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
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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
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P
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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
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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
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i
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w
w
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a
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B
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b
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b
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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
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74
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14
15
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31
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31
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33
35
35
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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.
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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
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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.
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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
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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.
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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.
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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.
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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
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i
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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
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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