Home Capital Group Inc. 2017 Annual Report
Ready to grow.
We are ready to grow.
We are inspired by a belief that
every hardworking Canadian
deserves a home.
We believe in the power of our
people to make a difference.
For more than three decades we
have helped thousands of people
realize their dreams of home
ownership. We are ready to be a
part of your life journey. We are
ready to grow with you.
Table of Contents
2 A Message from Our Chair
3
A Message from Our Chief
Executive Officer
6 Our Management Team
7 Financial Highlights
8 Ready to Grow:
8
10
Responsibly
Leading With Service, Deepening
Powerful Relationships
Improving Technology, Providing
Innovative Solutions
Welcome to Oaken
Sustainably
Management’s Discussion
and Analysis
12
14
16
18
81 Consolidated Financial Statements
88 Notes to the Consolidated
Financial Statements
124 Corporate Directory &
Shareholder Information
2017 Annual Report 1
We are
ready to grow.
A MESSAGE FROM OUR CHAIR
One goal:
leading in
every sense.
Dear Fellow Shareholders,
If the events of 2017 taught us one lesson, it was that in
our business, reputation is paramount. As we look ahead
to 2018, your Board is focused on doing what it takes to
ensure that Home Capital earns a deserved reputation as
Canada’s leading Alt-A lender in every sense.
To me, that means Home Capital should be recognized as
having the best service, the best performance, the highest
ethical standards and the best reputation for safety and
risk management.
This is a lofty goal, but none of us should be satisfied with
anything less.
To attain it, your revamped Board is working hard to instill
a deeper sense of accountability, and to ensure the highest
standards of corporate governance. The directors deserve
thanks for the work they have done in 2017. I would like to
say a special thank you to the five incredibly qualified and
hardworking directors who joined our Board in 2017 in the
midst of a very difficult time for the Company, and who did
so much to help Home Capital return to the strong position
it is in today.
The depth of expertise they have brought is unparalleled in
our sector.
Each of our four Board committees is overseen by one of our
new directors. Claude Lamoureux is chair of the Governance,
Nominating and Conduct Review Committee, Alan Hibben
chairs the Risk and Capital Committee, Paul Haggis chairs the
Audit Committee and Sharon Sallows is chair of the Human
Resources and Compensation Committee.
All of the new voices on our Board have been excellent
additions, and over time I expect we will see more renewal.
Ongoing board refreshment is a healthy and necessary
process for any company, and we will continue to seek
opportunities to add new expertise to the boardroom.
The Board has charged management with developing a
strategy for the long term – one that enables the Company
to grow sustainably for years to come and that puts
responsible risk management front and centre at all times.
We have worked closely with management to oversee
development of this strategy, and we are confident in the
direction the Company is taking under our renewed and
revitalized senior management team.
2 Home Capital Group Inc.
Yousry Bissada and his team are the right group to take us
forward and your Board has every confidence in their ability
to deliver. When we recruited Yousry, we were excited by
his track record of finding ways to ensure companies ran
more smoothly, with better service and technology, his
ability to balance entrepreneurial culture with operational
and regulatory discipline, and his talent for building and
energizing teams. I’m pleased to say that is exactly what he
is doing here at Home Capital.
Add that to our strong balance sheet, excellent liquidity,
dedicated employees, and great relationships out in the
market and, as Yousry says, we are ready to grow.
On behalf of the Board this year, I would like to express our
gratitude to all our employees, partners, customers and
shareholders for their support in what was an extraordinary
2017, and in what I believe will be an exciting 2018.
Brenda J. Eprile
Chair, Board of Directors
Our Board of Directors
Brenda J. Eprile, Chair
Alan R. Hibben
Jacqueline E. Beaurivage
Claude R. Lamoureux
Yousry Bissada
Robert J. Blowes
Paul G. Haggis
James H. Lisson
Sharon H. Sallows
Bonita J. Then
A MESSAGE FROM OUR
CHIEF EXECUTIVE OFFICER
We are
ready to grow.
We have the resources, the balance
sheet, the relationships and the team
to make it happen. We are building
Home Capital to be the leader in the
Alt-A lending space. The leader in
service. The leader in technology.
The leader in innovative solutions.
And the leader in risk management,
thanks to our focus on building a
sustainable risk culture.
A Sustainable Risk Culture
What does that mean?
A sustainable risk culture is one that ensures that we
look at everything we do through the lens of responsible
risk-taking. From making a loan to taking a deposit, from
launching a new mortgage product to evaluating a new line
of business, the first question has to be “Is this the right
decision for the long-term sustainability of the Company?”
We don’t want to do something that only has short-
term benefits.
In a business where regulation is changing, and where
there are understandable concerns about the ongoing
strength of the housing market, it is our duty to ensure that
we are a responsible lender. Protecting our reputation must
be at the core of everything we do.
To that end, we are taking actions such as establishing
performance objectives for all our employees that
emphasize and align with our number one corporate
priority which is a sustainable risk culture. As we grow,
those objectives will be a constant reminder to our team
not to lose sight of our commitment.
A Strong Financial Foundation
We have a lot going for us at Home Capital as we return
to growth.
Over the years, Home Capital has become known for
the quality of its loan portfolio. In 2017, one constant was
the strong performance of our loan book.
2017 Annual Report 3
A MESSAGE FROM OUR
CHIEF EXECUTIVE OFFICER
4 Home Capital Group Inc.
We are focused on setting
this organization on the right
path for the next decade.
Entering 2018, that strong portfolio performance
continues. What’s more, we have momentum in the
business as loan growth begins to pick up. We have
excellent liquidity and stable deposit funding based on
term deposits. We have one of the highest capital ratios
in our sector – a competitive advantage that gives us a
real margin of safety against any changes in the market
as well as flexibility to invest and grow the business.
We intend to grow with an eye on building value for the
long term. Markets go up and they go down. That’s true
of the housing and stock markets. We can’t control that.
What we can control is how we run the Company, by
making decisions that create value through cycles.
To do that, we are focused on setting this organization
on the right path for the next decade.
Leading with Service and Technology
To achieve our expected growth, we have started with
a strong focus on driving leading customer service and
delivering innovative solutions. That is a priority for the
team. We are investing in people, process and technology
for a better broker and customer experience.
Already we have ramped up important initiatives in
areas such as broker education to better explain to our
partners our underwriting standards and risk approach.
We have also improved efficiency in our underwriting
process to ensure we are doing the very best we can to
help brokers and customers.
As our environment continues to evolve, we will evolve with
it to ensure we have the innovative solutions needed to
attract and retain brokers and customers.
I want to thank the team at Home Capital for their hard work
and dedication in making this happen.
Since my arrival at Home Capital in August of 2017, I have
been so very impressed by the dedicated group that we
have here at our Company. We have asked a lot of our
people, and they have delivered, and they will continue to
do so. We are all inspired by the important work we do at
Home Capital, helping hardworking, deserving Canadians
purchase homes.
I also want to say thank you to our customers and to our
broker community. We appreciate the unwavering support of
our broker partners who have been with us throughout the
last 30 years of our growth and through 2017. And of course,
thank you to our shareholders for your continued support.
I look forward to reporting to you on our progress over the
years to come.
Yousry Bissada
President and Chief Executive Officer
Thank you to our customers,
and to our broker community.
We appreciate the unwavering
support of our broker partners
who have been with us throughout
the last 30 years of our growth
and through 2017. And of course,
thank you to our shareholders for
your continued support.
2017 Total Assets Under
Administration
$25.04b
2017 Common Equity
Tier 1 Capital Ratio
23.17%
Canadians Who Purchased or
Refinanced a Home in the Last
10 Years Through Home Capital
>140,000
2017 Annual Report 5
“ We have a solid foundation,
anchored by our capital
position, which provides us
with a unique value creation
opportunity. We will evaluate
options for capital deployment,
including organic growth,
dividends, share buybacks and
other opportunities that may
become available with a focus
on the long-term growth of
Home Capital.”
Brad Kotush
Executive Vice President
and Chief Financial Officer
OUR MANAGEMENT TEAM
Introducing our
Management
Team.
Building a business for the long term and achieving
our goal of being Canada’s leading alternative lender
requires the right leadership, skills and expertise. We
have attracted and retained excellent leaders. Our
senior management team brings deep knowledge and
experience in risk management, mortgages, sales,
underwriting, operations, finance, technology and
capital markets.
Yousry Bissada
President and Chief
Executive Officer
Brad Kotush
Executive Vice President
and Chief Financial
Officer
John Harry
Executive Vice
President,
Commercial Lending
Dinah Henderson
Executive Vice
President, Operations
Amy Bruyea
Senior Vice President,
Human Resources
David Cluff
Executive Vice
President, Enterprise
Risk Management and
Chief Risk Officer
Donald Correia
Senior Vice President,
Commercial
Underwriting
Victor DiRisio
Chief Information Officer
Mike Forshee
Senior Vice President,
Residential Underwriting
John Hong
Senior Vice President,
Chief Compliance Officer
and Chief Anti-Money
Laundering Officer
Ed Karthaus
Executive Vice
President, Sales and
Marketing
Benjy Katchen
Executive Vice
President, Deposits and
Consumer Lending
Anthony Stilo
Senior Vice President,
Internal Audit
Chris Ahlvik
Executive Vice
President, Corporate
Counsel and Corporate
Secretary
6 Home Capital Group Inc.
FINANCIAL HIGHLIGHTS
Loans Under
Administration
($ billions)
1
.
5
6 2
2
2
.
.
4
6
2
.
5
2
2
.
9
9
1
Mortgage Advances
($ billions)
Provision for
Credit Losses as a
% of Gross Loans
Common Equity
Tier 1 Capital Ratio
2
9
.
9
8
.
1
.
8
.
9
6
.
7
4
%
9
0
0
.
%
7
0
0
.
%
5
0
0
.
%
5
0
0
.
%
4
0
0
.
%
7
1
.
3
2
%
0
3
.
8
1
%
1
3
.
8
1
%
0
8
6
1
.
%
5
5
6
1
.
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
Summary of Data for
10 Year Review
For the years ended December 31
(000s, except per share amounts)
IFRS
CGAAP
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Total assets
$ 17,591,143
20,528,777 20,527,062
20,082,744
20,075,850
18,800,079 17,696,471 15,518,818
7,360,874
5,809,713
Total assets under administration
$ 25,040,182
28,917,534 27,316,476
24,281,366
21,997,781 19,681,750 17,696,471 15,518,818
11,508,585
8,423,971
Total loans
$ 15,064,424
18,035,317 18,268,708
18,364,910
18,019,901
17,159,913
16,089,648 14,091,755
5,468,540
4,531,568
Total loans under administration
$ 22,513,463 26,424,074 25,058,122
Deposits
$ 12,170,454 15,886,030 15,665,958
22,563,532
19,941,832
18,041,584
16,089,648 14,091,755
9,616,251
7,145,826
13,939,971
12,765,954
10,136,599
7,922,124
6,595,979
6,409,822
5,102,781
Liquid assets
$ 1,654,718
2,067,981
2,095,145
1,058,297
1,497,680
771,772
808,222
951,271
1,200,082
880,700
Shareholders’ equity1
$ 1,813,505
1,632,587
1,636,501
1,448,633
1,177,697
968,213
774,785
628,585
590,288
432,753
Net income
$
7,527
247,396
287,285
313,172
256,542
221,983
190,080
154,752
144,493
108,687
Book value of common shares1,2
$
22.60
25.36
Earnings per share – fully diluted2
$
0.10
3.71
23.39
20.67
16.95
13.98
11.19
9.07
8.50
6.28
4.09
4.45
3.66
3.19
2.73
2.22
2.08
1.57
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 2008 are on a former Canadian Generally Accepted Accounting
Principles (GAAP) basis.
1
The Company restated shareholders' equity for 2015, 2016 and 2017 reflecting an adjustment to retained earnings as described in Note 13(F) to the audited consolidated
financial statements included in this report.
2 Per share amounts have been restated to reflect the stock dividend of one common share per each issued and outstanding share, paid on March 10, 2014.
2017 Annual Report 7
READY TO GROW:
RESPONSIBLY
Home Capital
is growing,
responsibly, to
return to the
leading alternative
lender position in
Canada.
We aspire to be the leading
alternative lender in Canada.
To achieve that, and to create
meaningful, sustainable value,
we must grow responsibly,
within our risk framework.
We are a federally regulated financial
institution. We must always be careful
stewards of our depositors’ savings
and our investors’ capital.
We are focused on growing our assets
through strong broker and customer
relationships, understanding the needs
of those we work with and providing
them with the best customer experience
and solutions.
8 Home Capital Group Inc.
“ We have incredible
depth of experience and
expertise across all of the
major risk categories of
our business, and a Risk
Management Framework
that is top notch for a
company of our size and
complexity. We must
always strive to get even
better. Our top priority
is to further strengthen
the risk culture across
the Company.”
David Cluff
Executive Vice President, Enterprise
Risk Management and Chief Risk Officer
A bright future –
growing our mortgage
assets in our markets.
We know that historically about one
in five Canadians may not qualify for
a mortgage with the large Canadian
banks. These are small business
owners and professionals, or new
Canadians who have limited credit
history. These are our customers, and
we know this segment is growing. We
also know our customers take pride
in home ownership. It’s important
that these people have the ability to
participate in the housing market by
obtaining a mortgage. We are proud
to be there to help.
We believe today, more than ever,
in the basic premise on which Home
Capital was first founded more than
30 years ago – to provide residential
mortgages and other financial services
to a segment of the population made
up of reliable borrowers. Serving that
need is fundamental to the health and
well-being of the Canadian economy.
We are focused on this segment as we
grow our mortgage assets and build
our business responsibly.
2017 Total Loans Under
Administration1
$22.51b
2017 Total Deposits
$12.17b
2017 Liquid Assets
$1.65b
Growing our
business prudently,
managing risk.
We have one of the strongest
common equity tier 1 capital
positions among regulated
lenders. This provides us with an
abundant layer of security and
flexibility to invest in our business
– a competitive advantage in
our markets for many years to
come. Our capital position is a key
strength that, when combined with
our liquid assets and stable deposit
funding base, provides a unique
value creation opportunity.
We are managing our liquidity
prudently, ensuring we maintain an
adequate level of liquidity to fund
future origination growth. We are
focused on a reliable base of fixed-
term deposits. Our ability to raise
fixed-term deposits through deposit
brokers, or directly from Oaken,
our direct-to-consumer channel,
provides even greater flexibility
and stability.
As we manage liquidity and
consider ways to deploy capital,
we will do so in a manner that
emphasizes creating long-term
value. We believe this is the right
approach for shareholders.
1
Includes loans both on- and off-balance sheet.
2017 Annual Report 9
READY TO GROW:
LEADING WITH SERVICE, DEEPENING
POWERFUL RELATIONSHIPS
Our broker
origination and
funding networks
are strong. Now
we must be
service leaders.
We have built an extensive
network of thousands of
mortgage brokers and served
generations of customers
across the country over the
last three decades.
We know that to be the leading
alternative lender, we must also
be the leader in service. We
are investing in our people, our
processes and our technology
for a better broker and customer
experience and to help us
deepen our already solid broker
relationships and drive growth.
10 Home Capital Group Inc.
2017 Total Mortgage Advances
$4.72b
Employees Serving Thousands of
Mortgage Brokers and Customers
Across Canada
669
2017 Mortgage Advances
by Business Line
$3.34 billion
$0.68 billion
$0.70 billion
• Single-Family Residential
• Residential Commercial
• Non-Residential Commercial
Investing in people
to execute efficiently
and effectively.
Mortgage brokers don’t work
for Home Capital – they are
independent business people.
They see the value that Home
Capital delivers when we are able
to promptly provide a decision
on a loan application or answer
a product question. Although
mortgage brokers and customers
may have different needs, one
thing is clear: they all deserve
efficient and effective service.
To deliver that, we recognize the
need for ongoing investment in
training our people, to empower
them with the knowledge and
skills to deliver exceptional service
to brokers and customers.
Improving service
to retain existing
customers longer.
Customers who renew their existing
mortgage are just as important as
new mortgage customers. We expect
renewals to contribute meaningfully to
our growth, which is why we are focusing
on new initiatives to improve customer
retention. A specialized retention team
was put in place at the end of 2017 to
actively manage customer files from the
moment the loan application comes in
right up until that loan matures.
“ We are fortunate to
have very talented and
committed staff coast to
coast, who have the skills,
expertise and relationships
to drive the business. It
is our people, coupled
with great products, that
will allow us to grow our
business and make the
dream of home ownership
a reality for Canadians
across the country.”
Ed Karthaus
Executive Vice President,
Sales and Marketing
2017 Annual Report 11
“ Many people forget that
Home Trust helped fuel
the evolution of Canada’s
entire broker channel.
As regulations have
changed over the years,
so have broker needs and
wants, but throughout it
all, Home Trust has been
a constant.”
Mortgage Broker
READY TO GROW:
IMPROVING TECHNOLOGY, PROVIDING
INNOVATIVE SOLUTIONS
Technology
changes
everything.
We’re focused on
meeting evolving
customer
needs and
redefining the
Home Capital
experience.
Technology such as digital
solutions and artificial intelligence
are transforming our marketplace
and fundamentally reshaping
financial services.
People are changing their expectations
when it comes to dealing with their
financial institution. In this environment,
we cannot stand still. We are looking
at ways to redefine the experience that
customers and brokers have with us to
ensure we are keeping pace in areas
such as mobile access to our products
and services.
12 Home Capital Group Inc.
Improving technology
Technology will play a significant
role in improving our day-to-day
interactions with our clients,
ultimately helping us provide a
better experience. In the field,
mortgage broker relationship teams
are using new technology to be
more effective. Ongoing process
improvements and technology
updates to Loft, our internal systems
and broker submission platform,
will help mortgage brokers and
customers have better and more
efficient access to our products.
We will also improve the analytical
technology used to support our
retention and renewal efforts.
“ The Information Technology
team’s top priority is to use both
mature and emerging technologies
to significantly improve our
processes for the benefit of
brokers, customers and employees.
That’s in addition to the work we
do every day collaborating with our
business partners and managing
the complex technologies that it
takes to run a modern financial
services company.”
– Victor DiRisio
Chief Information Officer
Loft is our online
broker portal, designed
to streamline workflow.
It’s just one of the ways we are using
technology to be a service leader
and provide an exceptional broker
and customer experience. Loft
allows brokers to submit and track
mortgage applications efficiently
and securely. Loft’s two-way
communication capabilities facilitate
seamless pipeline management
and responsive message sharing
between brokers and underwriters.
The portal is easy to navigate, with
24-hour access and the use of online
notifications for final approval. To
ensure we meet the evolving needs
of our brokers, we are committed to
updating Loft with the latest features
and functions to drive a superior
broker and customer experience.
“ At Home Capital Group
we pride ourselves
on providing tailored
mortgage solutions for
Canadians. Our focus
is on strengthening our
foundation where a
sustainable risk culture,
accountability, and
efficiency are the drivers
of our future success.”
Mike Forshee
Senior Vice President,
Residential Underwriting
Financial solutions
As our environment evolves, we will
too. We will provide new products and
services to attract new brokers and
customers, and retain existing ones.
We have the skills, knowledge and
financial strength to make it happen,
and to be the provider of choice in
our markets.
2017 Annual Report 13
READY TO GROW:
WELCOME TO OAKEN
Home Trust
launched Oaken
Financial to offer
Canadians a
way to manage
and control
their savings
independently.
Our Oaken Financial brand and
stores embody the aspirations we
have for all our lines of business
– providing uncomplicated,
straightforward solutions that
make sense for customers, and
offering exceptional customer
experiences.
It has been nearly six years since we
launched Oaken Financial. It’s a great
blueprint that will be very valuable for
us as we focus on becoming a service
leader across all of Home Capital.
14 Home Capital Group Inc.
At Oaken Financial,
we have a Golden
Rule: Treat others the
way we would want to
be treated ourselves.
We live and work by this rule – it
colours everything we do, every
day. Customers are greeted by
knowledgeable and friendly staff
whenever they call or visit, and
we take pride in making sure they
will never be surprised by the fine
print. In fact, all Oaken print is
deliberately kept large. Customers
talk to real people who take the time
to listen, understand their needs,
and clearly explain all the options.
We encourage anyone to drop by
our stores at any time to connect
to the free Wi-Fi, have a cup of
coffee or to simply relax in a quiet,
comfortable setting.
“ We have built a
new banking brand
that truly puts the
customer at the heart
of everything we do.
Other banks say that
they do this then hide
behind the fine print of
teaser rate promotions
or a multitude of hidden
fees. The Oaken brand
really has become
the advocate for the
Canadian banking
consumer.”
Benjy Katchen
Executive Vice President,
Deposits and Consumer Lending
2017 Annual Report 15
Through Oaken Financial, we are able
to raise fixed-term deposits by selling
Guaranteed Investment Certificates
(GICs) directly to customers by
phone, online or in person at our
stores in Toronto and Calgary and
our offices in Halifax and Vancouver.
Oaken customers can seamlessly
move money to and from their Oaken
Savings accounts and their primary
financial institution online.
At the end of 2017, Oaken deposits
accounted for $2.03 billion or nearly
17% of Home Capital’s total deposit
base of $12.17 billion. At the end of
2017, only 4.4% of our deposits are
payable on demand compared to
15.9% at the end of 2016. Oaken
Financial offers deposits from both
Home Trust and Home Bank, both of
which are members of the Canada
Deposit Insurance Corporation (CDIC).
2017 Total Deposits:
$12.17 b1
• Total Oaken Deposits
• Total Other Deposits
1 Total deposits include $476 million of institutional
deposit notes and $171 million of other deposits
payable on demand.
READY TO GROW:
SUSTAINABLY
When we think
about growing
responsibly,
we look at what
we are doing
to improve the
communities in
which we live and
work, the lives of
those around us
and the impact we
are having on the
environment.
We also look within. We are very
proud of what our employees
accomplish every day, and we
strive to be a great place for
them to work.
16 Home Capital Group Inc.
To grow responsibly, we
must be sustainable, with
every decision we make
and in everything we do.
Community
We recognize the importance of
contributing to our communities
through corporate commitment and
employee fundraising efforts. We
invest in communities through a
variety of charitable donations and
sponsorships, and 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.
People
We strive to attract top talent and
create a workplace where people
feel engaged, inspired, challenged,
proud and respected. To that end, we
focus on all aspects of the employee
experience, including rewards
and recognition, communication,
leadership, culture, professional and
personal growth, accountability and
performance, and corporate social
responsibility. We also work hard and
have fun. Our outstanding team of
employees demonstrate integrity and
commitment every day.
• Providing a rewarding and engaging
experience for employees
• Valuing integrity and ethical
behaviour
• Ensuring a safe and healthy work
environment
Some of the Organizations
Supported in 2017:
SickKids Foundation
Canadian Blood Services
Covenant House
Habitat for Humanity
Junior Achievement Central
Ontario
Ronald McDonald House
Canadian Cancer Society
Sunnybrook Veterans Centre
Canadian Mental Health
Association
Donations to Charities in 2017
$522,000
Environment
Environmental responsibility is
a vital component of being a
good corporate citizen. We strive
to implement environmentally
sustainable business practices
that reduce our impact on the
environment. We achieve this
through employee awareness
programs, encouraging employees
to make green choices, and by
supporting business practices
and participating in initiatives that
benefit the environment in practical
and meaningful ways.
• Upholding sustainable business
practices
• Reducing energy consumption and
greenhouse gas emissions
• Developing partnerships to
conserve Canada’s natural
heritage
200 employees
volunteered more than
1,600 hours to support
our community.
2017 Annual Report 17
Management’s
Discussion and
Analysis
19 Caution Regarding
Forward-looking Statements
20 Business Profile
20 Business Portfolios
20 Mortgage Lending
20 Consumer Lending
21 Deposits
21 Other Activities
21 2017 Performance Overview
21 Overview
21 Recap of Liquidity Event in the
Second Quarter
22 Elevated Level of Expenses
22 Credit Performance and Losses
22 2018 Overall Outlook
22 Recent Government Changes
23 Market Conditions
23 Traditional Single-family Mortgage Lending
23 Uninsured Securitized Mortgage Lending
24
Insured Securitized Mortgage Lending
24 Commercial Mortgage Lending
24 Consumer Lending
24 Deposits
24 Credit Performance and Losses
24 Non-interest Expenses
24 Liquidity and Capital
25 Financial Highlights
26
26 Financial Position Summary for 2017
Income Statement Summary for 2017
27 Financial Performance Review
27 Net Interest Income and Margin
29 Non-interest Income (Loss)
30 Derivatives and Hedging
32 Non-interest Expenses
33 Taxes
33 Comprehensive Income
34 Financial Position Review
34 Assets
39 Liabilities
40 Shareholders’ Equity
41 Contingencies and Contractual Obligations
41 Off-balance Sheet Arrangements
41 Related Party Transactions
18 Home Capital Group Inc.
42 Quarterly Financial Highlights
43 Fourth Quarter 2017
43
44 Financial Position Summary
Income Statement Summary
45 Fourth Quarter Financial Information
52 Capital Management
55 Capital Management Activity
55
Internal Capital Adequacy Assessment
Process (ICAAP)
55 Credit Ratings
55 Share Information
56 Risk Management
56 Risk Overview
56 Risk Factors That May Affect Future Results
57 Risk Governance
60 Risk Management
62 Credit Risk
68 Market Risk
72 Liquidity and Funding Risk
74 Operational Risk
74 Compliance Risk
75 Capital Adequacy Risk
75 Strategic Risk
75 Reputational Risk
75 Accounting Standards and Policies
76 Future Changes in Accounting Standards
76 Controls Over Financial Reporting
77 Non-GAAP Measures and Glossary
77 Non-GAAP Measures
79 Glossary of Terms
80 Acronyms
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, 2017. 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, Home Bank. This MD&A should be read in conjunction
with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2017 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 14, 2018. 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 Group Inc. 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 the Company’s other publicly filed information, which is 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, liquidity
and funding risk, structural interest rate risk, operational risk, investment risk, strategic 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 section in the Annual Report. Forward-looking statements are
typically identified by words such as “will,” “believe,” “expect,” “anticipate,” “intend,” “should,” “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
uncertainty, 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 presents forward-looking statements to assist shareholders in understanding the
Company’s assumptions and expectations about the future that are relevant in management’s setting of performance goals,
strategic priorities and outlook. The Company presents its outlook to assist shareholders in understanding management’s
expectations on how the future will impact the financial performance of the Company. These forward-looking statements may
not be appropriate for other purposes. 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 2018 and its effect on Home Capital’s business are material
factors the Company considers when setting its strategic priorities 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 strategic priorities and outlook for
2018, management’s expectations continue to assume:
• The Canadian economy is expected to be relatively stable in 2018, supported by expanded Federal Government spending.
• Generally, the Company expects stable employment conditions in its established regions. 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 demand for the
Company’s lending products in its established regions.
• 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 that may result.
2017 Annual Report 19
MANAGEMENT’S DISCUSSION AND ANALYSIS • While the Company is assuming that interest rates will experience modest increases in 2018, the impact of such increases
is not expected to be material. The level of interest rates is expected to continue to support relatively low mortgage interest
rates for the foreseeable future.
• The Company believes that the current and expected levels of housing activity indicate a relatively stable real estate market
overall. Please see Market Conditions under the 2018 Overall Outlook for more discussion on the Company’s expectations
for the housing market.
• 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 deposits, residential and non-residential commercial mortgage lending and consumer lending. Home
Trust also conducts business through its wholly owned subsidiary, Home Bank. The Company’s other subsidiary, Payment
Services Interactive Gateway Inc. (PSiGate) provided payment services. On February 1, 2018, the Company closed the sale
of its payment processing and prepaid card business including PSiGate. Please see Note 23 of the consolidated financial
statements included in this report for more information. 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 and ACE Plus Lending
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. The ACE Plus product is a lower-rate mortgage product
directed toward lower-risk borrowers. These mortgages are generally funded by the Company’s deposit products.
Insured Residential Lending
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)
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
Non-residential commercial lending includes store and apartment mortgages and commercial mortgages. These loans are
funded by deposits.
Consumer Lending
Credit Card and Line of Credit Lending
The Company’s Equityline Visa product, which is a home equity line of credit (HELOC) secured by residential property,
currently represents more than 80% of the credit card portfolio. The Company also offers cash-secured and unsecured credit
card products. Credit card loans and lines of credit are funded by deposits.
Other Consumer Retail Lending
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 both originated directly and as cash flow payment streams via
other loans and rental contract originators. Consumer loans are funded with deposits.
20 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Deposits
The Company’s uninsured assets are largely funded by its deposit activities. Deposits are generally taken for fixed terms,
varying from 30 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 growing the Oaken Financial direct-to-consumer deposit brand and an
institutional deposit program. Home Trust and Home Bank deposit products are offered through both brokers and Oaken
Financial. Home Trust and Home Bank are both members of the Canada Deposit Insurance Corporation (CDIC) and their 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,
the sale of which was closed subsequent to the end of 2017 as indicated above. In addition, Home Trust’s subsidiary Home
Bank, a Canadian retail bank, offers deposit and mortgage 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.
2017 Performance Overview
Overview
As previously disclosed and discussed in more detail below, the Company experienced a significant liquidity event in
the second quarter of 2017. The Company successfully restored ample liquidity and stabilized its deposit funding during
the second half of 2017. However, third and fourth quarter performance continued to reflect a number of negative factors
stemming from the liquidity event including elevated costs and new loans originations well below historical levels.
Because of the liquidity event, the Company was required to slow the issuing of loan commitments and funding of new loan
originations for a period in the second and third quarters while it secured new sources of funding and stabilized its liquidity.
Although the Company successfully stabilized its liquidity position and quickly restored deposit funding, the process of
restoring loan growth is ongoing. The Company is focused on growing its residential and commercial loan balances through
a combination of improving service levels, competitive product offerings and broker outreach programs. Elevated deposit
balances in the third quarter, some of which were raised at premium rates in the immediate aftermath of the liquidity event,
relative to a smaller loan portfolio has negatively impacted net interest margin and earnings.
In addition, the Company is operating in the context of an evolving regulatory landscape that will affect the mortgage market
and the Company’s business, though the extent of any impact is not yet clear.
Against this backdrop, management and the Board are reassessing the corporate strategy and are focused on finalizing the
Company’s long-term strategy during the first half of 2018 to help grow the business, create shareholder value and regain
leadership in the Canadian alternative residential mortgage market.
Recap of Liquidity Event in the Second Quarter
As discussed in its 2017 quarterly reports, the Company faced significant uncertainty because of reputational events during
the second quarter, which in turn led to a loss of the confidence of depositors, investors, customers and other stakeholders.
This ultimately led to a severe loss of liquidity during the second quarter, as depositors withdrew most of the Company’s
outstanding demand deposits. In response, the Company was required to slow the funding of new business and manage
its commitment and renewal pipeline, while it focused on activities that would quickly restore its liquidity. These activities
included increasing rates on deposits, partnering with other lenders and arranging for the sale of certain commercial and
residential mortgage assets.
The Company also entered into an agreement for special financing from a major pension plan (Emergency Credit) to provide
a short-term bridge to a more sustainable solution to the Company’s loss of liquidity. At the end of the second quarter, the
Company completed an additional equity financing for proceeds of $153.2 million and obtained a new $2 billion line of credit
from a wholly owned subsidiary of Berkshire Hathaway Inc. (BH) that replaced the Emergency Credit on better terms. Please
see Note 4(A) to the consolidated financial statements in this report for more details on the line of credit facility from BH.
In the third quarter, subsequent to the announcement of the BH transactions, deposit inflows increased significantly and those
inflows combined with the proceeds from asset sales and lower lending activities stabilized the Company’s liquidity position.
At the end of July, the Company fully repaid the amounts drawn on the line of credit facility from BH. As of the end of the
year, the Company held liquid assets of $1.65 billion in addition to the undrawn balance of $2 billion on its BH line of credit.
For further information on the liquidity event and actions taken, please see the Overview of the Second Quarter and Outlook
section of the MD&A included in the Company’s 2017 Second Quarter Report.
2017 Annual Report 21
MANAGEMENT’S DISCUSSION AND ANALYSIS During the third quarter, the Company also made payments of $31.0 million ($29.0 million of which was funded under the
Company’s insurance program) under the previously announced settlements of the class action and Ontario Securities
Commission (OSC) proceeding discussed in the Second Quarter Report.
Elevated Level of Expenses
The Company recorded elevated costs in line with management expectations following actions taken during the second
quarter. The Company liquidated assets and established the $2 billion Emergency Credit (later replaced by the $2 billion
credit facility from BH) to help restore its funding and liquidity.
Second quarter costs related to the liquidity event included $130.6 million in commitment fees and interest related to the
Emergency Credit and BH line of credit facilities, professional and advisory fees, and a loss of $72.9 million realized on the
liquidation of securities. The Company also recognized $13.1 million of costs, reflecting the impairment of goodwill, intangible
and other assets, severance expense and other costs. Additionally, the Company recognized $7.0 million of costs in relation
to the OSC and class action matters, referred to above, and not covered by the Company’s insurers. For further information
on elevated costs in the second quarter, please see the Overview of the Second Quarter and Outlook section of the MD&A
included in the Company’s 2017 Second Quarter Report.
During the third quarter, some expenses associated with the liquidity event declined, such as the interest expense on the
Company’s standby credit facilities, which were repaid by the end of July. However, other related operating expenses
remained elevated, as expected. In addition, the Company recognized a loss of $13.2 million associated with the completion
of the previously announced asset sales required to repay outstanding balances on the BH credit facility. Project EXPO,
an initiative to reduce non-interest expenses, was successfully completed. The Company did not recognize any additional
severance or other expense related to this project during the third quarter.
Expenses remained elevated during the fourth quarter primarily as a result of additional impairment losses of $6.3 million on
intangible assets together with costs related to the exit from the PSiGate and prepaid businesses and litigation-related costs.
Credit Performance and Losses
The credit quality of the loan portfolio remained strong during the year with continued low non-performing loans and credit
losses. Provisions for credit losses were 0.07% of gross uninsured loans for the year while net non-performing loans as a
percentage of gross loans were 0.30% at the end of the year.
2018 Overall Outlook
In the near term, the Company’s priorities are to grow residential and commercial originations, take back market share and
improve retention levels. To achieve this, management is focused on improving service levels, introducing competitive
product offerings and increasing outreach in the broker community.
The Company is focused on carefully increasing lending activity and growing mortgage originations in step with growth in
deposit funding to maintain adequate liquidity. Management expects the balance of non-securitized single-family residential
mortgages to remain stable in the first part of 2018 with growth resuming mid-year.
Recent Government Changes
In October 2017, the Office of the Superintendent of Financial Institutions Canada (OSFI) announced revisions to Guideline
B-20 Residential Mortgage Underwriting Practices and Procedures (B-20), which became effective on January 1, 2018. The
revisions include the following new standards:
1) a qualifying stress test for uninsured mortgages;
2) guidance on co-lending and bundling arrangements; and
3) additional guidance on income verification and expectations to account for property price inflation when determining
an appropriate loan-to-value ratio.
The stress test requirement is expected to have the most material impact on the mortgage market and would result in a
material portion of the Company’s existing portfolio qualifying for a smaller loan size, if re-qualified under the new rules.
The net impact to future originations volume will be affected by borrower behaviour with respect to loan size requested
and down payments, and the potential for the Company to take on a part of the market that may no longer qualify at other
federally regulated institutions. The Company also expects these revisions will increase the rate of renewals of mortgage
loans with the existing lenders.
22 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS The following table provides, for illustrative purposes only, a comparison of the single-family residential mortgage continuity
over the 12 months ended December 31, 2017 against two scenarios for the next 12 months. The first scenario assumes a 10%
reduction in single-family residential mortgage advances resulting from the impact of the revisions to B-20, while the second
scenario assumes a 20% reduction in advances. Both scenarios assume a consistent rate of discharge and repayments and
exclude sales of mortgages.
(in billions, except %)
Opening Balance
Advances
Discharges
Other
Ending Balance
Growth Rate
Actual
12 months ended
December 31, 2017
Next 12 months
with 10% reduction
in Advances
Next 12 months
with 20% reduction
in Advances
$
$
14.3
3.3
(4.8)
(0.3)
12.5
$
$
12.5
3.0
(4.2)
0.3
11.6
$
$
12.5
2.7
(4.2)
0.3
11.3
(13)%
(7)%
(10)%
It is not clear yet what net impact the revisions to B-20 will have on the real estate and mortgage markets, particularly when
combined with changes under the Ontario Fair Housing Plan announced by the Ontario Ministry of Finance in April 2017.
The Company has identified a number of strategies to mitigate the impact of stress testing and co-lending changes while
maintaining overall credit quality. However, management will require more time to fully assess how the market responds to the
changes and what the net impact will be on the Company’s addressable market and product suite offering.
Market Conditions
The Company’s established regions have observed cooling trends in the housing market since the spring, consistent with
views that Canada’s housing market is adjusting to regulatory actions taken in the past year, including the Fair Housing Plan.
Reductions in average sale prices were observed in many parts of the Greater Toronto Area (GTA) since April 2017, while
the Greater Vancouver Area (GVA) experienced some price appreciation. By the end of the fourth quarter, sales activity in
the GTA rebounded, but remained lower compared to the same period last year. It is too early to determine whether this
activity is indicative of a sustained trend due to impending further rate increases by the Bank of Canada and the uncertainties
around the new B-20 rules. The Company views the recent moderation of housing activity as a positive path towards a more
sustainable real estate market compared to the rapid price increase conditions experienced in recent years, particularly in the
GTA. The Company expects further slowing of the rate of price appreciation in 2018, reflecting the impact of rising interest
rates and the new B-20 guideline which could worsen affordability, especially in the GTA and the Golden Horseshoe area.
The Company expects stable employment conditions, high immigration targets (the Federal Government has maintained a
target of 300,000 new permanent residents in 2018) and relatively tight housing supply to continue to provide support to the
Company’s primary markets. The Company continues to closely monitor emerging real estate market trends across Canada
and it will continue to apply a conservative approach to its residential lending. The expected rise in interest rates combined
with the current level of competition in the deposit market could lead to an increase in the Company’s funding cost which may
impact net interest margins.
Traditional Single-family Mortgage Lending
The Company expects to see continuing demand supporting its origination volumes through 2018, building its market share
through the Company’s proven lending model and continued focus on improving service levels. The Company expects that
focus on service, retention and product development in 2018 will allow the Company to continue to rebuild its origination
volumes, leveraging the demand for its traditional mortgages within its established regions. The Company will continue to
offer its uninsured ACE Plus product, which is a lower-rate mortgage product directed towards lower-risk borrowers, through
2018. The product may lower the overall uninsured single-family residential mortgage net interest margin.
The Company expects its 2018 net interest margin to be negatively impacted by the continued need for a credit facility
combined with the impact of the mortgage sales in 2017. The Company is also prepared for modest volatility as the net
interest margin will be impacted by the continued improving credit quality of the overall portfolio resulting from regulatory
changes to mortgage rules over the past few years, among other variables.
Uninsured Securitized Mortgage Lending
To partially offset the impact of the ACE Plus product on overall net interest margin, the Company commenced participation
in a bank-sponsored securitization conduit program during 2016. The sponsor of the program is a Schedule 1 Canadian bank
with which the Company entered into an agreement to assign to the conduit all of the Company’s interests in qualifying
uninsured single-family residential mortgages. The Company’s participation in this program provided for cost-effective
funding of its ACE Plus product. As access to this bank-sponsored securitization conduit is not available now, new ACE Plus
mortgages are funded by deposits and will not be securitized into the conduit.
2017 Annual Report 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 the insured multi-unit residential mortgages 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 and spreads will be impacted
by this level of competition. The Company remains committed to offering a range of mortgage products through its distribution
channel and is actively pursuing new products and initiatives, where possible, to fill market demand and capacity as needed.
Commercial Mortgage Lending
Commercial mortgage lending will remain an important portfolio for the Company, contributing high yields and providing asset
diversification. The Company has been a prudent and conservative lender in this segment, experiencing low levels of losses
and delinquencies. The Company plans to continue to rebuild the non-residential commercial portfolio in 2018.
Consumer Lending
Credit cards and other consumer retail loans are important complementary high-margin product offerings supporting the
lending strategy through the mortgage broker channel and diversification via other parties.
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 maintain its funding
capability through deposit brokers and continue to enhance Oaken Financial’s direct-to-consumer sales and service
capabilities. The Company intends to strategically limit demand deposits to an appropriate level that is aligned with the
Company’s liquidity and funding limits and taking into consideration that a primary purpose of the Oaken Savings Accounts
is to facilitate the seamless movement of funds to and from Oaken GICs for customers.
The Company will evaluate the deposit note market and may continue to issue deposit notes 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 in
its loan portfolios. Credit losses and delinquencies are expected to remain low in 2018; however, the Company is prepared for
volatility in this performance that may result from uncertainty in the macroeconomic environment. Implementing the changes
to B-20 could have a negative impact on the housing market and economic growth in the Company’s largest market of Ontario.
This in turn could contribute to deterioration in credit performance in future quarters, if the extent of the impact is more severe
than widely expected. The implementation of the new accounting standard (IFRS 9), which became effective on January 1, 2018
and requires consideration of forward-looking information, may also add volatility to reported credit losses. Please see Note 3
of the consolidated financial statements included in this report for more information on the implementation of IFRS 9.
Non-interest Expenses
Expenses are expected to remain somewhat elevated into the first half of 2018, including those related to litigation. However,
these costs will be partially offset by cost savings resulting from the Project EXPO expense savings initiative that was
completed in 2017. Operating costs related to the PSiGate and prepaid card business will also be lower in 2018, largely offset
by lower revenue from this business.
Liquidity and Capital
The Company continues to hold high levels of capital as measured by regulatory risk-based capital ratios and leverage ratios.
The Company will continue to employ robust capital adequacy stress-testing techniques to ensure that its conservative capital
position is maintained, 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’s normal course issuer bid expired at the end of the year. The Company opted to not renew the normal course
issuer bid. Management and the Board are focused on finalizing the Company’s long-term strategy and will consider share
repurchases and its dividend policy as part of this process. The Company expects capital ratios to exceed both regulatory
and internal capital targets while management reviews opportunities to deploy capital in the most efficient manner to
maximize shareholder value. The Company anticipates that return on shareholders’ equity will continue to be dampened
by a combination of lower earnings and the increased share capital.
The Company will continue to diversify its funding sources and maintain a strong liquidity position by holding a sufficient stock
of unencumbered high-quality liquid assets.
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.
24 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Financial Highlights
Table 1: Key Performance Indicators
For the years ended December 31
(000s, except %, multiples and per share amounts)
FINANCIAL PERFORMANCE MEASURES
Total revenue1
Net income
Net interest income
Earnings per share – basic2
Earnings per share – diluted2
Dividends per share2
Return on shareholders’ equity
Return on average assets
Net interest margin (TEB)3
Net interest margin non-securitized
assets (TEB)3
Net interest margin CMHC-
sponsored securitized assets
Efficiency ratio (TEB)3
FINANCIAL CONDITION MEASURES
Total assets
Total assets under administration4
Cash and securities-to-total assets
Total loans5
Total loans under administration4,5
Common Equity Tier 1 capital ratio6
Tier 1 capital ratio6
Total capital ratio6
Assets to regulatory capital multiple6,7
Leverage ratio6,7
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
2017
2016
2015
2014
2013
$ 291,311
$
581,959
$
584,883
$
592,888
$
497,038
7,527
302,930
247,396
485,164
287,285
481,090
313,172
459,529
256,542
421,979
0.10
0.10
0.26
0.4%
0.0%
1.55%
1.80%
0.48%
94.0%
3.71
3.71
0.98
15.1%
1.2%
2.37%
2.73%
0.47%
40.8%
4.09
4.09
0.88
18.5%
1.4%
2.36%
2.83%
0.49%
32.4%
4.48
4.45
0.70
23.8%
1.6%
2.25%
2.83%
0.67%
27.2%
3.70
3.66
0.54
23.9%
1.3%
2.17%
3.01%
0.73%
28.7%
$ 17,591,143
$ 20,528,777
$ 20,527,062
$ 20,082,744
$ 20,075,850
25,040,182
28,917,534
27,316,476
24,281,366
21,997,781
9.5%
8.5%
7.8%
4.7%
5.8%
$ 15,064,424
$ 18,035,317
$ 18,268,708
$ 18,364,910
$ 18,019,901
22,513,463
26,424,074
25,058,122
22,563,532
19,941,832
23.17%
23.17%
23.68%
N/A
8.70%
0.05%
0.30%
79.5%
16.55%
16.54%
16.97%
N/A
7.20%
0.04%
0.30%
73.4%
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%
1
The Company has revised its definition of Total Revenue and restated amounts in prior periods accordingly. Please see definition under Non-GAAP
Measures in this report.
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 2013 figures.
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.
7 Effective Q1 2015, the Assets to Regulatory Capital Multiple was replaced with the Basel III leverage ratio. See definition of the leverage ratio under
Non-GAAP Measures in this report.
2017 Annual Report 25
MANAGEMENT’S DISCUSSION AND ANALYSIS Income Statement Summary for 2017
• Net income of $7.5 million in 2017, a significant decrease from net income of $247.4 million in 2016 resulting from the impact
of the liquidity event that occurred in the second quarter of 2017.
• Diluted earnings per share of $0.10 decreased from $3.71 in 2016.
• Return on average shareholders’ equity was 0.4% for 2017, compared to 15.1% for 2016. The decrease from last year reflects
the combination of lower earnings and higher equity.
• Total net interest income decreased to $302.9 million, down $182.2 million or 37.6% from the $485.2 million earned in 2016,
reflecting a decrease in the loan portfolio and lower total net interest margin (TEB) of 1.55% compared to 2.37% in 2016.
• Net interest income on non-securitized assets was $286.4 million in 2017, decreasing 39.2% from 2016. Net interest margin
(TEB) on this portfolio was 1.80% for 2017, down from 2.73% in 2016 primarily as a result of interest and fees on the line of
credit facilities that included a commitment fee of $100 million on the Emergency Credit along with interest expense on
amounts drawn on both the Emergency Credit and the credit facility from BH.
• Total income earned from securitization includes both net interest income on securitized assets and securitization income
arising from sales of securitized assets. Combined net interest income on securitized assets and securitization income was
$29.0 million for the year, compared to $47.9 million in 2016. The decrease resulted from lower securitization gains on sales.
• Non-interest loss of $11.6 million in 2017, compared to non-interest income of $96.8 million in 2016, resulted from a loss on
sale of securities and loans, which were sold to provide liquidity and repay amounts drawn on the credit facility following the
liquidity event.
• The credit quality of the loan portfolio remains strong with continued low non-performing loans and credit losses. Provisions
for credit losses were $7.5 million for the year, a decrease from the $7.9 million recorded last year. Provisions were 0.07% of
gross uninsured loans, up from 0.05% in 2016. Net non-performing loans as a percentage of gross loans were 0.30% at the
end of 2017, consistent with last year.
• Non-interest expenses, which include salaries, premises and other operating expenses, were $274.9 million in 2017, up
15.0% over the $238.9 million recorded in 2016. The increase in expenses resulted from $12.8 million of impairment losses
on intangible assets and goodwill, $13.2 million of restructuring provisions related to the Project EXPO expense savings
initiative, $7.0 million of costs relating to the OSC and class action matters that were not covered by the Company’s insurers
and elevated costs associated with the liquidity event. The increased costs were partially offset by Project EXPO savings.
The Company’s efficiency ratio (TEB) increased to 94.0% in 2017 from 40.8% in 2016 because of the higher expenses
combined with lower revenue.
Financial Position Summary for 2017
• Total assets under administration, which includes $7.45 billion of mortgages accounted for off-balance sheet, were
$25.04 billion, a decrease of $3.88 billion or 13.4% from $28.92 billion in 2016, primarily reflecting asset sales in response
to the liquidity event and lower mortgage advances, which declined significantly following the liquidity event. Please see
Notes 4(C) and 5(H) to the consolidated financial statements included in this report for information on the asset sales.
• The Company sold residual interests in securitization transactions of $288.5 million. The decrease in sales contributed
to the decline in the off-balance sheet mortgage portfolio with a resulting increase to both on-balance sheet securitized
mortgages and securitization liabilities.
• Mortgage advances were $4.72 billion in 2017, compared to the $9.23 billion originated in 2016, a decrease of 48.8%.
The decrease in advances reflects decreases in all mortgage products and resulted from the impact of the liquidity event.
Single-family residential mortgage originations continued to represent the Company’s primary focus with combined
traditional and ACE Plus mortgage originations accounting for 64.8% of originations and Accelerator (insured) residential
mortgage originations accounting for 6.0% of originations. Residential commercial and non-residential commercial mortgage
originations make up the remaining 29.2% of the originations.
• Traditional mortgage advances were $2.88 billion, down 42.4% from originations of $4.99 billion in 2016. Accelerator
(insured) residential mortgage advances were $281.8 million, down 82.6% compared to 2016 advances of $1.62 billion.
ACE Plus mortgage advances were $185.3 million compared to originations of $407.8 million in 2016.
• Liquid assets at December 31, 2017 were $1.65 billion, compared to $2.07 billion at December 31, 2016. The Company
maintains a prudent level of liquidity, given the current level of operations and the Company’s obligations.
26 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS • 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 0.30%, consistent with last year.
• Deposits were $12.17 billion, down from $15.89 billion at December 31, 2016, reflecting the impact of the liquidity event
and the substantial decline in demand deposits. Total deposits raised through the Company’s deposit diversification
efforts, Oaken Financial, high-interest savings accounts and institutional deposits now total $2.65 billion, a decrease from
$4.59 billion last year.
• Securitization liabilities were $3.18 billion at the end of 2017, up from $2.65 billion last year, reflecting the decrease in sales
of residual interests indicated above.
• Shareholders’ equity of $1.81 billion at the end of 2017 increased from $1.63 billion at the end of last year as result of the
issuance of new common shares to a wholly owned subsidiary of BH.
• Home Trust’s capital levels were strong throughout 2017, as indicated by the Common Equity Tier 1 ratio of 23.17% and the
Tier 1 and Total capital ratios of 23.17% and 23.68%, respectively, at December 31, 2017. Home Trust’s Leverage ratio ended
2017 at 8.70%. The capital ratios increased from the end of 2016 primarily because of a decrease in risk-weighted assets.
Risk-weighted assets decreased as the Company constrained mortgage advances and renewals and sold mortgage assets
and securities to deal with the liquidity event.
Financial Performance Review
Table 2: Income Statement Summary
(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 (loss)
Non-interest expenses
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
2017
286,412
16,518
302,930
7,516
295,414
(11,619)
274,880
8,915
1,388
7,527
$
2016
471,057
14,107
485,164
7,890
477,274
96,795
238,939
335,130
87,734
$
247,396
0.10
0.10
$
$
3.71
3.71
$
$
$
$
Net Interest Income and Margin
Presented in Tables 3 and 4 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 3: 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 CMHC-sponsored securitized assets
Net interest margin bank-sponsored securitization conduit assets
Total net interest margin (non-TEB)
Total net interest margin (TEB)
Spread of non-securitized loans over deposits and credit facilities
2017
1.79%
1.80%
0.48%
1.37%
1.54%
1.55%
1.96%
2016
2.71%
2.73%
0.47%
1.90%
2.35%
2.37%
2.91%
2017 Annual Report 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total net interest margin (TEB), including the securitized portfolio, was 1.55% for 2017 compared to 2.37% in 2016. The
decrease in net interest margin resulted primarily from interest and fees on both the Emergency Credit and the line of credit
facility from BH, which includes a $100 million commitment fee on the Emergency Credit along with interest expense on
amounts drawn and the standby fees on undrawn amounts. Also contributing to the decline in total net interest margin from
last year is a decrease in the proportion of the average higher-yielding non-securitized loans, which represent 71.8% of
average total assets compared to 75.9% last year. The decrease in average non-securitized loans resulted from mortgage
sales primarily from the non-residential commercial portfolio and the decline in single-family residential mortgages. Average
lower-yielding securitized assets of $3.07 billion for the year represent 15.7% of average total assets compared to 13.4% last
year. Cash resources and securities of $1.95 billion represent 10.0% of total average assets compared to 8.2% last year. The
increase in proportion of cash resources and securities reflects the inflow of deposits experienced subsequent to the liquidity
event which were held as liquid assets until those funds were deployed for mortgage funding. The increased proportion
of average cash resources and securities combined with lower rates on those assets contributed to the decline in total net
interest margin.
Table 4: Net Interest Income by Product and Average Rate
(000s, except %)
Assets
Cash resources and securities
Traditional single-family
residential mortgages
ACE Plus 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 non-securitized assets
CMHC-sponsored securitized single-family
CMHC-sponsored securitized multi-unit
residential mortgages
Assets pledged as collateral for CMHC-
sponsored securitization
Total CMHC-sponsored securitized
residential mortgages
Bank-sponsored securitization
conduit assets
Other assets
Total assets
Liabilities and shareholders’ equity
Deposits and credit facilities
Senior debt
CMHC-sponsored securitization liabilities
Bank-sponsored securitization
conduit liabilities
Other liabilities and shareholders’ equity
Average
Balance1
Income/
Expense
2017
Average
Rate1
Average
Balance1
Income/
Expense
2016
Average
Rate1
$ 1,952,735
$
18,384
0.94% $ 1,699,889
$
21,185
1.25%
10,529,024
500,278
4.75%
11,178,997
540,522
396,064
14,284
3.61%
347,234
11,490
498,078
272,029
1,616,847
373,186
380,588
13,974
13,173
97,421
33,328
38,468
2.81%
4.84%
6.03%
8.93%
10.11%
1,301,346
427,924
1,703,572
372,841
341,315
14,065,816
710,926
5.05%
15,673,229
–
1,125
–
–
16,018,551
730,435
4.56%
17,373,118
30,935
17,614
102,465
33,536
31,472
768,034
3,654
792,873
586,338
30,782
5.25%
651,513
29,866
80,452
943
1.17%
234,968
2,246
2,880,007
83,778
2.91%
2,680,918
78,754
2.94%
residential mortgages
2,213,217
52,053
2.35%
1,794,437
46,642
191,177
498,554
6,151
–
3.22%
–
85,983
498,643
2,951
–
$ 19,588,289
$ 820,364
4.19% $ 20,638,662
$
874,578
$ 14,322,507
$ 442,898
3.09% $ 15,844,985
$
315,919
–
–
–
57,347
2,897,462
69,872
2.41%
2,719,469
188,500
2,179,820
3,539
–
1.88%
83,357
–
1,933,504
2,243
66,278
1,320
–
$
$
385,760
488,818
(3,654)
$
485,164
Total liabilities and shareholders’ equity
$ 19,588,289
$ 516,309
2.64% $ 20,638,662
Net Interest Income (TEB)
Taxable Equivalent Adjustment
Net Interest Income per Financial Statements
$ 304,055
(1,125)
$ 302,930
1 The average is calculated with reference to opening and closing monthly asset and liability and shareholders’ equity balances.
2 Residential commercial mortgages include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential
property types.
28 Home Capital Group Inc.
4.84%
3.31%
2.38%
4.12%
6.01%
8.99%
9.22%
4.90%
–
4.56%
2.60%
4.58%
0.96%
3.43%
–
4.24%
1.99%
3.91%
2.44%
1.58%
–
1.87%
MANAGEMENT’S DISCUSSION AND ANALYSIS Total net interest income of $302.9 million declined 37.6% from $485.2 million last year, reflecting a decrease in the
non-securitized portfolio offset partially by an increase of $2.4 million in the securitized portfolio.
Net interest income on the non-securitized portfolio of $286.4 million in 2017 decreased by $184.6 million or 39.2% from
2016, reflecting a decrease of $1.35 billion or 7.8% in average balances combined with the negative impact of interest and
fees on line of credit facility of $148.2 million. The decrease in average balances reflects the sale of mortgages and decline in
mortgage advances following the liquidity event. Non-securitized net interest margin (TEB) declined 93 basis points to 1.80%
from 2.73% last year as a result of a combination of a decrease in the spread of non-securitized loans over deposits and credit
facilities and the higher proportion of cash resources and securities and decline in the average rate earned on those assets.
The decline in the spread of non-securitized loans over deposits and credit facilities of 95 basis points to 1.96% from 2.91% last
year resulted from the interest and fees on both the Emergency Credit and credit facility from BH referred to above combined
with higher rates offered to attract new deposits and the significant decline in the proportion of the lower cost demand
deposits relative to higher cost fixed-term deposits. Demand deposits represented 4.4% of total deposits at the end of the
year compared to 15.9% at the end of 2016. The average rate of interest expense on deposits and credit facilities for the year
was 3.09% compared to 1.99% last year. Interest and fees on the line of credit facilities represented 103 basis points of the
total average rate of expense of 3.09% for the year. These unfavourable impacts on net interest margin were offset partially
by prepayment penalty interest earned on early payouts of consumer retail loan portfolios during the year.
The increase in the relative proportion of the lower earning cash resources and securities also contributed to the decline in
the non-securitized net interest margin. Average balances of cash resources and securities during the year of $1.95 billion
or 12.2% of total average non-securitized assets increased from $1.70 billion or 9.8% of average non-securitized assets in
the same period last year. The average rate earned on those assets also declined to 0.94% for the year from 1.25% last year,
reflecting lower dividend income following the liquidation of preferred shares during the second quarter. The increase in the
relative proportion of cash resources and securities reflects the inflow of deposits experienced subsequent to the liquidity
event, which were held as liquid assets until they could be deployed for mortgage funding when management shifted its focus
to growing mortgage balances.
The net interest income of $16.5 million on securitized assets in 2017 increased from $14.1 million last year. Net interest margin
on the CMHC-sponsored securitized assets improved slightly to 0.48% from 0.47% last year, while net interest margin on
the bank-sponsored securitization conduit assets decreased to 1.37% from 1.90% last year. As access to the bank-sponsored
securitization conduit is not available now, new ACE Plus mortgage advances have been funded through deposits. The funding
of ACE Plus mortgages through deposits has impacted overall total net interest margin.
Non-interest Income (Loss)
Table 5: Non-interest Income (Loss)
(000s)
Fees and other income
Securitization income
Gain on acquisition of CFF Bank
Net realized and unrealized losses on securities and loans
Net realized and unrealized losses on derivatives
Table 6: Securitization Income
(000s)
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.
$
$
2017
67,932
12,529
–
(90,070)
(2,010)
$
(11,619)
$
$
$
2017
5,695
(247)
7,081
$
12,529
$
2016
71,329
33,797
651
(175)
(8,807)
96,795
2016
26,972
399
6,426
33,797
The non-interest loss in 2017 resulted primarily from the recognition of $90.1 million of net losses on the sale of securities
and loans during the year. The net loss on sale of securities included $72.9 million of losses on the liquidation of preferred
shares in response to the liquidity event, which included $46.2 million of losses previously recognized as unrealized
losses in accumulated other comprehensive income (AOCI). A loss of $18.2 million was recognized on the sale of mortgages
for proceeds of $1.49 billion which were used to raise additional liquidity and repay the outstanding balance on the credit
facility from BH.
2017 Annual Report 29
MANAGEMENT’S DISCUSSION AND ANALYSIS Securitization income results primarily from gains recognized on the sale of insured multi-unit residential mortgages and
the sale of residual interests in single-family residential mortgage securitizations along with income earned on servicing
mortgages sold through securitization. In the case of single-family residential mortgage sales, the Company will service the
loans and record related servicing 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 net servicing revenue or fees are
recorded. Securitization income for the year resulted primarily from servicing income of $7.1 million, compared to $6.4 million
last year. Securitization income also included gains of $5.7 million recorded on sales of insured multi-unit residential
mortgages and residual interests in single-family residential mortgage securitizations compared to gains of $27.0 million of
gains last year. Gains of $3.6 million were recognized on the sale of $510.8 million of insured multi-unit residential mortgages
during the year compared to gains of $9.6 million recognized last year on sales of $1.05 billion of insured multi-unit residential
mortgages. Sales of residual interests led to gains of $2.1 million on the derecognition of $288.5 million of insured single-
family residential mortgages compared to gains of $17.4 million on the sale of $1.49 billion of residual interests last year. The
decline in sales of residuals from last year reflects the absence of sales subsequent to the first quarter of 2017. In the near
term, the Company does not expect to sell any residual interests. Please see Note 6 to the consolidated financial statements
included in this report for further information.
Fees and other income decreased 4.8% from last year, reflecting the decrease in the loan portfolio.
Please see the discussion below on Derivatives and Hedging related to net realized and unrealized loss on derivatives.
Derivatives and Hedging
The Company enters into derivative transactions primarily to hedge interest rate exposure resulting from outstanding loans
held for sale and to hedge interest rate risk on fixed-rate securitization liabilities and deposits. 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 18, Derivative
Financial Instruments, to the consolidated financial statements included in this report for further information. Table 7 below
summarizes the impact of derivatives and hedge accounting on the Company’s financial results.
Table 7: Derivatives Gains and Losses
(000s)
Fair value hedging ineffectiveness1
Derivative instruments marked-to-market gains (losses)2
Net realized and unrealized losses on derivatives
Included in fair value hedging ineffectiveness in 2016 are derivative losses related to senior debt.
1
2 Included in derivative instruments marked to market are swaps.
$
2017
(1,482)
(528)
$
$
(2,010)
$
2016
(9,335)
528
(8,807)
Cash Flow Hedging
The Company uses Government of Canada bond forwards 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. Cash flow hedge
accounting is also applied to total return swaps to hedge the variability in cash flows associated with forecasted future
compensation obligations attributable to changes in the Company’s stock price.
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. 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 non-interest income as hedge ineffectiveness through net
realized and unrealized gain or loss on derivatives.
30 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Economic Hedge of Loans Held for Securitization and Sale
The Company enters into bond forwards to hedge interest rate risk on loans held for securitization and sale through National
Housing Act Mortgage-Backed Securities (NHA MBS) securitization programs. The underlying loans are classified as held
for sale 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 sale. The fair value
changes reflect changes in interest rates. The net unrealized loss as at December 31, 2017 for fair value changes in both the
outstanding derivatives and the loans held for sale was $247 thousand (2016 – unrealized gain of $399 thousand), which was
recorded in securitization income.
Other Total Return Swaps
The Company had certain total return swaps that were not designated in hedge accounting relationships and, therefore,
were adjusted to fair value without an offsetting hedged amount. These swaps were originally intended as cash flow hedges
for issued restricted share units, however as the associated units were forfeited or cancelled, the swaps were left outside
of hedging relationships. Therefore their fair value change is recorded in non-interest income through net realized and
unrealized gain or loss on derivatives.
Please see Note 18 of the consolidated financial statements for further information.
Table 8: 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 credit3
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 credit3
Other consumer retail loans
Securitized single-family residential mortgages
Securitized multi-unit residential mortgages
Net write-offs
Amount
1,891
16
3,196
5,387
526
–
–
11,016
(3,500)
7,516
2,467
16
96
5,710
666
–
–
8,955
$
$
$
$
2017
% of Gross
Loans1
0.02% $
0.01%
0.31%
1.53%
0.15%
–
–
0.07%
(0.02)%
0.05% $
0.02% $
0.01%
0.01%
1.62%
0.18%
–
–
0.06% $
Amount
3,917
2
246
2,379
532
–
–
7,076
814
7,890
3,087
2
515
1,928
275
–
–
5,807
2016
% of Gross
Loans1
0.03%
0.00%
0.01%
0.64%
0.14%
–
–
0.04%
0.00%
0.04%
0.02%
0.00%
0.03%
0.52%
0.07%
–
–
0.03%
Gross loans used in the calculation of total Company ratio include securitized on-balance sheet loans.
1
2 There were no individual provisions, allowances or net write-offs on securitized mortgages.
3 Provision and write-offs for credit card loans in 2017 includes $2.2 million related to the non-core prepaid card business recognized in provision for credit
losses in the first quarter of 2017 and subsequently written off in the fourth quarter of 2017.
The provision for credit losses is charged to the consolidated statements 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.
2017 Annual Report 31
MANAGEMENT’S DISCUSSION AND ANALYSIS The Company continues to have strong credit performance with total provision for credit losses of $7.5 million in 2017
compared to $7.9 million last year. Provision as a percentage of gross uninsured loans remained low at 0.07% compared to
0.05% last year. Provision for credit losses included an individual provision of $2.5 million resulting from one non-residential
commercial property that is not considered to be indicative of increased credit exposure in the remainder of that portfolio.
The total provision for credit losses was favourably impacted by a reduction of $3.5 million in the Company’s collective
allowance to $33.6 million from $37.1 million one year ago. The reduction in the overall collective allowance resulted primarily
from a reduction of $6.5 million in the collective allowance for the non-residential mortgage portfolio related to the sale
of mortgages from that portfolio, offset by $3.0 million related to an increase in the construction and land segment of that
portfolio. The $6.5 million reduction related to mortgage sales was offset by a corresponding increase to the loss on sale of
the mortgages included in non-interest income. Please see Note 5(H) of the consolidated financial statements included in this
report for more information.
The collective provision in 2017 also comprises reductions in the collective allowance for the single-family residential mortgage
portfolio and the credit card loans and lines of credit portfolio of $2.7 million and $0.8 million, respectively, offset by an increase
in the collective allowance for other consumer retail loans of $3.5 million. The decreases in collective allowances reflect
decreases in the portfolio size, decreased loss rates and continued low levels of loans in arrears. The increase in the collective
allowance for other consumer retail loans reflects recent settlement experience related to cash reserves on certain programs
within that portfolio.
The current collective allowance continues to exceed the cumulative net write-offs experienced over the last 36 months.
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 $9.0 million and
represented 0.06% of gross loans compared to 0.03% in 2016.
Net non-performing loans as a percentage of gross loans remained low at 0.30% at the end of 2017 consistent with last year.
The Company remains satisfied with the credit performance of the portfolio, but is prepared for moderate volatility in the
trend. Please see the Credit Risk section of this MD&A for more details.
The level of individual allowances at the end of 2017 increased by $2.1 million over 2016, while gross non-performing loans
decreased by $6.2 million to $50.6 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.
Non-interest Expenses
Table 9: Non-interest Expenses
(000s, except % and number of employees)
Salaries and benefits
Premises
Other operating expenses
Efficiency ratio (TEB)
Active employees at end of year
$
2017
98,595
13,878
162,407
$
2016
101,880
14,505
122,554
$
274,880
$
238,939
94.0%
669
40.8%
916
Non-interest expenses increased by $35.9 million or 15.0% from the end of 2016, resulting primarily from an increase in
other operating expenses, partially offset by a decrease in salaries and benefits. The increased expenses combined with
lower revenue drove the increase in the efficiency ratio (TEB).
Other operating expenses increased by $39.9 million or 32.5% from last year. The increase in expenses resulted from
$12.8 million of impairment losses on intangible assets and goodwill, $7.0 million of costs relating to the OSC and class action
matters that were not covered by the Company’s insurers and elevated costs associated with the liquidity event.
The decrease in salaries and benefits reflects a decline in the number of active employees resulting from the expense savings
initiative, Project EXPO, and voluntary attrition following the liquidity event. The decrease was offset partially by restructuring
provisions related to Project EXPO.
32 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Taxes
Table 10: Income Taxes
(000s, except %)
Current
Deferred
Total income taxes
Effective income tax rate
$
2017
(2,475)
3,863
$
$
1,388
$
2016
90,895
(3,161)
87,734
15.57%
26.18%
The provision for income taxes for the year ended December 31, 2017 amounted to $1.4 million, reflecting an effective tax
rate of 15.57% ($87.7 million and 26.18% in 2016). 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
scientific research and experimental development (SR&ED) tax credits recognized throughout the year. The Company claimed
$1.8 million in SR&ED tax credits in 2017 ($2.0 million in 2016). Expenses that were non-deductible for tax purposes included
the goodwill impairment loss of $4.4 million and a penalty of $2.0 million.
Note 16 to the consolidated financial statements included in this report provides more information about the Company’s
current income taxes, deferred income taxes and provision for income taxes.
The Company expects that the effective income tax rate in 2018 will remain within the range of 25% to 26%, 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 2018 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.
Comprehensive Income
Table 11: Comprehensive Income
(000s)
Net income
Total other comprehensive income
Comprehensive income
$
2017
7,527
49,171
$
2016
247,396
10,479
$
56,698
$
257,875
Comprehensive income is the aggregate of net income and other comprehensive income (OCI). Comprehensive income for
the year was $56.7 million compared to $257.9 million in 2016.
OCI for the year was $49.2 million compared to $10.5 million in 2016. The increase in OCI primarily reflects the transfer to
the consolidated statements of income of previously recognized losses on the market value of available for sale securities
following the liquidation of preferred shares to raise funds because of the liquidity event.
2017 Annual Report 33
MANAGEMENT’S DISCUSSION AND ANALYSIS Financial Position Review
Assets
Table 12: Loan Portfolio
(000s, except % and number of loans)
CMHC-sponsored securitized single-family
residential mortgages
CMHC-sponsored securitized multi-unit
residential mortgages
Bank-sponsored securitization conduit single-family residential
mortgages
Traditional single-family residential mortgages
ACE Plus 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
Total insured mortgages under administration
Total uninsured mortgages under administration
Total mortgages under administration
Number of loans outstanding under administration
Mortgages
Credit card loans and lines of credit
Other consumer retail loans
Total number of loans outstanding
2017
% of Total
2016
% of Total
$ 2,291,066
10.2% $ 1,792,301
558,042
2.5%
620,193
144,142
9,247,900
384,290
403,332
114,357
1,042,853
351,605
360,890
0.6%
41.1%
1.7%
1.8%
0.5%
4.6%
1.6%
1.6%
114,310
11,024,960
433,800
963,248
305,188
1,954,820
369,678
378,901
14,898,477
165,947
$ 15,064,424
66.2%
0.7%
17,957,399
77,918
66.9% $ 18,035,317
$ 3,972,249
3,476,790
7,449,039
$ 22,513,463
$ 11,014,393
10,786,575
$ 21,800,968
17.7% $ 5,207,351
3,181,406
15.4%
33.1%
8,388,757
100.0% $ 26,424,074
50.5% $ 11,913,490
13,762,005
49.5%
100.0% $ 25,675,495
54,595
41,736
109,179
205,510
65,665
42,707
115,244
223,616
6.8%
2.4%
0.4%
41.7%
1.6%
3.7%
1.2%
7.4%
1.4%
1.4%
68.0%
0.3%
68.3%
19.7%
12.0%
31.7%
100.0%
46.4%
53.6%
100.0%
Total loans under administration were $22.51 billion at the end of 2017, a decrease of $3.91 billion or 14.8% from the end of
2016, reflecting decreases in both on- and off-balance sheet loans. On-balance sheet loans were down 16.5% from the end of
2016, while off-balance sheet loans were down 11.2% from the end of 2016. In 2017, the Company greatly reduced mortgage
advances and sold loans to manage the liquidity issues experienced during the year.
34 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 13: Mortgage Continuity
The following table presents the activity during the year in relation to the Company’s on-balance sheet mortgage portfolio.
Single-family residential mortgages and residential commercial mortgages include both non-securitized mortgages and
securitized mortgages. Residential commercial mortgages include loans held for sale.
(000s)
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-residential
Commercial
Mortgages
2017
Total
Balance at the beginning of the year
Advances
Renewal of mortgages previously derecognized1
Scheduled payments and prepayments2
Discharges
Capitalization and amortization of fees and other
Sales of mortgages and residual interests
$ 14,328,619
3,342,591
547,178
(336,610)
(4,849,952)
44,641
(605,737)
$ 1,003,299
678,512
19,199
(20,826)
(162,776)
(1,277)
(677,785)
$ 1,954,820
699,746
–
(60,783)
(541,606)
(1,242)
(1,008,082)
$ 17,286,738
4,720,849
566,377
(418,219)
(5,554,334)
42,122
(2,291,604)
Balance at the end of the year
$ 12,470,730
$
838,346
$ 1,042,853
$ 14,351,929
(000s)
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-residential
Commercial
Mortgages
2016
Total
Balance at the beginning of the year
Advances
Renewal of mortgages previously derecognized1
Scheduled payments and prepayments2
Discharges
Capitalization and amortization of fees and other
Sales of mortgages and residual interests
$ 14,927,528
7,020,821
62,548
(346,995)
(5,875,503)
31,070
(1,490,850)
$ 1,182,850
1,149,204
14,457
(21,976)
(271,425)
(3,354)
(1,046,457)
$ 1,490,648
1,055,752
–
(25,694)
(567,195)
1,309
–
$ 17,601,026
9,225,777
77,005
(394,665)
(6,714,123)
29,025
(2,537,307)
Balance at the end of the year
$ 14,328,619
$ 1,003,299
$ 1,954,820
$ 17,286,738
1
Represents renewals of mortgages that were previously derecognized and included in the off-balance sheet portfolio. Upon renewal, the mortgages are
recognized on the balance sheet.
2 Includes regularly scheduled principal payments and unscheduled partial payments.
2017 Annual Report 35
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 14: Mortgage Advances by Type and Province
(000s, except %)
Single-family residential mortgages
Traditional
ACE Plus
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
2017
% of Total
2016
% of Total
54.1%
4.4%
17.6%
1.5%
10.4%
0.5%
$ 2,875,535
185,283
281,773
60.9% $ 4,991,051
407,767
1,622,003
3.9%
6.0%
71,854
599,843
6,815
45,499
654,247
$ 4,720,849
1.5%
12.7%
0.1%
142,026
956,406
50,772
1.0%
13.9%
80,888
974,864
100.0% $ 9,225,777
0.9%
10.6%
100.0%
2017
% of Total
2016
% of Total
$
326,081
71,070
4,057,887
167,631
98,180
$ 4,720,849
6.9% $
1.5%
85.9%
3.6%
2.1%
721,718
263,843
7,347,408
498,393
394,415
100.0% $ 9,225,777
7.8%
2.9%
79.6%
5.4%
4.3%
100.0%
1 Other residential commercial mortgages include mortgages such as builders’ inventory.
Mortgage Lending
Uninsured Residential Mortgages – Traditional Mortgages and ACE Plus Mortgages
The Company’s uninsured residential mortgage portfolio includes both its traditional mortgage portfolio and its ACE Plus
mortgage portfolio. The ACE Plus product is a lower-rate mortgage product directed toward lower-risk borrowers, which the
Company began originating in 2015. The Company participated in a bank-sponsored securitization conduit program and assigned
select ACE Plus mortgages into this program. At the end of 2017, ACE Plus mortgages with a balance of $144.1 million have been
assigned to this program and reclassified to securitized mortgages on the consolidated balance sheet. As access to the bank-
sponsored securitization conduit is not available now, the Company has been funding new ACE Plus mortgage advances with
deposits. Combined traditional and non-securitized ACE Plus mortgages of $9.63 billion represent the largest portfolio within
loans under administration and on-balance sheet loans at 42.8% and 63.9%, respectively. The combined portfolio decreased by
15.9% from the end of 2016 resulting from lower originations and reduced retention. Combined originations of traditional and ACE
Plus mortgages of $3.06 billion for the year were down 43.3% from last year. The lower originations resulted from the Company’s
efforts to manage the liquidity issues experienced in the year and the time needed to restart the growth in its mortgage portfolio.
Insured Residential Mortgages
Insured residential loans under administration, which include both insured single-family and multi-unit residential mortgages,
were $11.01 billion at the end of 2017, a decrease of 7.5% from the balance of $11.91 billion at the end of 2016. Of this total,
$7.45 billion were accounted for off-balance sheet, down $0.94 billion or 11.2% from the end of 2016.
The Company originated $281.8 million in insured single-family Accelerator mortgages in 2017, down 82.6% from 2016 as the
Company scaled back its originations due to its liquidity needs during 2017 and continued to experience the expected impact
of the government changes to insured mortgage rules announced in late 2016. The Company continued to take a conservative
approach towards its residential mortgage business, and its participation in the highly competitive market for prime insured
mortgages. The Company views its Accelerator product offering as complementary to its traditional portfolio.
In 2017, the Company originated $599.8 million of insured multi-unit residential mortgages and sold $510.8 million that
qualified for off-balance sheet treatment resulting in $3.6 million in gains on sale. 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. All of the Company’s new 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).
36 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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’s originations were constrained in 2017 by the liquidity event and
the time needed to restart the growth in its mortgage portfolio.
Non-residential Commercial Mortgages
The decrease in the non-residential commercial mortgage portfolio reflects the asset sales from the portfolio and lower
originations. Please see Note 5(H) to the consolidated financial statements included in this report for more information on the
asset sales. Non-residential commercial mortgage originations were $699.7 million in 2017, a decrease of 33.7% from 2016.
The slowdown in originations is reflective of the response to the liquidity event and the time needed to restart the growth
in the Company’s mortgage portfolio. The focus was turned toward asset sales to assist in generating liquidity out of the
commercial loan portfolio.
Non-residential commercial mortgages, which include loans on office, industrial, retail and mixed-use properties as well as
commercial mortgages on development projects, have been an important complementary source of loan assets and revenue.
The Company expects to resume participating in appropriate commercial mortgage opportunities as they arise.
Geographic Concentration
Mortgage advances continued to favour Ontario and, in particular, the GTA, during the year. 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 included in this report for the geographic distribution of the portfolio.
Table 15: Consumer Lending Continuity
(000s)
Balance at the beginning of the year
Advances and draw-downs
Repayments
Capitalization of interest and fees,
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
2017
Total
Consumer
Lending
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
2016
Total
Consumer
Lending
$ 369,678
218,377
(274,744)
$ 378,901
197,962
(270,424)
$ 748,579
416,339
(545,168)
$ 370,825
218,962
(262,464)
$ 296,857
183,693
(144,360)
$ 667,682
402,655
(406,824)
and other
38,294
54,451
92,745
42,355
42,711
85,066
Balance at the end of the year
$ 351,605
$ 360,890
$ 712,495
$ 369,678
$ 378,901
$ 748,579
Authorized limit on new credit
card issuances
$ 128,897
$ 168,087
Consumer Lending
Consumer lending, comprising credit cards, lines of credit and other consumer retail loans, continued to be an important
source of loan assets with attractive returns. While representing 4.7% of the total on-balance sheet loan portfolio, these assets
generated 9.0% of the interest income from loans for the year.
Credit card and lines of credit balances decreased to $351.6 million at the end of 2017 from $369.7 million at the end of 2016.
The decline in issuance of new credit cards reflects a decrease in new Equityline Visa accounts (Home Equity Line of Credit)
consistent with the decline in residential mortgage originations. Equityline Visa accounts represented 87.8% of the total credit
card and lines of credit balance.
The balance of other consumer retail loans decreased to $360.9 million at the end of 2017 from $378.9 million at the end of
2016. The decrease resulted from the early payout on certain portfolios of consumer retail loans, which totalled $124.5 million
in 2017. These assets are typically generated through dealer programs which remain in place.
2017 Annual Report 37
MANAGEMENT’S DISCUSSION AND ANALYSIS Cash Resources and Securities
Combined cash resources and securities of $1.67 billion at the end of 2017 decreased by $71.7 million from the end of 2016,
reflecting a decrease in securities resulting from the liquidation of preferred shares in response to the liquidity event. The
Company maintains sufficient liquidity to meet its future commitments and expected business volumes.
The Company has a $2 billion line of credit facility with a wholly owned subsidiary of BH which is undrawn. The Company also
has an uncommitted secured credit facility with a Canadian chartered bank in the amount of $20 million which is undrawn. The
details of these facilities are disclosed in Note 4(A) 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 preferred shares. At December 31, 2017, the preferred share portfolio was $30.9 million or 9.3% of the Company’s
securities compared to $193.4 million or 36.1% in 2016. Investment-grade preferred shares represented 96.9% of the preferred
share portfolio (83.9% in 2016). Government bonds represented 90.4% of the securities portfolio compared to 63.0% in 2016.
The entire bond portfolio of $300.6 million ($337.2 million in 2016) is investment grade. Residual interests represented 0.3%
(2016 – 0.8%) of the securities portfolio.
Additional details related to the Company’s securities portfolio can be found in Note 4 to the consolidated financial statements
included in this report.
Table 16: Other Assets
(000s)
Restricted assets
Restricted cash
Treasury bills and other acceptable securities 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
Deferred tax assets
Goodwill and intangible assets
Goodwill
Intangible assets
2017
2016
$
254,134
182,877
7,325
49,651
3,644
182,930
10,431
13,340
76,774
9,577
2,324
98,669
143,296
122,078
37,524
60,314
3,289
213,312
13,013
25,619
33,091
16,914
6,752
115,003
$
891,676
$
790,205
Total other assets increased by $101.5 million from last year primarily because of an increase in restricted assets. The
increase in restricted cash of $110.8 million from last year reflects an increase in CMHC collateral requirements and increased
margin call requirements related to the Company’s derivative positions. The increase of $60.8 million in securities assigned
as replacement assets reflects approaching CMB maturities. In general, as CMB maturities approach, the Company replaces
maturing securitized mortgages with treasury bills and other acceptable securities. Further information on the Company’s
securitization activity can be found in Note 6 to the consolidated financial statements included in this report.
The increase in total other assets also reflects an increase in other prepaid assets and deferred items of $43.7 million. Included
in this increase is $39.5 million of continuing involvement asset and withheld proceeds related to the sale of mortgages during
the year. The continuing involvement asset is offset by an equivalent continuing involvement liability included in other liabilities
on the consolidated balance sheets (please see Note 5(H) to the consolidated financial statements included in this report
for more information).
38 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS The increase in total other assets was offset partially by decreases in derivative assets, securitization receivable and retained
interest, and goodwill and intangible assets. The decrease in derivative assets reflects changes in interest rates. Derivative
assets and liabilities are discussed in the Derivatives and Hedging section of this MD&A. The decrease in securitization
receivable and retained interest reflects the decrease in sales of both residual interests in single-family residential mortgage
securitizations and insured multi-unit residential mortgages (please see Note 6 to the consolidated financial statements
included in this report for more information). The decrease in goodwill and intangible assets reflects impairment losses
recognized during the year (please see Notes 9 and 10 to the consolidated financial statements included in this report for
more information).
Liabilities
Deposits and Securitization Liabilities
Table 17: Deposits and Securitization Liabilities
(000s, except % and number of accounts)
Deposits payable on demand
High-interest savings accounts
Oaken savings accounts
Other deposits payable on demand
Deposits payable on fixed dates
Brokered GICs
Oaken GICs
Institutional deposit notes
Total deposits
Securitization liabilities
2017
% of Totals
2016
% of Totals
$
138,948
1.1% $
2,016,881
229,511
170,905
539,364
9,350,235
1,805,332
475,523
1.9%
1.4%
340,809
174,113
4.4%
2,531,803
76.9%
11,120,107
14.8%
1,429,153
3.9%
804,967
11,631,090
95.6%
13,354,227
12.7%
2.1%
1.1%
15.9%
70.0%
9.0%
5.1%
84.1%
12,170,454
100.0%
15,886,030
100.0%
CMHC-sponsored mortgage-backed security liabilities
CMHC-sponsored Canada Mortgage Bond liabilities
Bank-sponsored securitization conduit liabilities
Total securitization liabilities
Total number of deposit accounts
1,562,152
1,473,318
142,279
49.1%
898,386
46.4%
1,637,117
4.5%
114,146
33.9%
61.8%
4.3%
$ 3,177,749
100.0% $
2,649,649
100.0%
391,182
441,782
Table 17(A): Non-Securitized Loans and Deposits by Remaining Contractual Term to Maturity
(000s)
December 31, 2017
Payable on
Demand
0–3 Months
3–12 Months
1 to 3 Years
Over 3 Years
Total
$
Non-securitized loans
Single-family
residential mortgages
Residential commercial
mortgages
Non-residential
commercial mortgages
Credit card loans and
lines of credit
Other consumer
retail loans
Deposits
Demand deposits and GICs
Institutional deposits
–
–
–
–
–
–
$ 1,806,068
$ 5,871,267
$ 2,119,370
$ 238,817
$ 10,035,522
38,723
36,547
33,053
6,034
114,357
226,034
449,363
337,464
29,992
1,042,853
351,605
–
–
–
351,605
4,149
23,096
66,046
2,426,579
6,380,273
2,555,933
267,599
542,442
360,890
11,905,227
539,364
1,431,121
3,818,779
4,150,463
1,755,204
11,694,931
–
174,972
300,551
–
–
475,523
539,364
1,606,093
4,119,330
4,150,463
1,755,204
12,170,454
Net maturity
$
(539,364)
$ 820,486
$ 2,260,943
$ (1,594,530)
$ (1,212,762)
$
(265,227)
2017 Annual Report 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company’s deposit portfolio primarily provides funding for the non-securitized loan portfolio and principally comprises
fixed-term deposits, which represent 95.6% 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. The above table presents the net remaining
contractual term to maturity of the Company’s non-securitized loans and deposits. Please see the Structural Interest Rate Risk
and the Liquidity and Funding Risk sections of this MD&A for more information.
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 $12.17 billion decreased 23.4% from 2016. The liquidity event that occurred during the year had a significantly
negative impact on the Company’s funding capabilities, particularly with respect to deposits from diversified sources.
Deposits from diversified sources, which comprise Oaken deposits, institutional deposit notes and Home Trust High-Interest
Savings Accounts, accounted for 21.8% of total deposits at the end of 2017 compared to 28.9% at the end of 2016. The decline
in balances from the end of 2016 resulted primarily from a significant level of redemptions in High-Interest Savings Accounts,
which has been attributed to heightened reputational concerns faced by the Company. In addition, the Company repaid
$325.0 million of institutional deposit notes in 2017 on the maturity date.
Securitization liabilities, including both CMHC- and bank-sponsored liabilities, increased $528.1 million from the end of 2016.
The increase was mainly due to the increase in MBS liabilities. MBS liabilities have increased from the end of 2016 as the
Company sold MBS from its liquidity portfolio and issued new MBS in 2017 which remained on-balance sheet. New CMHC-
sponsored securitization transactions related to insured fixed-rate single-family residential mortgages have primarily been
sold off-balance sheet subsequent to securitization in previous years. The increase in bank-sponsored securitization liabilities
from the end of 2016 resulted from the assignment of ACE Plus mortgages into the conduit during the first half of 2017. As
access to the bank-sponsored securitization conduit is not available now, the Company is no longer assigning ACE Plus
mortgages into the conduit. New ACE Plus mortgage advances are being funded by deposits. The increase in securitization
liabilities was partially offset by a decrease in CMB liabilities. CMB liabilities are bullet bonds and only decline when the
underlying bonds mature.
Table 18: Other Liabilities
(000s)
Derivative liabilities
Other liabilities
Accrued interest payable
Securitization servicing liability
Other, including accounts payable and accrued liabilities
Deferred tax liabilities
2017
$
38,728
$
133,888
20,924
205,665
30,230
2016
3,490
130,222
20,573
169,942
36,284
$
429,435
$
360,511
The increase in other liabilities resulted primarily from an increase in other, including accounts payable and accrued liabilities,
which fluctuates based on timing of the payment of associated liabilities and includes the continuing involvement liability
associated with mortgage sales during the year (please see Note 5(H) of the consolidated financial statements included in this
report for more information on these mortgage sales). Derivative liabilities also increased, reflecting changes in interest rates.
Shareholders’ Equity
Table 19: Shareholders’ Equity
(000s)
Shareholders’ equity at the beginning of the year
Net income
Other comprehensive income
Amounts related to stock-based compensation
Repurchase of shares
Issuance of shares
Dividends
Shareholders’ equity at the end of the year
40 Home Capital Group Inc.
2017
2016
$ 1,632,587
7,527
49,171
964
(5,999)
145,965
(16,710)
$ 1,636,501
247,396
10,479
2,581
(199,196)
–
(65,174)
$ 1,813,505
$ 1,632,587
MANAGEMENT’S DISCUSSION AND ANALYSIS The increase of $180.9 million in total shareholders’ equity since December 31, 2016 was primarily generated from the new
issuance of common shares to BH, net of direct costs, for $146.0 million and internally generated comprehensive income of
$56.7 million, net of $16.7 million for dividends to shareholders and $6.0 million related to the repurchase of shares. Please
see Notes 13 and 14 to the consolidated financial statements included in this report for more information.
At December 31, 2017, the book value per common share was $22.60, compared to $25.36 at December 31, 2016. The
decrease in book value per common share from the end of 2016 was due to the increase in the number of common shares
outstanding resulting from the share issuance to BH that occurred in 2017.
In the third quarter of 2017, the Company made an adjustment to retained earnings as at December 31, 2015 that is not significant
to the consolidated financial statements (please see Note 13(F) to the consolidated financial statements included in this report for
more information). The book value per common share for prior periods presented above has been adjusted accordingly.
Contingencies and Contractual Obligations
In the normal course of its activities, the Company enters into various types of contractual agreements. The Company ensures
that sufficient cash resources are available to meet these contractual obligations when they become due.
The following table presents a summary of the Company’s contractual obligations comprising minimum lease payments on
premises, property, computer hardware and software as at December 31, 2017.
Table 20: Contractual Obligations
(000s)
2018
2019
2020
2021
2022
Thereafter
Total
Minimum lease payments
$ 12,862
$
7,844
$
4,081
$
3,925
$
3,884
$ 21,803
$ 54,399
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 17 to the
consolidated financial statements included in this report 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 mortgages which were $875.9 million at December 31, 2017 ($1.34 billion – December 31, 2016). These
amounts included offers made but not yet accepted by the customer as of the reporting date. Also included within the
outstanding amounts were unutilized non-residential commercial loan advances of $196.7 million at December 31, 2017
($486.6 million – December 31, 2016). Offers for the loans remain open for various periods. As at December 31, 2017,
unutilized credit card balances amounted to $145.5 million ($146.3 million – December 31, 2016). Included in the outstanding
amounts for future advances of mortgage loans were outstanding future advances for the Equityline Visa portfolio of
$16.1 million at December 31, 2017 ($28.8 million – December 31, 2016). 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.
Credit commitments for mortgages are significantly lower than the levels at the end of 2016, reflecting the ongoing process
to rebuild the mortgage portfolio as a result of the impact of the liquidity event on mortgage advances.
The Company has $7.45 billion (2016 – $8.39 billion) of loans under administration that are accounted for off-balance sheet
(see Table 12). Please refer to Note 2 and Note 6 of the consolidated financial statements included in this report for details
of the Company’s securitization activities.
Related Party Transactions
IFRS considers key management personnel to be related parties. Compensation of key management personnel is disclosed
in Note 21 of the consolidated financial statements included in this report.
Previously, in the normal course of business, the Company referred borrowers who required loans at a higher loan-to-value
ratio than the Company would provide to second mortgage lenders. All referrals were conducted at arm’s length and at market
terms. Second mortgage lenders independently underwrote all second mortgages with the borrowers. During the year, the
Company discontinued this practice and no longer makes such referrals. One of the second mortgage lenders is related to
the Company through a close family relationship with a former member of the Company’s key management personnel. The
amount of second mortgages referred to this lender during the years ended December 31, 2017 and 2016 was not significant.
2017 Annual Report 41
MANAGEMENT’S DISCUSSION AND ANALYSIS Quarterly Financial Highlights
Table 21: Summary of Quarterly Results
(000s, except per share
amounts and %)
Q4
Q3
Q2
2017
Q1
Q4
Q3
Q2
2016
Q1
Net interest income (loss) (TEB1)
$
91,818
$
88,853
$
(3,298)
$
126,682
$
121,564
$
120,777
$
122,987
$
123,490
Less: TEB adjustment
100
91
109
825
944
853
884
973
Net interest income (loss) per
financial statements
Non-interest income (loss)
Non-interest expense
Total revenue
Net income (loss)
Return on shareholders’ equity
Return on average total assets
91,718
17,737
65,490
109,455
30,619
6.8%
0.7%
88,762
6,645
59,924
95,407
29,983
(3,407)
(57,886)
85,001
(61,293)
(111,116)
6.8%
0.6%
(25.9)%
(2.2)%
125,857
21,885
64,465
147,742
58,041
14.0%
1.1%
120,620
23,977
71,028
144,597
50,706
12.6%
1.0%
119,924
25,171
54,982
145,095
66,190
16.7%
1.3%
122,103
24,658
54,912
146,761
66,252
16.3%
1.3%
122,517
22,989
58,017
145,506
64,248
15.5%
1.2%
Total assets under administration
25,040,182
26,659,330
28,292,436
29,583,545
28,917,534
28,327,676
28,430,730
27,960,592
Total loans under administration
22,513,463
23,232,686
25,863,400
27,163,636
26,424,074
26,012,884
25,732,657
25,222,523
$
$
$
Earnings (loss) per common share
Basic
Diluted
Book value per common share
Efficiency ratio (TEB1)
Common equity tier 1 ratio2
Tier 1 capital ratio2
Total capital ratio2
Net non-performing loans as a %
$
$
$
0.38
0.38
22.60
59.8%
23.17%
23.17%
23.68%
0.37
0.37
22.20
62.7%
21.25%
21.25%
21.74%
$
$
$
(1.73)
(1.73)
21.82
$
$
$
(138.9)%
17.06%
17.06%
17.54%
$
$
$
0.90
0.90
26.18
43.4%
16.34%
16.34%
16.77%
$
$
$
0.79
0.79
25.36
48.8%
16.55%
16.54%
16.97%
$
$
$
1.01
1.01
24.70
37.7%
16.54%
16.53%
16.97%
$
$
$
0.99
0.99
23.90
37.2%
16.38%
16.38%
16.82%
0.92
0.92
23.97
39.6%
18.28%
18.28%
20.63%
of gross loans
0.30%
0.28%
0.23%
0.24%
0.30%
0.31%
0.33%
0.34%
Annualized provision as a %
of gross uninsured loans
Annualized provision as a %
of gross loans
0.12%
(0.14)%
0.07%
0.16%
0.07%
0.04%
0.08%
0.04%
0.09%
(0.11)%
0.05%
0.13%
0.05%
0.03%
0.06%
0.03%
1 TEB – Taxable Equivalent Basis: see definition under Non-GAAP Measures in this report.
2 These figures relate to the Company’s operating subsidiary, Home Trust Company.
The Company’s key financial measures for each of the last eight quarters are summarized in the table above. These highlights
illustrate the Company’s profitability, return on equity, efficiency measures and capital ratios. Most of the above financial
measures subsequent to Q1 2017 were significantly impacted by the liquidity event. 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
Expenses section of this MD&A for discussion on the increase in non-interest expenses in 2017 over 2016).
42 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Fourth Quarter 2017
Income Statement Summary
• Reported net income of $30.6 million in Q4 2017 was 39.6% lower than the $50.7 million net income recorded in Q4 2016
and 2.1% higher compared to $30.0 million in Q3 2017.
• Reported diluted earnings per share for the fourth quarter were $0.38, compared to $0.79 in Q4 2016 and $0.37 in Q3 2017.
• Return on shareholders’ equity was 6.8% in Q4 2017, compared to 12.6% in Q4 2016 and 6.8% in Q3 2017.
• Total net interest income of $91.7 million for the quarter declined by 24.0% from Q4 2016, reflecting the decrease in total
net interest margin (TEB) to 2.02% from 2.38% last year. Total net interest income for the quarter increased by 3.3% from
Q3 2017, reflecting the increase in net interest margin (TEB) from 1.85% last quarter.
• Net interest income on non-securitized assets was $89.1 million for the quarter, down 23.6% from Q4 2016, reflecting
the decrease in net interest margin (TEB) to 2.46% for the quarter from 2.73% last year. Net interest income on the non-
securitized portfolio increased $4.2 million from the $84.9 million reported in Q3 2017, while net interest margin (TEB)
improved by 25 basis points from 2.21% last quarter. The improvement over last quarter resulted primarily from prepayment
penalty interest income earned in Q4 2017 on the early payment of a consumer retail loan portfolio and higher interest
earned on government bonds combined with lower interest and fees on line of credit facility reflecting a full quarter with
no drawn balances on the BH facility.
• Total income earned from securitization includes both net interest income on securitized assets and securitization income
arising from sales of securitized assets. Combined net interest income on securitized assets and securitization income was
$4.3 million in Q4 2017, down from $13.0 million in Q4 2016 and from $6.4 million in Q3 2017.
• Fees and other income of $16.3 million in Q4 2017 were down 7.2% from the $17.6 million recorded in Q4 2016 and 9.6% from
$18.1 million in Q3 2017 reflecting the decline in the mortgage portfolio.
• The credit quality of the loan portfolio remained strong in the quarter with the level of credit losses and non-performing
loans remaining low. Provision for credit losses for the quarter was $3.4 million, compared to $2.4 million in Q4 2016 and
a $4.3 million release in Q3 2017. The annualized credit provision as a percentage of gross uninsured loans for the quarter
was 0.12%, compared to 0.07% in Q4 2016 and (0.14)% in Q3 2017. The increase in the PCL ratio over last year resulted from
an individual provision of $2.2 million resulting from one non-residential commercial property that is not considered to be
indicative of increased credit exposure in the remainder of that portfolio. The negative PCL ratio last quarter resulted from
the reduction of $6.5 million in the collective allowance for the non-residential portfolio related to assets sales from that
portfolio (see Note 5(H) of the consolidated financial statements included in this report for more information). In the absence
of this reduction, the PCL ratio in Q3 2017 was 0.07%. Net non-performing loans as a percentage of gross loans ended 2017
at 0.30%, compared to 0.30% at the end of 2016 and 0.28% at the end of Q3 2017.
• Non-interest expenses were $65.5 million in the fourth quarter, down $5.5 million from Q4 2016 and up $5.6 million from
last quarter. The efficiency ratio was 59.8% in the fourth quarter, up from 48.8% in Q4 2016 and down from 62.7% in Q3
2017. The decrease in non-interest expenses from last year reflects lower salaries and benefits resulting from the reduced
number of employees from the impact of Project EXPO and voluntary attrition. The increase from last quarter reflects higher
operating expenses which include $11.4 million of expenses comprising $6.3 million of impairment losses on intangible
assets along with costs related to the exit of the PSiGate and prepaid card business and litigation-related costs. The
increase was offset partially by lower salaries and benefits.
2017 Annual Report 43
MANAGEMENT’S DISCUSSION AND ANALYSIS Financial Position Summary
• Total loans under administration, which includes securitized mortgages that qualify for off-balance sheet accounting,
decreased by $3.91 billion in 2017 to $22.51 billion, from $26.42 billion at the end of 2016 and by 3.1% or $719.2 million
from $23.23 billion at the end of Q3 2017.
• Total loans were $15.06 billion at Q4 2017, a decrease of 16.5% from $18.04 billion at the end of 2016 and 2.4% from
$15.43 billion at the end of Q3 2017.
• The total value of mortgages originated in Q4 2017 was $872.1 million, compared to $2.43 billion in Q4 2016 and
$385.1 million in Q3 2017.
• The Company originated $537.4 million of combined traditional and ACE Plus single-family residential mortgages
in Q4 2017, compared to $1.43 billion in Q4 2016 and $202.7 million in Q3 2017.
• Accelerator (insured) single-family residential mortgage originations were $29.0 million in Q4 2017, compared to
$346.7 million in Q4 2016 and $21.3 million in Q3 2017.
• Multi-unit residential originations were $194.8 million in the quarter, compared to $371.5 million in Q4 2016 and $99.1 million
in Q3 2017. 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.
• Non-residential commercial mortgage originations, which include store and apartment mortgages, were $111.2 million
in Q4 2017, compared to $277.3 million in Q4 2016 and $62.0 million in Q3 2017.
• Liquid assets at December 31, 2017 were $1.65 billion, compared to $2.07 billion at the end of 2016 and $2.66 billion at
September 30, 2017. The Company maintains a prudent level of liquidity, given the current level of operations and the
Company’s obligations.
• Total deposits were $12.17 billion at the end of Q4 2017, compared to $15.89 billion at the end of 2016 and $13.36 billion
at the end of Q3 2017. The decrease in deposits from the end of last year reflects the elevated level of redemptions of the
Company’s High-Interest Savings Accounts during the liquidity event. The decrease in deposits from the end of last quarter
reflects the Company’s intentional actions to slow the inflow of deposits to match expected mortgage originations. During
the third quarter, the Company was required to offer premium rates on deposits to increase inflows following the liquidity
event, resulting in the growth of deposits outpacing loan growth. By the end of the third quarter, the Company reduced
deposit interest rates on new deposits to market levels, intentionally lowering deposit growth, as efforts turned to growing
mortgage balances.
• Home Trust’s Common Equity Tier 1 (CET 1) and Total capital ratios remained very strong at 23.17% and 23.68%, respectively,
at December 31, 2017, and well above Company and regulatory minimum targets. Home Trust’s Leverage ratio was 8.70% at
December 31, 2017, also well above regulatory minimums.
44 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Fourth Quarter Financial Information
Table 22: Fourth Quarter Review of Financial Performance
(000s, except per share amounts)
Net Interest Income Non-Securitized Assets
Interest from loans
Dividends from securities
Other interest
Interest on deposits and other
Interest and fees on line of credit facility
Net interest income non-securitized assets
Net Interest Income Securitized Loans and Assets
Interest income from securitized loans and assets
Interest expense on securitization liabilities
Net interest income securitized loans and assets
Total Net Interest Income
Provision for credit losses
Non-Interest Income
Fees and other income
Securitization income
Net realized and unrealized losses on securities
Net realized and unrealized losses 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
For the three months ended
December 31
2017
September 30
2017
December 31
2016
$
$
$
158,938
278
6,417
165,633
70,330
6,215
89,088
22,563
19,933
2,630
91,718
3,434
88,284
16,346
1,695
–
(304)
17,737
106,021
17,063
3,478
44,949
65,490
40,531
8,160
1,752
9,912
167,159
253
4,303
171,715
75,430
11,368
84,917
23,130
19,285
3,845
88,762
(4,257)
93,019
18,087
2,525
(13,155)
(812)
6,645
99,664
22,610
3,283
34,031
59,924
39,740
5,839
3,918
9,757
$
30,619
$
29,983
$
190,389
2,614
2,514
195,517
78,868
–
116,649
19,923
15,952
3,971
120,620
2,400
118,220
17,613
9,064
–
(2,700)
23,977
142,197
24,134
3,607
43,287
71,028
71,169
22,941
(2,478)
20,463
50,706
$
$
0.38
0.38
$
$
0.37
0.37
$
$
0.79
0.79
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic
Diluted
80,246
80,286
80,246
80,246
64,479
64,519
Total number of outstanding common shares
Book value per common share
80,246
22.60
$
80,246
22.20
$
64,388
25.36
$
2017 Annual Report 45
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 23: Fourth Quarter Review of Comprehensive Income
(000s)
NET INCOME
OTHER COMPREHENSIVE INCOME
Available for Sale Securities and Retained Interests
Net unrealized gains
Net losses reclassified to net income
Income tax expense
Cash Flow Hedges
Net unrealized gains (losses)
Net (gains) losses reclassified to net income
Income tax expense (recovery)
Total other comprehensive income
For the three months ended
December 31
2017
September 30
2017
December 31
2016
$
30,619
$
29,983
$
50,706
1,431
–
1,431
378
1,053
356
(68)
288
78
210
1,263
1,483
–
1,483
394
1,089
(467)
287
(180)
(50)
(130)
959
12,774
–
12,774
3,391
9,383
(1,677)
174
(1,503)
(398)
(1,105)
8,278
COMPREHENSIVE INCOME
$
31,882
$
30,942
$
58,984
46 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 24: Fourth Quarter Review of Financial Position
(000s)
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
Deferred tax assets
Goodwill and intangible assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Deposits payable on demand
Deposits payable on a fixed date
Securitization Liabilities
CMHC-sponsored mortgage-backed security liabilities
CMHC-sponsored Canada Mortgage Bond liabilities
Bank-sponsored securitization conduit liabilities
Other
Derivative liabilities
Other liabilities
Deferred tax liabilities
Shareholders’ Equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
December 31
2017
As at
September 30
2017
$ 1,336,138
$ 2,337,760
332,468
165,947
331,544
40,320
2,993,250
11,905,227
14,898,477
3,133,906
12,255,424
15,389,330
(33,563)
(33,563)
14,864,914
15,355,767
437,011
7,325
336,770
9,577
100,993
891,676
289,870
10,177
365,685
15,873
109,298
790,903
$ 17,591,143
$ 18,856,294
$
539,364
11,631,090
$
441,008
12,917,610
12,170,454
13,358,618
1,562,152
1,473,318
142,279
3,177,749
38,728
360,477
30,230
429,435
1,606,818
1,473,350
174,511
3,254,679
31,192
395,291
34,773
461,256
15,777,638
17,074,553
231,156
4,978
1,583,265
(5,894)
1,813,505
231,156
5,096
1,552,646
(7,157)
1,781,741
$ 17,591,143
$ 18,856,294
2017 Annual Report 47
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 CMHC-sponsored securitized assets
Net interest margin bank-sponsored securitization conduit assets
Total net interest margin (non-TEB)
Total net interest margin (TEB)
Spread of non-securitized loans over deposits and credit facilities
Table 26: Fourth Quarter Net Interest Income by Product and Average Rate
For the three months ended
December 31
2017
September 30
2017
December 31
2016
2.46%
2.46%
0.30%
0.99%
2.02%
2.02%
2.84%
2.21%
2.21%
0.43%
1.17%
1.85%
1.85%
2.62%
2.71%
2.73%
0.53%
1.90%
2.36%
2.38%
2.86%
(000s, except %)
Assets
Cash resources and securities
Traditional single-family residential mortgages
ACE Plus 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 non-securitized assets
CMHC-sponsored securitized single-family
December 31, 2017
September 30, 2017
December 31, 2016
Income/
Expense
Average
Rate1
Income/
Expense
Average
Rate1
Income/
Expense
Average
Rate1
For the three months ended
$
6,695
1.12% $
4,556
0.75% $
5,128
115,118
3,732
3,442
1,881
16,257
8,021
10,487
158,938
100
165,733
4.88%
3.94%
122,489
3,612
4.82%
3.62%
131,029
3,344
3.72%
4.98%
6.25%
9.03%
11.39%
5.25%
–
2,763
2,063
18,777
8,327
9,128
167,159
91
3.98%
5.98%
6.12%
8.99%
10.11%
6,505
4,291
28,233
8,389
8,598
5.16%
190,389
–
944
4.57%
171,806
4.47%
196,461
1.31%
4.75%
3.38%
2.24%
3.99%
5.93%
9.02%
9.32%
4.86%
–
4.56%
residential mortgages
13,891
2.40%
13,718
2.27%
11,115
2.50%
CMHC-sponsored securitized multi-unit
residential mortgages
7,115
5.04%
7,718
5.31%
7,197
4.63%
343
1.20%
122
0.68%
495
1.35%
Assets pledged as collateral for CMHC-
sponsored securitization
Total CMHC-sponsored securitized
residential mortgages
Bank-sponsored securitization conduit assets
21,349
1,214
2.85%
2.98%
21,558
1,572
2.81%
3.26%
18,807
1,116
Total assets
$ 188,296
4.15% $ 194,936
4.06% $ 216,384
Liabilities and shareholders’ equity
Deposits and credit facilities
CMHC-sponsored securitization liabilities
Bank-sponsored securitization conduit
liabilities
Other liabilities and shareholders’ equity
$ 76,545
19,121
2.41% $ 86,798
18,277
2.51%
2.54% $ 78,868
15,438
2.37%
812
–
2.04%
–
1,008
–
2.16%
–
514
–
Total liabilities and shareholders’ equity
$ 96,478
2.13% $ 106,083
2.21% $ 94,820
Net Interest Income (TEB)
Taxable Equivalent Adjustment
$ 91,818
(100)
Net Interest Income per Financial Statements $ 91,718
$ 88,853
(91)
$ 88,762
$ 121,564
(944)
$ 120,620
The average is calculated with reference to opening and closing monthly asset and liability and shareholders’ equity balances.
1
2 Residential commercial mortgages include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential
property types.
48 Home Capital Group Inc.
2.96%
3.53%
4.24%
2.00%
2.41%
1.61%
–
1.86%
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 27: Fourth Quarter Mortgage Advances
(000s)
Single-family residential mortgages
Traditional
ACE Plus
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
2017
September 30
2017
December 31
2016
$
515,699
21,713
28,635
17,568
177,224
–
1,870
109,343
$
201,131
1,541
21,292
$ 1,325,896
106,477
346,690
–
99,054
–
–
62,047
53,999
293,306
24,179
14,878
262,423
$
872,052
$
385,065
$ 2,427,848
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
(000s, except %)
December 31, 2017
September 30, 2017
December 31, 2016
For the three months ended
$
Provision2
Single-family residential mortgages
Residential commercial mortgages
Non-residential commercial mortgages3
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
Amount
266
(9)
2,584
485
108
–
–
% of Gross
Loans1
0.01% $
(0.03)%
0.99%
0.55%
0.12%
–
–
Amount
1,165
6
202
756
114
–
–
% of Gross
Loans1
0.04% $
0.02%
0.08%
0.83%
0.13%
–
–
Amount
1,029
2
45
1,164
160
–
–
3,434
–
$ 3,434
0.09%
–
0.09% $
2,243
(6,500)
(4,257)
0.06%
(0.17)%
2,400
–
(0.11)% $
2,400
Net Write-offs2
Single-family residential mortgages
Residential commercial mortgages
Non-residential commercial mortgages
Credit card loans and lines of credit4
Other consumer retail loans
Securitized single-family residential
mortgages
Securitized multi-unit residential
mortgages
Net write-offs
$
489
17
14
3,288
138
–
–
$ 3,946
0.02% $
0.06%
0.01%
3.74%
0.15%
–
–
0.11% $
506
4
33
637
73
–
–
0.02% $
0.02%
0.01%
0.70%
0.08%
–
–
440
2
(5)
469
48
–
–
% of Gross
Loans1
0.03%
0.00%
0.01%
1.26%
0.17%
–
–
0.05%
–
0.05%
0.01%
0.00%
(0.00)%
0.51%
0.05%
–
–
1,253
0.03% $
954
0.02%
Gross loans used in the calculation of total Company ratio include securitized on-balance sheet loans.
1
2 There were no individual provisions, allowances or net write-offs on securitized mortgages.
3 Provision for credit losses includes an individual provision of $2.2 million resulting from one non-residential commercial property that is not considered to
be indicative of increased credit exposure in the remainder of the portfolio.
4 Write-offs for credit card loans for the three months ended December 31, 2017 includes $2.3 million related to the non-core prepaid card business which
was recognized in provision for credit losses in the first quarter of 2017.
2017 Annual Report 49
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 29: Fourth Quarter Allowance for Credit Losses
(000s)
For the three months ended December 31, 2017
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-
residential
Commercial
Mortgages
Credit Card
Loans and
Lines of
Credit
Other
Consumer
Retail Loans
Individual allowances
Allowance on loan principal
Balance at the beginning of the period
Provision for credit losses
Write-offs1
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 losses2
Total allowance
Total provision
(000s)
$
$ 1,860
358
(760)
271
1,729
1,108
(92)
1,016
2,745
23,032
(2,692)
20,340
$ 23,085
$
(2,426)
$
$
Total
$ 5,724
3,434
(4,350)
404
5,212
1,501
–
1,501
6,713
33,563
–
33,563
$
$
300
2,464
(21)
7
2,750
$ 3,260
485
(3,366)
78
457
358
120
478
–
–
–
304
110
(186)
48
276
9
(2)
7
3,228
457
283
6,000
–
6,000
3,904
(808)
3,096
300
3,500
3,800
–
17
(17)
–
–
26
(26)
–
–
327
–
327
327
$ 9,228
$ 3,553
$ 4,083
$ 40,276
(9)
$ 2,584
$
(323)
$ 3,608
$ 3,434
For the three months ended September 30, 2017
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-
residential
Commercial
Mortgages
Credit Card
Loans and
Lines of
Credit
Other
Consumer
Retail Loans
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 losses3
$
1,302
1,064
(651)
145
1,860
1,007
101
1,108
2,968
23,032
–
23,032
Total allowance
Total provision
$ 26,000
$
1,165
$
$
$
–
4
(4)
–
–
24
2
26
26
$
141
192
(33)
–
300
348
10
358
658
327
–
327
353
6
12,500
(6,500)
6,000
6,658
(6,298)
$
$
$
$
3,141
756
(705)
68
3,260
–
–
–
3,260
3,904
–
3,904
7,164
756
$
$
$
264
113
(136)
63
304
8
1
9
313
300
–
300
613
114
$
Total
4,848
2,129
(1,529)
276
5,724
1,387
114
1,501
7,225
40,063
(6,500)
33,563
$ 40,788
$
(4,257)
50 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 29: Fourth Quarter Allowance for Credit Losses (continued)
(000s)
For the three months ended December 31, 2016
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-
residential
Commercial
Mortgages
Credit Card
Loans and
Lines of
Credit
Other
Consumer
Retail Loans
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
$
1,637
783
(619)
179
1,980
1,095
246
1,341
3,321
23,032
–
23,032
Total allowance
Total provision
$ 26,353
$
1,029
$
$
$
$
–
2
(2)
–
–
–
–
–
–
20
5
(5)
10
30
58
40
98
128
327
–
327
327
2
9,500
–
9,500
9,628
45
$
$
$
$
85
1,164
(493)
24
780
–
–
–
780
3,904
–
3,904
4,684
1,164
$
$
$
302
157
(126)
78
411
9
3
12
423
300
–
300
723
160
$
Total
2,044
2,111
(1,245)
291
3,201
1,162
289
1,451
4,652
37,063
–
37,063
$ 41,715
$
2,400
1 Write-offs in the credit card and line of credit portfolio include $2.3 million related to the non-core prepaid card business that was recognized as provision
for credit losses in Q1 2017.
2 The following changes were recognized in the collective allowance:
• Single-family residential mortgage portfolio – reduction of $2.7 million reflecting the decrease in the portfolio size, decreased loss rates and continued
low levels of loans in arrears.
• Credit card loans and lines of credit portfolio – reduction of $0.8 million reflecting the decrease in the portfolio size, decreased loss rates and continued
low levels of loans in arrears.
• Other consumer retail loans portfolio – increase of $3.5 million reflects recent settlement experience related to cash reserves on certain programs
within that portfolio.
3 Non-residential commercial mortgage portfolio – reduction of $6.5 million reflecting the sale of mortgages from this portfolio (please see Note 5(H)
for more information).
There were no individual provisions, allowances or net write-offs on securitized residential mortgages.
Table 30: Securitization Income
(000s)
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 Gains on sale of mortgages and residual interest are net of hedging impact.
For the three months ended
December 31
2017
September 30
2017
December 31
2016
$
$
163
(137)
1,669
$
1,695
$
434
349
1,742
2,525
$
$
7,006
276
1,782
9,064
2017 Annual Report 51
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 31: Securitization Activity
(000s)
December 31, 2017
For the three months ended
September 30, 2017
Single-family
Residential
MBS
Multi-unit
Residential
MBS
Single-family
Residential
MBS
Multi-unit
Residential
MBS
Total MBS
Total MBS
Carrying value of underlying mortgages
derecognized
$
Net gains on sale of mortgages or
residual interest1
Retained interests recorded
Servicing liability recorded
(000s)
–
–
–
–
$ 51,869
$ 51,869
$
163
2,730
444
163
2,730
444
–
–
–
–
$ 58,905
$ 58,905
434
2,349
480
434
2,349
480
For the three months ended
December 31, 2016
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 and residual interest are net of hedging impact.
Capital Management
Single-family
Residential
MBS
Multi-unit
Residential
MBS
Total MBS
$ 392,298
$ 314,985
$ 707,283
4,284
–
–
2,722
10,004
2,408
7,006
10,004
2,408
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 a 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.
Capital requirements are addressed in the Company’s policy, including 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 Home 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 Home Bank, a wholly
owned subsidiary of Home Trust, is regulated under 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 exposures, derivatives, securities financing transactions and off-balance sheet exposures. In addition,
dividends paid by Home Trust to Home Capital may be subject to restrictions by OSFI.
52 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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:
Table 32: Basel III Regulatory Capital (Based only on Home Trust Company consolidated financial position)
(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
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 ratio
December 31
2017
All-In Basis
December 31
2016
All-In Basis
$
38,497
951
1,604,357
(5,897)
1,189
(125,768)
1,513,329
–
$
38,497
951
1,604,758
(55,040)
1,476
(160,917)
1,429,725
–
1,513,329
1,429,725
33,563
33,563
37,063
37,063
1,546,892
1,466,788
5,580,361
942,038
6,522,399
8,650
6,531,049
9,251
6,531,650
9,731
7,578,490
1,050,888
8,629,378
11,544
8,640,922
12,806
8,642,184
13,889
$ 6,532,130
$ 8,643,267
23.17%
23.17%
23.68%
8.70%
7.00%
8.50%
10.50%
3.00%
16.55%
16.54%
16.97%
7.20%
7.00%
8.50%
10.50%
3.00%
1
Regulatory deductions on the all-in basis include intangible assets, net of deferred taxes, unrealized mortgage securitization gains, net of deferred taxes
and deferred tax assets related to loss carryforwards from Home Bank.
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, 2017, the Company’s collective allowance represented
0.60% of total credit risk-weighted assets, inclusive of total CVA.
3 CVA – Credit Valuation Adjustment.
Home Trust’s regulatory “all-in” total capital ratios have increased from the end of 2016 primarily because of a decrease in
risk-weighted assets. Risk-weighted assets decreased as the Company constrained mortgage originations and renewals and
sold mortgage assets to deal with the liquidity event of 2017.
2017 Annual Report 53
MANAGEMENT’S DISCUSSION AND ANALYSIS The Leverage ratio is a non-risk-adjusted view of a company’s leverage. The Leverage ratio 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 Company’s Leverage ratio 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 Company has disclosed the Leverage ratio and its components under “Regulatory
Disclosures” on the Home Trust website.
Home Trust’s Common Equity Tier 1, Total Tier 1 and Total capital ratios continue to exceed regulatory and internal
capital targets.
Home Trust adopted certain Basel III capital requirements beginning January 1, 2013, as required by OSFI. The transitional
basis allowed 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 Home Trust Company consolidated financial position)
(000s, except %)
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
Deferred tax assets for loss carryforwards
Intangible assets
Collective allowance for credit losses
Total assets
Off-balance sheet items
Loan commitments
Total credit risk
Operational risk
2017
2016
Balance Sheet
Amounts
Effective
Risk Weight1
Risk-weighted
Amount
Balance Sheet
Amounts
Effective
Risk Weight1
Risk-weighted
Amount
$ 1,146,147
20.0% $ 229,229
$ 1,145,116
20.0% $
229,023
437,011
331,500
3,565,354
11.6%
9.3%
0.5%
50,827
30,936
18,867
265,374
530,594
3,524,733
10.8%
36.4%
0.9%
28,659
193,350
30,449
9,637,873
35.2%
3,393,375
11,501,997
35.3%
4,057,571
105,849
1,042,853
351,605
360,890
341,345
100.0%
105,849
305,188
100.7%
1,049,722
1,954,820
42.2%
75.0%
71.4%
148,506
270,668
243,844
369,678
378,901
383,435
17,320,427
32.0%
5,541,823
20,359,836
6,390
98,669
(33,563)
–
–
–
–
–
–
15,920
115,003
(37,063)
100.3%
100.1%
43.3%
75.0%
62.4%
36.8%
–
–
–
306,123
1,957,094
160,040
284,176
239,198
7,485,683
–
–
–
17,391,923
31.9%
5,541,823
20,453,696
36.6%
7,485,683
799,892
18,191,815
–
4.8%
38,538
1,172,628
7.9%
92,807
5,580,361
21,626,324
942,038
–
7,578,490
1,050,888
Total risk-weighted assets, before CVA
$ 18,191,815
$ 6,522,399
$ 21,626,324
$ 8,629,378
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.
54 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Management Activity
During the fourth quarter of 2016, the Company filed a Normal Course Issuer Bid through the Toronto Stock Exchange,
which allowed it to purchase up to 5,336,040 of the Company’s common shares. The normal course issuer bid expired
on December 31, 2017 and the Company opted to not renew it. Please refer to the press release issued by the Company
on December 23, 2016 for more information. 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. The Company will determine its plans for future share repurchases and whether it will file
a new normal course issuer bid as part of the strategic planning process that is underway.
During 2017, the Company repurchased 203,000 common shares for $6.0 million under the normal course issuer bid thereby
reducing retained earnings by $5.7 million and share capital by $0.3 million. In 2016, the Company repurchased a total of
5,660,691 common shares under both its substantial issuer bid and normal course issuer bid for $199.2 million, thereby
reducing retained earnings by $191.9 million and share capital by $7.3 million. Included in the amount allocated to retained
earnings in 2016 was $0.4 million (net of tax) for transaction costs associated with the substantial issuer bid.
Universal Base Shelf Prospectus
On October 18, 2017, the Company filed a short form universal base shelf prospectus (the ”Prospectus”) with the securities
commissions in each of the provinces and territories of Canada, except for Quebec. The Prospectus qualifies offerings of up
to $750 million of securities over a 25-month period. The Prospectus is not a commitment to undertake any financing, nor
does the Company have any current intention of offering securities from treasury under this Prospectus. The Prospectus was
filed to satisfy Home Capital’s obligations under the registration rights agreement entered into with a subsidiary of Berkshire
Hathaway Inc. and to provide the Company with financing flexibility going forward.
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.
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.
Home Trust Company
DBRS
Standard & Poor’s
DBRS
Standard & Poor’s
B (low)
R-5
Stable
B-
B
Positive
BB (low)
R-4
Stable
B+
B
Positive
Number of
Shares
80,246
840
511
$
2017
Amount
231,156
N/A
18,333
Number of
Shares
64,388
1,074
587
$
2016
Amount
84,910
N/A
18,107
1 Please see Note 13(B) of the consolidated financial statements included in this report for details on shares issued during the year.
2 Please see Note 14(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.
2017 Annual Report 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Management
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, 2017.
Risk Overview
Risk management is an essential component of the Company’s strategy, contributing directly to the Company’s profitability.
The Company continues to invest significantly in risk management practices and resources.
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:
• Identification of the principal risks to the Company’s strategy and adoption of policies, guidelines and mitigation strategies
to address such risks;
• Adoption of a risk appetite framework that includes risk capacity, a risk appetite statement, risk limits and other key
risk indicators;
• Adoption of a risk governance structure that includes promotion of a sound risk and compliance culture, a three lines
of defence model for the management of risk, and active oversight by the Board of Directors and senior management;
• Extensive risk identification, assessment, measurement and monitoring practices and controls executed by experienced
personnel and supported by appropriate processes and technology;
• Monitoring of the Company’s internal and external environments to identify and respond on a timely basis to emerging risk
exposures, and to ensure that risks are considered in all change initiatives; and
• Robust reporting on risk exposures including establishment of key risk indicators that provide early warning indicators
of changes in risk profile.
Risk Factors That May Affect Future Results
The Company is exposed to a variety of continually changing risks that have the potential to 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.
Top and Emerging Risks
Canadian Housing Market and Canadian Consumer Debt
The Canadian housing market, and in particular the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), remains
a top concern for the Company. The Company is closely monitoring the impact of the new federal and provincial measures,
designed to cool the housing market, on our mortgage originations. Risks associated with high Canadian household
indebtedness remain elevated, particularly considering the rising interest rate environment. The Company expects further
slowing of housing price appreciation in 2018, reflecting the impact of regulatory changes and rising interest rates which could
worsen affordability, especially in the GTA and the Golden Horseshoe area. However, stable employment conditions and high
levels of immigration are expected to continue to provide support to our primary markets.
The Company continues to apply conservative credit risk management practices, which includes manual adjudication of loan
applications, establishing and monitoring prudent risk limits and regular performance of stress tests. The Company believes
the risk of a severe housing correction in our established regions to be unlikely, and stress testing results suggest that even
a severe real estate decline, coupled with high unemployment rates, would lead to manageable losses.
56 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Regulatory and Political Risk
The Company is subject to a variety of regulations and related oversight. Regulatory reforms aimed at cooling the housing
market and strengthening underwriting practices, at the federal and provincial levels of government, are a key risk for the
Company. Implementation of the measures could potentially result in increased regulatory and compliance costs.
The Company maintains a framework and controls to address compliance with existing laws and regulations and monitors
and assesses the potential impact of regulatory developments and implements any necessary changes; however, regulators
or other reviewers may challenge the interpretation or implementation of such compliance. Failure to comply with legal and
regulatory requirements could result in fines, penalties, litigation, regulatory sanctions and limitations, all of which could have
a negative impact on the Company’s financial performance, reputation and ability to operate as a regulated entity.
Third Party Risk
The Company recognizes the value of using third parties to support its business activities, as they provide access to an
expanded customer base, specialized expertise and systems, economies of scale and operational efficiencies. However, they
also create reliance on the integrity, reliability, and security of these relationships, and their associated people, processes and
technology. While the Company has implemented internal controls to manage the risks associated with key vendors as well
as business partners such as mortgage brokers and loan servicers, failures could result in adverse effects including service
disruptions, financial loss and damage to the Company’s reputation.
Other Factors That May Affect Future Results
Information Security and Privacy Risk
As a financial institution, the Company is exposed to a variety of types of fraud and other financial crime, including cyber-
crime. The scale, scope, complexity and velocity of these crimes are increasing, and could result in business interruptions,
service disruptions, corporate espionage, theft of private and confidential information, and reputational damage. The
Company is committed to investing in defensive technology, resources and processes to prevent, detect and manage
information security and privacy threats.
Ability to Attract and Retain Employees
Underlying the Company’s performance is its ability to attract and retain key personnel as there is strong competition
for talent in the financial services sector. The recent liquidity event highlighted the importance of employee retention.
Management has been addressing this risk through key employee retention programs, increased employee communications,
and focused recruitment activities. The Company believes that it is now better positioned to manage the rate of attrition and
that attrition will return to more historical levels.
Change Management Risk
The Company has undergone changes to its Board and senior management team as well as enhancements to its
organizational structure, processes and technology to improve service to the Company’s customers and broker network,
deliver efficiencies, strengthen internal controls and meet regulatory expectations. To manage the risk of change, the
Company has employed structured processes such as its New Initiative Risk Assessment Process, as well as emphasizing
stakeholder involvement and communication throughout the Company.
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 of this MD&A and within the notes to the consolidated financial statements.
Risk Governance
The Company’s strategies and management of risk are supported by an overall enterprise risk management framework
including policies, guidelines, and procedures for each major category of risk to which it is exposed. The Company defines risk
management as an ongoing process involving its Board of Directors, management and other personnel in the identification,
assessment, measurement, management and monitoring of risks that may positively or negatively impact the organization
as a whole. Risk management 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 the risk management
framework is to support superior and sustainable business performance, including informed decision making, improved
deployment of capital, reduced volume and severity of surprises and losses, improved long-term business performance and
increased stakeholder confidence.
Supporting the Company’s risk management 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.
2017 Annual Report 57
MANAGEMENT’S DISCUSSION AND ANALYSIS Risk and Compliance Culture
The Company’s risk and compliance culture is influenced by many factors, and is supported by the following guiding principles:
Risk Governance
• Alignment and commitment to an effective three lines of defence model, including respective roles, responsibilities,
accountabilities and effective challenge that is supported by strong Board oversight.
• An effective system of controls commensurate with the size and complexity of the organization and consistent with
regulatory expectations.
• Decision making is facilitated by engaging all relevant parties in the process to arrive at the best decision for
the organization.
Risk Appetite
• The Company’s risk appetite is forward-looking, reflects its strategic and financial objectives and informs enterprise and line
of business decision making.
• Risk-reward balance is consistent with the Company’s risk appetite.
Accountability
• Risk management structures and capabilities are embraced and add value to the business.
• Business leaders are empowered to manage all aspects of their business and are held accountable for financial and
risk results.
Capability
• The lines of business (first line) have the capability (people, information, tools, processes and models) to effectively measure
and manage performance, risk and compliance.
• Human capital decisions reflect risk and compliance competencies and behaviours.
Tone from the Top
• Board and senior management lead by example and promote adherence to the Company’s risk appetite and compliance
requirements, as well as a continuous improvement and learning culture.
• Proportionate disciplinary actions are taken when necessary in response to compliance and internal policy breaches and
Code of Conduct and Ethics violations.
Communication
• Risk and compliance culture is actively promoted (formally and informally) through multiple modes of communication and
training to internal and external stakeholders.
Compensation & Incentives
• Employees are rewarded in a manner that encourages behaviour that is consistent with the Company’s long-term strategic
objectives, risk appetite, and adherence to compliance requirements.
Risk Governance Structure
The Company’s risk governance is based on a three lines of defence model:
• First Line of Defence – consists of the business units and corporate functions. As risk owners, management is accountable
for identifying, assessing, measuring, managing, monitoring, and reporting on the risks generated within their respective
areas of responsibility. Business risk management teams are embedded within the first line of defence to assist
management in carrying out their risk and compliance responsibilities.
• Second Line of Defence – consists of the Enterprise Risk Management and Corporate Compliance groups who are
responsible for the establishment of the Company’s risk management frameworks and the independent oversight of
their implementation. Together with Finance, they are also responsible for the independent assessment, monitoring
and reporting of risk-taking activities. Enterprise Risk Management and Corporate Compliance are independent from
management. The Chief Risk Officer and Chief Compliance Officer are appointed by and report to the Risk and Capital
Committee and Audit Committee, respectively.
• Third Line of Defence – Internal Audit is responsible for providing independent, objective assurance to the Board of
Directors and Executive Management by assessing the effectiveness of governance, risk management and control
processes. The Chief Audit executive is appointed by and reports directly to the Audit Committee.
58 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS The risk 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
I
S
E
E
T
T
M
M
O
C
Audit
Committee
Governance,
Nominating and
Conduct Review
Committee
Human Resources
and Compensation
Committee
Risk and Capital
Committee
Management
CEO and Executive
Committee
Disclosure
Committee
Executive
Project Review
Committee
Operational
Risk
Committee
Asset/
Liability
Committee
Credit
Risk
Committee
Capital
Management
Committee
Three Lines of Defence
1st Line
Business Units and
Corporate Functions
2nd Line
ERM, Corporate
Compliance, Finance
3rd Line
Internal
Audit
2017 Annual Report 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Board of Directors (the “Board”) is accountable for establishing the overall vision, mission, values, objectives
and strategies of the Company and setting the Company’s overall risk-bearing capacity and risk appetite. The Board
challenges management’s proposals and plans to ensure that the forecasted results and risk assessments are reasonable
and in line with the Company’s capabilities, objectives and risk appetite. These risk management responsibilities
are primarily carried out through the Risk and Capital Committee (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 provides oversight of the independence and
effectiveness of the Company’s Enterprise Risk Management (ERM) function.
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 its mandate is the implementation of the
risk appetite and risk management frameworks. The EC is also accountable for implementation of an appropriate risk
and compliance culture and monitoring the Company’s business activities, and providing risk oversight for Strategic,
Reputational and Compliance Risks.
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, Asset/Liability, Capital
Management, Operational Risk, Disclosure, and Executive Project Review) recommend policies for approval as
proposed by the lines of business, with review by ERM and/or Corporate Compliance, proactively monitor and challenge
management of specific risks under their mandates, and provide reporting to a Board Committee on risk profile compared
to the Board-approved risk appetite and risk limits.
The ERM group is mandated to work with management and the Board to support sustainable business performance
through the independent identification, measurement, monitoring and reporting of all significant risks to the Company,
regardless of source. Working closely with management and the RCC, the ERM group recommends the Company’s overall
risk appetite and limits, develops and maintains an enterprise risk management framework and related risk governance
structure to enable effective management of risk. It provides monitoring and oversight of the implementation of the
risk appetite and risk management frameworks, including providing independent challenge and a current view of the
Company’s risk profile by monitoring actual exposures 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 enterprise-wide compliance framework (a set of controls and oversight
processes) designed to mitigate the Company’s compliance risk. The Corporate Compliance group is an independent
function that promotes a sound risk and compliance culture. 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 Executive
Management on the effectiveness of governance, risk management and internal control processes.
The Finance group is mandated to establish and maintain a financial management framework (a set of controls and oversight
processes). In addition to the first line of defence responsibilities for implementing, monitoring and reporting on controls, the
Finance group has second line of defence responsibilities relating to the oversight of the effectiveness of financial controls.
The Chief Financial Officer reports to management and 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.
Risk Management
Risk Appetite Statement
The Company’s risk appetite statement 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 framework guides the risk-taking activities of
the Company by establishing qualitative and quantitative benchmarks, parameters and limits related to the amount of risk the
Company is willing to accept, considering financial, operational and macroeconomic factors.
60 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS The Company’s risk appetite statement articulates the following major enterprise principles:
The Company will:
• Maintain adequate capital and liquidity at all times.
• Only take risks that are transparent and manageable and that fit the Company’s business strategy.
• Not expose itself to any significant single loss event on any individual transaction or acquisition.
• Not take risks that are expected to result in significant volatility in earnings or shareholder returns.
• Conduct business with honesty, integrity, respect and high ethical standards.
• Strive to protect the Company’s reputation at all times, with all key stakeholders.
• Adopt a risk-based approach for identifying, assessing, managing, mitigating and monitoring risk that meets regulatory
requirements and expectations.
• 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.
• Incorporate risk and compliance measures into performance and reward measurement programs.
The risk appetite framework includes key risk appetite measures supported by management and management risk committee-
level limit structures that provide forewarning capabilities intended to trigger management actions and mitigation plans before
risk appetite limits are breached.
Risk Policies and Limits
The Company maintains policies, guidelines, delegated lending authorities, risk limits and an internal control framework
designed to ensure that business activities are conducted within the Company’s risk appetite. Risk policies and guidelines
are reviewed regularly and challenged by management risk committees, and key policies and frameworks are reviewed,
challenged and approved by the Board.
The Company has identified the following eight principal risks, as illustrated below.
Principal Risk
Credit
Key Policy / Framework
Risk Limits
Management Oversight
Credit Risk Policy
Credit Concentration Limits
Credit Risk Committee
Residential Mortgage
Underwriting Policy
Delegated Lending Authorities
Market
Market Risk Policy
Market Risk Limits
Asset/Liability Committee
Liquidity and Funding
Liquidity and Funding
Risk Policy
Liquidity and Funding
Risk Limits
Asset/Liability Committee
Operational
Operational Risk Management
Policy and Framework
Internal Control Framework
Funding Concentration Limits
Key Risk Indicators
Operational Risk Committee
Key Control Indicators
Disclosure Committee
Executive Project
Review Committee
Compliance
Corporate Compliance Policy
Key Risk Indicators
Executive Committee
Strategic
Anti-Money Laundering and
Anti-Terrorist Financing Policy
Strategic and Financial
Planning Policy
Risk Appetite Statement
Executive Committee
Reputational
Reputational Risk Policy
Risk Appetite Statement
Executive Committee
Capital Adequacy
Capital Management Policy
Key Risk Indicators
Capital Management
Committee
2017 Annual Report 61
MANAGEMENT’S DISCUSSION AND ANALYSIS In addition to these principal risks, the Company employs a risk register to describe risk categories and related subcategories
to facilitate consistent risk identification and provide a common starting point in developing risk management strategies and
processes. These risks are identified, measured, assessed, and monitored on an ongoing basis, with regular reporting to risk
committees of both senior management and the Board of Directors. 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 impacts
to the Company’s reputation or ability to execute strategic objectives.
Risk Identification and Assessment
The Company uses a range of risk tool programs to proactively identify its exposure to key risks and assesses the
effectiveness of related mitigation strategies. Risk assessments are also performed on regulatory compliance management
and significant new initiatives (e.g., products, services or technologies) by business and support groups, and other internal
subject matter experts.
Risk Measurement
The ability to measure risks is a key component of the Company’s risk management framework and capital management
processes. The Company’s risk measurement processes align with regulatory requirements such as liquidity measures,
leverage ratios, capital adequacy and stress testing. While quantitative risk measurement is important, reliance is also
placed on qualitative factors for those risk types that are difficult to quantify. The Company uses various risk measurement
methodologies including scenario and sensitivity analysis, stress testing, risk limits, provision for credit losses, and internal
and external operational risk event monitoring.
Stress Testing
Management conducts regular stress testing, including stress testing through the Company’s ICAAP, liquidity and funding
planning, credit risk management 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 severe real estate price decline, interest rate shock, a reputational risk event, 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.
Risk Monitoring and Reporting
Enterprise and business level risk monitoring and reporting processes are designed to ensure that risks and issues are
identified, escalated and managed on a timely basis. The Company monitors external developments, key risk indicators
and early warning indicators to identify and provide timely responses to emerging risk issues and other changes in risk
profile before risk appetite limits are reached. ERM, management risk committees and the Board regularly monitor the
Company’s risk profile in relation to risk appetite and related limits, with timely escalation of issues requiring broader
attention and/or approval.
In addition to the above, risk-specific presentations are provided to and discussed with management risk committees and
the Board periodically.
The following sections describe the principal risk types and how they are managed.
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, risk limits, a Board-approved Credit Risk Policy, delegated lending
authorities, and regular independent monitoring and reporting. The Credit Risk Committee establishes, implements
and monitors credit risk-related policies and guidelines enterprise-wide, considering 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, Capital Management
Committee, the ERM group, and the Risk and Capital Committee of the Board provide oversight of the credit portfolio
through ongoing reviews of credit risk management policies, lending practices, portfolio composition and risk profile,
the adequacy of allowance for credit losses and the allocation of credit risk-based capital.
62 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 a detailed assessment of the borrower’s
ability to service the loan, credit history and underlying security. 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.
Table 36: Credit Risk Portfolio Metrics
(000s, except % and number of credit cards and lines of credit issued)
2017
2016
2015
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
$ 14,898,477
$ 17,957,399
$ 18,133,665
$ 14,185,982
$ 17,208,820
$ 17,465,983
92.6%
7.4%
24.0%
98.4%
0.2%
20.3%
68.9%
88.6%
11.4%
20.0%
98.3%
0.3%
27.7%
65.0%
91.5%
8.5%
23.7%
98.2%
0.3%
22.1%
66.4%
$
351,605
$
369,678
$
370,825
87.8%
4.3%
98.2%
0.5%
61.2%
86.6%
4.0%
98.2%
0.4%
63.2%
86.6%
3.9%
98.5%
0.4%
62.9%
$
$
$
21,580
497,475
41,736
12
$
$
$
21,253
515,947
42,707
12
$
$
$
20,646
511,283
40,355
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 without any price adjustment. For Equityline Visa,
loan-to-value includes both the first mortgage and the secured Equityline Visa balance.
2017 Annual Report 63
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 Company’s risk appetite. 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 as well as through
collateral in the form of real property. Loan-to-value (LTV) is a key credit risk indicator. Please see Tables 41 and 42 for
further information.
The Company separately monitors segments of its portfolio for indications of deterioration in performance. Due to the level
of activity and price appreciation in the high-rise condominium market in certain cities, the Company continues to closely
monitor market conditions and the performance of this portfolio. High-rise condominiums represent 8.0% of the residential
mortgage portfolio and, of these, 25.9% are insured. The average current LTV of the high-rise condominium portfolio was
54.0% at the end of 2017. The credit performance of the high-rise condominium portfolio is strong and within the Company’s
expectations, with 99.2% of the portfolio current and 0.1% over 90 days past due.
The level of non-residential mortgages decreased during the year following the sale of mortgages from this portfolio. Please
see Note 5(H) to the consolidated financial statements included in this report for more information.
Consumer Lending
Credit card and Equityline Visa balances were $351.6 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 57.2% at the end of the year compared to 63.2% at the end of 2016. 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 line of credit portfolio.
The portfolio continues to perform well, with arrears well within expected levels. As of December 31, 2017, $2.3 million or 0.7%
of the credit card and line of credit portfolio was over 90 days in arrears, compared to $2.4 million or 0.4% at December 31, 2016.
Other consumer retail loans are primarily secured by charges on financed assets, primarily fixtures and/or improvements to
residential property. The Company has a small auto financing portfolio. These portfolios continue to perform well and within
expected levels.
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.
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
$
$
Gross
31,836
–
16,489
2,038
276
50,639
$
2017
Net1
30,107
–
13,739
1,581
–
45,427
$
Gross
49,834
–
4,577
2,049
411
56,871
2016
Net1
47,854
–
4,547
1,269
–
53,670
$ 14,903,689
$ 17,960,600
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
0.30%
$
40,276
0.27%
79.54%
0.06%
0.30%
$
41,715
0.23%
73.35%
0.03%
1 Non-performing loans are net of individual allowances as shown in Table 38, Allocation of Allowance for Credit Losses.
64 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 $9.0 million or 0.06% of gross loans in 2017, compared to $5.8 million or 0.03% of gross loans in 2016. The Company
continually monitors arrears and write-offs and deals quickly with non-performing loans. From time to time, the Company may
sell non-performing loans to third parties. The Company has not sold any loans to such parties in 2017.
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 with a combination
of loan-to-values, risk-sensitive pricing and a strong capital position.
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 allowance1
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
$
2017
Opening
Balance
3,321
–
128
780
423
4,652
23,032
327
9,500
3,904
300
37,063
Write-offs
Net of
Recoveries
Provision for
Credit Losses
$
$
(2,467)
(16)
(96)
(5,710)
(666)
(8,955)
–
–
–
–
–
–
$
1,891
16
3,196
5,387
526
11,016
(2,692)
–
(3,500)
(808)
3,500
(3,500)
$
41,715
$
(8,955)
$
7,516
$
$
2016
Opening
Balance
2,491
–
397
329
166
3,383
22,232
327
9,500
3,890
300
36,249
Write–offs
Net of
Recoveries
Provision for
Credit Losses
$
$
(3,087)
(2)
(515)
(1,928)
(275)
(5,807)
–
–
–
–
–
–
$
3,917
2
246
2,379
532
7,076
800
–
–
14
–
814
$
39,632
$
(5,807)
$
7,890
$
2017
Ending
Balance
2,745
–
3,228
457
283
6,713
20,340
327
6,000
3,096
3,800
33,563
40,276
2016
Ending
Balance
3,321
–
128
780
423
4,652
23,032
327
9,500
3,904
300
37,063
41,715
1 The reduction in the collective allowance of $3.5 million during 2017 comprises the following:
• Single-family residential mortgage portfolio – reduction of $2.7 million reflecting the decrease in the portfolio size, decreased loss rates and continued
low levels of loans in arrears.
• Non-residential commercial mortgage portfolio – net reduction of $3.5 million comprises a reduction of $6.5 million reflecting the sale of mortgages
from this portfolio (please see Note 5(H) for more information), offset partially by an increase of $3.0 million reflecting an increase in the construction
and land segment of this portfolio.
• Credit card loans and lines of credit portfolio – reduction of $0.8 million reflecting the decrease in the portfolio size, decreased loss rates and continued
low levels of loans in arrears.
• Other consumer retail loans portfolio – increase of $3.5 million reflects recent settlement experience related to cash reserves on certain programs
within that portfolio.
2017 Annual Report 65
MANAGEMENT’S DISCUSSION AND ANALYSIS The Company has security in the form of real property or cash deposits for virtually the entire loan portfolio. The Company
maintains an allowance for credit losses in accordance with IFRS which represents management’s best estimate of impairment
incurred in the loan portfolio. The allowance is reviewed quarterly at a minimum. The Company records individual allowances
for credit losses for loans that are specifically identified as impaired based on factors such as borrower performance. In
addition, the Company records a collective allowance to estimate incurred credit losses inherent in the portfolio but not yet
individually identified. Key factors in determining these estimates are credit scores, past loss experience, delinquency trends,
loan-to-value ratios and general economic conditions. At December 31, 2017, the collective allowance was $33.6 million
($37.1 million – December 31, 2016), representing more than the cumulative total net write-offs over the past 36 months.
Current accounting standards do not permit the Company to carry allowances for possible or future losses. This risk is
considered in the determination of the appropriate level of capital supporting the Company’s operations. The Company holds
capital for possible further credit losses. This includes capital required by regulation (see Table 32) and additional capital
amounts as recommended by management and approved by the Board. The Company uses stress testing and scenario
analysis to challenge the adequacy of the capital appropriated for credit risk. As at December 31, 2017, the Company held total
regulatory capital at 226% of the regulatory minimum. A substantial portion of this is appropriated for credit risk.
On the adoption of IFRS 9 in 2018, the accounting standards relating to credit losses will change such that forward-looking
information regarding the possibility of future losses will be considered in the determination of allowances for credit losses. Please
refer to Note 3 in the consolidated financial statements included in this report for further information on the adoption of IFRS 9.
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
(000s, except %)
British Columbia
Alberta
Ontario
Quebec
Other
(000s, except %)
British Columbia
Alberta
Ontario
Quebec
Other
Insured
Residential
Mortgages1
Percentage
of Total for
Province
Uninsured
Residential
Mortgages
Percentage
of Total for
Province
Equityline
Visa2
Percentage
of Total for
Province
2017
Total
$ 255,452
33.8% $ 498,570
65.9% $
2,390
0.3% $
756,412
387,436
1,834,007
113,804
242,158
59.3%
17.2%
33.8%
63.0%
257,211
8,519,604
222,413
140,075
39.3%
80.0%
65.9%
36.5%
9,049
294,570
1,058
1,803
1.4%
653,696
2.8%
10,648,181
0.3%
0.5%
337,275
384,036
$ 2,832,857
22.2% $ 9,637,873
75.4% $ 308,870
2.4% $ 12,779,600
Insured
Residential
Mortgages1
Percentage
of Total for
Province
Uninsured
Residential
Mortgages
Percentage
of Total for
Province
Equityline
Visa2
Percentage
of Total for
Province
2016
Total
$
286,444
32.1% $
603,377
67.6% $
2,585
0.3% $
892,406
298,432
1,950,188
99,465
192,093
47.9%
314,519
15.7%
10,145,301
25.1%
56.8%
295,017
143,783
50.5%
81.8%
74.6%
42.5%
10,347
304,468
1,217
2,268
1.6%
2.5%
0.3%
0.7%
623,298
12,399,957
395,699
338,144
$ 2,826,622
19.3% $ 11,501,997
78.5% $
320,885
2.2% $ 14,649,504
1 See definition of insured loans under the Glossary of Terms in this report.
2 Equityline Visa is an uninsured product.
66 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 40: Insured and Uninsured Single-Family Residential Mortgages by Effective Remaining Amortization Period
(000s, except %)
Balance outstanding
Percentage of total
(000s, except %)
≤20
Years
> 20 and ≤ 25
Years
> 25 and ≤ 30
Years
> 30 and ≤ 35
Years
> 35
Years
2017
Total
$ 882,326
$ 2,459,857
$ 9,091,672
$
35,591
$
1,284
$ 12,470,730
7.1%
19.7%
72.9%
0.3%
0.0%
100.0%
≤ 20
Years
> 20 and ≤ 25
Years
> 25 and ≤ 30
Years
> 30 and ≤ 35
Years
> 35
Years
2016
Total
Balance outstanding
Percentage of total
$
696,937
$ 2,329,016
$ 11,227,579
$
72,348
$
2,739
$ 14,328,619
4.9%
16.3%
78.3%
0.5%
0.0%
100.0%
Table 41: Weighted-Average Loan-to-Value Ratios for Uninsured Single-family Residential Mortgages Originated During the Year
British Columbia
Alberta
Ontario
Quebec
Other
Total
Uninsured
Residential
Mortgages1
63.0%
68.8%
70.9%
69.2%
69.6%
70.3%
2017
Equityline
Visa1
47.1%
56.3%
56.6%
24.5%
58.6%
56.5%
Uninsured
Residential
Mortgages1
63.6%
69.4%
72.9%
69.3%
72.4%
72.2%
2016
EquityLine
Visa1
52.4%
44.1%
63.9%
65.3%
58.9%
63.8%
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. LTVs are calculated
using appraised property values at the time of origination.
The Company actively manages the mortgage portfolio and performs regular and ad-hoc stress testing. Stress testing
includes scenarios that are based on a combination of increasing unemployment, rising interest rates, and a decline in real
estate values, as well as specific operational, market and single-factor stress tests. The probability of default in the residential
mortgage portfolio is most closely correlated with changes in employment rates. Consequently, during an economic
downturn, either regionally or nationally, the Company would expect an increased rate of default and an increase in credit
losses arising from lower real estate values. 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 events, albeit with increases to credit losses. The total single-family residential mortgage portfolio
including HELOC was $12.78 billion as of December 31, 2017, of which $2.83 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.
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, 2017, the weighted-average
LTV of the uninsured portfolio against the estimated current market value was 55.3% compared to 60.9% at the end of 2016.
These average current LTVs were estimated with appraised property values adjusted for price changes by using the Teranet-
National Bank House Price Index. This index provides changes in prices for all of Canada by region using the first three digits
of the postal code in which the property is located. 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 weighted-average LTV for each
significant market is indicated below.
2017 Annual Report 67
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 42: Weighted-Average Loan-to-Value Ratios for Uninsured Residential Mortgages
Weighted-average
Current LTV1
Percentage of Total Value
of Outstanding Mortgages with
Current LTV Less than or Equal to
Weighted-average
Current LTV1
2017
2016
Percentage of Total Value
of Outstanding Mortgages with
Current LTV Less than or Equal to
British Columbia
Alberta
Ontario
Quebec
Other
Total
49.6%
63.9%
55.2%
61.4%
61.7%
55.3%
75%
99.5%
84.9%
96.2%
94.8%
87.7%
95.9%
65%
90.0%
51.3%
74.2%
60.9%
53.9%
73.8%
52.0%
65.0%
61.2%
62.8%
62.1%
60.9%
75%
98.4%
81.1%
85.7%
92.1%
86.4%
86.4%
65%
89.1%
46.8%
59.0%
53.4%
54.5%
60.1%
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
Market Risk is the potential for adverse changes in the value of assets, liabilities or earnings resulting from changes in market
variables such as interest rates, equity prices and counterparty credit spreads. 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 of earnings and capital from changes in security prices and dividends in the investment
portfolio, whether they arise from macroeconomic factors, the economic prospects of the issuer, or the availability of
liquid markets among other factors. The Company’s investment portfolio consists primarily of government bonds at 90.4%
of the portfolio and preferred shares at 9.3% of the portfolio. The total balance was $332.5 million at December 31, 2017
compared to $534.9 million at the end of 2016. During the year, the Company liquidated the majority of its preferred share
portfolio incurring a loss of $72.9 million, of which $46.2 million had previously been recognized in accumulated other
comprehensive loss.
The Company’s investment risk management framework is approved by the Asset/Liability Committee (ALCO) and
the RCC. The ALCO is responsible for defining and monitoring the Company’s investment portfolio and identifying
investments that may be at risk of impairment. The ERM group conducts analysis of counterparties to assess if credit
deterioration has resulted in an impairment of the investments. 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. The ERM group recommends policies, reviews procedures and guidelines, and
provides enterprise-wide oversight and challenge of investment risk, including valuations.
As of December 31, 2017, the Company assessed its securities portfolio for evidence of impairment and has not identified any
negative credit events during the year in relation to its preferred share or debt holdings.
68 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 can 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 has significantly reduced the proportion of overall funding
from high-interest savings demand deposits. This has significantly reduced the Company’s risk of a funding mismatch.
The Company has established prudent limits on the level of deposits that may comprise demand deposits.
The Company’s market risk management framework includes interest rate risk policies that are approved by the ALCO
and the RCC. 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 to hedge interest rate exposure resulting from
outstanding loan commitments on fixed-rate mortgages, deposits, and CMB liabilities. 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
because of hedging requirements under the terms of its participation in the CMB program. The Company utilizes total
return swaps to hedge Restricted Share Units awarded to employees. 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 because 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, 2017 and
December 31, 2016 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 because of a mortgage becoming impaired and for credit commitments. 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.
2017 Annual Report 69
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 43: Interest Rate Sensitivity
(000s, except %)
Assets
Floating
Rate
0 to 3
Months1
3 to 6
Months
6 to 12
Months
1 to 5
Years
Over Non-interest
Sensitive
5 Years
Total
As at December 31, 2017
Cash and cash equivalents
$
562,185 $
773,953 $
– $
Weighted-average interest rate
1.3%
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
–
–
–
–
–
–
–
–
1.2%
10
9.9%
–
–
–
–
–
–
–
– $
–
– $
–
3,147
329,311
6.4%
1.6%
–
–
–
–
– $
– $ 1,336,138
–
–
–
165,947
2.9%
–
–
–
–
–
–
–
–
–
1.3%
332,468
1.8%
165,947
2.9%
2,993,250
3.1%
1,297,012
145,838
301,889
1,248,511
2.7%
3.1%
4.7%
3.1%
2,664,609
2,044,506
4,252,340
2,903,822
17,987
(11,600)
11,871,664
5.0%
59,402
367,877
1.0%
1.4%
4.8%
9,146
0.5%
5.2%
7,911
1.6%
4.9%
8.7%
–
5.0%
–
–
–
–
447,340
891,676
–
0.7%
Total
$
621,587 $ 5,103,461 $ 2,199,490 $ 4,565,287 $ 4,481,644 $
183,934 $
435,740 $ 17,591,143
Weighted-average interest rate
Liabilities and shareholders’ equity
1.3%
3.6%
4.6%
5.1%
4.2%
3.5%
–
4.1%
Deposits payable on demand
$
368,459 $
Weighted-average interest rate
Deposits payable at a fixed rate
Weighted-average interest rate
Securitization liabilities
Weighted-average interest rate
Other liabilities
Weighted-average interest rate
Shareholders’ equity
Weighted-average interest rate
1.4%
–
–
–
–
–
–
–
–
– $
–
– $
–
– $
–
– $
–
1,606,093
1,404,164
2,715,166
5,905,667
1.8%
2.2%
2.4%
2.4%
1,324,280
162,538
303,047
1,387,884
1.7%
2.1%
3.7%
2.3%
38,728
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– $
170,905 $
539,364
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.4%
11,631,090
2.3%
3,177,749
2.1%
390,707
429,435
–
–
1,813,505
1,813,505
–
–
Total
$
368,459 $ 2,969,101 $ 1,566,702 $ 3,018,213 $ 7,293,551 $
– $ 2,375,117 $ 17,591,143
Weighted-average interest rate
1.4%
1.7%
2.2%
2.5%
2.4%
–
–
1.9%
$
253,128 $ 2,134,360 $
632,788 $ 1,547,074 $ (2,811,907)
$
183,934 $ (1,939,377)
$
Credit commitments
Weighted-average interest rate
Interest rate sensitivity gap
Cumulative gap
Cumulative gap as a percentage
of total assets
$
$
–
–
(844,583)
18,643
25,887
773,794
26,259
5.6%
5.7%
4.3%
4.5%
3.1%
–
–
253,128 $ 1,289,777 $
651,431 $ 1,572,961 $ (2,038,113)
$
210,193 $ (1,939,377)
$
253,128 $ 1,542,905 $ 2,194,336 $ 3,767,297 $ 1,729,184 $ 1,939,377 $
– $
1.4%
8.8%
12.5%
21.4%
9.8%
11.0%
–
–
–
–
–
–
–
70 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Table 43: Interest Rate Sensitivity (continued)
(000s, except %)
Assets
Floating
Rate
0 to 3
Months¹
3 to 6
Months
6 to 12
Months
1 to 5
Years
Over
5 Years
Non-interest
Sensitive
Total
As at December 31, 2016
Cash and cash equivalents
$
505,649 $
699,745 $
Weighted-average interest rate
0.9%
0.7%
– $
–
– $
–
– $
–
– $
– $ 1,205,394
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
–
–
–
–
–
–
–
–
–
–
71,694
16,461
11,050
429,921
4.4%
4.0%
4.1%
1.5%
3.6%
–
–
–
–
–
–
12,879
65,039
1.9%
2.6%
834,641
38,517
47,447
1,606,199
2.2%
3.6%
3.0%
3.5%
–
–
–
5,798
–
–
–
–
–
–
–
0.8%
534,924
2.1%
77,918
2.5%
2,526,804
3.1%
3,536,255
2,015,900
5,625,534
4,175,070
50,838
(10,065)
15,393,532
5.0%
205,095
0.7%
4.8%
5,333
1.9%
4.7%
4.8%
5.5%
–
4.8%
4,975
87,495
2.0%
0.8%
–
–
487,307
790,205
–
0.3%
Total
$
505,649 $ 5,347,430 $ 2,076,211 $ 5,689,006 $ 6,311,564 $
121,675 $
477,242 $ 20,528,777
Weighted-average interest rate
Liabilities and shareholders’ equity
0.9%
3.8%
4.8%
4.7%
4.2%
3.8%
–
4.1%
Deposits payable on demand
$ 2,358,084 $
Weighted-average interest rate
Deposits payable at a fixed rate
Weighted-average interest rate
Securitization liabilities
Weighted-average interest rate
Other liabilities
Weighted-average interest rate
Shareholders’ equity
Weighted-average interest rate
1.4%
–
–
–
–
–
–
–
–
– $
–
– $
–
– $
–
– $
–
1,626,102
2,034,495
3,274,977
6,418,653
1.8%
2.0%
1.8%
2.3%
1,041,593
1.1%
3,490
–
–
–
–
–
–
–
–
–
81,416
1,526,640
1.5%
2.7%
–
–
–
–
–
–
–
–
– $
173,719 $ 2,531,803
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.3%
13,354,227
2.1%
2,649,649
2.0%
357,021
360,511
–
–
1,632,587
1,632,587
–
–
Total
$ 2,358,084 $ 2,671,185 $ 2,034,495 $ 3,356,393 $ 7,945,293 $
– $ 2,163,327 $ 20,528,777
Weighted-average interest rate
1.4%
1.5%
2.0%
1.8%
2.4%
–
–
1.8%
$ (1,852,435)
$ 2,676,245 $
41,716 $ 2,332,613 $ (1,633,729)
$
121,675 $ (1,686,085)
$
Credit commitments
Weighted-average interest rate
–
–
(1,282,939)
27,107
63,538
1,179,369
12,925
4.4%
5.5%
5.6%
4.3%
2.5%
–
–
Interest rate sensitivity gap
$ (1,852,435)
$ 1,393,306 $
68,823 $ 2,396,151 $
(454,360)
$
134,600 $ (1,686,085)
$
Cumulative gap
$ (1,852,435)
$
(459,129)
$
(390,306)
$ 2,005,845 $ 1,551,485 $ 1,686,085 $
– $
Cumulative gap as a percentage
of total assets
(9.0)%
(2.2)%
(1.9)%
9.8%
7.6%
8.2%
–
–
–
–
–
–
–
1 Total assets in the 0-3 month category above include $2.31 billion in variable rate mortgages (2016 – $2.00 billion)
2017 Annual Report 71
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 many 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 or decrease in interest rates on net interest income and on the economic value
of shareholders’ equity and OCI, corresponding to an interest rate environment that is floored at 0%.
Table 44: Impact of Interest Rate Shifts
(thousands of Canadian dollars)
100 basis point shift
December 31
2017
December 31
2016
December 31
2017
December 31
2016
Increase in interest rates
Decrease in interest rates
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
$
$
2,418
(2,448)
2,243
$
4,024
4,438
3,265
$
(2,418)
1,952
(2,243)
(5,696)
(6,415)
(2,677)
As illustrated in the above table, a change in interest rates will have an 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.
Liquidity and Funding Risk
This is the risk that the Company is unable to generate or obtain sufficient cash or equivalents in a timely manner and
at a reasonable cost to meet its financial obligations (both on- and off-balance sheet) as they fall 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 High-Interest Savings Accounts and Oaken Savings Accounts add to liquidity risk as depositors can withdraw
deposits on notice in the absence of fixed contractual terms. The Company’s current exposure to this risk has been
reduced following the significant redemptions of High-Interest Savings Accounts in 2017, which led to the liquidity event.
The Company obtained a $2 billion line of credit facility from a wholly owned subsidiary of Berkshire Hathaway Inc. at the
end of June 2017 to further strengthen its liquidity position. Please see Note 4(A) to the consolidated financial statements
included in this report for details on this credit facility. Also, the Company sold assets in response to the liquidity event to
improve its overall liquidity position. The Company believes the current level of liquidity and credit facilities are sufficient
to support ongoing business for the foreseeable future. As indicated in Table 17(A), maturities of non-securitized loans
are in excess of deposit maturities for the next 12 months. The Company intends to strategically limit demand deposits
to an appropriate level that is aligned with the Company’s liquidity and funding limits and taking into consideration that
a primary purpose of the Oaken Savings Accounts is to facilitate the seamless movement of funds to and from Oaken
GICs for customers.
The Company’s liquidity risk management framework includes a three-year enterprise funding plan, liquidity and funding
risk policies, and a Contingency Funding Plan that are approved by the ALCO and the RCC. 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 liquidity and funding risk policies and
strategies and regularly monitors compliance with those policies. The ALCO also oversees the stress testing of liquidity
and funding risk and the testing of the Company’s Contingency Funding Plan. The Treasury group is responsible for
managing the Company’s liquidity and funding 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 liquidity and funding risk.
72 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS The Company’s annual three-year funding plan assesses future funding needs and how the Company intends to fulfill
these requirements as measured against the Company’s risk appetite. Securing sustainable diversified funding at a
reasonable cost and acceptable level of liquidity risk is fundamental to the Company realizing its future growth potential.
The Company’s liquidity and funding 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 RCC.
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, term deposit runoff, demand deposit runoff, loan growth, liquidity portfolio valuation, loan arrears and write-
downs. In addition, the Company regularly monitors a number of other structural liquidity and funding ratios in its overall
liquidity and funding risk management framework.
The Company holds liquid assets in the form of cash, bank deposits, securities issued or guaranteed by the Government of
Canada, securities issued by provincial governments, and highly rated short-term money market securities, 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
2017
2016
$ 1,336,138
332,468
17,046
$ 1,205,394
534,924
521,013
1,685,652
(30,934)
2,261,331
(193,350)
$ 1,654,718
$ 2,067,981
$ 1,654,665
$ 2,142,289
9.4%
10.1%
Certain Company-originated NHA 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 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.
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 its longer-term strategy to diversify its sources of funding through its direct-to-consumer brand,
Oaken Financial and its bank subsidiary, Home Bank. The Company will restrict its funding through demand deposits such
as high interest savings accounts.
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 liquidity and funding risk.
2017 Annual Report 73
MANAGEMENT’S DISCUSSION AND ANALYSIS OSFI Liquidity Requirements
As required by OSFI’s Liquidity Adequacy Requirements (LAR), 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.
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, reputational
harm, or regulatory enforcement actions, among others. Operational risk is inherent in every business and support activity,
including the practices for managing other risks such as credit, compliance and liquidity and funding risks. The Company has
taken proactive steps to mitigate this risk in order to create and sustain shareholder value, execute on business strategies
and operate effectively. Strategies to manage operational risk include the deployment of risk managers into the business
lines, mitigation by controls as well as risk avoidance, transfer, and acceptance. Oversight of the operational risk framework
is provided by the ERM group, the Operational Risk Committee, and the Audit and Risk and Capital Committees of the Board.
The Company continues to strengthen its operational risk framework which includes the following components:
• Risk and control self-assessments are applied at the line of business level as well as for significant processes in the
Company. Business process mapping supports the analysis of risks and controls at the process level.
• The new initiative risk assessment process requires risks to be identified and assessed for new initiatives including new
or changed products, processes and systems, joint ventures and other corporate development activities.
• Subject-matter experts with expertise in privacy, security, data governance, legal, and other areas have been designated
to assist in risk assessments.
• Risks are monitored on an ongoing basis through the use of key risk indicators which have established limits and thresholds
aligned with the Company’s risk appetite.
• Internal and external operational risk events are regularly reported along with root cause analysis and action plans as required.
• Risk mitigation action plans established for identified risks are regularly tracked and reported.
• Stress testing and scenario analysis have included scenarios such as earthquakes, pandemics, cyber-attacks, active
shooters, and fraud scenarios.
• Information/Cyber Security, Business Continuity Management and Data Recovery programs have been established and are
subject to regular testing.
• Through the model risk management program, key models are independently vetted and validated before use, and model
performance is monitored on an ongoing basis.
• The Data Governance program is focused on providing accurate, complete and timely information to support decision making.
• Third-party risk management programs require that appropriate risk assessment and due diligence be performed before
engaging in business with third-party service providers and on a periodic basis going forward.
• The Company manages a portfolio of insurance and other risk mitigating arrangements. The insurance terms and provisions,
including types and amounts of coverage in the portfolio, are continually assessed to ensure that both the Company’s
tolerance for risk and, where applicable, statutory requirements are satisfied.
Compliance Risk
Compliance risk refers to the risk of non-compliance with laws, regulations, guidelines, an undertaking to a regulatory
authority or provision, section, subsection, order, term or condition, including related internal policies and procedures.
This includes requirements that have been identified by the Executive Committee and senior management that require the
Company to do certain things, including conducting its affairs in a particular manner, and where non-compliance could have
an impact on the Company’s reputation and/or safety and soundness.
While all business units and corporate functions of the Company (as the first line of defence) are responsible for ensuring that
compliance risk (including but not limited to anti-money laundering, anti-fraud, ethics and conduct, privacy and sanctions)
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 Regulatory Compliance Framework.
74 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 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 of this MD&A for further information.
Oversight of the management of capital adequacy risk is provided by the ERM group, Finance, the Capital Management
Committee and the Risk and Capital Committee of the Board.
Strategic Risk
Strategic risk is the risk to earnings, capital or corporate value arising from making inappropriate strategic choices, lack of
responsiveness to changes in the financial services and operating environment, or the inability to successfully implement
selected strategies, related plans and decisions. Strategic risk is managed by the Executive Committee. On a regular basis,
the Executive Committee reviews the current business environment, including regulatory developments 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.
Reputational Risk
Reputational risk is the risk that stakeholder impressions, whether true or not, regarding the Company’s business practices,
actions or inactions, will adversely affect the Company’s earnings, economic value, capital, or ability to maintain existing or
establish new business relationships and continued access to sources of funding.
The objective of reputational risk management is to protect and enhance the Company’s reputation by building and
maintaining stakeholder confidence and trust that the Company can deliver on its promises. The Company has adopted a
reputational risk management framework which provides an overview of its approach for this type of risk, focusing on risk
management principles, stakeholder management, and organizational accountabilities for the prevention and detection
of reputational risk vulnerabilities. The Company’s approach to the management of this risk combines the experience and
knowledge applied in the management of other risk types with a corporate understanding of potential consequences to the
Company. Oversight is provided by the Executive Committee and the Risk and Capital Committee of the Board.
Accounting Standards 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 and provisions and contingent liabilities. In applying judgement in its
assessment of impairment of intangible assets and goodwill, management has considered the asset usage, obsolescence and
impact on that assessment of the decline in the Company’s common share price to below the book value per common share.
While impairments recognized on intangible assets and goodwill as a result of usage and obsolescence, management does
not consider the current common share price to warrant the recognition of additional impairment in its intangible assets and
goodwill as at the date of these consolidated financial statements. Management will continue to assess the implications of the
common share price remaining below book value on its assessment of impairment of intangible assets and goodwill.
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 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). 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, 13, 16, 17, 18 and 20 to the consolidated
financial statements.
2017 Annual Report 75
MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
Controls Over 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 (GAAP). As such,
management has established disclosure controls and procedures and internal controls over financial reporting to ensure that
the Company’s consolidated financial statements and Management’s Discussion and Analysis present fairly, in all material
respects, the financial position of the Company and the results of its operations.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered
and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis so that
appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was
conducted as of December 31, 2017. 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, 2017.
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 the authorizations of
management and the Board; 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, 2017. 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, 2017.
Changes in Internal Control over Financial Reporting
There were no significant changes in 2017 that have affected or could reasonably be expected to materially affect internal
control over financial reporting.
76 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS Non-GAAP 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:
Allowance as a Percentage of Gross Loans
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
were 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 Company. The
calculations are in accordance with guidelines issued by OSFI. Refer to the Capital Management section of this MD&A and
Note 13(G) to the consolidated financial statements included in this report.
Dividend Payout Ratio
Dividend payout ratio is a measure of the proportion of a Company’s earnings that is paid to shareholders in the form of
dividends. The Company calculates its dividend payout ratio as the amount of dividends per share as a percentage of diluted
earnings per share.
Efficiency Ratio
Management uses the efficiency ratio as a measure of the Company’s efficiency in generating revenue. This ratio represents
non-interest expenses as a percentage of total revenue, net of interest expense. The Company also looks at the same ratio
on a taxable equivalent basis and will include this adjustment in arriving at the efficiency ratio, on a taxable equivalent basis.
A lower ratio indicates better efficiency.
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 a percentage. The Capital Measure is the all-in Tier 1 capital of Home Trust
Company. 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 Company 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.
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 average total assets.
2017 Annual Report 77
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 average total assets.
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)
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.
Risk-weighted Assets (RWA)
The risk-weighted assets reported in this MD&A are those of the Company’s wholly owned subsidiary Home Trust Company.
The calculations are in accordance with guidelines issued by OSFI. Refer to the Capital Management section in this MD&A and
Note 13(G) 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 $1.1 million for 2017 ($3.7 million – 2016) 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 4 for the calculation of net interest income on a TEB.
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.
Total Revenue
Total revenue is a measure of the revenue, net of interest expense, earned by the Company before non-interest expenses,
provision for credit losses and income taxes. Total revenue is the sum of interest and dividend income, net of interest expense,
and non-interest income.
78 Home Capital Group Inc.
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 are a contract between two parties, which requires little or no initial investment and where payments between
the parties are dependent upon the movements in price of an underlying instrument, index or financial rate. Examples of
derivatives include swaps, options, forward rate agreements and futures. The notional amount of the derivative is the contract
amount used as a reference point to calculate the payments to be exchanged between the two parties, and the notional
amount itself is generally not exchanged by the parties.
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 Company uses interest rate
swaps and total return swaps. An interest rate swap is an agreement where counterparties generally exchange fixed-rate and
floating-rate interest payments based on a notional value in a single currency. A total return swap is an agreement in which
one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the
return of an underlying asset, which includes both the income it generates and any capital gains.
2017 Annual Report 79
MANAGEMENT’S DISCUSSION AND ANALYSIS Acronyms
ALCO – Asset/Liability Committee
AOCI – Accumulated Other Comprehensive Income
CDIC – Canada Deposit Insurance Corporation
CMB – Canada Mortgage Bond
CMHC – Canada Mortgage and Housing Corporation
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
IASB – International Accounting Standards Board
IFRS – International Financial Reporting Standards
LTV – Loan-to-Value (ratio expressed as a percentage)
MBS – Mortgage-Backed Security
MD&A – Management’s Discussion and Analysis
NCCF – Net Cumulative Cash Flow
NHA – National Housing Act
OCI – Other Comprehensive Income
OSFI – Office of the Superintendent of Financial Institutions Canada
TEB – Taxable Equivalent Basis
80 Home Capital Group Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Consolidated
Financial
Statements
82 Management’s Responsibility for
Financial Information
83 Independent Auditors’ Report
84 Consolidated Financial Statements
84 Consolidated Balance Sheets
85 Consolidated Statements of Income
86 Consolidated Statements of
Comprehensive Income
86 Consolidated Statements of Changes
in Shareholders’ Equity
87 Consolidated Statements of Cash Flows
88
Notes to the Consolidated
Financial Statements
88 Corporate Information
88 Summary of Significant Accounting Policies
95 Future Changes in Accounting Policies
98 Cash Resources and Securities
99 Loans
104 Securitization Activity
106 Restricted Assets
107 Other Assets
107
108 Goodwill
108 Deposits by Remaining Contractual Term
Intangible Assets
to Maturity
108 Other Liabilities
109 Capital
110 Employee Benefits
113
Accumulated Other Comprehensive
Income
Income Taxes
113
115 Commitments and Contingencies
117 Derivative Financial Instruments
Current and Non-current Assets
119
and Liabilities
119 Fair Value of Financial Instruments
122 Related Party Transactions
122 Risk Management
123 Subsequent Events
Note
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
2017 Annual Report 81
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 Home 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 the Company’s financial disclosures for fairness before released 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, 2017, 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 and Home Bank are in a sound financial position and that they
comply 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.
Yousry Bissada
President and Chief Executive Officer
Toronto, Canada
February 14, 2018
Brad Kotush, CPA, CA
Chief Financial Officer
82 Home Capital Group Inc.
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, 2017 and 2016, 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, 2017 and 2016, and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 14, 2018
2017 Annual Report 83
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 18)
Other assets (note 8)
Deferred tax assets (note 16(C))
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
Securitization Liabilities (note 6(B))
CMHC-sponsored mortgage-backed security liabilities
CMHC-sponsored Canada Mortgage Bond liabilities
Bank-sponsored securitization conduit liabilities
Other
Derivative liabilities (note 18)
Other liabilities (note 12)
Deferred tax liabilities (note 16(C))
Shareholders’ Equity
Capital stock (note 13)
Contributed surplus
Retained earnings (note 13(F))
Accumulated other comprehensive loss (note 15)
Commitments and Contingencies (note 17)
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
Yousry Bissada
President and Chief Executive Officer
Paul Haggis
Chair of Audit Committee
84 Home Capital Group Inc.
December 31
2017
As at
December 31
2016
$ 1,336,138
$ 1,205,394
332,468
165,947
534,924
77,918
2,993,250
11,905,227
14,898,477
2,526,804
15,430,595
17,957,399
(33,563)
(37,063)
14,864,914
17,920,336
437,011
7,325
336,770
9,577
100,993
891,676
265,374
37,524
348,638
16,914
121,755
790,205
$ 17,591,143
$ 20,528,777
$
539,364
11,631,090
$ 2,531,803
13,354,227
12,170,454
15,886,030
1,562,152
1,473,318
142,279
3,177,749
38,728
360,477
30,230
429,435
898,386
1,637,117
114,146
2,649,649
3,490
320,737
36,284
360,511
15,777,638
18,896,190
231,156
4,978
1,583,265
(5,894)
1,813,505
84,910
4,562
1,598,180
(55,065)
1,632,587
$ 17,591,143
$ 20,528,777
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 and fees on line of credit facility (note 4(A))
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 (Loss)
Fees and other income
Securitization income (note 6(C))
Gain on acquisition of CFF Bank
Net realized and unrealized losses on securities and loans (notes 4(C) and 5(H))
Net realized and unrealized losses on derivatives (note 18)
Non-Interest Expenses
Salaries and benefits (note 17(D))
Premises (note 17(D))
Other operating expenses (notes 9, 10 and 17(D))
Income Before Income Taxes
Income taxes (note 16(A))
Current
Deferred
NET INCOME
NET INCOME PER COMMON SHARE (note 13(E))
Basic
Diluted
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (note 13(E))
Basic
Diluted
$
For the year ended
December 31
2017
December 31
2016
$
710,926
3,117
15,267
729,310
294,685
148,213
286,412
89,929
73,411
16,518
302,930
7,516
295,414
67,932
12,529
–
(90,070)
(2,010)
(11,619)
768,034
10,112
11,073
789,219
318,162
–
471,057
81,705
67,598
14,107
485,164
7,890
477,274
71,329
33,797
651
(175)
(8,807)
96,795
283,795
574,069
98,595
13,878
162,407
274,880
101,880
14,505
122,554
238,939
8,915
335,130
(2,475)
3,863
1,388
7,527
90,895
(3,161)
87,734
$
247,396
0.10
0.10
$
$
3.71
3.71
72,349
72,358
66,601
66,668
$
$
$
Total number of outstanding common shares (note 13(B))
Book value per common share
80,246
22.60
$
64,388
25.36
$
The accompanying notes are an integral part of these consolidated financial statements.
2017 Annual Report 85
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
thousands of Canadian dollars
NET INCOME
OTHER COMPREHENSIVE INCOME
Available for Sale Securities and Retained Interests
Net unrealized gains
Net losses reclassified to net income
Income tax expense
Cash Flow Hedges (note 18)
Net unrealized (losses) gains
Net losses reclassified to net income
Income tax expense
Total other comprehensive income
COMPREHENSIVE INCOME
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the year ended
December 31
2017
December 31
2016
$
7,527
$
247,396
19,878
46,650
66,528
17,644
48,884
(721)
1,120
399
112
287
11,852
204
12,056
3,179
8,877
1,035
1,147
2,182
580
1,602
49,171
10,479
$
56,698
$
257,875
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, 2016 (note 13(F))
$
84,910 $
4,562 $ 1,598,180 $
(53,589) $
(1,476) $
(55,065) $ 1,632,587
Comprehensive income
Stock options settled (notes 13(B) and 14(C))
Amortization of fair value of
employee stock options (note 14(C))
Repurchase of shares (note 13(C))
Issuance of shares (note 13(D))
Dividends ($0.26 per share)
–
548
–
(267)
145,965
–
–
(141)
557
–
–
–
7,527
48,884
287
49,171
–
–
(5,732)
–
(16,710)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
56,698
407
557
(5,999)
145,965
(16,710)
Balance at December 31, 2017
$ 231,156 $
4,978 $ 1,583,265 $
(4,705) $
(1,189) $
(5,894) $ 1,813,505
Balance at December 31, 2015 (note 13(F))
$
90,247 $
3,965 $ 1,607,833 $
(62,466)
$
(3,078)
$
(65,544)
$ 1,636,501
Comprehensive income
Stock options settled (notes 13(B) and 14(C))
–
1,984
–
(530)
247,396
8,877
1,602
10,479
257,875
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,454
1,127
(199,196)
(65,174)
–
1,127
(7,321)
–
–
–
(191,875)
(65,174)
Amortization of fair value of
employee stock options (note 14(C))
Repurchase of shares (note 13(C))
Dividends ($0.98 per share)
Balance at December 31, 2016 (note 13(F))
$
84,910 $
4,562 $ 1,598,180 $
(53,589)
$
(1,476)
$
(55,065)
$ 1,632,587
The accompanying notes are an integral part of these consolidated financial statements.
86 Home Capital Group Inc.
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 on securities
Provision for credit losses
Loss on sale of loan portfolio
Gain on sale of mortgages or residual interest
Net realized and unrealized losses on securities
Amortization and impairment losses¹
Amortization of fair value of employee stock options
Deferred income taxes
Changes in operating assets and liabilities
Loans, net of gains or losses on 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 (used in) provided by operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares
Repurchase of shares
Exercise of employee stock options
Repayment of senior debt
Dividends paid to shareholders
Cash flows provided by (used in) financing activities
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities
Purchases
Proceeds from sales
Proceeds from maturities
Purchases of capital assets
Capitalized intangible development costs and acquisition of intangible assets
Cash flows provided by (used in) investing activities
Net increase 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
For the year ended
December 31
2017
December 31
2016
$
7,527
$
247,396
(330)
7,516
18,160
(5,695)
71,910
34,345
557
3,863
2,947,462
(171,637)
65,836
10,613
3,666
(3,715,576)
528,100
13,086
(180,597)
145,965
(5,999)
407
–
(16,710)
123,663
(378,123)
491,883
84,919
(1,715)
(9,286)
187,678
130,744
1,205,394
(458)
7,890
–
(26,972)
175
29,686
1,127
(3,161)
253,837
(69,453)
27,497
2,668
(1,312)
220,072
(130,907)
2,757
560,842
–
(199,196)
1,454
(150,000)
(65,174)
(412,916)
(203,674)
–
132,932
(2,550)
(19,089)
(92,381)
55,545
1,149,849
$ 1,336,138
$ 1,205,394
$
$
4,542
825,030
512,643
3,002
10,037
863,321
388,440
84,559
1 Amortization and impairment losses include amortization on capital and intangible assets and impairment losses on intangible assets and goodwill.
The accompanying notes are an integral part of these consolidated financial statements.
2017 Annual Report 87
1. Corporate Information
Home Capital Group Inc. (the Company or Home Capital) 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
mortgage products and consumer lending. Home Trust also offers deposits via brokers and financial planners, and through
its direct-to-consumer deposit brand, Oaken Financial. Home Bank, a wholly owned subsidiary of Home Trust, is a federally
regulated retail bank offering mortgage, deposit and personal banking products. The Company’s subsidiary, Payment
Services Interactive Gateway Inc. (PSiGate), provides payment services. On February 1, 2018, the Company closed the sale
of PSiGate. 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, 2017 were authorized for issuance by the Board
of Directors (the Board) of the Company on February 14, 2018. The Board has the power to amend the consolidated financial
statements after their issuance only in the case of discovery of an error.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted
accounting principles (GAAP) for publicly accountable enterprises, which are International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB).
The accounting policies were consistently applied to all periods presented unless otherwise noted. The significant accounting
policies used in the preparation of these consolidated financial statements are summarized below.
Use of Judgement and Estimates
Management has exercised judgement in the process of applying the Company’s accounting policies. In particular, the
Company’s management has applied judgement in the application of its accounting policy with respect to derecognition
of the loans and other assets used in current securitization programs. 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. Other
key areas where management has applied judgement and 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, useful lives of
capital assets and intangible assets and provisions and contingent liabilities. Actual results could differ from those estimates.
In applying judgement in its assessment of impairment of intangible assets and goodwill, management has considered the
asset usage, obsolescence and impact on that assessment of the decline in the Company’s common share price to below
the book value per common share. While impairments recognized on intangible assets and goodwill as a result of usage
and obsolescence, management does not consider the current common share price to warrant the recognition of additional
impairment in its intangible assets and goodwill as at the date of these consolidated financial statements. Management will
continue to assess the implications of the common share price remaining below book value on its assessment of impairment
of intangible assets and goodwill.
88 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 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.
The Company consolidates those entities, including structured entities, which 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, Home Bank and PSiGate. Home Trust is a wholly owned subsidiary of Home Capital Group. Home Bank is a wholly
owned subsidiary of Home Trust. PSiGate was a wholly owned subsidiary of Home Capital Group prior to its sale, which closed
on February 1, 2018 as described in Note 23.
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, including cash and deposits with regulated financial institutions, treasury bills and other eligible deposits.
Cash and deposits are carried at fair value. 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. All securities are
recognized on the trade date 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 dates. 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 are accrued as earned with the passage of time and 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. A deterioration in credit quality is considered objective evidence of impairment for available
for sale debt securities. 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. A significant or prolonged decline in the fair value of the security below its cost is considered
objective evidence of impairment for available for sale equity securities. Management will perform a detailed assessment
if there has been a significant decline of 20% or more or a prolonged decline of 12 months or more. Since the business model
of the Company is to purchase preferred shares for the purpose of earning dividend income, with the intent of holding them
for the long-term, all preferred shares are assessed for impairment using a debt impairment model.
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.
2017 Annual Report 89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) Loans Held for Securitization and Sale
When identifiable, loans for which the Company has the intention of securitizing and derecognizing from the consolidated
balance sheets in the near term are classified as held for sale 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 securitization 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 sale is determined by discounting the expected future cash flows of the loans at market rates
for financial instruments with similar terms and credit risk.
Loans
Loans are non-derivative financial assets with fixed or determinable payments that the Company does not intend to sell
immediately or in the near term and that are not quoted in an active market. Loans are initially recognized at fair value and
subsequently measured at amortized cost net of the individual allowance for credit losses and any unearned income.
Interest income is recognized using the effective interest rate method and 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. 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 there is objective evidence of deterioration in credit quality to
the extent 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. The allowance is increased by the provision for credit losses
and decreased by write-offs, net of recoveries.
Individual Allowances
Individual allowances are determined on an item-by-item basis and reflect the associated estimate of credit loss. 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 any 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.
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, 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.
90 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) Derecognition of Financial Assets
The Company derecognizes a financial asset when the contractual rights to that asset have expired. If substantially all the
risks and rewards of ownership of the financial asset have been retained, the Company continues to recognize the financial
asset and also recognizes a financial liability for the consideration received. If substantially all the risks and rewards of
ownership of the financial asset have been transferred, the Company will derecognize the financial asset and recognize
separately as assets or liabilities any rights or obligations created or retained in the transfer.
The Company periodically pools and securitizes insured mortgages under Canada Mortgage and Housing Corporation’s
(CMHC) National Housing Act (NHA) Mortgage-Backed Securities (MBS) program and sells the securities to investors or uses
the securities as collateral for participation in CMHC’s Canada Mortgage Bond (CMB) program. Mortgage loan securitization
activities are a part of the Company’s funding and liquidity strategies.
Most transfers of pools of mortgages under the MBS and CMB programs do not result in derecognition of the mortgages
from the Company’s consolidated balance sheets because the Company continues to hold a residual interest. As such, these
transactions result in the recognition of securitization liabilities when cash is received and the mortgages are reclassified to
securitized residential mortgages on the consolidated balance sheets and continue to be accounted for as loans.
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 18 for more information.
In certain cases, the Company’s remaining involvement is quite limited, although it has not transferred substantially all of the
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 a retained 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
carried at fair value. 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 residual interest arising from securitization transactions, resulting in the
transfer of 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 recognized as securitization income in non-interest income on the
consolidated statements of income.
The Company transfers cash flows from residential mortgages as part of a bank-sponsored securitization conduit program to
receive access to cost-effective funding. Mortgages continue to be recognized on the consolidated balance sheets, along with
a securitization liability as the risks and rewards of ownership of mortgages have not been transferred.
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 MBS or treasury bills pledged as 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 uses bond forwards
to economically hedge interest rate risk on loans held for sale that are not designated in hedge accounting relationships.
The realized and unrealized gains or losses on the bond forwards are recognized in non-interest income on the consolidated
statements of income.
2017 Annual Report 91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) Hedge Accounting
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 non-interest 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, 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 hedging relationship and on an ongoing basis. 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 non-interest income.
Fair Value Hedges
The Company’s fair value hedges generally use interest rate swaps to hedge changes in the fair value of fixed-rate assets or
liabilities (the hedged items) attributable to interest rate risk. Changes in the 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 or loss on derivatives.
Changes in the 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 non-
interest income immediately.
Cash Flow Hedges
The Company’s cash flow hedges 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. Total return swaps are used
to hedge the variability in cash flows associated with forecasted future compensation obligations attributable to changes in
the Company’s stock price.
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 transaction is no longer
expected to occur, the related cumulative gain or loss in AOCI is immediately recognized in non-interest income.
If the hedging instrument expires, or is settled or sold, or if the hedge no longer meets the criteria for hedge accounting under
IAS 39, the hedge relationship is terminated. Upon termination of the hedge relationship, any related cumulative gain or loss in
AOCI is immediately recognized in non-interest income.
Capital Assets
Capital assets, which comprise office furniture and equipment, computer equipment and purchased 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
3 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.
92 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars)
Intangible Assets
The Company’s intangible assets comprise internally developed software costs and acquired intangible assets. An intangible
asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits
that are attributable to the asset will flow to the Company. 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.
All of the Company’s intangible assets 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
14 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 are 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.
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. Goodwill impairment is recorded as non-interest expense 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. Also included in deposits on the consolidated balance sheets are amounts related to fair value
hedge accounting that increase or decrease the carrying amount of deposits. Please see Note 18 for more information.
2017 Annual Report 93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) Income Taxes
Income tax comprises current and deferred tax and is recognized in net income, except to the extent that it relates to items
recognized directly in shareholders’ equity, in which case the related taxes are also recognized directly in shareholders’
equity. 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 temporary 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 determined 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 20 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 20 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.
Fees and Other Income
Fee income primarily relates to payment services and loan servicing and administration, net of related expenses to service the
loans, with the net revenue recognized as the associated services are rendered.
Stock-based Compensation Plans
The Company has stock-based compensation plans, which are described in Note 14.
The Company’s Employee Stock Option Plan provides for the granting of stock options to certain employees of the Company.
In some cases, stock appreciation rights are also granted in tandem with the stock option, providing the Company with, at its
sole discretion, the alternative of settling the award in cash at an amount equal to the excess of the market price of the shares
to which the option relates over the exercise price of the option. The Company accounts for stock options, including those
with tandem stock appreciation rights, as equity-settled transactions where the fair value of options granted is recognized as
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 Company has
historically determined the fair value of the options granted using the Black-Scholes option pricing model. In July 2017, the
Company began using the binomial option pricing model as it more accurately reflects the impact of the volatility and dividend
assumptions in the valuation of the options granted. The change in the valuation methodology has been applied prospectively.
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
other operating expenses in the consolidated statements of income, with a corresponding increase in other liabilities on the
consolidated balance sheets.
94 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) The Company grants restricted share units (RSUs) and performance share units (PSUs) to certain key members of
management, which are settled in cash equivalents of common shares and earn dividend equivalents at the same rate as
dividends on common shares. Salaries and benefits expense is recognized based on the fair value of the share units at the
grant date adjusted for changes in fair value between the grant date and the vesting date, net of the effects of hedges, over
the service period required for employees to become fully entitled to the awards. Changes in the PSU obligation resulting
from changes in the market price of common shares are multiplied by a performance factor ranging from 50% to 125% and
are recognized in the consolidated statements of income as salaries and benefits expense.
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 14 for more information.
Earnings per Share
Both basic and diluted earnings per share (EPS) are presented for the Company’s common shares. Basic earnings per common
share is determined as net income for the year divided by the average number of common shares outstanding for the year.
Diluted earnings 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 consolidated balance sheets. 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.
3. Future Changes in Accounting Policies
The following accounting pronouncements issued by the IASB were not effective as at December 31, 2017 and therefore have
not been applied in preparing these consolidated financial statements.
IFRS 9 Financial Instruments
In July 2014, the IASB issued IFRS 9, Financial Instruments (IFRS 9), which replaces IAS 39. IFRS 9 is effective for annual
periods beginning on or after January 1, 2018 and is to be applied retrospectively with certain exceptions. IFRS 9 includes
requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and general
hedge accounting. The Company, as permitted, will not restate comparative period financial information. An adjustment to
opening retained earnings will be made upon adoption of IFRS 9 on January 1, 2018, if required.
Consequential amendments were made to IFRS 7, Financial Instruments: Disclosures (IFRS 7) related to IFRS 9, which are
required to be adopted on January 1, 2018 when the Company adopts IFRS 9. In June 2016, the Office of the Superintendent
of Financial Institutions Canada (OSFI) issued its final guideline, IFRS 9 Financial Instruments and Disclosures. The guideline
sets out OSFI’s expectations on the application of IFRS 9 and includes supervisory guidance on sound credit risk practices
associated with the implementation and ongoing application of expected credit loss accounting frameworks. In October 2017,
the IASB published amendments to IFRS 9 relating to prepayment features with negative compensation. The amendments
are to be applied retrospectively to annual reporting periods beginning on or after January 1, 2019 with earlier application
permitted. Based on preliminary assessments, the amendment is not expected to materially impact the Company.
Classification and Measurement
Financial assets will be classified and measured based on the Company’s business models and the nature of its contractual
cash flows. These factors will determine whether financial assets are measured at amortized cost, fair value through other
comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). These categories replace the existing IAS 39
classifications of available for sale, loans and receivables, and held to maturity.
2017 Annual Report 95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) The IFRS 9 classification and measurement model requires all debt instrument financial assets that do not meet the solely
payment of principal and interest (SPPI) test, including those that contain embedded derivatives, to be classified at initial
recognition as FVTPL. For debt instrument financial assets that meet the SPPI test, classification at initial recognition will
be determined based on the business model under which the instruments are managed. Debt instruments that are managed
on a hold to collect basis will be classified at amortized cost, debt instruments that are managed on a held for trading or fair
value basis will be classified as FVTPL, and debt instruments that are managed on both hold to collect and held for trading
basis will be classified as FVOCI.
The classification of financial liabilities is largely unchanged under IFRS 9. Equity securities are measured at FVTPL unless
an irrevocable election is made for certain equity securities to be measured at FVOCI with no subsequent reclassification
to profit or loss. Only interest and dividends continue to be recognized in profit or loss. The Company has assessed the
cash flow characteristics for in-scope financial assets and defined its significant business models. The classification and
measurement of financial assets will remain largely unchanged under IFRS 9 for the Company.
Impairment
IFRS 9 introduces a new forward-looking three-stage expected credit loss (ECL) model that requires the recognition of an
unbiased and probability-weighted impairment amount reflecting a range of possible outcomes. Under IFRS 9, the ECL model
could result in recognition of credit losses earlier when compared to the current incurred loss model under IAS 39.
Upon initial recognition of financial assets, entities are required to recognize a 12-month ECL allowance resulting from default
events that are possible within the next 12 months (Stage 1). If there has been a significant increase in credit risk (SICR),
an entity is required to recognize a lifetime ECL allowance resulting from possible default events over the expected life of
the financial instrument (Stage 2). This assessment must consider all reasonable and supportable information about past
events, current conditions and forecasts of future events and economic conditions that impact the Company’s credit risk
assessment. The Company has engaged an external service provider for forecasts of future events and economic information
including macroeconomic factors. Examples of such factors include unemployment rates, housing price index, interest
rates and gross domestic product. Criteria for assessing SICR are defined at a portfolio level and vary based on the risk of
default at the origination of the portfolio. The SICR will be determined through changes in the lifetime probability of default
(PD) since initial recognition of the financial assets, using a combination of borrower specific and account specific attributes
and relevant reasonable and supportable forward-looking information, with a rebuttable presumption that credit risk has
increased significantly when contractual payments are more than 30 days past due. The Company does not plan to rebut this
presumption. If credit quality subsequently improves such that the increase in credit risk since initial recognition is no longer
significant, the loss allowance will revert back to be measured based on a 12-month ECL, and the financial asset will move
from Stage 2 back to Stage 1. Stage 1 and Stage 2 comprise all non-impaired financial instruments.
Financial assets with objective evidence of impairment as a result of loss events that have a negative impact on the estimated
future cash flows are considered to be impaired requiring the recognition of a lifetime ECL allowance with interest revenue
recognized based on the carrying amount of the asset, net of the allowance, rather than its gross carrying amount (Stage 3).
Furthermore, IFRS 9 prescribes a rebuttable presumption that objective evidence of impairment exists when the contractual
payments are 90 days or more past due. The Company does not plan to rebut this presumption. This new impairment
model will apply to all loans and debt securities measured at amortized cost and FVOCI, as well as loan commitments and
guarantees that are not measured at FVTPL.
ECL will be measured based on three forward-looking scenarios including base, optimistic, and pessimistic, that will be
probability-weighted with an expected life based on the maximum contractual period over which the Company is exposed
to credit risk. The expected life of certain revolving credit facilities is based on the period over which the Company is exposed
to credit risk and where the credit losses would not be mitigated by management actions. The three scenarios will be updated
at each reporting date. In addition, management will exercise expert credit judgements in assessing exposures that have
experienced SICR and in determining the amount of ECL allowance required at each reporting date by considering reasonable
and supportable information that is not already included in the quantitative models. ECL is calculated as the product of PD,
loss given default (LGD), and exposure at default (EAD), and will be calculated over the remaining expected life of the financial
asset and discounted to the reporting date.
In March 2017, the Basel Committee on Banking Supervision issued its standard, Regulatory Treatment of Accounting
Provisions – Interim Approach and Transitional Arrangements. The current regulatory treatment of accounting provisions
will be retained for an interim period. Longer-term regulatory capital treatment of provisions will be considered based on
quantitative impact assessments. Jurisdictions may adopt transitional arrangements to smooth any potential significant
negative impact on regulatory capital arising from the introduction of ECL accounting. In August 2017, OSFI further released
a consultative revision on the treatment of IFRS 9 allowances in the regulatory capital framework for implementation in the first
quarter of 2018. In November 2017, OSFI released the final version of the Capital Adequacy Requirement guidelines regarding
the revisions made to the capital treatment of IFRS 9 allowances.
96 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) Transition
To manage the transition to IFRS 9, the Company established an enterprise-wide program sponsored by the Chief Financial
Officer including establishing a formal governance structure supported by a Project Steering Committee comprising senior
management representatives from Finance, Enterprise Risk Management, Information Technology, Operations and Treasury.
The Company has also retained the services of external consultants with proven IFRS 9 expertise. Progress reporting
protocols were established with regular updates provided to the key stakeholders, including the Audit Committee, on key
decisions made. The Company’s dedicated committee has further enhanced its governance framework to review, challenge,
and approve key areas of judgement and assumptions used in forecasting multiple economic scenarios and calculating the
expected credit losses.
During 2017, the Company completed the development, testing, and validation of the new ECL model and related processes
and controls. The Company also completed the update of its accounting and risk policies in association with IFRS 9, and will
continue to refine the remaining financial and regulatory controls and disclosures related to IFRS 9 in 2018.
As of December 31, 2017, the Company’s current estimate of the impact of adoption of IFRS 9, subject to further enhancement,
is not expected to be significant to retained earnings. There are changes expected to how allowance for expected credit
loss will be allocated to each of the Company’s underlying loan portfolios; however, these changes are not expected to be
significant. The expected impact to regulatory capital is not expected to be significant.
General Hedge Accounting
IFRS 9 introduces a new general hedge accounting model that aims to better align accounting with risk management
activities. The Company has an accounting policy choice to adopt the new general hedge accounting model under IFRS 9
or continue to apply the hedge accounting requirements under IAS 39. As permitted, the Company has elected to continue
to apply the hedge accounting requirements under IAS 39. The Company will implement the revised hedge accounting
disclosures that are required under IFRS 7 in its 2018 Annual Report.
IFRS 15 Revenue from Contracts with Customers
The Company will be required to adopt IFRS 15, Revenue from Contracts with Customers (IFRS 15) on January 1, 2018. IFRS 15
provides a principles-based five-step framework that applies to contracts with customers, except for revenue arising from
financial instruments, insurance contracts and leases. In April 2016, amendments were made to IFRS 15 to clarify the principles
related to identification of performance obligations, determining whether a company is a principal or agent and license
revenue. IFRS 15 can be applied on a retrospective basis or using a modified retrospective approach. Given a majority of the
Company’s revenue qualifies for treatment under IFRS 9, the adoption of this standard is not expected to have any material
impact. The Company plans to adopt IFRS 15 using the retrospective approach and enhance the prior period comparative
disclosures required by IFRS 15.
Amendments to IFRS 2 Share-based Payment
The Company will be required to adopt narrow scope amendments to IFRS 2, Share-based Payment (IFRS 2) on January 1, 2018,
related to the classification and measurement of share-based payment transactions. The amendments to IFRS 2 are not
expected to have a material impact on the Company’s consolidated financial statements.
IFRS 16 Leases
The Company will be required to adopt IFRS 16, Leases (IFRS 16) on January 1, 2019. IFRS 16 requires lessees to recognize
right-of-use assets with corresponding lease liabilities for most leases. The accounting for lessors remains substantially
unchanged from IAS 17. Management is currently evaluating the potential impact that the adoption of IFRS 16 will have on the
Company’s consolidated financial statements.
2017 Annual Report 97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 4. Cash Resources and Securities
(A) Cash Resources and Line of Credit Facility
thousands of Canadian dollars
Cash and cash equivalents
December 31
2017
December 31
2016
$ 1,336,138
$ 1,205,394
The Company has a $2 billion line of credit facility with a wholly owned subsidiary of Berkshire Hathaway Inc., a major US
investment firm, which was undrawn as at December 31, 2017. The amount that may be drawn on the facility is limited to
$2 billion and is subject to the Company providing acceptable collateral. As at December 31, 2017, the facility is secured
against a portfolio of mortgages with a carrying value totalling $3.40 billion. The interest rate on outstanding balances is 9%
and the standby fee on undrawn funds is 1%. The facility matures at the end of June 2018 and cannot be terminated prior to
the maturity date. Funds drawn on the facility are repayable at any time. Interest expense on drawn amounts and the standby
fee on undrawn amounts are included in interest and fees on line of credit facility in the consolidated statements of income.
Transaction costs on the facility are amortized over the life of the facility and are also included in interest and fees on line
of credit facility.
An initial draw of $1.65 billion on the $2 billion line of credit facility referred to above was made on June 29, 2017 and used
to repay and terminate the emergency credit facility that was obtained during the liquidity event experienced in the second
quarter of 2017. Under the terms of the emergency credit facility, the Company paid a non-refundable commitment fee of
$100.0 million, interest at a rate of 10% on outstanding balances and a standby fee of 2.5% on undrawn balances. All interest
on drawn amounts, the full $100.0 million commitment fee and other transaction costs associated with the emergency credit
facility are included in interest and fees on line of credit facility in the consolidated statements of income.
The Company also has an uncommitted secured credit facility with a Canadian chartered bank in the amount of $20 million,
which is undrawn.
(B) Available for Sale Securities at Fair Value by Type and Remaining Term to Maturity and Rate Reset Date
thousands of Canadian dollars
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
December 31
2017
December 31
2016
Total
Fair Value
Total
Fair Value
Debt securities
Preferred shares
$
876
2,281
$
92
19,575
$ 300,566
9,078
$
$
3,157
$ 19,667
$ 309,644
$
–
–
–
$ 301,534
30,934
$ 341,574
193,350
$ 332,468
$ 534,924
(C) Available for Sale Securities – Net Unrealized Gains and Losses
thousands of Canadian dollars, except %
As at December 31, 2017
Debt securities
Preferred shares
Cost
$ 300,037
40,340
$
Gross
Unrealized
Gains
1,497
–
Gross
Unrealized
Losses
Total
Fair Value
$
–
(9,406)
$ 301,534
30,934
Weighted-
Average
Yield
1.7%
2.7%
$ 340,377
$
1,497
$
(9,406)
$ 332,468
thousands of Canadian dollars, except %
As at December 31, 2016
Debt securities
Preferred shares
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Total
Fair Value
$ 341,050
269,586
$
$ 610,636
$
721
1,707
2,428
$
(197)
(77,943)
$ 341,574
193,350
$
(78,140)
$ 534,924
Weighted-
Average
Yield
1.0%
3.6%
Net unrealized gains and losses (excluding impairment losses, which are transferred to net income) are included in AOCI
and presented in the table above. These unrealized gains and losses are not included in net income. Please see Note 15
for more information.
98 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 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, 2017, the Company assessed its securities portfolio for evidence of impairment and has not identified any
negative credit events during the year in relation to its preferred share or debt holdings.
During the second quarter of 2017, the Company sold federal and provincial bonds for proceeds of $338.1 million resulting
in the realization of gains of $1.0 million. The Company also sold preferred shares in the second quarter of 2017 for proceeds
of $154.2 million resulting in the realization of losses of $72.9 million, of which $46.2 million were previously recognized as
unrealized losses in AOCI as at March 31, 2017.
Included in available for sale securities are preferred shares of $28.7 million which are held as security for the $20 million
uncommitted secured credit facility referred to in Note 4(A) above. The Company may at any time and at its discretion replace
the preferred shares as security for the credit facility with other acceptable forms of security.
5. Loans
(A) Loans by Geographic Region and Type (net of individual allowances for credit losses)
thousands of Canadian dollars, except %
As at December 31, 2017
British
Columbia
Alberta
Ontario
Quebec
Other
Total
Securitized single-family residential mortgages1
$ 228,024
$ 278,110
$ 1,666,337
$
84,977
$ 177,760
$ 2,435,208
Securitized multi-unit residential mortgages
Total securitized mortgages
Single-family residential mortgages
Residential commercial mortgages2
Non-residential commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
84,860
312,884
525,998
9,819
18,853
6,193
1,948
44,728
322,838
366,537
1,924
10,638
17,183
11,476
227,686
1,894,023
8,687,274
96,817
986,723
321,114
330,119
45,664
130,641
251,240
3,037
24,190
1,473
195
155,104
332,864
558,042
2,993,250
204,473
10,035,522
2,760
2,449
5,642
17,152
114,357
1,042,853
351,605
360,890
Total non-securitized mortgages and loans3
562,811
407,758
10,422,047
280,135
232,476
11,905,227
$ 875,695
$ 730,596
$ 12,316,070
$ 410,776
$ 565,340
$ 14,898,477
As a % of portfolio
5.9%
4.9%
82.6%
2.8%
3.8%
100.0%
thousands of Canadian dollars, except %
As at December 31, 2016
British
Columbia
Alberta
Ontario
Quebec
Other
Total
Securitized single-family residential mortgages1
$
200,882
$
211,131
$ 1,298,919
$
68,229
$
127,450
$ 1,906,611
Securitized multi-unit residential mortgages
Total securitized mortgages
Single-family residential mortgages
Residential commercial mortgages2
Non-residential commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
86,479
287,361
688,939
15,387
48,335
7,548
950
45,819
256,950
281,923
1,580,842
401,820
10,796,570
21,271
58,688
20,265
20,492
232,819
1,795,461
333,903
354,356
47,638
115,867
326,253
24,058
35,820
1,253
–
158,334
285,784
620,193
2,526,804
208,426
12,422,008
11,653
16,516
6,709
3,103
305,188
1,954,820
369,678
378,901
Total non-securitized mortgages and loans3
761,159
522,536
13,513,109
387,384
246,407
15,430,595
$ 1,048,520
$
779,486
$ 15,093,951
$
503,251
$
532,191
$ 17,957,399
As a % of portfolio
5.8%
4.3%
84.1%
2.8%
3.0%
100.0%
1 Securitized single-family residential mortgages include both CMHC-sponsored securitized insured mortgages and bank-sponsored securitization conduit
uninsured mortgages.
2 Residential commercial mortgages include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential
property types.
3 Loans exclude mortgages held for sale.
2017 Annual Report 99
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. An uninsured residential or commercial mortgage, 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
As at December 31, 2017
1 to 30 Days
31 to 60 Days
61 to 90 Days
Over 90 Days
Securitized single-family residential mortgages1
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
$
7,826
–
130,553
833
9,812
2,361
236
$
$
$
824
–
27,561
–
2,023
1,051
40
172
–
5,932
823
–
883
119
$
–2
–
3,1382
–
–
253
–
Total
8,822
–
167,184
1,656
11,835
4,548
395
$ 151,621
$
31,499
$
7,929
$
3,391
$ 194,440
thousands of Canadian dollars
As at December 31, 2016
1 to 30 Days
31 to 60 Days
61 to 90 Days
Over 90 Days
$
Securitized single-family residential mortgages1
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
21,253
–
167,408
424
3,126
2,882
221
$
$
1,348
–
27,944
–
6,890
611
106
$
252
–
3,644
–
–
823
103
$
1822
–
5,6202
–
–
316
–
Total
23,035
–
204,616
424
10,016
4,632
430
$
195,314
$
36,899
$
4,822
$
6,118
$
243,153
1 Securitized single-family residential mortgages include CMHC-sponsored securitized insured mortgages and bank-sponsored securitization conduit
uninsured mortgages.
2 Insured residential mortgages are considered impaired when they are 365 days past due.
100 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) (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 CMHC-sponsored securitized residential mortgages are insured, credit losses are generally not
anticipated. There were no impaired uninsured securitized mortgages or any individual allowances on such mortgages
at December 31, 2017 and December 31, 2016.
thousands of Canadian dollars
As at December 31, 2017
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-residential
Commercial
Mortgages
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
Total
Gross amount of impaired loans
Individual allowances on principal
Net amount of impaired loans
$ 31,836
(1,729)
$
$ 30,107
$
–
–
–
$ 16,489
(2,750)
$ 2,038
(457)
$
276
(276)
$ 50,639
(5,212)
$ 13,739
$ 1,581
$
–
$ 45,427
thousands of Canadian dollars
As at December 31, 2016
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-residential
Commercial
Mortgages
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
Total
Gross amount of impaired loans
Individual allowances on principal
Net amount of impaired loans
$ 49,834
(1,980)
$
$ 47,854
$
–
–
–
$
$
4,577
(30)
$
2,049
(780)
411
(411)
$ 56,871
(3,201)
$
4,547
$
1,269
$
–
$ 53,670
Included in the gross amount of impaired loans are foreclosed loans with an estimated realizable value of $1.5 million
(2016 – $0.6 million).
(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, 2017, the total appraised value of the collateral held for mortgages
past due that are not impaired, as determined when the mortgages were originated, was $297.3 million (2016 – $367.0 million).
For impaired mortgages, the total appraised value of collateral at December 31, 2017 was $76.5 million (2016 – $81.3 million).
2017 Annual Report 101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) (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
2017
Total
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 losses1
Total allowance
Total provision
thousands of Canadian dollars
$
$ 1,980
2,216
(3,120)
653
1,729
1,341
(325)
1,016
2,745
23,032
(2,692)
20,340
$ 23,085
$
(801)
$
$
$
–
16
(21)
5
–
–
–
–
–
327
–
327
327
30
2,816
(103)
7
2,750
98
380
478
$
$
780
5,387
(5,968)
258
457
–
–
–
3,228
457
411
531
(847)
181
276
12
(5)
7
283
$ 3,201
10,966
(10,059)
1,104
5,212
1,451
50
1,501
6,713
9,500
(3,500)
6,000
3,904
(808)
3,096
300
3,500
3,800
37,063
(3,500)
33,563
$ 9,228
$ 3,553
$ 4,083
$ 40,276
16
$
(304)
$ 4,579
$ 4,026
$ 7,516
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-residential
Commercial
Mortgages
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
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
$
1,652
3,415
(3,608)
521
1,980
839
502
1,341
3,321
22,232
800
23,032
Total allowance
Total provision
$ 26,353
$
4,717
$
$
$
$
–
2
(2)
–
–
–
–
–
–
340
205
(537)
22
30
57
41
98
128
327
–
327
327
2
9,500
–
9,500
9,628
246
$
$
$
$
329
2,379
(2,117)
189
780
–
–
–
780
3,890
14
3,904
4,684
2,393
$
$
$
161
525
(519)
244
411
5
7
12
423
300
–
300
723
532
$
2016
Total
2,482
6,526
(6,783)
976
3,201
901
550
1,451
4,652
36,249
814
37,063
$ 41,715
$
7,890
1 The reduction in the collective allowance of $3.5 million during 2017 comprises the following:
• Single-family residential mortgage portfolio – reduction of $2.7 million reflecting the decrease in the portfolio size, decreased loss rates and continued
low levels of loans in arrears.
• Non-residential commercial mortgages portfolio – net reduction of $3.5 million comprises a reduction of $6.5 million reflecting the sale of mortgages
from this portfolio (please see Note 5(H) for more information), offset partially by an increase of $3.0 million reflecting an increase in the construction
and land segment of this portfolio.
• Credit card loans and lines of credit portfolio – reduction of $0.8 million reflecting the decrease in the portfolio size, decreased loss rates and continued
low levels of loans in arrears.
• Other consumer retail loans portfolio – increase of $3.5 million reflects recent settlement experience related to cash reserves on certain programs
within this portfolio.
There were no individual provisions, allowances or net write-offs on securitized residential mortgages.
102 Home Capital Group Inc.
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
ACE Plus 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
CMHC-sponsored securitized single-family residential mortgages
CMHC-sponsored securitized multi-unit residential mortgages
Assets pledged as collateral for CMHC-sponsored securitization
Bank-sponsored securitization conduit assets
Total interest income on securitized loans
(G) Loans by Remaining Contractual Term to Maturity
$
$
2017
500,278
14,284
13,974
13,173
97,421
33,328
38,468
710,926
52,053
30,782
943
6,151
89,929
2016
540,522
11,490
30,935
17,614
102,465
33,536
31,472
768,034
46,642
29,866
2,246
2,951
81,705
$
800,855
$
849,739
thousands of Canadian dollars
Securitized single-family residential
mortgages1
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
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
December 31
2017
December 31
2016
Total
Book Value
Total
Book Value
$ 345,144
$ 1,218,625
$ 871,439
$
230,153
325,405
2,484
–
–
$ 2,435,208
$ 1,906,611
558,042
620,193
7,677,335
2,119,370
232,639
6,178
10,035,522
12,422,008
75,270
675,397
351,605
27,245
33,053
337,464
–
6,034
29,778
–
–
214
–
66,046
255,344
12,255
114,357
305,188
1,042,853
1,954,820
351,605
360,890
369,678
378,901
$ 9,382,149
$ 4,099,963
$ 1,397,718
$
18,647
$ 14,898,477
$ 17,957,399
(33,563)
(37,063)
$ 14,864,914
$ 17,920,336
1 Securitized single-family residential mortgages include both CMHC-sponsored securitized insured mortgages and bank-sponsored securitization conduit
uninsured mortgages.
(H) Sale of Loan Portfolios
In July 2017, the Company sold residential commercial and non-residential commercial mortgages with a carrying value of
$969.0 million for proceeds of $962.6 million. The Company analyzed each transaction under the derecognition requirements
outlined in IAS 39 and concluded that the mortgages should be derecognized, except to the extent of the Company’s
continuing involvement. The Company’s continuing involvement relates to $23.9 million of the gross sale proceeds withheld
to over up to 80% of future credit losses on the commercial mortgages sold through to the maturity of the loans. The majority
of the loans sold will mature before December 31, 2019, with the remainder maturing before December 31, 2021. As a result,
the Company recognized a continuing involvement asset and liability of $23.9 million in other assets and other liabilities on
the consolidated balance sheets, respectively.
The above sales resulted in an aggregate loss of $12.6 million, including $6.5 million released from the collective allowance
on non-residential commercial mortgages to reserve against withheld proceeds of $23.9 million. The loss is included in non-
interest income (loss) on the consolidated statements of income. The Company recognized a receivable for the resultant net
amount of withheld proceeds of $17.4 million in other assets.
The balances of the continuing involvement asset and liability referred to above were $23.0 million as at December 31, 2017
and the receivable for withheld proceeds was $16.5 million.
During 2017, the Company sold mortgages for proceeds of $525.6 million. The Company analyzed each transaction under the
derecognition requirements outlined in IAS 39 and concluded that the mortgages should be derecognized. The sales resulted
in the recognition of $5.6 million of losses included in non-interest income (loss) in the consolidated statements of income.
2017 Annual Report 103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 6. Securitization Activity
(A) Assets Pledged as Collateral
As a requirement of the NHA MBS and CMB programs, the Company assigns to CMHC all of its interest in CMHC-sponsored
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.
During 2016, the Company commenced participation in a bank-sponsored securitization conduit program to provide for
cost-effective funding of the Company’s ACE Plus product. The sponsor of the program is a Schedule 1 Canadian bank with
which the Company entered into an agreement to assign to the conduit all of the Company’s interests in certain uninsured
single-family residential mortgages. Under the agreement, the assigned mortgages remain in the program until maturity and
the sponsoring bank retains all of the refinancing risks related to the program, with the Company bearing no risk for funding
the program. As at December 31, 2017, the conduit is no longer available for new assignments of mortgages.
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 for both the CMHC- and bank-sponsored securitization programs. 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 of on-balance sheet assets assigned as collateral for securitization1
Mortgages assigned in new securitizations
Net change in treasury bills and other acceptable securities
Mortgages derecognized2
Maturity, amortization and changes in mortgages assigned as CMB replacement assets
Ending balance of on-balance sheet assets assigned as collateral for securitization1
2017
2016
$ 2,648,882
2,007,633
60,799
(799,271)
(741,916)
$ 2,731,350
3,805,816
65,203
(2,537,307)
(1,416,180)
$ 3,176,127
$ 2,648,882
1
Included in the on-balance sheet assets assigned as collateral, at December 31, 2017, is $182.9 million (2016 – $122.1 million) in treasury bills and other
acceptable securities and $2.99 billion (2016 – $2.53 billion) 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.
Treasury bills and other acceptable securities assigned as collateral are accounted for as available for sale assets and
included in restricted assets on the consolidated balance sheets. Please see Note 7 for more information. Additionally, off-
balance sheet mortgage loans of $7.44 billion (2016 – $8.38 billion) are assigned as collateral related to CMHC for sponsored
securitization programs. Included in this amount is $0.82 billion (2016 – $1.23 billion) of mortgages that were sold under the
former whole loan sales program of Home Bank. These mortgages were securitized subsequent to the whole loan sales by
the purchaser.
(B) Securitization Liabilities
The following table presents the securitization liabilities, including liabilities added during the year, which are secured by
insured mortgages for CMHC-sponsored securitizations, uninsured mortgages for the bank-sponsored securitization conduit
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
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
2017
2016
$ 2,649,649
1,496,819
(966,328)
(2,391)
$ 2,780,556
2,654,106
(2,744,123)
(40,890)
$ 3,177,749
$ 2,649,649
$ 1,980,441
$ 3,744,735
1 Other includes premiums, discounts, transaction costs and changes in the mark to market of hedged items.
104 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) The following table provides the remaining contractual term to maturity of securitization liabilities.
thousands of Canadian dollars, except %
CMHC-sponsored mortgage-backed
security liabilities
Contractual yield
CMHC-sponsored Canada Mortgage
Bond liabilities
Contractual yield
Bank-sponsored securitization
conduit liabilities
Contractual yield
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
December 31
2017
December 31
2016
Total
Book Value
Total
Book Value
$ 168,349
$ 662,435
$ 731,368
$
2.1%
1.4%
1.7%
231,886
636,972
604,460
4.2%
3.3%
1.7%
97,828
43,099
2.1%
2.1%
1,352
2.1%
$ 498,063
$ 1,342,506
$ 1,337,180
$
–
–
–
–
–
–
–
$ 1,562,152
$
898,386
1.6%
1.5%
1,473,318
1,637,117
2.8%
2.3%
142,279
114,146
2.1%
1.6%
$ 3,177,749
$ 2,649,649
(C) Securitization Income
The following table presents the total securitization income for the year.
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.
$
$
2017
5,695
(247)
7,081
$
12,529
$
2016
26,972
399
6,426
33,797
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.
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 residential 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. 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.
2017 Annual Report 105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 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
Single-family
Residential
MBS
Multi-unit
Residential
MBS
2017
Total MBS
Single-family
Residential
MBS
Multi-unit
Residential
MBS
2016
Total MBS
$ 288,458
$ 510,813
$ 799,271
$ 1,490,850
$ 1,046,457
$ 2,537,307
2,084
–
–
3,611
20,815
4,943
5,695
20,815
4,943
17,368
–
–
9,604
41,900
8,955
26,972
41,900
8,955
1 Gains on sale of mortgages or residual interest are net of hedging impact.
7. Restricted Assets
thousands of Canadian dollars
Restricted cash
Restricted cash – CMHC- and bank-sponsored securitization programs
Restricted cash – derivatives
Restricted cash – other programs
Total restricted cash
Treasury bills and other acceptable securities assigned as replacement assets
Total restricted assets
December 31
2017
December 31
2016
$
$
158,569
59,391
36,174
254,134
182,877
106,616
19,262
17,418
143,296
122,078
$
437,011
$
265,374
Restricted cash – CMHC- and bank-sponsored securitization programs represent deposits held as collateral by the sponsors
in connection with the Company’s securitization activities.
Restricted cash – derivatives are deposits held by counterparties as collateral for the Company’s 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 certain portfolios included in other consumer retail
loans. 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, treasury bills and other acceptable
securities assigned as CMB replacement assets. Please see Note 6(A) for more information.
thousands of Canadian dollars
Restricted cash
Treasury bills and other
acceptable securities assigned
as replacement assets
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
December 31
2017
December 31
2016
Total
Fair Value
Total
Fair Value
$ 254,134
$
–
$
–
$
–
$ 254,134
$ 143,296
182,877
$ 437,011
$
–
–
$
–
–
$
–
–
182,877
122,078
$ 437,011
$ 265,374
106 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 8. Other Assets
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
9. Intangible Assets
December 31
2017
December 31
2016
$
$
49,651
3,644
182,930
10,431
13,340
76,774
60,314
3,289
213,312
13,013
25,619
33,091
$
336,770
$
348,638
The following table presents the net carrying amount of internally developed software costs and acquired intangible assets as at
December 31, 2017 and 2016, along with the changes in net carrying amount for the years ended December 31, 2017 and 2016.
thousands of Canadian dollars
Cost
Core
Banking
System1
Other
Software
Costs2
Acquired
Intangible
Assets
2017
Total
Core
Banking
System1
Other
Software
Costs2
Acquired
Intangible
Assets
2016
Total
Balance at the beginning of the year
$ 113,722 $
45,444 $
2,260 $ 161,426 $ 110,397 $
37,067 $
– $ 147,464
Additions from internal development
Acquisition of intangible assets
Impairment loss
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
211
–
(5,088)
108,845
40,153
9,559
49,712
8,741
–
(1,202)
52,983
6,232
7,215
13,447
–
334
(2,059)
8,952
334
(8,349)
8,452
–
(5,127)
8,377
–
–
–
2,260
–
16,829
2,260
(5,127)
535
162,363
113,722
45,444
2,260
161,426
38
497
535
46,423
17,271
63,694
31,889
8,264
40,153
2,980
3,252
6,232
–
38
38
34,869
11,554
46,423
Carrying amount at the end of the year $
59,133 $
39,536 $
– $
98,669 $
73,569 $
39,212 $
2,222 $ 115,003
1 As at December 31, 2017, there was $nil ($12.1 million – December 31, 2016) in work in progress related to the core banking system that was not
being amortized.
2 As at December 31, 2017, there was $7.0 million ($13.0 million – December 31, 2016) in work in progress related to other software costs that was not
being amortized.
During 2017, the Company recognized a total impairment loss on intangible assets of $8.3 million. An impairment loss
of $6.3 million was recognized on components of the core banking system and other software costs that have become
obsolete. It has been determined that the benefits from these components may not be realized and the capitalized amount
is not recoverable. The impairment of these components does not impact the functionality of the systems currently in use.
The remaining $2.0 million of impairment loss was recognized on other acquired intangible assets within the prepaid card
business. The $8.3 million impairment loss is included in other operating expenses on the consolidated statements of income.
The Company also revised the estimated useful life of the core banking system from 15 to 14 years as a result of expected
future upgrades, and this change in estimate has been applied prospectively.
During 2016, the Company recognized an impairment loss of $5.1 million on a component for its core banking system that was
in the process of being developed. The development of this component was deferred indefinitely leading to the determination
that the benefits from this software development may not be realized and the capitalized amount is not recoverable. The deferral
of development on this component did not impact the functionality of the core banking system currently in use. The $5.1 million
impairment loss was included in other operating expenses on the consolidated statements of income.
2017 Annual Report 107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 10. Goodwill
The following table presents the carrying amount of goodwill.
thousands of Canadian dollars
Home Trust
PSiGate
December 31
2017
December 31
2016
$
$
2,324
–
2,324
$
$
2,324
4,428
6,752
During the second quarter of 2017, the Company determined that it would exit its payment processing and prepaid card
business through a sale transaction. This includes the Company’s subsidiary PSiGate. In connection with this decision, the
Company recorded a write-down of the remaining goodwill related to PSiGate in the amount of $4.4 million, based on the
estimated fair value less costs to sell. The write-down is included in other operating expenses under non-interest expenses
in the consolidated statements of income. Subsequent to the end of 2017, the Company completed its sale of PSiGate.
See Note 23 for more information.
During the fourth quarter of 2016, goodwill in the PSiGate business was initially determined to be impaired. An impairment
loss of $9.0 million was recorded as part of other operating expenses in 2016 in the consolidated statements of income.
This impairment reflected revised expectations of revenues due to a reduction in business development activities, as well
as increased operating expenses.
There were no additions, disposals or other impairments of goodwill for the year ended December 31, 2017.
11. Deposits by Remaining Contractual Term to Maturity
thousands of Canadian dollars,
except %
December 31
2017
December 31
2016
Payable
on Demand
Within 1 Year
1 to 3 Years
3 to 5 Years
Total
Total
Individuals
Businesses
Institutional deposits
$ 475,361
$ 4,887,744
$ 3,835,665
$ 1,581,976
$ 10,780,746
$ 13,766,732
64,003
–
362,156
475,523
314,798
173,228
–
–
914,185
475,523
1,314,331
804,967
$ 539,364
$ 5,725,423
$ 4,150,463
$ 1,755,204
$ 12,170,454
$ 15,886,030
Average contractual yield
1.0%
2.1%
2.3%
2.5%
2.2%
1.9%
12. Other Liabilities
thousands of Canadian dollars
Accrued interest payable on deposits
Accrued interest payable on securitization liabilities
Securitization servicing liability
Other, including accounts payable and accrued liabilities
December 31
2017
December 31
2016
$
$
125,965
7,923
20,924
205,665
122,905
7,317
20,573
169,942
$
360,477
$
320,737
108 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 13. Capital
(A) Authorized
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
Issuance of shares
Outstanding at the end of the year
The Company has no preferred shares outstanding.
$
Number
of Shares
64,388
16
(203)
16,045
2017
Amount
84,910
548
(267)
145,965
$
Number
of Shares
69,978
71
(5,661)
–
80,246
$
231,156
64,388
$
2016
Amount
90,247
1,984
(7,321)
–
84,910
(C) Repurchase of Shares
During the year, the Company repurchased 203,000 common shares under its normal course issuer bid (NCIB) for
$6.0 million. The purchase price of shares acquired through the NCIB is allocated between capital stock and retained
earnings. The reduction to capital stock for the year ended December 31, 2017 was $0.3 million. The balance of the
purchase price of $5.7 million was charged to retained earnings.
In the second quarter of 2016, the Company repurchased for cancellation 3,989,361 common shares at a price of
$37.60 per share totalling $150.0 million under the Company’s substantial issuer bid (SIB). In addition, the Company continued
to repurchase shares under its NCIB. In 2016, the Company repurchased a total of 5,660,691 common shares under the SIB
and NCIB for $199.2 million which was allocated between share capital and retained earnings. The reduction to share capital
was $7.3 million. The balance of the purchase price of $191.9 million was charged to retained earnings. Included in the amount
allocated to retained earnings was $0.4 million (net of tax) for transaction costs associated with the SIB.
(D) Issuance of Shares
On June 29, 2017, the Company issued 16,044,580 new common shares at a price of $9.55 per share to Columbia Insurance
Company, a wholly owned subsidiary of Berkshire Hathaway Inc., for proceeds of $153.2 million. The amount recorded in
capital stock in 2017 reflects the proceeds received net of $9.8 million ($7.3 million, net of tax) of associated professional fees
and other transaction costs.
(E) Earnings per Common Share (EPS)
Basic earnings per common share of $0.10 (2016 – $3.71) is determined as net income for the year divided by the average
number of common shares outstanding of 72,348,998 (2016 – 66,601,374).
Diluted earnings per common share of $0.10 (2016 – $3.71) is determined as net income for the year divided by the average
number of common shares outstanding of 72,348,998 (2016 – 66,601,374) plus the stock options potentially exercisable, as
determined under the treasury stock method, of 8,871 (2016 – 66,264) for a total of 72,357,869 (2016 – 66,667,638) diluted
common shares.
Diluted earnings per common share exclude employee stock options which are anti-dilutive for the periods presented.
2017 Annual Report 109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) (F) Retained Earnings
During the third quarter of 2017, the Company made an adjustment to retained earnings and other liabilities as it was
determined that a dividend recognized in a prior period was accrued prior to being declared by the Company. This adjustment
is not significant to the consolidated financial statements of the Company. As a result of the adjustment, retained earnings
increased by $15.4 million and other liabilities decreased by a corresponding amount as at December 31, 2015.
(G) 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 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.
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
2017
All-In Basis
December 31
2016
National Regulatory
Minimum
All-In Basis
All-In Basis
23.17%
23.17%
23.68%
16.55%
16.54%
16.97%
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. As at
December 31, 2017, the Leverage ratio was 8.70% (December 31, 2016 – 7.20%), which exceeds OSFI’s minimum requirements.
Home Trust’s Common Equity Tier 1, Total Tier 1, and Total capital ratios have exceeded OSFI’s regulatory targets, as well as
Home Trust’s internal capital targets. The capital position was further enhanced through the issuance of new common shares
in the second quarter of 2017 (please see Note 13(D)).
14. Employee 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
$1.3 million for 2017 (2016 – $1.7 million).
(B) Employee Retirement Savings Plan
During the year, Home Trust contributed $1.3 million (2016 – $1.3 million) to the employee group registered retirement
savings plan.
110 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) (C) Stock Options
The details and changes in the issued and outstanding options are as follows:
thousands, except per share amounts and years
2017
2016
Outstanding at the beginning of the year
Granted
Exercised
Forfeited
Expired
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
Number
of Shares
Weighted-average
Exercise Price
Number
of Shares
Weighted-average
Exercise Price
$
1,074
160
(16)
(142)
(236)
840
511
$
$
32.73
22.79
25.03
32.58
24.21
33.40
35.85
$
26.37
2.8
1,208
25
(71)
(88)
–
1,074
587
$
$
$
$
32.45
31.95
20.62
38.41
–
32.73
30.86
31.44
2.9
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 2017 or 2016.
As at December 31, 2017, the maximum number of options on common shares that could be issued was 10,670,396,
representing approximately 13.3% 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 five and 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, based
on predetermined conditions including vesting conditions, such as earnings per share targets, are achieved for each year
as established by the Board at the time of the grant.
As at December 31, 2017, the weighted-average exercise prices for stock options outstanding to acquire common shares
ranged from $14.06 to $46.96. 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
Stock options exercisable
As at December 31, 2017
Weighted-average
Contractual Life
Remaining in
Years
Weighted-
average
Exercise Price
4.7
1.4
2.9
3.0
1.2
2.2
2.0
2.8
$
$
14.06
20.84
28.77
31.98
39.65
43.05
46.96
33.40
Number
Outstanding
57,129
46,500
361,688
50,000
139,500
14,000
170,861
839,678
$
Number
Exercisable
–
46,500
172,038
31,250
139,500
13,500
108,600
511,388
$
Weighted-
average
Exercise Price
–
23.25
29.30
32.00
17.90
43.06
46.92
35.85
The Company determined the fair value of options granted prior to the September 2017 grant using the Black-Scholes
option pricing model. Starting with the September 2017 grant, the Company began using the binomial option pricing model,
prospectively, as it more accurately reflects the impact of the volatility and dividend assumptions in the valuation of options
granted. The weighted-average fair value of the options granted during the year was $4.67 (2016 – $5.76).
2017 Annual Report 111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) The following assumptions were used to determine the fair value of each of the following option grants on the date of grant:
Canadian dollars, except % and years
Fair value of options granted
Share price
Exercise price
Expected share price volatility
Expected period until exercise in years1
Forfeiture rate
Expected dividend yield
Risk-free rate of return
Valuation model
1 Exercisable upon vesting.
December
2017
September
2017
$
$
$
4.40
16.85
17.36
$
$
$
4.23
14.00
13.90
$
$
$
February
2017
4.94
27.65
27.65
$
$
$
38.7%
3.8
–
3.53%
2.05%
42.7%
3.8
–
3.60%
2.15%
32.7%
3.8
5.0%
3.95%
1.01%
May
2016
5.76
31.95
31.95
30.8%
3.8
5.0%
2.95%
0.64%
Binomial
Binomial
Black-Scholes
Black-Scholes
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.
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 (2017 – $0.6 million;
2016 – $1.1 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 (2017 – $0.4 million; 2016 – $1.5 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, 2017 was $4.0 million
(2016 – $3.5 million). As of December 31, 2017, there were 217,791 DSUs outstanding (2016 – 103,368).
(E) Restricted Share Units (RSUs)
The Company grants RSUs to certain key members of management. The RSUs generally vest over three years and 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, 2017 was $277 thousand (2016 – $443 thousand).
As of December 31, 2017, there were 60,705 RSUs outstanding (2016 – 34,794 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 50% to 125%.
The fair value of the PSU liability as at December 31, 2017 was $1.2 million and there were 76,598 PSUs outstanding
(2016 – $2.0 million and 87,787 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)
2017
557
2,065
2,622
$
$
2016
1,127
2,328
3,455
$
$
112 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 15. Accumulated Other Comprehensive Income
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
16. Income Taxes
December 31
2017
December 31
2016
$
$
(6,425)
(1,720)
(4,705)
(72,953)
(19,364)
(53,589)
(1,606)
(417)
(1,189)
(2,005)
(529)
(1,476)
$
(5,894)
$
(55,065)
(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 26.50% (2016 – 26.50%) 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
2017
8,915
2,362
$
$
2016
335,130
88,810
$
$
(873)
2,085
(1,483)
(703)
(2,683)
2,867
(1,516)
256
$
1,388
$
87,734
(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
2017
26.50%
(9.79)%
23.39%
(16.63)%
(7.90)%
15.57%
2016
26.50%
(0.80)%
0.86%
(0.45)%
0.07%
26.18%
2017 Annual Report 113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) (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
Deferred share unit plan expenses
Deferred financing costs
Capital assets
December 31
2017
December 31
2016
$
$
6,690
3,693
4,659
541
26,244
607
42,434
9,432
8,341
1,448
2,040
520
21,781
8,517
2,557
3,160
1,123
29,916
633
45,906
9,046
15,920
1,570
–
–
26,536
19,370
Net deferred tax liability
$
20,653
$
Net deferred tax liabilities on the consolidated balance sheets were $30.2 million (December 31, 2016 – $36.3 million) and
deferred tax assets were $9.6 million (December 31, 2016 – $16.9 million). The deferred tax liability comprises deferred tax
on commissions, finders’ fees, transaction costs, development costs and tax credits. The deferred tax liability is presented
net of certain deferred tax assets, primarily attributed to allowance for credit losses. The deferred tax asset presented on the
consolidated balance sheets results primarily from $31.3 million of loss carryforwards of Home Bank. Deferred tax assets also
include deferred financing costs which primarily relate to share issuance costs, which were accounted for as a deduction from
shareholders’ equity. The losses generated in Home Bank begin to expire after 2033. The Company continues to generate
sufficient income in Home Bank to be able to utilize the losses recognized as a deferred tax asset.
Capital losses totalling $2.7 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.
During the year, the Company also recognized Scientific Research and Experimental Development investment tax credits
related to the development of its internally generated software. The investment tax credits are recorded as a reduction of tax
provisions, net of any tax that would be eligible on such benefit.
114 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 17. Commitments and Contingencies
(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
2017
December 31
2016
$
$
12,862
19,734
21,803
$
54,399
$
16,923
27,869
6,471
51,263
Lease payments recognized as an expense in the consolidated statements of income amounted to $25.3 million in 2017
(2016 – $25.6 million).
(B) Credit Commitments
Outstanding amounts for future advances on mortgage loans amounted to $875.9 million as at December 31, 2017
(2016 – $1.34 billion). 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 $196.7 million at
December 31, 2017 (2016 – $486.6 million). Offers for loans remain open for various periods. The average rate on mortgage
offers is 4.57% (2016 – 4.48%).
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, 2017, these contractual amounts in aggregate
were $497.5 million (2016 – $515.9 million), of which $145.5 million (2016 – $146.3 million) had not been drawn by customers.
Included in the outstanding amounts for future advances of mortgage loans are outstanding future advances for the Equityline
Visa portfolio of $16.1 million at December 31, 2017 (2016 – $28.8 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) Provisions and Contingencies
Restructuring Provision
For the year ended December 31, 2017, the Company recorded total restructuring charges of $13.2 million in relation to its
expense savings initiative, Project EXPO, which commenced in the first quarter of 2017. This restructuring initiative was
intended to result in cost savings while positioning the Company to meet its strategic goals. These measures included
organizational review, process redesign and premise optimization. The restructuring charges recorded relate primarily to
employee severance and other related costs and are included in salaries and benefits. The remaining restructuring charges
are included in premises and other operating expenses. The Company announced on October 2, 2017 that it has completed
Project EXPO and does not expect further charges.
2017 Annual Report 115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) The following table provides a continuity of the Company’s restructuring provision in 2017.
thousands of Canadian dollars
Balance at the beginning of the year
Additions
Amounts used
Balance at the end of the year
$
2017
–
13,197
(8,406)
$
4,791
Contingencies
In the ordinary course of business, the Company and its subsidiaries are involved in various legal actions. The
Company establishes legal provisions when it becomes probable that the Company will incur a loss and the amount
can be reliably estimated.
In management’s opinion, based on its current knowledge and after consultation with counsel, the ultimate disposition of
these actions, individually or in the aggregate, will not have a material adverse effect on the consolidated financial position of
the Company. However, as there are uncertainties inherent in litigation advice, there is a possibility that the ultimate resolution
of these actions may be material to the Company’s consolidated results of operations for any particular reporting period.
The following is a description of the Company’s material legal actions.
Claims by Shareholders Who Opted out of Securities Class Action Settlement Related to Disclosure
The Company has been served with three claims by shareholders who opted out of the securities class action settlement
previously disclosed in Q3 2017. Together these claims are advanced on behalf of shareholders holding 1,717,400 shares out
of 1,717,600 shares that were opted out of the class action settlement.
The claim filed on behalf of West Face Long Term Opportunities Global Master LP (“West Face”), a Caymans Island limited
partnership is based on allegations of misrepresentation and seeks $70 million in damages. West Face alleges that it built a
significant short position in Home Capital in the spring and summer of 2013. It then reversed its investment strategy, covering
its short position between the fall of 2013 and the spring of 2015.
The claim filed by Roland Keiper and Brian Chapman is based on allegations of common law and statutory misrepresentation
and oppressive conduct and seeks $2 million in damages.
The claim filed by Marc Cohodes is based on allegations of misrepresentation and oppressive conduct and seeks $4 million
in damages. Mr. Cohodes claims to have altered his investment strategy, covering at least some of his short position between
March and June of 2015.
Management’s current assessment is that it has good and valid defences to all three claims and the Company intends to fully
defend its conduct. The costs incurred by the Company in the defence of each proceeding will be expensed in the period in
which they are incurred.
Putative Class Action Related to Consumer HVAC Equipment Financing
A claim has been filed with the Ontario Superior Court of Justice against Home Trust Company, and co-defendants
MDG Newmarket Inc. doing business as Ontario Energy Group (OEG) and Eugene Farber. In that matter Home Trust is a
defendant in a putative class action brought on behalf of persons who purchased consumer HVAC equipment financed by
Home Trust from OEG, an entity arms-length from Home Trust. In May 2016, Home Trust ceased purchasing income streams
arising out of contracts with new customers of OEG and in September 2016 provided notice that it will no longer accept
any rental agreement from OEG under the income-stream purchase program. In May of 2017, the plaintiff served motions for
certification and summary judgement which are scheduled to proceed in May 2018. Home Trust considers that it has good
defences to the action.
116 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 18. Derivative Financial Instruments
The Company uses interest rate swaps and bond forward contracts to hedge exposures related to interest rate risk to
minimize volatility in earnings. Total return swaps are used to hedge the Company’s exposure to changes in its share price
related to its RSU liability. 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.
Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or
other factors. The fair value of 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
income in net realized and unrealized gain or loss on derivatives.
Cash Flow Hedging Relationships
The Company uses bond forward contracts to hedge the 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 Company uses total return swaps to hedge the variability in cash flows associated with forecasted future obligations to
eligible employees on vesting of RSUs attributable to changes in the Company’s stock price. Over time, redemptions and
cancellations of the RSUs may result in unhedged derivative positions. These unhedged derivatives are not designated as
hedges for accounting purposes, and as such the changes in fair value do not flow through AOCI and compensation expense.
The changes in fair value of such derivatives flow directly to the consolidated statements of income within derivative gain or
loss. Net losses of $528 thousand (2016 – net gains of $528 thousand) were recorded in income through net realized and
unrealized gain or loss on derivatives.
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 gains (losses) recorded in OCI
Reclassification from OCI to net income
$
2017
(721)
(1,120)
$
2016
1,035
(1,147)
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 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 items for interest rate risk2
Hedge ineffectiveness losses recognized in non-interest income3
$
2017
(63,975)
62,493
$
$
(1,482)
$
2016
(30,794)
21,459
(9,335)
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.
3 Included in fair value hedging ineffectiveness in 2016 are derivative losses related to senior debt.
2017 Annual Report 117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) Other Derivative Gains and Losses
The Company enters into bond forwards to economically 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.
As at December 31, 2017 and 2016, the outstanding swaps and bond forward contract positions were as follows:
thousands of Canadian dollars
As at December 31, 2017
Term (years)
Swaps designated as accounting hedges
< 1 year
1 to 5 years
Bond forwards not designated as
accounting hedges2
1 to 5 years
> 5 years
Total
Notional
Amount
Current
Replacement
Cost1
Credit
Equivalent
Amount1
Risk-
weighted
Balance1
Derivative
Asset
Derivative
Liability
Net
Fair Market
Value
$ 739,206 $
2,584 $
2,615 $
523 $
2,584 $
(303) $
2,281
3,231,323
3,970,529
3,530
6,114
19,710
22,325
9,641
10,164
3,530
6,114
(38,425)
(34,895)
(38,728)
(32,614)
28,600
130,400
159,000
224
987
1,211
367
2,943
3,310
367
2,943
3,310
224
987
1,211
–
–
–
224
987
1,211
$ 4,129,529 $
7,325 $
25,635 $
13,474 $
7,325 $
(38,728) $
(31,403)
thousands of Canadian dollars
As at December 31, 2016
Term (years)
Swaps designated as accounting hedges
< 1 year
1 to 5 years
Bond forwards designated as
accounting hedges2
1 to 5 years
Bond forwards not designated as
accounting hedges2
1 to 5 years
> 5 years
Total
Notional
Amount
Current
Replacement
Cost1
Credit
Equivalent
Amount1
Risk-
weighted
Balance1
Derivative
Asset
Derivative
Liability
Net
Fair Market
Value
$ 298,680 $
1,816 $
1,816 $
363 $
1,816 $
– $
1,816
2,263,045
2,561,725
34,622
36,438
45,938
47,754
9,187
9,550
34,622
36,438
(3,366)
(3,366)
31,256
33,072
85,000
85,000
72,100
9,400
81,500
677
677
392
17
409
1,102
1,102
752
158
910
220
220
506
158
664
677
677
392
17
409
(50)
(50)
(19)
(55)
(74)
627
627
373
(38)
335
$ 2,728,225 $
37,524 $
49,766 $
10,434 $
37,524 $
(3,490)
$
34,034
1 The values are calculated based on the capital adequacy requirements required by OSFI.
2 The term of the bond forward contracts is based on the term of the underlying bonds.
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.
118 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 19. Current and Non-current Assets and Liabilities
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, 2017 and 2016.
thousands of Canadian dollars
As at December 31, 2017
As at December 31, 2016
Within 1 Year
After 1 Year
Total
Within 1 Year
After 1 Year
Total
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
Deferred tax assets
Goodwill and intangible assets
Total assets
Liabilities
Deposits payable on demand
Deposits payable on a fixed date
CMHC-sponsored mortgage-backed
security liabilities
CMHC-sponsored Canada Mortgage
Bond liabilities
Bank-sponsored securitization
conduit liabilities
Derivative liabilities
Other liabilities
Deferred tax liabilities
Total liabilities
Net
$ 1,336,138
$
–
$ 1,336,138
$ 1,205,394
$
–
$ 1,205,394
3,157
329,311
332,468
165,947
99,205
77,918
435,719
–
534,924
77,918
–
2,151,977
2,993,250
378,962
2,147,842
2,526,804
165,947
841,273
9,110,971
2,794,256
11,905,227
10,780,371
4,650,224
15,430,595
(22,375)
437,011
2,584
(11,188)
–
4,741
(33,563)
437,011
7,325
220,811
115,959
336,770
–
–
9,577
9,577
100,993
100,993
(24,708)
177,879
1,816
227,672
–
–
(12,355)
87,495
35,708
120,966
16,914
121,755
(37,063)
265,374
37,524
348,638
16,914
121,755
$ 12,095,517
$ 5,495,626
$ 17,591,143
$ 12,924,509
$ 7,604,268
$ 20,528,777
$
539,364
$
–
$
539,364
$ 2,531,803
$
–
$ 2,531,803
5,725,423
5,905,667
11,631,090
6,935,574
6,418,653
13,354,227
321,667
1,240,485
1,562,152
156,979
741,407
898,386
231,886
1,241,432
1,473,318
162,677
1,474,440
1,637,117
102,718
303
339,553
–
39,561
38,425
20,924
30,230
142,279
38,728
360,477
30,230
12,556
101,590
–
300,164
–
3,490
20,573
36,284
114,146
3,490
320,737
36,284
$ 7,260,914
$ 8,516,724
$ 15,777,638
$ 10,099,753
$ 8,796,437
$ 18,896,190
$ 4,834,603
$ (3,021,098)
$ 1,813,505
$ 2,824,756
$
(1,192,169)
$ 1,632,587
20. Fair Value of Financial Instruments
The amounts set out in the following tables 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 consolidated balance sheet
date in the principal or most advantageous market that 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.
2017 Annual Report 119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) 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 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 government-backed debt instruments, loans held for sale, interest rate swaps, total
return swaps, bond forwards, certain corporate debt instruments.
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.
The following table presents the fair value of financial instruments across the levels of the fair value hierarchy.
thousands of Canadian dollars
As at December 31, 2017
Level 1
Level 2
Level 3
Fair Value
Carrying Value
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
$ 1,336,138
$
–
$
–
–
254,134
1,590,272
165,947
7,325
–
173,272
–
300,566
30,934
–
–
–
182,877
–
Total financial assets available for sale
30,934
483,443
–
–
–
–
–
$ 1,336,138
$ 1,336,138
165,947
7,325
254,134
165,947
7,325
254,134
1,763,544
1,763,544
968
–
–
105,528
106,496
301,534
30,934
182,877
105,528
620,873
301,534
30,934
182,877
105,528
620,873
Loans and receivables
Securitized mortgages
Non-securitized mortgages and loans
Securitization receivables
Other
Total loans and receivables
–
–
–
–
–
–
–
–
–
–
3,005,970
3,005,970
2,993,250
11,958,552
11,958,552
11,871,664
81,046
62,991
81,046
62,991
81,046
62,991
15,108,559
15,108,559
15,008,951
Total
$ 1,621,206
$ 656,715
$ 15,215,055
$ 17,492,976
$ 17,393,368
Financial liabilities at amortized cost
Deposits
Securitization liabilities
Other
Total financial liabilities carried at
amortized cost
Financial liabilities at fair value
Derivative liabilities
Total
$
$
–
–
–
–
–
–
$
–
–
–
–
$ 12,432,343
$ 12,432,343
$ 12,170,454
3,174,786
3,174,786
3,177,749
360,477
360,477
360,477
15,967,606
15,967,606
15,708,680
38,728
–
38,728
38,728
$
38,728
$ 15,967,606
$ 16,006,334
$ 15,747,408
120 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
thousands of Canadian dollars
As at December 31, 2016
Level 1
Level 2
Level 3
Fair Value
Carrying Value
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
$ 1,205,394
$
–
$
–
–
143,296
1,348,690
77,918
37,524
–
115,442
–
–
–
–
–
$ 1,205,394
$ 1,205,394
77,918
37,524
143,296
77,918
37,524
143,296
1,464,132
1,464,132
–
337,244
4,330
193,350
–
–
–
122,078
–
–
–
107,953
112,283
341,574
193,350
122,078
107,953
764,955
341,574
193,350
122,078
107,953
764,955
Total financial assets available for sale
193,350
459,322
Loans and receivables
Securitized mortgages
Non-securitized mortgages and loans
Securitization receivables
Other
Total loans and receivables
–
–
–
–
–
–
–
–
–
–
2,545,281
2,545,281
2,526,804
15,490,078
15,490,078
15,393,532
105,359
89,222
105,359
89,222
105,359
89,222
18,229,940
18,229,940
18,114,917
Total
$ 1,542,040
$
574,764
$ 18,342,223
$ 20,459,027
$ 20,344,004
Financial liabilities at amortized cost
Deposits
Securitization liabilities
Other
Total financial liabilities at amortized cost
Financial liabilities at fair value
Derivative liabilities
Total
$
$
–
–
–
–
–
–
$
–
–
–
–
$ 16,096,097
$ 16,096,097
$ 15,886,030
2,697,463
320,737
2,697,463
320,737
2,649,649
320,737
19,114,297
19,114,297
18,856,416
3,490
–
3,490
3,490
$
3,490
$ 19,114,297
$ 19,117,787
$ 18,859,906
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, 2017 or December 31, 2016.
The following methods and assumptions were used to estimate the fair values of financial instruments:
• The fair value of 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 acquired 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.
2017 Annual Report 121
• 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 18.
• 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 their correspondent current market rates including market rates
for MBS, CMB and interest rate swap curve.
21. Related Party Transactions
IFRS considers key management personnel to be related parties. Key management personnel are those persons having
authority and responsibility for planning, directing, and controlling the activities of the Company, directly or indirectly. The
Company considers certain of its officers and Directors to be key management personnel. Compensation of key management
personnel of the Company is as follows:
thousands of Canadian dollars
Short-term employee benefits1
Share-based payment2
Other long-term benefits3
2017
7,057
1,275
183
8,515
$
$
2016
8,580
216
324
9,120
$
$
1 Short-term employee benefits include salary, benefits and accrued cash bonuses for officers and fees for non-executive Directors including fees elected to
be received in the form of DSUs.
2 Share-based payment includes fair value of stock options, RSUs and PSUs granted during the year to officers.
3 Other long-term benefits include the Company’s contribution to officers’ Employee Share Purchase Plan and Employee Retirement Savings Plan and other
long-term benefits.
Previously, in the normal course of business, the Company referred borrowers who required loans at a higher loan-to-value
ratio than the Company would provide to second mortgage lenders. All referrals were conducted at arm’s length and at market
terms. Second mortgage lenders independently underwrote all second mortgages with the borrowers. During the year, the
Company discontinued this practice and no longer makes such referrals. One of the second mortgage lenders is related to
the Company through a close family relationship with a former member of the Company’s key management personnel. The
amount of second mortgages referred to this lender during the years ended December 31, 2017 and 2016 was not significant.
22. Risk Management
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 capital adequacy, credit, market, liquidity and funding, operational, compliance,
strategic 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 18.
122 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in Canadian dollars) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
23. Subsequent Events
On February 1, 2018, the Company completed the previously announced sale of the Company’s payment processing and
prepaid card business including its Payment Services Interactive Gateway subsidiaries. As part of the agreement, Home
Capital and Home Trust Company have entered into a transition services agreement and will continue to provide services for
certain clients for up to a year, at which time the Company will have completely exited this business line. The Company does
not expect the sale to have a material impact on its financial position or performance.
In addition, the Company received a claim in January 2018 filed by Marc Cohodes based on allegations of misrepresentation
and oppressive conduct and seeks $4 million in damages. Please see Note 17(D) for further information.
2017 Annual Report 123
Corporate
Directory &
Shareholder
Information
BRANCHES
Toronto
145 King Street West, Suite 2300
Toronto, Ontario M5H IJ8
Tel: (416) 360-4663
1-800-990-7881
Fax: (416) 363-7611
1-888-470-2092
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
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 Boulevard Robert-Bourassa, Suite 2420
Montreal, Quebec H3A 2A5
Tel: (514) 843-0129
1-866-542-0129
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
OAKEN FINANCIAL STORES
Toronto
145 King Street West, Concourse Level
Toronto, Ontario M5H IJ8
124 Home Capital Group Inc.
Calgary
517-10th Avenue SW
Calgary, Alberta T2R 0A8
Tel:
1-855-OAKEN-22 (625-3622)
Email:
service@oaken.com
HOME CAPITAL GROUP INC.
145 King Street West, Suite 2300
Toronto, Ontario M5H 1J8
Auditors
Ernst & Young LLP
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
Capital Stock
As at December 31, 2017 there were
80,246,349 Common Shares outstanding.
Stock Listing
Toronto Stock Exchange,
Ticker Symbol: HCG
Options Listing
Montreal Stock Exchange,
Ticker Symbol: HCG
For Shareholder Information,
Please Contact:
Corporate Counsel and Corporate Secretary
Home Capital Group Inc.
145 King Street West, Suite 2300
Toronto, Ontario M5H 1J8
Tel: (416) 360-4663
Fax: (416) 363-7611
Websites
Home Capital Group Inc.
www.homecapital.com
Home Trust Company
www.hometrust.ca
Investor Information Service
Home Capital Group Inc. has established an
e-mail investor information service. Sign up
at www.homecapital.com to receive quarterly
reports, press releases, the annual report, the
management information circular, and other
information pertaining to the Company.
a
d
a
n
a
C
n
i
d
e
t
n
i
r
P
i
s
n
o
i
t
a
c
n
u
m
m
o
C
&
n
g
s
e
D
b
a
r
i
i
C
:
i
n
g
s
e
D
Geographic Distribution of Loans1
Rest of
Canada
3.8%
British
Columbia
5.9%
Alberta
4.9%
Quebec
2.8%
Ontario
82.6%
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 mortgage products, consumer lending and credit
card services. In addition, Home Trust offers deposits via
brokers and financial planners, and through its direct-to-
consumer deposit brand, Oaken Financial. Home Trust also
conducts business through its wholly owned subsidiary, Home
Bank. Licensed to conduct business across Canada, Home
Trust has offices in Ontario, Alberta, British Columbia, Nova
Scotia, Quebec and Manitoba.
Ticker Symbol: HCG
1
Loans exclude mortgages held for sale and are net of individual allowances for credit losses.
Thank you.
Home Capital Group Inc.
Suite 2300
145 King Street West
Toronto, Ontario M5H 1J8
Tel: 416-360-4663
Toll Free: 1-800-990-7881