appraised value of collateral at December 31, 2015 was $74.5 million (2014 – $81.2 million). (e) allowance for Credit losses thousands of Canadian dollars Single-family residential mortgages residential Commercial mortgages non-residential Commercial mortgages Credit Card loans and lines of Credit other Consumer retail loans 2015 total Individual allowances Allowance on loan principal Balance at the beginning of the year $ Allowance assumed on purchase of CFF Bank 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 Allowance assumed on purchase of CFF Bank provision for credit losses total allowance total provision 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 1,808 $ – $ 55 $ 80 $ 160 $ 2,103 – 5,136 (6,357) 1,065 1,652 560 279 839 2,491 – 4 (9) 5 – – – – – – 720 (486) 51 340 57 – 57 397 420 798 (1,005) 36 329 – – – 329 20,632 327 9,300 3,541 – 169 (442) 274 161 3 2 5 166 300 – 1,600 22,232 24,723 $ 7,015 $ $ $ – – 327 327 $ – 200 9,500 9,897 $ 324 25 3,890 4,219 $ 4 $ 920 $ 823 $ – – 300 466 $ 171 $ 420 6,827 (8,299) 1,431 2,482 620 281 901 3,383 34,100 324 1,825 36,249 39,632 8,933 2014 total 201 $ 571 (752) 60 80 236 $ 196 (488) 216 160 1,638 10,754 (11,203) 914 2,103 1,201 $ 9,706 (9,645) 546 1,808 759 (199) 560 2,368 – $ – $ 24 (24) – – 25 (25) – – 257 (294) 92 55 44 13 57 112 – – – 80 18,032 2,600 20,632 23,000 $ 12,107 $ $ $ 327 – 327 327 $ (1) $ 9,300 – 9,300 9,412 $ 270 $ 3,541 – 3,541 3,621 $ 571 $ 12 (9) 3 163 300 – 300 463 $ 187 $ 840 (220) 620 2,723 31,500 2,600 34,100 36,823 13,134 thousands of Canadian dollars Single-family Residential Mortgages Residential Commercial Mortgages non-residential Commercial Mortgages Credit Card loans and lines of Credit other Consumer Retail loans there were no specific provisions, allowances or net write-offs on securitized residential mortgages. Home Capital Group inC. AnnuAl RepoRt 2015 93 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) (F) interest income by product thousands of Canadian dollars traditional single-family residential mortgages Accelerator single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans total interest income on non-securitized loans Securitized single-family residential mortgages Securitized multi-unit residential mortgages Assets pledged as collateral for securitization total interest income on securitized loans (G) loans by remaining Contractual term to maturity 2015 588,854 $ 28,777 17,053 80,032 31,427 23,419 769,562 62,891 36,625 4,325 103,841 873,403 $ 2014 552,112 26,746 14,355 64,852 28,529 31,204 717,798 105,393 54,634 6,464 166,491 884,289 $ $ December 31 2015 December 31 2014 total Book Value total Book Value thousands of Canadian dollars Securitized single-family residential mortgages Securitized multi-unit residential mortgages Single-family residential mortgages Residential commercial mortgages non-residential commercial mortgages Credit card loans and lines of credit other consumer retail loans Collective allowance for credit losses (H) Sale of loan portfolio within 1 year 1 to 3 years 3 to 5 years over 5 years $ 684,837 $ 552,455 $ 710,818 $ – $ 1,948,110 $ 2,990,119 66,594 9,475,219 230,274 250,332 2,253,665 81,309 388,434 1,190,595 7,255 21,005 59,939 2,604 726,365 12,979,418 321,442 955,535 12,450,528 243,318 833,909 370,825 18,186 616,109 – 48,572 $ 11,679,844 $ 3,802,442 $ 2,484,929 $ 40,630 – 147,197 – 1,106,878 1,490,648 – 330,327 370,825 82,902 186,111 296,857 166,450 $ 18,133,665 $18,262,816 (34,100) $ 18,097,416 $ 18,228,716 (36,249) During the fourth quarter of 2014, the Company recognized $32.7 million of prepayment income in relation to the sale of $234.9 million of water heater loans and leases and other loans, as a result of the sale of a customer’s business. this was a non-recurring transaction. 94 Home Capital Group inC. AnnuAl RepoRt 2015 note 6 SeCuritiZation aCtiVity (a) assets pledged as Collateral As a requirement of the national Housing Authority Mortgage-Backed Securities (nHA MBS) and Canada Mortgage Bond (CMB) programs, the Company assigns to Canada Mortgage Housing Corporation (CMHC) all of its interest in securitized mortgage pools. If the Company fails to make timely payment under an nHA MBS or CMB security, CMHC may enforce the assignment of the mortgages included in all the mortgage pools as well as other assets backing the MBS issued. the following table presents the activity associated with the principal value of the Company’s on-balance sheet mortgage loans and other assets assigned as collateral. the mortgages are recorded as securitized single-family or multi-unit residential mortgages and assets assigned as CMB replacement assets are recorded as restricted assets. thousands of Canadian dollars Beginning balance on-balance sheet assets assigned as collateral for securitization1 Mortgages pledged in securitization acquired on purchase of CFF Bank Mortgages assigned in new securitizations Change in assets assigned as replacements of repaid amounts to Canada Housing trust net reduction of non-Home trust MBS and treasury bills Mortgages derecognized2 Maturity and amortization of securitization assets ending balance on-balance sheet assets assigned as collateral for securitization1 2015 2014 $ 4,247,644 $ 5,740,171 – 2,553,211 765,024 (228,159) (2,529,426) (2,053,177) $ 2,731,350 $ 4,247,644 19,805 2,386,624 55,502 (245,115) (1,897,888) (1,835,222) 1 Included in the on-balance sheet assets assigned as collateral at December 31, 2015 is $56.9 million ($302.0 million – December 31, 2014) in non-Home trust MBS and treasury bills and $2.67 billion ($3.95 billion – December 31, 2014) of securitized mortgages. 2 Mortgages are derecognized upon the sale of residual interest in insured single-family residential mortgages and the securitization and sale of multi-unit residential mortgages. non-Home trust MBS and treasury bills assigned as collateral are accounted for as available for sale assets and included in restricted assets on the consolidated balance sheets. Additionally, all off-balance sheet mortgage loans ($6.79 billion – December 31, 2015 and $4.20 billion – December 31, 2014) are assigned as collateral related to CMHC for sponsored securitization programs. please see note 7 for more information. (B) Securitization liabilities the following table presents the securitization liabilities, including liabilities added during the year, which are secured by insured mortgages and other restricted assets. this table includes only on-balance sheet originations and discharges. thousands of Canadian dollars Balance at the beginning of the year Securitization liabilities assumed on purchase of CFF Bank Addition to securitization liabilities as a result of on-balance sheet activity net reduction in securitization liabilities due to maturities, amortization and sales other1 Securitization liability proceeds received for mortgages assigned in new securitizations 1 other includes premiums, discounts, transaction costs and changes in the mark to market of hedged items. the following table provides the remaining contractual term to maturity of MBS and CMB liabilities. 2015 2014 $ 4,303,463 $ 5,773,064 – 144,354 (1,616,801) 2,846 $ 2,780,556 $ 4,303,463 $ 2,374,209 $ 2,551,698 19,746 484,112 (2,033,078) 6,313 December 31 2015 December 31 2014 thousands of Canadian dollars, except % Mortgage-backed security liabilities Contractual yield Canada Mortgage Bond liabilities Contractual yield within 1 year $ 1 to 3 years 3 to 5 years over 5 years 1,660 $ 1.0% 317,115 $ 212,551 $ 2.1% 1.3% – $ – total Book Value 531,326 $ total Book Value 471,551 1.7% 2.0% $ 1,104,177 $ 397,823 $ 639,649 $ 107,581 $ 2,249,230 $ 3,831,912 1.7% 2.9% 3.1% 0.9% 2.3% 2.5% $ 1,105,837 $ 714,938 $ 852,200 $ 107,581 $ 2,780,556 $ 4,303,463 Home Capital Group inC. AnnuAl RepoRt 2015 95 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) (C) Securitization income the following table presents the total securitization income for the period. thousands of Canadian dollars net gain on sale of mortgages and residual interest1 net change in unrealized gain or loss on hedging activities Servicing income total securitization income 1 Gain on sale of mortgages and residual interest are net of hedging impact. 2015 21,412 $ (313) 5,109 26,208 $ 2014 23,712 (177) 3,310 26,845 $ $ the hedging activities included in the previous table hedge interest rate risk on loans held for sale. the derivatives, which are typically bond forwards, are not designated in hedge accounting relationships. the gains or losses on the derivatives are mostly offset by the fair value changes related to the loans held for sale, which are classified as held for trading for accounting purposes. During the year, the Company securitized and sold through the nHA MBS program certain insured multi-unit residential mortgages with no prepayment privileges. these mortgages are recognized on the Company’s consolidated balance sheets 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 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. the Company also sold residual interests in certain pools of insured single-family mortgages securitized through the nHA MBS program. the sales resulted in the Company transferring substantially all of the risks and rewards of ownership associated with the underlying mortgages and the mortgages are derecognized. As a result, the mortgages are derecognized and a gain on sale is recognized. the gains on both of the above transaction types are included in non-interest income under securitization income in the consolidated statements of income. the following table provides additional quantitative information about these securitization and sales activities during the year. thousands of Canadian dollars Carrying value of underlying mortgages derecognized net gains on sale of mortgages or residual interest1 Retained interests recorded Servicing liability recorded 2015 Single-family residential mBS multi-unit residential mBS Single-family Residential MBS Multi-unit Residential MBS total mBS 2014 total MBS $ 1,184,253 $ 713,635 $ 1,897,888 $ 1,745,454 $ 783,972 $ 2,529,426 15,499 – – 5,913 33,228 6,229 21,412 33,228 6,229 18,685 – – 5,027 32,090 6,781 23,712 32,090 6,781 1 Gains on sale of mortgages or residual interest are net of hedging impact. (D) purchased residual interests In 2014, the Company purchased from certain counterparties, residual interests of underlying insured fixed-rate residential mortgages that have been securitized. the purchase results in the Company acquiring only the residual interests without acquiring either the underlying mortgages or the corresponding liabilities. At December 31, 2015, the notional amount of these instruments was $520.6 million, with $9.3 million related to the purchased residual interests recorded in available for sale securities (December 31, 2014 – notional amount of $602.6 million, with $14.1 million related to the purchased residual interests recorded in available for sale securities). no residual interests were purchased prior or subsequent to 2014. Interest earned on these investments is recorded in other interest income on the consolidated statements of income. 96 Home Capital Group inC. AnnuAl RepoRt 2015 note 7 reStriCteD aS SetS thousands of Canadian dollars Restricted cash Restricted cash – CMB and MBS programs Restricted cash – derivatives Restricted cash – other programs total restricted cash non-Home trust MBS and treasury bills assigned as replacement assets total restricted assets December 31 2015 December 31 2014 $ 110,448 $ 14,172 14,426 139,046 56,875 $ 195,921 $ 106,624 12,265 204 119,093 301,990 421,083 Restricted cash – CMB and MBS programs represent deposits held as collateral by CMHC in connection with the Company’s securitization activities. Restricted cash – derivatives are deposits held by counterparties as collateral for the Company’s interest rate swap and bond forward transactions. the terms and conditions for the collateral are governed by International Swaps and Derivatives Association (ISDA) agreements. Restricted cash – other programs include reserve accounts held in trust for the water heater financing and lines of credit through CFF Bank. these amounts are held as cash collateral against potential credit losses. In addition, other programs include account balances held in trust for the whole loan sales program. the following table provides the remaining contractual term to maturity of restricted cash, non-Home trust MBS and treasury bills assigned as CMB replacement assets. please see note 6 (A) for more information. December 31 2015 December 31 2014 thousands of Canadian dollars Restricted cash non-Home trust MBS and treasury bills assigned as replacement assets within 1 year $ 139,046 $ 56,875 $ 195,921 $ – $ – – $ – $ – – $ 1 to 3 years 3 to 5 years over 5 years total Fair Value – $ 139,046 $ total Fair Value 119,093 note 8 otHer aS SetS thousands of Canadian dollars Accrued interest receivable prepaid CMB coupon Securitization receivable and retained interest Capital assets Income taxes recoverable other prepaid assets and deferred items – – $ 56,875 195,921 $ 301,990 421,083 December 31 2015 63,532 $ $ 3,544 142,243 14,468 35,953 27,677 $ 287,417 $ December 31 2014 65,132 4,506 128,522 12,052 – 25,404 235,616 Home Capital Group inC. AnnuAl RepoRt 2015 97 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) note 9 intanGiBle aSSetS Intangible assets comprise internally developed software costs which are principally related to the Company’s core banking system. the following table presents the net carrying amount of software costs for the core banking system and other software costs as at December 31, 2015 and 2014, along with the changes in net carrying amount for the years ended December 31, 2015 and 2014. thousands of Canadian dollars Core Banking System1 other Software Costs2 total Core Banking System1 other Software Costs2 2015 2014 total 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 $ 95,660 $ 14,737 110,397 26,557 $ 10,510 37,067 122,217 $ 25,247 147,464 75,957 $ 19,703 95,660 13,797 $ 12,760 26,557 89,754 32,463 122,217 22,453 9,436 31,889 78,508 $ 2,380 600 2,980 24,833 10,036 34,869 34,087 $ 112,595 $ 14,084 8,369 22,453 73,207 $ 2,265 115 2,380 24,177 $ 16,349 8,484 24,833 97,384 1 As at December 31, 2015, there was $14.6 million ($20.3 million – December 31, 2014) in work in progress related to the core banking system that was not being amortized. 2 As at December 31, 2015, there was $8.4 million ($6.3 million – December 31, 2014) in work in progress related to other software costs that was not being amortized. note 10 GooD will the carrying amount of goodwill in relation to the Company’s subsidiaries is as follows: thousands of Canadian dollars Home trust pSiGate December 31 2015 2,324 $ $ 13,428 15,752 $ $ December 31 2014 2,324 13,428 15,752 there have been no additions, disposals or impairment losses of goodwill during the year. During 2015, the Company acquired CFF Bank, which did not result in the recognition of goodwill, but instead a gain on acquisition, which was recognized in the consolidated statements of income. please refer to note 23 of the consolidated financial statements. 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). 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 2015. the recoverable amount of the unit was determined on the basis of its fair value less costs of disposal. the fair value of the unit was determined using a discounted cash flow methodology where estimated cash flows were projected to December 31, 2019 and assuming a terminal growth rate of 3.0% (2014 – 3.0%) thereafter. A revenue growth rate of 10.92% (2014 – 6.4%) was assumed over the period of projections, with a stable gross margin percentage. operating expenses considered necessary to support the expected growth were included and increased over the period of projections at an expected inflationary rate. planned capital expenditures, also necessary to support expected growth, were incorporated. A discount rate of 15.15% (2014 – 15.50%) 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 15.15% to 16.15% or a decrease in annual revenue growth from 10.92% to a growth rate of 9.6% for each year of the projection, assuming unchanged values for the other assumptions, would have caused the recoverable amount to equal the carrying amount. 98 Home Capital Group inC. AnnuAl RepoRt 2015 note 1 1 DepoSitS By remaininG Contr a Ct ua l ter m to m atu r ity payable December 31 2015 December 31 2014 thousands of Canadian dollars, except % Individuals Businesses Institutional deposits 1 to 3 years on Demand within 1 year total $ 1,479,776 $ 6,665,844 $ 3,740,193 $ 1,607,882 $ 13,493,695 $ 12,588,166 549,055 802,750 $ 1,986,136 $ 7,236,932 $ 4,736,044 $ 1,706,846 $ 15,665,958 $ 13,939,971 1,188,764 983,499 187,264 808,587 506,360 – 396,176 174,912 98,964 – 3 to 5 years total Average contractual yield 1.4% 1.9% 2.3% 2.5% 2.0% 2.0% note 1 2 Senior DeBt 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. the carrying amount includes unamortized issue costs and fair value adjustments related to interest rate hedging. note 1 3 otHer liaBil itieS thousands of Canadian dollars Accrued interest payable on deposits Accrued interest payable on securitization liabilities Securitization servicing liability Income taxes payable other, including accounts payable and accrued liabilities note 1 4 Capital (a) authorized $ December 31 2015 124,068 $ 7,466 15,234 – 118,173 264,941 $ December 31 2014 117,089 10,046 11,216 11,317 50,163 199,831 $ 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 the Company has no preferred shares outstanding. number of Shares 70,096 $ 227 (345) 69,978 $ 2015 amount 84,687 6,002 (442) 90,247 number of Shares 69,488 $ 636 (28) 70,096 $ 2014 Amount 70,233 14,488 (34) 84,687 Home Capital Group inC. AnnuAl RepoRt 2015 99 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) (C) repurchase of Shares During the year, 344,700 (2014 – 28,000) common shares were purchased for $10.7 million (2014 – $1.4 million). the purchase price of shares acquired through the normal Course Issuer Bid is allocated between share capital and retained earnings. the reduction to share capital for the year ended December 31, 2015 was $442 thousand (2014 – $34 thousand). the balance of the purchase price of $10.3 million (2014 – $1.4 million) was charged to retained earnings. (D) earnings per Common Share (epS) Basic earnings per common share of $4.09 (2014 – $4.48) is determined as net income for the year divided by the average number of common shares outstanding of 70,169,686 (2014 – 69,857,391). Diluted earnings per common share of $4.09 (2014 – $4.45) is determined as net income for the year divided by the average number of common shares outstanding of 70,169,686 (2014 – 69,857,391) plus the stock options potentially exercisable, as determined under the treasury stock method, of 153,763 (2014 – 574,277) for a total of 70,323,449 (2014 – 70,431,668) diluted common shares. Diluted income per common share excludes contingently assumable average options outstanding of 696,847 with a weighted-average exercise price of $36.15 for December 31, 2015 and contingently assumable average options outstanding of 599,791 with a weighted- average exercise price of $38.99 for December 31, 2014, as not all vesting and performance criteria had been met. (e) Capital management the Company has a Capital Management policy that governs the quantity and quality of capital held. the objectives of the policy are to ensure that capital levels are adequate and that Home trust meets all regulatory capital requirements, while also providing a sufficient return to investors. the Risk and Capital Committee and the Board review the policy annually and monitor compliance with the policy on a quarterly basis. the Company’s subsidiary, Home trust, is subject to the regulatory capital requirements stipulated by the office of the Superintendent of Financial Institutions Canada (oSFI). these requirements are consistent with international standards (Basel II and Basel III) set by the Bank for International Settlements. Home trust follows the Basel II Standardized Approach for calculating credit risk and the Basic Indicator Approach for operational risk. In addition, dividends paid by Home trust to Home Capital, may be subject to restrictions by oSFI. 100 Home Capital Group inC. AnnuAl RepoRt 2015 the regulatory capital position of Home trust was as follows: Regulated capital to risk-weighted assets Common equity tier 1 ratio tier 1 capital ratio total regulatory capital ratio December 31 2015 all-in Basis December 31 2014 All-In Basis national Regulatory Minimum All-In Basis 18.31% 18.30% 20.70% 18.30% 18.30% 20.94% 7.00% 8.50% 10.50% Home trust adopted certain Basel III capital requirements, as required by oSFI, beginning January 1, 2013. the transitional basis allows for the transition of certain capital deductions over a period ending January 1, 2018, whereas the all-in basis includes all applicable deductions immediately. For purposes of meeting minimum regulatory capital ratios prescribed by oSFI, the all-in basis is required. Home trust is required to meet a minimum leverage ratio determined by oSFI which has replaced the Assets to Regulatory Capital ratio required in previous years. As at December 31, 2015, the leverage ratio was 7.36%, which exceeds oSFI’s minimum requirements. Subordinated debt advanced by Home Capital to Home trust is included in total capital, as tier 2 capital. under Basel III this subordinated debt will be subject to straight-line amortization out of capital in the final five years prior to maturity. the principal amounts of the subordinated debt currently mature in 2021 and 2022 in the amounts of $100 million and $56 million, respectively. Currently, Home trust’s Common equity tier 1, total tier 1, and total capital ratios significantly exceed oSFI’s regulatory targets, as well as Home trust’s internal capital targets. no new capital was raised in 2015. note 1 5 em pl oyee BeneFitS (a) employee Share purchase plan under the employee Share purchase plan, every year eligible employees can elect to purchase common shares of the Company up to 10% of their annual earnings. 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 $1.5 million for 2015 (2014 – $1.2 million). (B) employee retirement Savings plan During the year, Home trust contributed $1.3 million (2014 – $1.1 million) to the employee group registered retirement savings plan. (C) Stock options the details and changes in the issued and outstanding options are as follows: thousands, except per share amounts and years 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 2015 weighted- average exercise price 31.00 30.61 19.42 44.49 32.45 27.39 39.69 3.7 number of Shares 1,235 $ 257 (227) (57) 1,208 $ 511 $ $ 2014 Weighted- average exercise price 23.02 46.78 16.65 33.90 31.00 23.44 48.50 4.1 number of Shares 1,650 $ 263 (636) (42) 1,235 $ 634 $ $ 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. 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 in 2015 or 2014. Home Capital Group inC. AnnuAl RepoRt 2015 101 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) As at December 31, 2015, the maximum number of options on common shares that could be issued was 10,670,396, representing approximately 15.25% 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. As at December 31, 2015, the exercise prices for stock options outstanding to acquire common shares ranged from $15.94 to $50.02. the weighted-average range of exercise prices for stock options outstanding and exercisable are presented below along with the number of options outstanding and exercisable and the weighted-average contractual life remaining. Range of exercise prices less than $20.00 $20.01 – $25.00 $25.01 – $30.00 $30.01 – $35.00 $35.01 – $40.00 $40.01 – $45.01 over $45.01 Stock options outstanding weighted-average Contractual life remaining in years weighted- average exercise price as at December 31, 2015 Stock options exercisable number exercisable weighted- average exercise price 0.4 $ 2.2 4.4 4.7 4.9 4.2 4.0 3.7 $ 15.94 23.86 28.78 31.90 39.66 43.07 46.93 32.45 30,000 $ 296,250 74,000 18,000 89,500 500 2,750 511,000 $ 15.94 23.92 29.14 32.01 39.66 42.81 47.04 27.39 number outstanding 30,000 327,250 363,360 65,000 181,000 32,000 209,237 1,207,847 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 $4.82 (2014 – $6.65). 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 December 2015 September 2015 august 2015 February 2015 December 2014 november 2014 May 2014 February 2014 Fair value of options granted Share price exercise price expected share price volatility expected period until exercise in years1 Forfeiture rate expected dividend yield Risk-free rate of return 1 exercisable upon vesting. $ $ $ 4.55 $ 26.83 $ 28.84 $ 5.26 $ 32.30 $ 31.76 $ 3.94 $ 27.50 $ 25.98 $ 6.38 $ 43.08 $ 43.09 $ 6.34 $ 44.66 $ 46.76 $ 8.36 $ 50.11 $ 50.02 $ 9.43 $ 46.04 $ 47.07 $ 9.51 42.50 42.81 28.4% 27.9% 27.3% 23.5% 23.2% 23.1% 26.0% 27.6% 3.8 5.0% 3.28% 0.60% 3.8 5.0% 2.72% 0.68% 3.8 5.0% 3.20% 0.59% 3.8 5.0% 0.80% 0.54% 3.8 6.8% 0.80% 1.25% 3.8 6.8% 0.72% 1.34% 3.8 6.8% 0.64% 1.57% 3.8 6.8% 0.56% 1.49% the above assumptions for expected volatility were determined on the basis of historical volatility. During Q2 2014, the Company amended its employee Stock option plan to allow options to be exercised, as they vest at a rate of 25% each year. previously, stock options could not be exercised until the end of the four-year vesting period. 102 Home Capital Group inC. AnnuAl RepoRt 2015 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 (2015 – $1.6 million; 2014 – $1.9 million). When these stock options are exercised, the Company records the amount of proceeds, together with the amount recorded in contributed surplus, in capital stock (2015 – $4.4 million; 2014 – $10.6 million). (D) Deferred Share units (DSus) 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 fair value of the DSu liability as at December 31, 2015 was $2.09 million (2014 – $2.81 million). As of December 31, 2015, there were 72,691 DSus outstanding (2014 – 58,603). (e) restricted Share units (rSus) the Company grants 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 fair value of the RSu liability as at December 31, 2015 was $389 thousand (2014 – $714 thousand). As of December 31, 2015, there were 69,105 RSus outstanding (2014 – 64,424 RSus outstanding). (F) performance Share units (pSus) the Company grants pSus to certain key members of management. the pSus vest after three years on the condition that certain performance criteria are met. the vested amount is settled on the vesting date. pSus earn dividend equivalents in the form of additional pSus at the same rate as dividends on common shares. the cash value of the pSus is equivalent to the market value of common shares on the vesting date multiplied by a performance factor ranging from 0% to 200%. the fair value of the pSu liability as at December 31, 2015 was $1.3 million and there were 131,799 pSus outstanding (2014 – $1.2 million and 84,298 pSus outstanding). (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, RSus and pSus (representing all expenses arising from cash–settled share–based payment transactions) note 1 6 a CCumulateD otHer Compr eHe nSiVe inCom e thousands of Canadian dollars unrealized losses on Available for sale securities and retained interests Income tax recovery unrealized losses on Cash flow hedges Income tax recovery Accumulated other comprehensive loss 2015 1,581 $ (738) 843 $ 2014 1,900 2,311 4,211 $ $ December 31 2015 December 31 2014 $ (85,009) $ (22,543) (62,466) (22,101) (5,859) (16,242) (4,187) (1,109) (3,078) (65,544) $ (3,212) (849) (2,363) (18,605) $ Home Capital Group inC. AnnuAl RepoRt 2015 103 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) note 17 inCome taXeS (a) reconciliation of income taxes 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 26.51% (2014 – 26.49%) due to various permanent differences. 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 Scientific research and experimental development investment tax credits 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 Scientific research and experimental development investment tax credits other effective income tax rate (C) Sources of Deferred tax Balances 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 loss carryforwards other net deferred tax liability 2015 $ 385,277 $ 102,148 2014 $ 417,502 $ 110,587 (2,816) 465 (1,837) 32 97,992 (3,025) 568 (3,897) 97 $ 104,330 $ 2015 26.51% (0.73)% 0.12% (0.48)% 0.01% 25.43% 2014 26.49% (0.73)% 0.14% (0.93)% 0.02% 24.99% December 31 2015 December 31 2014 $ $ 9,110 3,281 1,820 2,851 29,880 344 47,286 8,464 15,043 1,248 24,755 22,531 $ $ 9,129 3,914 2,121 4,712 25,795 344 46,015 8,169 – 1,292 9,461 36,554 Capital losses totalling $2.4 million are available to reduce capital gains in future years. the future tax benefits arising from application of these losses have not been reflected in the consolidated statements of income and changes in shareholders’ equity. on october 1, 2015, the Company acquired CFF Bank. on the date of acquisition, the Company recognized a deferred tax asset relating to losses generated in CFF Bank in the amount of $13.5 million. At December 31, 2015 the losses generated in CFF Bank increased the deferred tax asset to $15.0 million. the losses generated in CFF Bank expire after 2029. the Company plans to be able to generate sufficient income in CFF Bank to be able to utilize the losses recognized as a deferred tax asset. During the year, the Company recognized Scientific Research and experimental Development investment tax credits related to the development of its core banking system. the investment tax credits are recorded as a reduction of tax provisions, net of any tax that would be eligible on such benefit. 104 Home Capital Group inC. AnnuAl RepoRt 2015 note 1 8 Com mitm entS anD Conti nGenCi eS (a) lease Commitments the Company has entered into commercial leases on premises and property, as well as certain computer hardware and software leases. 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 2015 18,846 $ 36,488 11,220 66,554 $ December 31 2014 14,212 33,523 14,683 62,418 $ lease payments recognized as an expense in the consolidated statements of income amounted to $26.4 million in 2015 (2014 – $19.3 million). (B) Credit Commitments outstanding amounts for future advances on mortgage loans amounted to $1.14 billion as at December 31, 2015 (2014 – $850.1 million). these amounts include offers made but not yet accepted by the customers as of the reporting date. Also, included within the outstanding amounts are unutilized non-residential commercial loan advances of $303.9 million at December 31, 2015 (2014 – $233.8 million). offers for loans remain open for various periods. the average rate on mortgage offers is 4.26% (2014 – 4.72%). the Company also has contractual amounts to extend credit to its clients for its credit card products. the contractual amounts 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, 2015, these contractual amounts in aggregate were $461.3 million (2014 – $430.9 million), of which $118.8 million (2014 – $100.9 million) had not been drawn by customers. In addition, other lines of credit have commitments to extend credit in the amount of $50.0 million (nil – December 31, 2014), of which $21.5 million has not been drawn by customers. outstanding amounts for future advances for the equityline Visa portfolio were $11.6 million at December 31, 2015 (2014 – $5.6 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 amounts. Secured credit cards have spending limits restricted by collateral held by the Company. (C) Directors’ and officers’ indemnification 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 there were no material contingencies identified by the Company in 2015. note 1 9 DeriV atiVe FinanCial inSt ru m entS the Company utilizes interest rate swaps and bond 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 the effectiveness of the hedge is assessed and the ineffectiveness is measured. Changes in the fair value of the derivative instruments must be highly effective at offsetting either the changes in the fair value of the on- balance sheet asset or liability being hedged or the changes in the amount of future cash flows. Home Capital Group inC. AnnuAl RepoRt 2015 105 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) 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 to hedge the economic value exposure to 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 is to use the bond forwards to manage the change in cash flows of the future interest payments on the anticipated secured borrowings through asset securitization. Changes in the fair value of the derivative instrument that occur before the liability is incurred are recorded in AoCI. the fair value changes recorded in AoCI are reclassified into net interest income over the term of the hedged liability. 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 Reclassification from oCI to net interest income and securitization gains $ 2015 (2,449) $ (1,474) 2014 (1,061) (1,461) Fair Value Hedging Relationships the Company uses interest rate swaps to hedge changes in the fair value of fixed-rate assets and liabilities, which are associated with changes in market interest rates. Fair value hedges include hedges of fixed-rate mortgages and fixed-rate liabilities, which include deposits, deposit notes, senior debt and securitization liabilities. 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 risk2 Hedge ineffectiveness (loss) gain recognized in non-interest income 2015 24,737 $ (32,534) (7,797) $ $ $ 2014 10,339 (9,171) 1,168 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 fixed-rate hedged items for the risk being hedged are recorded as part of the associated fixed-rate asset or 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. net realized and unrealized losses of $0.1 million (2014 – net realized and unrealized losses of $2.0 million) were recorded in income through net realized and unrealized gain or loss on derivatives. the Company may also enter into bond forwards or interest rate swaps to hedge interest rate risk on loans held for securitization. Realized and unrealized gains or losses on these derivatives are included in securitization income on the consolidated statements of income. please see note 6 for more information. 106 Home Capital Group inC. AnnuAl RepoRt 2015 Swaps not designated as accounting hedges < 1 year Bond forwards designated as accounting hedges1 1 to 5 years Bond forwards not designated as accounting hedges1 < 1 year > 5 years total As at December 31, 2015 and 2014, the outstanding interest rate swap and bond forward contract positions were as follows: thousands of Canadian dollars as at December 31, 2015 term (years) Swaps designated as accounting hedges < 1 year 1 to 5 years notional amount Current replacement Cost Credit equivalent amount risk- weighted Balance Derivative asset Derivative liability net Fair market Value $ 317,100 $ 2,370 $ 2,370 $ 474 $ 2,370 $ 1,889,700 2,206,800 62,332 64,702 71,775 74,145 14,355 14,829 62,332 64,702 – $ – – 2,370 62,332 64,702 50,000 50,000 475,000 475,000 – – 91 91 – – 2,466 2,466 – – 493 493 – – 91 91 (407) (407) (407) (407) (3,226) (3,226) (3,135) (3,135) 47,000 122,950 169,950 $ 2,901,750 $ – 3 3 64,796 $ – 1,848 1,848 78,459 $ – 585 585 15,907 $ – 3 3 64,796 $ (321) (1,493) (1,814) (5,447) $ (321) (1,490) (1,811) 59,349 thousands of Canadian dollars As at December 31, 2014 notional Amount Current Replacement Cost Credit equivalent Amount Risk- weighted Balance Derivative Asset Derivative liability net Fair Market Value term (years) Swaps designated as accounting hedges < 1 year 1 to 5 years > 5 years $ 1,457,414 $ 1,945,800 59,000 3,462,214 Swaps not designated as accounting hedges 1 to 5 years Bond forwards designated as accounting hedges1 1 to 5 years > 5 years Bond forwards not designated as accounting hedges1 1 to 5 years > 5 years 50,000 50,000 100,000 75,000 175,000 6,600 83,500 90,100 7,623 $ 7,623 $ 25,754 5,151 38,528 – – 6 – 6 1 – 1 35,433 6,036 49,092 250 250 506 1,125 1,631 33 1,253 1,286 1,525 $ 8,245 1,207 10,977 7,623 $ 25,754 5,151 38,528 (34) $ (36) – (70) 7,589 25,718 5,151 38,458 50 50 101 225 326 49 15,255 15,304 – – 6 – 6 – – – (509) (509) (509) (509) (391) (301) (692) (20) (975) (995) (385) (301) (686) (20) (975) (995) total $ 3,777,314 $ 38,535 $ 52,259 $ 26,657 $ 38,534 $ (2,266) $ 36,268 1 the term of the bond forward contracts is based on the term of the underlying bonds. Home Capital Group inC. AnnuAl RepoRt 2015 107 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) the notional amount is not recorded as an asset or liability as it represents the face amount of the contract to which the rate or price is applied in order to calculate the amount of cash exchanged. notional amounts do not represent the potential gain or loss associated with market risk and are not indicative of the credit risk associated with the derivatives. not e 20 Current anD non- Current aS SetS anD li aBi l it ieS the following table presents an analysis of each asset and liability line item by amounts, including prepayment assumptions, expected to be recovered or settled within one year or after one year as at December 31, 2015 and 2014. thousands of Canadian dollars assets Cash and cash equivalents Available for sale securities loans held for sale Securitized mortgages non-securitized mortgages and loans Collective allowance for credit losses Restricted assets Derivative assets other assets Goodwill and intangible assets 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 other liabilities Deferred tax liabilities total liabilities as at December 31, 2015 As at December 31, 2014 within 1 year after 1 year total Within 1 Year After 1 Year total – $ – $ 1,149,849 $ $ 1,149,849 $ 80,132 135,043 962,649 11,389,911 (24,166) 195,921 2,370 191,862 – 360,746 582,819 102,094 3,945,654 14,317,162 (34,100) 421,083 38,534 235,616 113,136 $ 14,083,571 $ 6,428,448 $ 20,512,019 $ 13,327,446 $ 6,755,298 $ 20,082,744 360,746 $ 112,942 102,094 1,696,838 10,483,974 (22,733) 421,083 7,623 164,879 – 453,230 135,043 2,674,475 15,459,190 (36,249) 195,921 64,796 287,417 128,347 373,098 – 1,711,826 4,069,279 (12,083) – 62,426 95,555 128,347 469,877 – 2,248,816 3,833,188 (11,367) – 30,911 70,737 113,136 – $ 1,986,136 $ 1,064,152 $ $ 1,986,136 $ 7,236,932 151,480 58,829 1,104,177 728 249,707 – – $ 1,064,152 12,875,819 152,026 471,551 3,831,912 2,266 199,831 36,554 $ 10,787,989 $ 8,102,924 $ 18,890,913 $ 10,102,945 $ 8,531,166 $ 18,634,111 13,679,822 151,480 531,326 2,249,230 5,447 264,941 22,531 6,442,890 – 472,497 1,145,053 4,719 15,234 22,531 6,877,452 – 138,232 1,834,460 34 188,615 – 5,998,367 152,026 333,319 1,997,452 2,232 11,216 36,554 net $ 3,295,582 $ (1,674,476) $ 1,621,106 $ 3,224,501 $ (1,775,868) $ 1,448,633 note 21 Fair V alue oF Fin anCial inStrum entS 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 the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants that are under no compulsion to act at the balance sheet date in the principal or most advantageous market which is accessible to the Company. For financial instruments carried at fair value that lack an active market, the Company applies present value and valuation techniques that use, to the greatest extent possible, 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. the Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: level 1: Significant inputs are quoted (unadjusted) prices in active markets for identical assets or liabilities. this level includes cash and cash equivalents, equity securities traded on the toronto Stock exchange and quoted corporate and government-backed debt instruments. level 2: Significant inputs are observable for the asset or liability, either directly or indirectly, and are not quoted prices included within level 1. this level includes loans held for sale, interest rate swaps, bond forwards, mutual funds, certain corporate debt instruments and senior debt. level 3: Significant inputs are unobservable for the asset or liability. this level includes retained interest, certain corporate debt instruments, securitized and non-securitized mortgages and loans, securitization receivables and liabilities, other assets and liabilities, and deposits. 108 Home Capital Group inC. AnnuAl RepoRt 2015 the following table presents the fair value of financial instruments across the levels of the fair value hierarchy. thousands of Canadian dollars level 1 level 2 level 3 Fair Value Carrying Value as at December 31, 2015 $ 1,149,849 $ – $ 135,043 64,796 – 199,839 – $ 1,149,849 $ 1,149,849 135,043 – 64,796 – – 139,046 1,488,734 – 135,043 64,796 139,046 1,488,734 Financial assets held for trading Cash and cash equivalents loans held for sale Derivative assets Restricted assets total financial assets held for trading Financial assets available for sale Debt securities equity securities Restricted assets Retained interest owned total financial assets available for sale loans and receivables Securitized mortgages non-securitized mortgages and loans Securitization receivables other total loans and receivables total Financial liabilities carried at amortized cost Deposits Senior debt Securitization liabilities other total financial liabilities carried at amortized cost Financial liabilities at fair value Derivative liabilities total – – 139,046 1,288,895 253,185 190,706 56,875 – 500,766 – – – – – $ 1,789,661 $ $ $ – $ – – – – – – $ – – – – – 9,339 – – 81,087 90,426 262,524 190,706 56,875 81,087 591,192 262,524 190,706 56,875 81,087 591,192 – – – – – 2,674,475 15,422,941 61,156 103,029 18,261,601 199,839 $ 18,474,944 $ 20,464,444 $ 20,341,527 2,734,862 15,485,471 61,156 103,029 18,384,518 2,734,862 15,485,471 61,156 103,029 18,384,518 – $ 15,807,316 $ 15,807,316 $ 15,665,958 151,480 2,780,556 264,941 18,862,935 – 2,868,419 264,941 18,940,676 151,402 2,868,419 264,941 19,092,078 151,402 – – 151,402 5,447 5,447 156,849 $ 18,940,676 $ 19,097,525 $ 18,868,382 5,447 – Home Capital Group inC. AnnuAl RepoRt 2015 109 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) thousands of Canadian dollars Financial assets held for trading Cash and cash equivalents loans held for sale Derivative assets Restricted assets total financial assets held for trading Financial assets available for sale Debt securities equity securities Restricted assets Retained interest owned total financial assets available for sale loans and receivables Securitized mortgages non-securitized mortgages and loans Securitization receivables other total loans and receivables total Financial liabilities carried at amortized cost Deposits Senior debt Securitization liabilities other total financial liabilities carried at amortized cost Financial liabilities at fair value Derivative liabilities total level 1 level 2 level 3 As at December 31, 2014 Fair Value Carrying Value $ 360,746 $ – $ – – 119,093 479,839 320,671 248,069 297,443 – 866,183 – – – – – $ 1,346,022 $ $ $ – $ – – – – – – $ 102,094 38,534 – 140,628 – – 4,547 – 4,547 – $ – – – – 360,746 $ 102,094 38,534 119,093 620,467 14,079 – – 58,685 72,764 334,750 248,069 301,990 58,685 943,494 360,746 102,094 38,534 119,093 620,467 334,750 248,069 301,990 58,685 943,494 – – – – – 3,945,654 14,283,062 69,837 69,638 18,368,191 145,175 $ 18,569,801 $ 20,060,998 $ 19,932,152 4,012,822 14,344,740 69,837 69,638 18,497,037 4,012,822 14,344,740 69,837 69,638 18,497,037 – $ 14,062,381 $ 14,062,381 $ 13,939,971 152,026 4,303,463 199,831 18,595,291 154,347 4,410,496 199,831 18,827,055 – 4,410,496 199,831 18,672,708 154,347 – – 154,347 2,266 2,266 156,613 $ 18,672,708 $ 18,829,321 $ 18,597,557 2,266 – the Company did not transfer any financial instrument from level 1 or level 2 to level 3 of the fair value hierarchy during the years ended December 31, 2015 or December 31, 2014. 110 Home Capital Group inC. AnnuAl RepoRt 2015 the following methods and assumptions were used to estimate the fair values of financial instruments: > Cash and cash equivalents, restricted cash (included in restricted assets), other assets and other liabilities approximate their carrying values due to their short-term nature. > Available for sale securities are valued based on the quoted bid price. third-party MBS are fair valued using average dealer quoted prices. the fair value of the residual interests of underlying securitized insured fixed-rate residential mortgages is calculated by modelling the future net cash flows. the cash flows are calculated as the difference between the expected cash flow from the underlying mortgages and payment to nHA MBS holders, discounted at the appropriate rate of return. > Fair value of loans held for sale, all of which are insured, is determined by discounting the expected future cash flows of the loans at current market rates imputed by the realized sale of loans with similar terms. > the fair value of the retained interest is determined by discounting the expected future cash flows using the current MBS spread over Government of Canada Bonds imputed from recent sale transactions. > the fair value of securitization receivables is determined by discounting the expected future cash flows using current interest rate swap rates. > Restricted assets include both securities valued based on quoted bid prices and securities where fair value is determined using average dealer quoted prices. > Securitized and non-securitized mortgages and loans are carried at amortized cost in the financial statements. For fair value disclosures, the fair value is estimated by discounting the expected future cash flows of the loans, adjusting for credit risk and prepayment assumptions at current market rates for offered loans with similar terms. > Fair value of derivative financial instruments is calculated as described in note 19. > Retail deposits are not transferable by the deposit holders. In the absence of such transfer transactions, fair value of deposits is determined by discounting the expected future cash flows of the deposits at offered rates for deposits with similar terms. the fair value of the institutional deposit notes is determined using current rates of Government of Canada Bonds, plus a spread. the rates reflect the credit risks of similar instruments. > Fair value of securitization liabilities is determined using current market rates for MBS and CMB. > Fair value of the senior debt is determined using current market rates of Government of Canada Bonds, plus a spread. the rates reflect the credit risks of similar instruments. note 2 2 relateD party tranSa Ct io nS IFRS considers key management personnel to be related parties. 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 2015 7,912 $ 1,948 321 10,181 $ 2014 7,926 7,784 300 16,010 $ $ the Company had no related party transactions, other than with key management personnel, as described above, for the years ended December 31, 2015 and 2014. Home Capital Group inC. AnnuAl RepoRt 2015 111 notes to the Consolidated Financial Statements (unless otherwise stated, all amounts are in Canadian dollars) note 23 BuSineSS a CQuiSition on october 1, 2015, the Company completed the acquisition of 100% of the issued and outstanding common shares of CFF Bank through its wholly owned subsidiary, Home trust, for cash consideration of $19.6 million. CFF Bank is a Schedule 1 Bank under the Bank Act (Canada) offering deposit, mortgage and personal banking products through a number of channels. the acquisition provides the Company the addition of a bank licence to support the Company’s long-term plan to achieve funding diversification and add new banking products. the following table presents the fair value of the assets acquired and liabilities assumed, net of the cash consideration transferred to determine the gain on bargain purchase arising from the acquisition of CFF Bank: thousands of Canadian dollars Fair value recognized on acquisition Assets Cash and cash equivalents non-securitized mortgages and lines of credit Securitized mortgages Restricted assets Deferred tax assets other assets total assets liabilities Deposits Securitization liabilities Derivative liabilities other liabilities total liabilities net fair value of identifiable assets and liabilities Cash purchase consideration transferred Fair value of contingent consideration Bargain purchase arising on acquisition December 31 2015 $ $ $ $ $ $ 135,513 74,496 19,805 4,671 13,534 3,824 251,843 201,755 19,746 19 6,710 228,230 23,613 19,621 1,936 2,056 the excess fair value of net assets acquired over the purchase consideration of $2.1 million has been recognized in the consolidated statements of income as a gain on acquisition on a preliminary basis. the bargain purchase amount recognized primarily represents the fair value of deferred tax assets in the amount of $13.5 million. the Company is in the process of finalizing the purchase price allocation. In addition, the Company recognized the fair value of contingent consideration in the amount of $1.9 million. this contingent liability could require the Company to transfer additional consideration to the seller in relation to future sublease revenue. the maximum amount that the Company could be required to remit is $4.4 million. the following assumptions were used to estimate the fair values of the acquired assets and assumed liabilities: > Cash and cash equivalents and restricted cash approximate their carrying values due to their short-term nature. > Securitized mortgages are fair valued based on the expected future cash flows, adjusting for credit risk and prepayment assumptions. > the fair value for mortgages held for sale is determined by discounting the expected cash flows at current market rates. > Securitization liabilities are fair valued using current market rates for MBS and CMB. > the fair value of deposits is based on the discounted expected cash flow at offered rates for deposits with similar terms. In connection with the acquisition, the Company incurred $0.7 million in acquisition costs and $3.5 million in integration costs. these amounts are recognized as other operating expenses in non-interest expenses. Since the date of acquisition, CFF Bank has contributed $2.0 million to the Company’s revenue and has incurred a loss, before taxes of $5.7 million. If the acquisition had occurred on January 1, 2015, management estimates that CFF Bank would not have had a material contribution to the results of the Company. 112 Home Capital Group inC. AnnuAl RepoRt 2015 note 24 riSk m an a Gem ent 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 strategic, credit, market, funding and liquidity, operational, compliance, capital adequacy, and reputational risk. 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, procedures and limits 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 Management’s Discussion and Analysis included in this report. Significant exposures to credit and liquidity risks are described in notes 4, 5 and 19. Home Capital Group inC. AnnuAl RepoRt 2015 113 Corporate Directory Ho me Capital Group inC. Directors: kevin p. D. Smith 3, 4 Chairman of the Board president and Chief executive officer St. Joseph’s Health System Burlington, ontario Jacqueline Beaurivage 1, 2 Corporate Director toronto, ontario robert J. Blowes Corporate Director Waterloo, ontario william Falk 2, 3, 4 Managing partner pricewaterhouse Coopers Grand Valley, ontario Diana Graham 1, 2 Corporate Director toronto, ontario John m. e. marsh1, 3, 4 Corporate Director port Colborne, ontario robert a. mitchell, Cpa, Ca 1, 2, 3 Corporate Director oakville, ontario Gerald m. Soloway Chief executive officer Home Capital Group Inc. toronto, ontario Bonita then1, 2, 4 Corporate Director toronto, ontario william J. walker partner Gowling WlG Caledonia, ontario 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 Committees: audit Committee Robert A. Mitchell, CpA, CA Chair Bonita then Vice Chair risk and Capital Committee Bonita then Chair William Falk Vice Chair Governance, nominating and Conduct review Committee John M. e. Marsh Chair William Falk Vice Chair Human resources and Compensation Committee Kevin p. D. Smith Chair John M. e. Marsh Vice Chair officers: Gerald m. Soloway Chief Executive Officer martin reid President Brian r. mosko Chief Operating Officer and Executive Vice President robert morton, Cpa, Cma Chief Financial Officer and Executive Vice President pino Decina Executive Vice President, Residential Mortgage Lending John r. k. Harry Executive Vice President, Commercial Mortgage Lending Chris ahlvik, ll.B. Executive Vice President, Corporate Counsel and Corporate Secretary Greg parker Chief Risk Officer and Executive Vice President 114 Home Capital Group inC. AnnuAl RepoRt 2015 Fariba rawhani Executive Vice President and Chief Information Officer Carol Ferguson Senior Vice President, Human Resources Benjy katchen Senior Vice President, Deposits and Credit Cards Dinah Henderson Executive Vice President, Operations Gary wilson Executive Vice President, Underwriting marie Holland, Cpa, Ca Senior Vice President, Internal Audit John Hong Senior Vice President, Chief Compliance Officer and Chief Anti-Money Laundering Officer annual meeting notice the Annual Meeting of Shareholders of Home Capital Group Inc. will be held at one King West, Grand Banking Hall, toronto, ontario, on Wednesday, May 11, 2016 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. Corporate Directory Corporate Directory HOmE TRUsT COmPANy HOmE TRUsT COmPANy Directors: Directors: Kevin P. D. smith Kevin P. D. smith Chairman of the Board Chairman of the Board Jacqueline Beaurivage Jacqueline Beaurivage Robert J. Blowes Robert J. Blowes William Falk William Falk Diana Graham Diana Graham John m. E. marsh John m. E. marsh Robert A. mitchell, CPA, CA Robert A. mitchell, CPA, CA martin Reid martin Reid Gerald m. soloway Gerald m. soloway Bonita Then Bonita Then William J. Walker William J. Walker Chair Emeritus: Chair Emeritus: Hon. William G. Davis Hon. William G. Davis P.C., C.C., Q.C. P.C., C.C., Q.C. Officers: Officers: Gerald m. soloway Gerald m. soloway Chief Executive Officer Chief Executive Officer martin Reid martin Reid President President Brian R. mosko Brian R. mosko Chief Operating Officer and Chief Operating Officer and Executive Vice President Executive Vice President Robert morton, CPA, CmA Robert morton, CPA, CmA Chief Financial Officer and Chief Financial Officer and Executive Vice President Executive Vice President Pino Decina Pino Decina Executive Vice President, Executive Vice President, Residential Mortgage Residential Mortgage Lending Lending John R. K. Harry John R. K. Harry Executive Vice President, Executive Vice President, Commercial Mortgage Commercial Mortgage Lending Lending Chris Ahlvik, LL.B. Chris Ahlvik, LL.B. Executive Vice President, Executive Vice President, Corporate Counsel and Corporate Counsel and Corporate Secretary Corporate Secretary Greg Parker Greg Parker Chief Risk Officer and Chief Risk Officer and Executive Vice President Executive Vice President Fariba Rawhani Fariba Rawhani Executive Vice President and Executive Vice President and Chief Information Officer Chief Information Officer Dinah Henderson Dinah Henderson Executive Vice President, Executive Vice President, Operations Operations Gary Wilson Gary Wilson Executive Vice President, Executive Vice President, Underwriting Underwriting marie Holland, CPA, CA marie Holland, CPA, CA Senior Vice President, Senior Vice President, Internal Audit Internal Audit John Hong John Hong Senior Vice President, Senior Vice President, Chief Compliance Officer Chief Compliance Officer and Chief Anti-Money and Chief Anti-Money Laundering Officer Laundering Officer stock Listing: stock Listing: toronto stock exchange toronto stock exchange ticker symbol: HCg ticker symbol: HCg Options Listing: Options Listing: Montreal stock exchange Montreal stock exchange ticker symbol: HCg ticker symbol: HCg Capital stock: Capital stock: as at december 31, 2015, as at december 31, 2015, there were 69,977,980 there were 69,977,980 Common shares outstanding Common shares outstanding memberships: memberships: Canada deposit Insurance Canada deposit Insurance Corporation Corporation Canadian payments Canadian payments association association trust Companies association trust Companies association of Canada of Canada Halifax: Halifax: 1949 Upper Water street, 1949 Upper Water street, suite 101 suite 101 Halifax, nova scotia B3J 3n3 Halifax, nova scotia B3J 3n3 tel: 902-422-4387 tel: 902-422-4387 1-888-306-2421 1-888-306-2421 Fax: 902-422-8891 Fax: 902-422-8891 1-888-306-2435 1-888-306-2435 montreal: montreal: 2020 Boul. robert-Bourassa 2020 Boul. robert-Bourassa suite 2420 Montreal, Quebec suite 2420 H3a 2a5 Montreal, Quebec tel: 514-843-0129 H3a 2a5 tel: 514-843-0129 Fax: 514-843-7620 1-866-542-0129 1-866-542-0129 1-866-620-7620 1-866-620-7620 Fax: 514-843-7620 Winnipeg: 201 portage avenue Winnipeg: suite 830 201 portage avenue Winnipeg, Manitoba suite 830 r3B 3K6 Winnipeg, Manitoba tel: 204-220-3400 r3B 3K6 Fax: 204-942-1638 tel: 204-220-3400 Fax: 204-942-1638 Carol Ferguson Carol Ferguson Senior Vice President, Senior Vice President, Human Resources Human Resources Benjy Katchen Benjy Katchen Senior Vice President, Senior Vice President, Deposits and Credit Cards Deposits and Credit Cards Branches: Branches: Toronto: Toronto: 145 King street West 145 King street West suite 2300 suite 2300 toronto, Ontario M5H 1J8 toronto, Ontario M5H 1J8 tel: 416-360-4663 tel: 416-360-4663 1-800-990-7881 1-800-990-7881 Fax: 416-363-7611 Fax: 416-363-7611 1-888-470-2092 1-888-470-2092 Calgary: Calgary: 517 – 10th avenue sW 517 – 10th avenue sW Calgary, alberta t2r 0a8 Calgary, alberta t2r 0a8 tel: 403-244-2432 tel: 403-244-2432 1-866-235-3081 1-866-235-3081 Fax: 403-244-6542 Fax: 403-244-6542 1-866-544-3081 1-866-544-3081 Vancouver: Vancouver: 200 granville street 200 granville street suite 1288 suite 1288 Vancouver, British Columbia Vancouver, British Columbia V6C 1s4 V6C 1s4 tel: 604-484-4663 tel: 604-484-4663 Fax: 604-484-4664 Fax: 604-484-4664 1-866-235-3080 1-866-235-3080 1-866-564-3524 1-866-564-3524 For shareholder For shareholder Information, Please Information, Please Contact: Contact: Chris ahlvik Chris ahlvik executive Vice president, executive Vice president, Corporate Counsel and Corporate Counsel and Corporate secretary Corporate secretary Home Capital group Inc. Home Capital group Inc. 145 King street West 145 King street West suite 2300 toronto, Ontario M5H 1J8 toronto, Ontario M5H 1J8 tel: 416-360-4663 tel: 416-360-4663 1-800-990-7881 1-800-990-7881 Fax: 416-363-7611 Fax: 416-363-7611 1-888-470-2092 1-888-470-2092 www.homecapital.com www.homecapital.com www.hometrust.ca www.hometrust.ca Financial Highlights Financial Highlights Summary of Data for 10 Year Review Summary of Data for 10 Year Review For the years ended december 31 (000s, except per share amounts) For the years ended december 31 (000s, except per share amounts) 2015 – Adjusted 2015 – Adjusted 2014 – adjusted 2014 – adjusted 2013 2013 2012 2012 2011 2011 2010 IFrs 2010 IFrs 2010 Cgaap 2010 Cgaap 2009 2009 2008 2008 2007 2007 2006 2006 total assets total assets total assets under administration total assets under administration total loans total loans total loans under administration total loans under administration securitized residential mortgages securitized residential mortgages deposits deposits shareholders’ equity shareholders’ equity revenue1 revenue net income1 net income Book value of common shares2 Book value of common shares earnings per share – basic1,2 earnings per share – basic earnings per share – fully diluted1,2 earnings per share – fully diluted $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 20,512,019 20,512,019 20,082,744 20,082,744 27,301,433 27,301,433 24,281,366 24,281,366 18,268,708 18,268,708 25,058,122 25,058,122 2,674,475 2,674,475 15,665,958 15,665,958 1,621,106 1,621,106 993,711 993,711 288,857 288,857 23.17 23.17 4.12 4.12 4.11 4.11 18,364,910 18,364,910 22,563,532 22,563,532 3,945,654 3,945,654 13,939,971 13,939,971 1,448,633 1,448,633 1,010,311 1,010,311 289,153 289,153 20.67 20.67 4.14 4.14 4.11 4.11 20,075,850 20,075,850 21,997,781 21,997,781 18,019,901 18,019,901 19,941,832 19,941,832 5,210,021 5,210,021 12,765,954 12,765,954 1,177,697 1,177,697 949,547 949,547 256,542 256,542 16.95 16.95 3.70 3.70 3.66 3.66 18,800,079 18,800,079 19,681,750 19,681,750 17,159,913 17,159,913 18,041,584 18,041,584 6,706,160 6,706,160 10,136,599 10,136,599 968,213 968,213 887,685 887,685 221,983 221,983 13.98 13.98 3.20 3.20 3.19 3.19 17,696,471 17,696,471 17,696,471 17,696,471 16,089,648 16,089,648 16,089,648 16,089,648 8,243,350 8,243,350 7,922,124 7,922,124 774,785 774,785 790,274 790,274 190,080 190,080 11.19 11.19 2.74 2.74 2.73 2.73 15,518,818 15,518,818 7,712,239 7,712,239 7,360,874 7,360,874 15,518,818 15,518,818 15,878,772 15,878,772 11,508,585 11,508,585 14,091,755 14,091,755 5,861,722 5,861,722 14,091,755 14,091,755 14,028,255 14,028,255 5,468,540 5,468,540 9,616,251 9,616,251 5,809,713 5,809,713 8,423,971 8,423,971 4,531,568 4,531,568 7,145,826 7,145,826 4,975,093 4,975,093 6,434,548 6,434,548 4,045,571 4,045,571 4,505,026 4,505,026 3,902,316 3,902,316 5,009,878 5,009,878 3,328,858 3,328,858 4,436,420 4,436,420 8,116,636 8,116,636 6,595,979 6,595,979 628,585 628,585 687,249 687,249 154,752 154,752 9.07 9.07 2.23 2.23 2.22 2.22 — — — — — — — — — — 6,522,850 6,522,850 6,409,822 6,409,822 5,102,781 5,102,781 4,413,984 4,413,984 3,443,640 3,443,640 742,280 742,280 533,937 533,937 180,944 180,944 10.71 10.71 2.61 2.61 2.60 2.60 590,288 590,288 489,179 489,179 144,493 144,493 8.50 8.50 2.10 2.10 2.08 2.08 432,753 432,753 454,695 454,695 108,687 108,687 6.28 6.28 1.57 1.57 1.57 1.57 348,040 348,040 368,881 368,881 90,241 90,241 5.04 5.04 1.31 1.31 1.29 1.29 276,866 276,866 282,549 282,549 67,815 67,815 4.05 4.05 0.99 0.99 0.97 0.97 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. 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. 18.8 % 18.8 % Return on equity1 was 18.8% on an adjusted Return on equity1 was 18.8% on an adjusted basis, reflecting a strong balance sheet and basis, reflecting a strong balance sheet and accumulated earnings accumulated earnings $288.9 million $288.9 million Net income1 for 2015 remained strong at Net income1 for 2015 remained strong at $288.9 million on an adjusted basis $288.9 million on an adjusted basis $25.06 billion $25.06 billion $993.7 million $993.7 million Total loans under administration grew by 11.1% over Total loans under administration grew by 11.1% over 2014 to reach $25.06 billion at the end of 2015 2014 to reach $25.06 billion at the end of 2015 Total Revenue1 remained healthy in 2015 Total Revenue1 remained healthy in 2015 at $993.7 million on an adjusted basis at $993.7 million on an adjusted basis Net Income1 Net Income1 ($ millions) ($ millions) Diluted Earnings per Share1,2 Diluted Earnings per Share1,2 ($) ($) After-tax Return on Equity1 After-tax Return on Equity1 (percentage) (percentage) Ten-year Cumulative Total Return on $100 Investment Ten-year Cumulative Total Return on $100 Investment Ten-year Cumulative Total Return on $100 Investment Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) December 31, 2005–December 31, 2015 December 31, 2005–December 31, 2015 Ten-year Cumulative Total Return on $100 Investment Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) Comparison between S&P/TSX Composite Index (S&P/TSX) and Home Capital Group Inc. (HCG) December 31, 2005–December 31, 2015 December 31, 2005–December 31, 2015 400 400 400 400 289 289 289 289 257 257 222 222 190 190 4.11 4.11 4.11 4.11 3.66 3.66 3.19 3.19 2.73 2.73 27.1 27.1 25.5 25.5 23.9 23.9 22.0 22.0 18.8 18.8 11 11 12 12 13 13 14* 14* 15* 15* 11 11 12 12 13 13 14* 14* 15* 15* 11 11 12 12 13 13 14* 14* 15* 15* $288.9m $288.9m $4.11 $4.11 5 5 18.8% 18.8% 30 30 Home Capital reported adjusted net Home Capital reported adjusted net income of $288.9 million in 2015 income of $288.9 million in 2015 compared to $289.2 million in 2014. compared to $289.2 million in 2014. 4 4 adjusted diluted earnings per share adjusted diluted earnings per share were $4.11 for the year ended were $4.11 for the year ended december 31, 2015, consistent with december 31, 2015, consistent with the prior year. the prior year. 3 3 24 24 Home Capital reported adjusted return Home Capital reported adjusted return on equity of 18.8%, representing the on equity of 18.8%, representing the Company’s continued strong financial Company’s continued strong financial position. position. 18 18 see definition of adjusted net Income, total adjusted revenue, adjusted earnings per share and adjusted return on equity in the non-gaap Measures and glossary section of this report and the see definition of adjusted net Income, total adjusted revenue, adjusted earnings per share and adjusted return on equity in the non-gaap Measures and glossary section of this report and the reconciliation of net Income to adjusted net Income in table 2 of this report. reconciliation of net Income to adjusted net Income in table 2 of this report. 2 2 12 12 share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. 1 1 * 2014 and 2015 figures are adjusted. * 2014 and 2015 figures are adjusted. 0 0 6 6 0 0 11 11 12 12 13 14 Adjusted 14 Adjusted 13 15 Adjusted 15 Adjusted 11 11 12 12 13 14 Adjusted 14 Adjusted 13 15 Adjusted 15 Adjusted 11 11 12 12 13 14 Adjusted 14 Adjusted 13 15 Adjusted 15 Adjusted 0 0 400 400 350 350 280 280 210 210 140 140 70 70 0 0 1 1 2 2 300 300 300 300 200 200 100 100 200 200 0 0 HCG Stock HCG Stock Price Price Performance Performance 100 100 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 $17.03 $17.03 $20.95 $20.95 $9.90 $9.90 $20.93 $20.93 $25.90 $25.90 $24.55 $24.55 $29.54 $29.54 $40.47 $40.47 $47.99 $47.99 $26.92 $26.92 Closing price as of december 31 Closing Price as of December 31 Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. * Compounded Annual Growth over 10 years. * Compounded annual growth over 10 years. Closing price as of december 31 Closing Price as of December 31 Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. * Compounded Annual Growth over 10 years. * Compounded annual growth over 10 years. HCG 6%* HCG 6%* S&P/TSX S&P/TSX 4%* 4%* Auditors: Auditors: ernst & Young LLp ernst & Young LLp Chartered accountants Chartered accountants toronto, Ontario toronto, Ontario Principal Bankers: Principal Bankers: Bank of Montreal Bank of Montreal Bank of nova scotia Bank of nova scotia Transfer Agent: Transfer Agent: Computershare Investor Computershare Investor services Inc. services Inc. 100 University avenue 100 University avenue toronto, Ontario M5J 2Y1 toronto, Ontario M5J 2Y1 tel: 1-800-564-6253 tel: 1-800-564-6253 m m o o c c . . r r i i m m b b . . w w w w w w o o s s s s e e d d a a r r I I s s l l l l i i M M n n a a y y r r B B r r i i m m b b y y b b d d e e n n g g i i s s e e D D HCG HCG 6%* 6%* S&P/TSX S&P/TSX 4%* 4%* 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 $17.03 $17.03 $20.95 $20.95 $9.90 $9.90 $20.93 $20.93 $25.90 $25.90 $24.55 $24.55 $29.54 $29.54 $40.47 $40.47 $47.99 $47.99 $26.92 $26.92 Inside Panel HCG Stock HCG Stock Price Price 300 300 Performance Performance 100 100 400 400 0 0 300 300 200 200 100 100 0 0 200 200 Closing Price as of December 31 Closing Price as of December 31 * Compounded Annual Growth over 10 years. * Compounded Annual Growth over 10 years. Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. Share prices have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014. 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 CANADA’S ONE-STOP MORTGAGE LENDER AnnuAL REPORT 2015 Business Profile 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 I n C . A n n u A L R E P O R T 2 0 1 5 Moving Forward CANADA’S ONE-STOP MORTGAGE LENDER Front Panel Home Capital Group Inc. is a public company, traded on the Toronto Stock Exchange (HCG), operating through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of insured residential fi rst mortgage products, consumer lending and credit card services. In addition, Home Trust offers deposits via brokers and fi nancial planners, and through its direct -to -consumer deposit brand, Oaken Financial. Home Trust also conducts business through its wholly owned subsidiary, CFF Bank. Licensed to conduct business across Canada, Home Trust has offi ces in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba. VISIOn, MISSIOn AnD VALuES In 2015, the Company relaunched its Vision, Mission and Values in concert with its evolving service delivery commitments to its stakeholders. Our Vision The Company’s vision is to be the market leader in alternative-based fi nancial services solutions to Canadians. Our Mission We believe every Canadian deserves a home and the opportunity to prosper. Our Corporate Values (PROSPER) Passion Risk awareness Optimism Service Professionalism Ethics Respect Home Trust Branches MORTGAGE LEnDInG 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. COnSuMER LEnDInG 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, as well as unsecured cards under Home Trust’s brand name. 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. DEPOSIT InVESTMEnTS Home Trust provides a broad range of deposit investment services through its extensive deposit broker network. In addition, Home Trust’s direct-to-consumer brand, Oaken Financial, offers a suite of consumer deposit products and provides customers with a secure alternative to manage their savings independently. With effi cient, personal service and competitive rates, Home Trust and Oaken Financial offer a number of solutions to meet the long -term and short -term needs of investors looking to diversify their portfolios. COnTEnTS 1 Chairman’s Letter 2 Letter to Shareholders 4 Q&A with Martin Reid 6 Proven Results 7 Performance vs. Target 8 Corporate Governance at Home Capital 11 Corporate Social Responsibility 12 Management’s Discussion and Analysis 7 5 Consolidated Financial Statements 82 Notes to the Consolidated Financial Statements 114 Corporate Directory

Continue reading text version or see original annual report in PDF format above