H O M E C A P I T A L G R O U P I N C . 2 0 1 8 A N N U A L R E P O R T
This is your story
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Table of Contents
A Message from our Chair 2
Key 2018 Accomplishments 3
A Message from our CEO 4
Your Management Team 7
We See Possibility 8
Oaken Financial 10
Sustainable Risk Culture 12
Growing Responsibly 14
Investing for the Future 16
Financial Highlights 17
Management’s Discussion and Analysis 18
Consolidated Financial Statements 70
Notes to the Consolidated Financial Statements 79
Corporate Directory and Shareholder Information 119
cvr4 Home Capital Group Inc.
Welcome Home
For more than 30 years, our customers and partners have
been bringing us their stories, their financial plans and
their dreams for the future. They come to us looking for
a partner to help make those dreams come true.
At Home Capital, we understand the feelings of pride
and security that come from owning your own home.
Our people are dedicated to helping deserving people
own homes, even when they thought it wasn’t possible.
Our focus on relationships and excellent customer service
has made us a leader in alternative mortgage lending
in Canada.
So, come and tell us your story. Take a step on your journey
to the future you are dreaming of. Let it begin at Home.
2018
Total Assets
$18.14
Billion
62,064,531
Shares Outstanding
as at December 31, 2018
Canadians Who Purchased or
Refinanced a Home in the Last
10 Years Through Home Capital
>140,000
2018 Annual Report
1
A MESSAGE FROM OUR CHAIR
“ The most important
element of this work
was putting in place
a leadership team
with the expertise
to position the
company for the
long term, while
establishing a
sustainable risk
culture that will
ensure the success
of our company
into the future.”
2
Home Capital Group Inc.
Dear Fellow Shareholders:
Last year was a year of considerable progress at
Home Capital Group. At our last annual meeting, I was
honoured to be elected to the Board of Directors and
to be named Chair after my election. As part of our
continuing renewal effort, the Board also welcomed the
addition of three highly qualified directors: Lisa Ritchie,
Sue Hutchison and Hossein Rahnama.
The activities of the Board in 2017 were largely focused on
stabilizing the company. The most important element of
this work was putting in place a leadership team with the
expertise to position the company for the long term, while
establishing a sustainable risk culture that will ensure
the success of our company into the future. In 2018,
a refreshed and revitalized management team, under
the leadership of Yousry Bissada, was fully engaged in
returning Home Capital to its position of leadership in the
alternative lending market.
Under the supervision of your Board, Home Capital
has developed a strategy to deliver on the
promise of long-term shareholder value creation.
We believe that, with our experienced management team,
dedicated employees, healthy liquidity and strong capital
base, all the elements for success are in place. By focusing
on relationships, offering top level service to our partners,
employing our leading risk-management capability and
operating at the highest ethical standards, your company
is in a strong position to execute on that strategy.
I would like to thank the management team and all
Home Capital employees for their hard work. I thank our
customers, partners and my fellow Board members for
their contributions and, of course, shareholders for their
continuing support. I look forward to what the future holds
for all of us at Home Capital.
Paul W. Derksen
Chair, Board of Directors
Your Board of Directors
Paul W. Derksen, Chair
Yousry Bissada
Claude R. Lamoureux
Robert J. Blowes
James H. Lisson
Paul G. Haggis
Alan R. Hibben
Hossein Rahnama
Lisa L. Ritchie
Susan E. Hutchison
Sharon H. Sallows
Key 2018
Accomplishments
Home Capital reported strong results across its businesses in 2018.
We delivered meaningful improvements in all financial measures with higher reported assets under management,
significant growth in new loans and growth in deposits through our Oaken channel. We reported improvements
in earnings per share, book value per share and return on equity. We maintained a high credit quality in our
loan portfolio with low levels of provisions and write-offs. We returned $300 million to shareholders through a
Substantial Issuer Bid and received approval to return additional capital through a Normal Course Issuer Bid.
Most importantly, we achieved these results while operating within our prudent risk management framework.
Earnings Growth in 2018 (millions)
Year-end CET1 Ratio1
$7.5
2017
2018
+1,668%
$132.6
Other*
Home
Trust
10.9%
18.9%
Shareholder returns
Healthy capital and liquidity metrics
1 Year end of eight largest Canadian banks is October 31, 2018
*
Average of eight largest Canadian banks
$7.5
Earnings Growth in 2018 (millions)
Growth in Originations (millions)
Home Capital’s earnings growth was driven by
improvement in every aspect of our operations.
$872.1
Higher revenues and improved operating
efficiency, achieved within our conservative risk
appetite, contributed to meaningful growth in
income to shareholders.
+1,668%
$1,230.2
$1,159.2
$132.6
$1,435.8
$1,614.2
Other*
2014
Home
2015
Trust
2016
2017
2018
Year-end CET1 Ratio1
Provision for Credit Losses as a % of Gross Loans2
Under our sustainable risk culture, we maintain
very healthy levels of liquidity and capital resources,
10.9%
well in excess of levels dictated by regulatory
requirements. We will continue to be an industry
18.9%
leader in our risk-management activities.
0.05%
0.07%
0.04%
0.05%
0.13%
Growth in Originations (millions)
Provision for Credit Losses as a % of Gross Loans2
$872.1
2014
0.07%
$1,159.2
Earnings growth
in 2018
$1,230.2
$1,435.8
Q4 2017 $872.1
Q1 2018 $1,159.2
Q2 2018 $1,230.2
Q3 2018 $1,435.8
Q4 2018 $1,614.2
$1,614.2
Originations
2015
0.05%
Home
18.9
8 largest 10.9
0.04%
0.05%
"2014
"2015
"2016
"2017
"2018
0.07
0.05
0.04
0.05
0.13
0.13%
2016
2017
2018
Q3 2018
Q4 2018
"2017
"2018
7.5
132
2017
Q4 2017
2018
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q4 2017
Q1 2018
Q2 2018
Growth in originations
Credit quality remains high
Earnings growth
in 2018
By the end of 2018, Home Capital had reported
five consecutive quarters of sequential growth in
mortgage originations. Our focus on relationships
Q4 2017 $872.1
and customer service mean that people want to
Q1 2018 $1,159.2
Q2 2018 $1,230.2
do business with Home.
Q3 2018 $1,435.8
Q4 2018 $1,614.2
7.5
132
"2017
"2018
Originations
The benefits of our expertise in underwriting and risk
management were evident in the credit quality of our
Home
18.9
"2014
portfolio. Provisions for credit losses, as well as actual
8 largest 10.9
"2015
credit loss experience, remained at very low levels.
"2016
"2017
"2018
2 The 2018 value is prepared according to IFRS 9 Financial Instruments.
Prior values are prepared according to IAS 39 Financial Instruments.
0.07
0.05
0.04
0.05
0.13
2018 Annual Report
3
A MESSAGE FROM OUR CEO
We are here to
open doors for Canadians
This is the reason Home Capital was founded.
This is the reason we have been in business for over 30 years.
We help people unlock their dreams when they unlock their front doors.
Earnings Per Share
$1.66
Book Value Per Share
$26.43
Return on Equity
7.7%
Dear Fellow Shareholders:
It is my pleasure to be writing to you again to tell you of the strong progress we made in 2018 at
Home Capital.
This year was not without challenges for our industry. At the beginning of the year, OSFI’s revised
B-20 Guideline for the underwriting of residential mortgages took effect. The revised guideline included
a stress test to mortgage applications to reduce the risk of a homebuyer taking out a loan they could not
afford. Three rate increases by the Bank of Canada totalling 75 basis points created a further challenge
to affordability. These changes contributed to reduced mortgage volumes across Canada, including in all
our major markets.
At Home Capital, with our sustainable risk culture as a foundation, we took the necessary
measures to adapt to the change in markets.
In our long history, our success has depended on our ability to adapt to changing conditions. But there
is one thing that does not change. And that is the dream of so many Canadians of owning a home.
For our customers, a home is not just a building. Owning a home means feeling like part of a community.
It represents comfort and security. It means Canadians investing their income to secure their
financial future.
4
4
Home Capital Group Inc.
Home Capital Group Inc.
“ What we are most proud of is our
reputation for excellence in customer
service and the enthusiasm that our
employees bring to work every day.”
Yousry Bissada
President and Chief Executive Officer
2018 Annual Report
5
A MESSAGE FROM OUR CEO
“ We responded to
the challenge by
focusing on service.
Following the strategy
that we had set out
at the beginning of
the year, we listened
to the stories of
our customers and
worked with our
partners to find
ways to say yes, all
while adhering to
the sustainable risk
culture that is the
foundation of all
our operations.
“ Home Capital’s
financial results
are evidence of
the success of that
strategy.”
6
Home Capital Group Inc.
We responded to the challenge by focusing on service.
Following the strategy that we had set out at the
beginning of the year, we listened to the stories of our
customers and worked with our partners to find ways to
say yes, all while adhering to the sustainable risk culture
that is the foundation of all our operations.
Home Capital’s financial results are evidence of
the success of that strategy.
Our mortgage originations grew 15% to $5.4 billion.
We reported earnings of $1.66 per share, up significantly
from $0.10 in the prior year, along with improvements in
our book value per share and return on equity.
During the year, Home Capital replaced a $2 billion
standby credit facility with a $500 million facility
sponsored by two major Canadian banks. We also took
measures to return $300 million of cash to shareholders
through a Substantial Issuer Bid. But our story does not
begin and end with the financial results. What we are most
proud of is our reputation for excellence in customer
service, the enthusiasm that our employees bring to work
every day, and our dedication to upholding our values and
to executing with the highest standards of performance
and integrity.
Looking ahead to 2019, we are taking the next steps
to position Home for the future. We are launching a
multi-year digital transformation of the systems
underlying our core operations that will improve the
experience for our customers, while making our internal
operations more flexible and efficient.
I would like to thank our Board of Directors for their
insights and guidance throughout 2018. Their dedication
to innovation and excellence provides valuable input
to our strategic decisions. I would like to thank our
customers and partners for their loyalty and support, and
to pay tribute to our top-notch team of employees who
put our values into action every day.
I look forward to the next chapter in our story.
Yousry Bissada
President and Chief Executive Officer
YOUR MANAGEMENT TEAM
Leading for the
long term
Your Management Team
Executing on our strategy to deliver long-term sustainable growth requires a team of
talented leaders with the vision and commitment to put our plans into action. Each
member of our management team brings depth of knowledge and experience along with
the ability to inspire our people to work together.
“ I am proud of the achievements of our team in 2018,
uniting behind the objective of returning Home Capital
to its position of industry leadership.”
Yousry Bissada
President and Chief Executive Officer
From left to right:
Anthony Stilo
Senior Vice President, Internal Audit
David Cluff
Executive Vice President,
Enterprise Risk Management and
Chief Risk Officer
Benjy Katchen
Chief Digital and Strategy Officer
Dinah Henderson
Executive Vice President, Operations
Don Correia
Senior Vice President,
Commercial Underwriting
Yousry Bissada
President and Chief Executive
Officer
Mark Hemingway
General Counsel and Corporate
Secretary
Ed Karthaus
Executive Vice President,
Sales and Marketing
Brad Kotush
Executive Vice President and
Chief Financial Officer
Amy Bruyea
Senior Vice President,
Human Resources
Victor DiRisio
Chief Information Officer
Mike Forshee
Executive Vice President,
Underwriting
Absent:
John Hong
Senior Vice President, Chief
Compliance Officer and CAMLO
7
WE SEE POSSIBILITY
Single-family
Residential Originations
Commercial
Originations
Total
Originations
19.5%
$4.00 billion
4.8%
$1.44 billion
15.2%
$5.44 billion
8
8
Home Capital Group Inc.
Home Capital Group Inc.
We see possibility
where others might not
The dream of home ownership is one that many Canadians share.
But very often that dream is denied to borrowers who do not fit the criteria of traditional lenders.
In 2018, with the slowing housing market resulting from regulatory changes and higher interest rates,
more Canadians turned to Home Capital when they no longer qualified for prime mortgages at the
larger Canadian banks.
We helped borrowers such as self-employed business owners, people who are new to Canada, and
people whose credit history has been bruised by a one-time life event. Sometimes it takes extra work
and diligence to determine whether a borrower has the income to qualify for a mortgage. We are
willing to do that work. We recognize that our customers have the same dreams and are worthy of the
same consideration as any other borrower. The dedication to seeing the possibility, and to offering
excellent products and services, will fuel our growth for the years to come.
“ Sometimes it takes extra work and diligence to
determine whether a borrower has the income
to qualify for a mortgage. We are willing to do
that work. ”
Ed Karthaus
Executive Vice President, Sales and Marketing
Mortgage Originations
Sourced through mortgage broker
Sourced through other
85%
15%
Growing along with our broker partners
Mortgage brokers are often the first stop for our customers
when they decide to buy a home. Brokers are the people
on the ground across the country, hearing the stories and
working with us to find the right solutions. We work in
partnership with an active network of thousands of mortgage
brokers across Canada.
2018 Annual Report
9
OAKEN FINANCIAL
Oaken Financial Deposits
$2.7billion
>30%
>20%
At December 31, 2018
Growth in 2018
Share of Total Deposits
10 Home Capital Group Inc.
10 Home Capital Group Inc.
Oaken Financial
Our direct-to-consumer brand
Treating our customers as we would wish to be treated.
Oaken Financial offers Canadians another tool for managing their total financial plan. Customers
come to Oaken for secure, uncomplicated options at great rates. We offer a selection of products from
both Home Bank and Home Trust, eligible for CDIC insurance coverage. With Oaken, we offer a range
of savings and investment solutions along with the flexibility to bank by phone, online, or in person at
Oaken stores across Canada.
But it is our service excellence that drives the business growth at Oaken. We believe that saving for
the future does not have to be complicated. We believe that putting the customer at the heart of
everything we do means customers will trust us to listen to them and understand their needs.
At Oaken Financial, we take pride in our commitment to providing an exceptional customer
experience every time. We look forward to helping more Canadians with the right solutions for their
financial future.
“ At Oaken Financial, we take pride in our
commitment to providing an exceptional
customer experience every time.”
Benjy Katchen
Chief Digital and Strategy Officer
Total Oaken Deposits (millions)
$2,681
$2,035
$1,770
3,000
2,500
2,000
1,500
1,000
$765
500
0
$1,088
2014
2015
2016
2017
2018
Growth at Oaken Financial
Oaken Financial was launched in 2013 to offer Canadians a
competitive alternative to manage their savings independently.
Every year, more and more Canadians trust Oaken for great
solutions to meet their investment goals. At the end of 2018,
Oaken had grown to nearly $2.7 billion in total deposits or
over 20% of our total deposit base.
2018 Annual Report
11
3000
2500
2000
1500
1000
500
0
2014
2015
2016
2017
2018
Total Oaken Deposits
Total Oaken Deposits
"2014
"2015
"2016
"2017
"2018
765
1088
1770
2035
2681
SUSTAINABLE RISK CULTURE
7.54%
Leverage Ratio
0.13%
Provisions for Credit Loss
as a % of Gross Loans
59.0%
Weighted-Average Loan-to-Value
Ratio on Uninsured Residential
Mortgages
12 Home Capital Group Inc.
12 Home Capital Group Inc.
Sustainable
Risk Culture
Market conditions change. Our sustainable risk culture will see us
prepared and protected.
When we took on the challenge of stabilizing and rebuilding our business, we knew that our
success would depend on having a sustainable risk culture as the foundation for all our activities.
We undertake a continuous review of the conditions in the housing market, the economy and the
financial markets to anticipate the impact of changing conditions on all our stakeholders. This
includes our depositors, borrowers, partners, employees and shareholders.
Today, our approach to managing risk is a competitive advantage in the market. We nurture a culture
whereby there is a high level of risk awareness among all employees. Every decision we make is
underpinned by durable risk management practices that will serve us well for the long term. As we
look to the future, we can be confident that our sustainable risk culture supports our goals of
responsible growth and shareholder value creation.
“ We nurture a culture whereby there is a high
level of risk awareness among all employees.”
David Cluff
Executive Vice President, Enterprise Risk Management
and Chief Risk Officer
Our Values
Protect our Home
Un-complicate
Win as a team
Know your
business
Execute with
excellence
YES
Amaze them
every time
Act with urgency;
choose wisely
Say ‘yes’ first
Be proud of
our Home
Work hard,
play hard
2018 Annual Report
13
GROWING RESPONSIBLY
Corporate
Social Responsibility
It’s a commitment to improve
communities and the lives around us
180 employees
Participating in Charitable Events
>800 hours
Employee Volunteer Hours
$350,000
In Donations and Sponsorships
14 Home Capital Group Inc.
14 Home Capital Group Inc.
Home Capital believes in supporting the
communities we serve, as a corporation and
through the efforts of our people.
Community
We are proud of our commitment to make a difference in the
communities we serve. Whether by donating funds at the corporate
level or the many hours our employees dedicate to fundraising and
volunteer activities, our dedication to building communities does not
end when we leave work. Our people give where they live.
People
The strength of our company is our people. We want Home Capital
to be a place where people are excited to come to work every day.
We are attracting the top talent in the industry by establishing a
healthy and respectful workplace, a deeply-held set of shared values,
and a culture where top performance is valued and rewarded.
Environment
Respect for the environment is a vital element of long-term
sustainable operations. Within the workplace, we look for
opportunities to create awareness of our impact on the environment
and encourage employees to make choices for sustainability.
Outside the workplace, we support our employees who volunteer
their time to raise awareness and participate in environmental
cleanup efforts.
We are proud to support the activities of
organizations that support the communities
where we live and work.
Community Matters Toronto
Bruce Trail Conservancy
Tom Trenouth Charity Golf
Tournament
Sunnybrook Health Sciences Centre
Nature Conservancy of Canada
Ronald McDonald House Charities
of Toronto
Tree Canada
Covenant House
Heart & Stroke Foundation
Eva’s Initiatives for Homeless Youth
Holland Bloorview Kids
Rehabilitation Hospital
Fred Victor
Children’s Aid Foundation
2018 Annual Report
15
INVESTING FOR THE FUTURE
Investing for
the Future
Being a service leader means continuous improvement in how we
engage with our partners and customers.
As the market evolves, Home Capital is investing in systems and technology to ensure that we
continue to lead the way. Beginning in 2019, we are undertaking a multi-year commitment to invest in
technology. This initiative will require replacing our existing systems with more up-to-date platforms
to improve all aspects of our operations.
With our strategic investments in core banking, analytics and digital technologies, we aim to provide
brokers and customers with a more seamless, flexible and rewarding experience. By giving our
employees better systems and advanced data management tools, we can achieve faster turnaround
times and improved customer service.
Internally, implementing this initiative will mean reducing our spending on outdated technology,
leading to lower costs and improved efficiency. With our company back on the path to long-term
growth and our sustainable risk culture firmly established, we are confident that now is the right time
to make the investments that will support our objective of being a service leader now and in the future.
“ With our strategic investments in core banking, analytics and
digital technologies, we aim to provide brokers and customers
with a more seamless, flexible and rewarding experience.”
Victor DiRisio
Chief Information Officer
16 Home Capital Group Inc.
FINANCIAL HIGHLIGHTS
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
$22.6
$25.1
$26.4
$22.5
$22.9
2014
2015
2016
2017
2018
$8.9
$8.1
$9.2
$4.7
$5.4
Loans Under Administration (billions)
Mortgage Advances (billions)
$20.67
$23.39
$25.36
$22.60
$26.43
2014
2015
2016
2017
2018
18.30%
18.31%
16.55%
23.17%
18.94%
Book Value Per Share
Common Equity Tier 1 Capital Ratio
Summary of Data for 10 Year Review
For the years ended December 31 (000s, except per share amounts)
"2014
"2015
"2016
"2017
"2018
2017
2.25635
2.50581
2.64241
2.25135
2.29333
2018
Total assets
2016
2015
2014
2013
"2014
"2015
"2016
"2017
"2018
8.9
8.1
9.2
2012
4.7
5.4
2011
2010
CGAAP
2009
$
18,141,689
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
Total assets under administration
$ 24,680,225
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
Total loans1
15,069,636 18,038,518 18,271,190
$
16,394,738
0.07
0.05
0.04
Total loans under administration1
0.05
0.13
"2014
"2015
"2016
"2017
"2018
22,933,274
$
Deposits
2014
2015
2016
2017
2018
Book Value Per Share
$20.67
$23.39
$25.36
$22.60
$26.43
18.3
18,367,013 18,021,539 17,162,619
18.31
16.55
23.17
18.94
"2014
"2015
"2016
"2017
"2018
22,565,635 19,943,470 18,044,290
22,518,675 26,427,275 25,060,604
16,091,162
16,091,162
14,096,652
5,471,119
14,096,652
9,618,830
$
12,977,090
12,170,454
15,886,030 15,665,958 13,939,971 12,765,954 10,136,599
7,922,124
6,595,979
6,409,822
Total mortgage originations
$
5,439,393
4,720,849
9,225,777
8,059,409
8,851,295
6,917,183
6,005,367
5,116,860
6,868,591
4,798,943
Shareholders’ equity
$
1,640,610
1,813,505
1,632,587
1,636,501
1,448,633
1,177,697
968,213
774,785
628,585
590,288
Revenue2
$
418,852
291,311
581,959
584,883
592,888
497,038
437,374
368,834
318,198
289,086
Net income
$
132,603
7,527
247,396
287,285
313,172
256,542
221,983
190,080
154,752
144,493
Book value per common share3
$
26.43
22.60
25.36
23.39
20.67
16.95
13.98
11.19
9.07
8.50
Earnings per share – fully diluted3
$
1.66
0.10
3.71
4.09
4.45
3.66
3.19
2.73
2.22
2.08
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 are on a former Canadian Generally Accepted Accounting Principles (GAAP) basis.
1
2
Loan balances previously presented net of individual allowances have been reclassified to a gross presentation.
The Company has revised its definition of Total Revenue and restated amounts in prior periods accordingly. Please see the definition under Non-GAAP Measures in this report.
3 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.
2018 Annual Report
17
Quarterly Financial Highlights
Fourth Quarter 2018
Income Statement Summary
Financial Position Summary
Capital Management
Capital Management Activity
39
40
40
41
42
44
Internal Capital Adequacy Assessment Process (ICAAP) 45
Credit Ratings
Share Information
Risk Management
Risk Overview
Risk Factors That May Affect Future Results
Risk Governance
Risk Management
Credit Risk
Market Risk
Liquidity and Funding Risk
Operational Risk
Compliance Risk
Capital Adequacy Risk
Strategic Risk
Reputational Risk
Accounting Standards and Policies
Current and Future Changes in Accounting Standards
Comparative Consolidated Financial Statements
Controls Over Financial Reporting
Disclosure Controls and Internal Control over
Financial Reporting
Disclosure Controls and Procedures
Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting
Non-GAAP Measures and Glossary
Non-GAAP Measures
Glossary of Terms
Acronyms
45
45
45
45
46
47
49
51
56
61
62
63
63
63
63
64
64
64
65
65
65
65
65
66
66
68
69
MANAGEMENT’S DISCUSSION AND ANALYSIS
TABLE OF CONTENTS
Caution Regarding Forward-looking Statements
Business Profile
Business Portfolios
Mortgage Lending
Consumer Lending
Deposits
Other Activities
2019 Outlook
Market Conditions
Traditional Single-family Mortgage Lending
Insured Securitized Mortgage Lending
Commercial Mortgage Lending
Consumer Lending
Net Interest Margin
Credit Performance and Losses
Non-interest Expenses
Deposits
Liquidity and Capital
Financial Highlights
Income Statement Summary for 2018
Financial Position Summary for 2018
Financial Performance Review
Net Interest Income and Margin
Non-Interest Income (Loss)
Derivatives and Hedging
Cash Flow Hedging
Fair Value Hedging
Economic Hedge of Loans Held for
Securitization and Sale
Other Total Return Swaps
Non-Interest Expenses
Taxes
Comprehensive Income
Financial Position Review
Assets
Mortgage Lending
Cash Resources and Securities
Liabilities
Shareholders’ Equity
Contingencies and Contractual Obligations
Off-balance Sheet Arrangements
Related Party Transactions
18 Home Capital Group Inc.
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38
Management’s Discussion and Analysis
This Management’s Discussion and Analysis (MD&A) is provided to enable readers to assess the financial condition and results of
operations of Home Capital Group Inc. (the “Company” or “Home Capital”) for the year ended December 31, 2018. 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, 2018 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 21, 2019. 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 2019 and its effect on Home Capital’s business are material factors
the Company considers when setting 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 and other third-party providers. In setting and reviewing its strategic priorities and outlook for
2019, management continues to assume:
> The Canadian economy is expected to be relatively stable in 2019. However, it will continue to be influenced by economic
conditions in the United States and global markets, including the impact from the renegotiated trade agreement with the United
States and Mexico and from other global trade relations; the Company is prepared for potential volatility.
> Stable employment conditions in the Company’s 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 Bank of Canada may continue to raise its overnight interest rate in 2019 dependent on economic circumstances.
2018 Annual Report
19
MANAGEMENT’S DISCUSSION AND ANALYSIS
> Current and expected levels of housing activity indicate a relatively stable real estate market overall and in particular for the
Company’s key Greater Toronto Area (GTA) market. Please see Market Conditions under the 2019 Outlook for more discussion
on the Company’s expectations for the housing market.
> Debt service levels of Canadian households will remain manageable in 2019; however, high levels of consumer debt make the
economy more vulnerable to higher interest rates and any economic weakness.
> Access to the mortgage and deposit markets through broker networks will be maintained.
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 former 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 22 of the consolidated financial statements included in this report for
more information. Licensed to conduct business across Canada, Home Trust and Home Bank have 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 Residential 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. These mortgages are generally funded by the Company’s deposits.
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 balances receivable for the credit card loans and lines of credit. 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.
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. Home Trust and Home Bank
deposits 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 deposits 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 included PSiGate, the sale of which was closed on February 1, 2018 as indicated above. In
addition, Home Trust’s subsidiary Home Bank, a Canadian retail bank, offers deposits and mortgages.
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.
2019 Outlook
The Company’s priorities are to position the business for long-term leadership in the alternative lending industry within the framework
of a sustainable risk culture. To achieve this, management is focused on offering competitive products, increasing outreach in the
broker community and enhancing service experience through technological innovation and process re-engineering. The Company
has undertaken a multi-year plan of investment in systems and technology (the “IT Roadmap”) to improve productivity and customer
service for the long term.
Market Conditions
In 2018, market conditions in the Company’s established regions were impacted by higher interest rates and regulatory and
government actions intended to moderate the rapid house price increases of recent years. The Company believes that current
market conditions suggest a balanced and sustainable real estate market going forward, supported by healthy and rational levels of
competition. The Company expects stable employment conditions, high immigration targets and relatively tight housing supply to
continue to provide support to the Company’s primary markets.
Traditional Single-family Mortgage Lending
The Company expects that focus on service for 2019 will allow the Company to continue to improve traditional mortgage origination
volumes within its established regions.
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
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.
Commercial Mortgage Lending
Commercial mortgage lending will remain an important portfolio for the Company, contributing high yields and providing asset
diversification. The Company continues to grow the non-residential commercial portfolio. The Company expects increased
competition in this market which may drive down yields in this portfolio.
Consumer Lending
Credit cards and other consumer retail loans remain important complementary product offerings supporting the Company’s lending
strategy.
2018 Annual Report
21
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Interest Margin
The Company’s net interest margin in 2018 was negatively impacted by increased funding costs resulting from increases in market
interest rates over the past year, without a commensurate increase in mortgage interest rates. Net interest margin in 2019 will be
impacted by higher rates on deposits issued in the latter part of 2018 to raise funds to support the repurchase of $300 million of
the Company’s common shares under the Company’s substantial issuer bid (SIB) and repayment of institutional deposit notes in
December 2018. Net interest margins in 2019 may continue to be impacted by further rate activity. Net interest margin will continue to
benefit from the $500 million reduced standby credit facility relative to the previous $2 billion facility that was in place during the first
half of 2018.
The Company is prepared for modest volatility in its net interest margin which may be impacted by Bank of Canada interest rate
changes, improving credit quality of the uninsured residential mortgage portfolio resulting from regulatory changes and increased
competition from other lenders, among other variables.
Credit Performance and Losses
The Company’s prudent underwriting and collection practices are reflected by the low levels of credit losses and delinquencies in its
loan portfolios. Credit losses and delinquencies are expected to remain low in 2019; however, the Company is prepared for volatility in
this performance that may result from uncertainty in the macroeconomic environment.
The allowance for credit losses, as determined under IFRS 9, is sensitive to the inputs used in models, including macroeconomic
variables in the forward-looking scenarios and their respective probability weightings, among other factors. This may add significant
volatility to reported credit losses.
Non-interest Expenses
It is expected that salaries and benefits will increase in line with an increase in the number of employees along with normal merit
and cost of living increases. Some of the expected increase in number of employees will result from additional resources needed
to support the IT Roadmap. The lingering impact of certain costs stemming from the liquidity event in 2017 is expected to continue
through 2019. In addition, it is expected that non-interest expenses will be higher than normal until the conclusion of the IT Roadmap.
Contributing to the higher level of expense will be accelerated amortization of internally developed software currently in use that will
be replaced with software being developed under the IT Roadmap.
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 intends to maintain demand deposits to an
appropriate level that is aligned with the Company’s liquidity and funding requirements as well as its risk appetite.
Liquidity and Capital
In December 2018, the Company completed the previously announced SIB resulting in the repurchase of $300 million of its common
shares. A total of 18,181,818 common shares were repurchased under the SIB representing 22.7% of the issued and outstanding
shares prior to the repurchase. 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 and provide for the flexibility to take advantage of appropriate market opportunities as
they arise.
As previously announced, the Company implemented a Normal Course Issuer Bid, effective January 2, 2019. The Company will
continue to review opportunities to optimize its capital structure. The Company expects capital ratios will remain in excess of both
regulatory and internal capital targets.
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.
This Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-looking Statements in
this report.
22 Home Capital Group Inc.
Financial Highlights
Table 1: Key Performance Indicators
For the years ended December 31
(000s, except %, multiples and per share amounts)
FINANCIAL PERFORMANCE MEASURES1
Total revenue
Net income
Net interest income
Earnings per share – basic
Earnings per share – diluted
Dividends per share
Return on shareholders’ equity
Return on average assets
Net interest margin (TEB)2
Net interest margin non-securitized assets (TEB)2
Net interest margin CMHC-sponsored
securitized assets
Efficiency ratio (TEB)2
FINANCIAL CONDITION MEASURES1
2018
2017
2016
2015
2014
$
418,852
$
291,311 $
581,959 $
584,883 $
592,888
132,603
352,400
7,527
302,930
247,396
485,164
287,285
481,090
313,172
459,529
1.66
1.66
—
7.7%
0.7%
1.99%
2.37%
0.42%
52.0%
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%
Total assets
$ 18,141,689
$ 17,591,143
$ 20,528,777
$ 20,527,062
$ 20,082,744
Total assets under administration3
Cash and securities-to-total assets
24,680,225
25,040,182
28,917,534
27,316,476
24,281,366
5.8%
9.5%
8.5%
7.8%
4.7%
Total loans4
$ 16,394,738
$ 15,069,636
$ 18,038,518
$ 18,271,190
$ 18,367,013
Total loans under administration3. 4
Common Equity Tier 1 capital ratio5
Tier 1 capital ratio5
Total capital ratio5
Assets to regulatory capital multiple5, 6
Leverage ratio5, 6
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
22,933,274
22,518,675
26,427,275
25,060,604
22,565,635
18.94%
18.93%
19.38%
N/A
7.54%
0.13%
0.47%
54.0%
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%
1 The amounts pertaining to 2018 have been prepared in accordance with IFRS 9 Financial Instruments (IFRS 9); prior period amounts have not been
restated and have been prepared in accordance with IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). Please see Note 2 in the
audited consolidated financial statements included in this report for further information.
2 See definition of Taxable Equivalent Basis (TEB) under Non-GAAP Measures in this report.
3 Total assets and loans under administration include both on- and off-balance sheet amounts.
4 Total loans include loans held for sale and are presented gross of allowance for credit losses for all periods presented.
5 These figures relate to the Company’s operating subsidiary, Home Trust Company.
6 Effective Q1 2015, the Assets to Regulatory Capital Multiple was replaced with the Basel III leverage ratio. See definition of Leverage Ratio under
Non-GAAP Measures in this report.
2018 Annual Report 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Statement Summary for 2018
> Net income was $132.6 million in 2018 compared to $7.5 million in 2017. Net income in 2017 was significantly lower as a result of
the impact of the liquidity event that occurred in the second quarter of 2017.
> Diluted earnings per share of $1.66 increased from $0.10 in 2017, primarily reflecting the increase in net income noted above.
> Return on average shareholders’ equity of 7.7% for 2018 increased from 0.4% for 2017, also reflecting the increase in net income.
> Total net interest income of $352.4 million increased $49.5 million or 16.3% from $302.9 million in 2017. Net interest income in
2017 was significantly impacted by interest and fees on the line of credit facilities drawn upon as a result of the liquidity event,
which included an emergency line of credit and a subsequent $2 billion credit facility from a subsidiary of Berkshire Hathaway Inc.
that was used to repay the emergency line of credit. Interest and fees on these facilities included a $100 million commitment fee on
the emergency line of credit along with interest expense on amounts drawn on both facilities.
> Total net interest margin (TEB) improved to 1.99% in 2018 from 1.55% in 2017, while non-securitized net interest margin (TEB)
improved to 2.37% in 2018 from 1.80% in 2017. The net interest margins in 2017 were negatively impacted by the interest and fees
on the line of credit facilities referred to above. The improvement in net interest margin attributable to the reduction in interest and
fees on credit facilities was largely offset by the impact of increased funding costs resulting from increases in market interest rates
without a commensurate increase in mortgage rates.
> 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 $24.4 million
for the year, compared to $29.0 million in 2017. The decrease resulted from both lower net interest margin and lower securitization
income. The decrease in securitization income resulted from the absence of sales of residual interests of underlying securitized
insured single-family residential mortgages in 2018 as the Company is retaining such residual interests.
> Non-interest income was $66.5 million in 2018 compared to a non-interest loss of $11.6 million in 2017. The non-interest loss in
2017 resulted from a loss on sale of securities and loans, which were sold following the liquidity event in 2017.
> The credit quality of the loan portfolio remains strong, with continued low credit losses and non-performing loans. Provisions for
credit losses were 0.13% of gross loans compared to 0.05% in 2017. Net non-performing loans as a percentage of gross loans were
0.47% at the end of 2018, compared to 0.30% at the end of 2017. The provision for credit losses in 2018 reflects the adoption of
the expected credit loss impairment approach of IFRS 9 in 2018, which replaced the previous incurred loss approach used prior
to 2018.
> Non-interest expenses, which include salaries, premises and other operating expenses, were $218.1 million in 2018, down 20.7%
from the $274.9 million recorded in 2017. The higher expenses in 2017 included $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 Ontario Securities Commission (OSC) and class action matters that were not covered by the Company’s
insurers and elevated costs associated with the liquidity event. In addition, a decline in the average number of employees resulting
from the impact of Project EXPO and voluntary attrition following the liquidity event contributed to the decrease in salaries and
benefits expense. The Company’s efficiency ratio (TEB) decreased to 52.0% in 2018 from 94.0% in 2017 reflecting the decrease in
expenses and increased revenue.
24 Home Capital Group Inc.
Financial Position Summary for 2018
> Total assets under administration, which includes $6.54 billion of mortgages accounted for off-balance sheet, were $24.68 billion,
a decrease of $360.0 million or 1.4% from $25.04 billion in 2017, resulting primarily from a decrease in cash balances following the
repurchase of common shares under the Company’s SIB and the repayment of institutional deposit notes that matured towards
the end of the year.
> Total loans under administration increased to $22.93 billion from $22.52 billion at the end of 2017, resulting from an increase in
the on-balance sheet portfolio reflecting improved mortgage originations and retention, offset partially by a decrease in the off-
balance sheet single-family residential mortgage portfolio. The decrease in the single-family residential mortgage off-balance sheet
portfolio has resulted from the Company retaining its residual interests in securitized insured single-family residential mortgages
and the resulting absence of sales and corresponding derecognition from the balance sheet.
> Mortgage originations were $5.44 billion in 2018, compared to the $4.72 billion originated in 2017, an increase of 15.2%. The
increase resulted primarily from traditional single-family residential mortgage originations, which increased to $3.76 billion in
2018 from $3.06 billion in 2017. Single-family residential mortgage originations continued to represent the Company’s primary
focus, with traditional mortgage originations accounting for 69.1% of originations and Accelerator (insured) residential mortgage
originations accounting for 4.3% of originations. Residential commercial and non-residential commercial mortgage originations
made up the remaining 26.6% of the originations.
> Liquid assets at December 31, 2018 were $1.29 billion, compared to $1.65 billion at December 31, 2017. The Company maintains a
prudent level of liquidity, given the current level of operations and the Company’s obligations including the maturity profile of these
obligations.
> The credit quality of the loan portfolio remains strong with continued low non-performing loans as indicated previously.
> Deposits were $12.98 billion, up from $12.17 billion at December 31, 2017. Deposits raised through the Company’s direct-to-
consumer brand, Oaken Financial represented 20.7% of total deposits at the end of 2018 compared to 16.7% at the end of 2017.
> Securitization liabilities were $2.86 billion at the end of 2018, down from $3.18 billion last year, resulting from CMB maturities and a
decline in bank-sponsored securitization conduit liabilities as the conduit facility has not been available since the first half of 2017.
> Shareholders’ equity at the end of 2018 decreased to $1.64 billion from $1.81 billion at the end of last year, resulting from the
repurchase of $300 million of common shares under the Company’s SIB at the end of the year.
> Home Trust’s capital levels were strong throughout 2018, as indicated by the Common Equity Tier 1 Capital ratio of 18.94% and the
Tier 1 and Total capital ratios of 18.93% and 19.38%, respectively, at December 31, 2018. Home Trust’s Leverage ratio ended 2018
at 7.54%. The capital ratios decreased from the end of 2017 as a result of a combination of reduced capital and an increase in risk-
weighted assets. The reduction in Home Trust regulatory capital resulted from the declaration of dividends from Home Trust to the
Company in support of the SIB. The increase in risk-weighted assets reflects growth in the mortgage portfolio.
2018 Annual Report 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Performance Review
Table 2: Income Statement Summary
(000s, except per share amounts)
Net interest income non-securitized assets1
Net interest income securitized loans and assets1
Total net interest income1
Provision for credit losses1
Non-interest income (loss)
Non-interest expenses
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
2018
2017
$
338,554
$
286,412
13,846
352,400
20,377
332,023
66,452
218,073
180,402
47,799
132,603
1.66
1.66
$
$
$
16,518
302,930
7,516
295,414
(11,619)
274,880
8,915
1,388
7,527
0.10
0.10
$
$
$
1 The amounts pertaining to 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated and have been prepared in
accordance with IAS 39. Please see Note 2 to the audited consolidated financial statements included in this report for further information.
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
2018
2.37%
2.37%
0.42%
1.43%
1.99%
1.99%
2.41%
2017
1.79%
1.80%
0.48%
1.37%
1.54%
1.55%
1.96%
Total net interest margin (TEB), including the securitized portfolio, was 1.99% for 2018 compared to 1.55% in 2017. Net interest margin
in 2017 was significantly impacted by interest and fees on the credit facilities that were drawn upon in connection with the liquidity
event experienced in 2017. Interest and fees on line of credit facilities were $148.2 million in 2017. Included in the interest and fees
on these facilities was a $100 million commitment fee along with interest expense on drawn amounts and standby fees on undrawn
amounts. To raise liquidity following the liquidity event, the Company also sold higher-yielding assets, including both securities and
mortgages. These asset sales also contributed to the reduction in net interest margins.
The improvement in net interest margin in 2018 over last year primarily reflects the reduction in interest and fees on credit facilities
from the significant amount indicated above. The Company did not draw on its standby credit facilities during 2018 thereby incurring
no interest on drawn amounts. At the end of the second quarter of 2018, the Company replaced its $2 billion standby credit facility
with a $500 million facility, substantially reducing the standby fee. The resulting interest and fees on credit facilities for 2018 was
$17.3 million, significantly lower than the $148.2 million noted above. Also contributing to the improvement in net interest margin was
a reduction in total cash and securities and improved yields on those assets. The decline in cash balances reflects actions taken by the
Company to better align its liquidity position to its liquidity and funding requirements. While net interest margins improved over 2017,
margins in 2018 were negatively impacted by increased funding costs resulting from increases in market interest rates over the past
year without a commensurate increase in mortgage rates.
26 Home Capital Group Inc.
13,974
13,173
97,421
33,328
38,468
710,926
1,125
730,435
2.81%
4.84%
6.03%
8.93%
10.11%
5.05%
—
4.56%
Table 4: Net Interest Income by Product and Average Rate
(000s, except %)
Assets
Average
Balance1
Income/
Expense
2018
Average
Rate1
Average
Balance1
Income/
Expense
2017
Average
Rate1
Cash resources and securities
$ 1,631,437 $
25,990
1.59% $ 1,952,735 $
18,384
0.94%
9,933,571
477,612
4.81% 10,925,088
514,562
4.71%
Traditional single-family
residential mortgages
Accelerator single-family
residential mortgages
Residential commercial mortgages2
Non-residential
commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
505,482
255,908
1,256,999
370,878
342,286
16,109
11,527
75,823
32,420
30,879
3.19%
4.50%
6.03%
8.74%
9.02%
498,078
272,029
1,616,847
373,186
380,588
Total non-securitized loans
12,665,124
644,370
5.09% 14,065,816
Taxable equivalent adjustment
—
455
—
—
Total non-securitized assets
14,296,561
670,815
4.69% 16,018,551
CMHC-sponsored securitized
single-family residential mortgages
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
2,342,802
65,683
2.80%
2,213,217
52,053
2.35%
509,234
24,166
4.75%
586,338
30,782
5.25%
120,949
1,550
1.28%
80,452
943
1.17%
2,972,985
91,399
3.07%
2,880,007
83,778
2.91%
95,289
389,190
3,138
—
3.29%
—
191,177
498,554
6,151
—
$ 17,754,025 $
765,352
4.31% $ 19,588,289 $
820,364
3.22%
—
4.19%
Deposits and credit facilities
$ 12,390,325 $
331,806
2.68% $ 14,322,507 $
442,898
3.09%
CMHC-sponsored
securitization liabilities
Bank-sponsored securitization
conduit liabilities
Other liabilities and
shareholders’ equity
Total Liabilities and
Shareholders’ Equity
Net Interest Income (TEB)
Taxable Equivalent Adjustment
Net Interest Income per
Financial Statements
2,987,798
78,915
2.64%
2,897,462
69,872
2.41%
88,521
1,776
2.01%
188,500
3,539
1.88%
2,287,381
—
—
2,179,820
—
—
$ 17,754,025 $
412,497
2.32% $ 19,588,289 $
516,309
2.64%
$
352,855
(455)
$
352,400
$
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.
2018 Annual Report
27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total net interest income of $352.4 million increased $49.5 million or 16.3% over $302.9 million in 2017 primarily resulting from
an increase of $52.1 million in non-securitized net interest income to $338.6 million from $286.4 million in 2017. Securitized net
interest income of $13.8 million in 2018 decreased from $16.5 million in 2017, partially offsetting the increase in non-securitized
net interest income.
The improvement in non-securitized net interest income reflects an improvement in non-securitized net interest margin (TEB) to
2.37% in 2018 from 1.80% in 2017 and resulted primarily from the reduction in interest and fees on credit facilities discussed above.
However, as previously noted, net interest margin was negatively impacted by increasing funding costs outpacing mortgage rates. In
addition, the reduction in asset balances resulting from loans and securities sold last year in response to the liquidity event, combined
with the decline in originations following the liquidity event, caused a decline in the asset base. While the Company was successful in
re-building its mortgage portfolio through 2018, total non-securitized interest income, including dividends, declined to $670.4 million
in 2018 from $729.3 million in 2017. Despite this decline in interest income, interest expense on deposits in 2018 increased to
$314.5 million from $294.7 million in 2017. The increase in interest expense on deposits reflects the increase in market interest rates
combined with an increase in deposit balances during the year. The increase in deposit balances reflects the higher liquidity levels
that were being held in the earlier part of 2018 combined with increased deposit inflows in the second half of the year to fund the
Company’s repurchase of shares under its SIB and repayment of institutional deposit notes in December.
The decrease in net interest income on securitized assets from 2017 reflects the decrease in net interest margin on CMHC-sponsored
securitized assets to 0.42% from 0.48% last year.
Non-Interest Income (Loss)
Table 5: Non-interest Income (Loss)
(000s)
Fees and other income
Securitization income
Gain on sale of PSiGate
Net realized and unrealized gains (losses) on securities and loans
Net realized and unrealized gains (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.
2018
$
47,806 $
10,540
950
5,467
1,689
2017
67,932
12,529
—
(90,070)
(2,010)
$
66,452 $
(11,619)
2018
$
4,633
$
8
5,899
2017
5,695
(247)
7,081
$
10,540
$
12,529
Non-interest income was $66.5 million in 2018 compared to a non-interest loss of $11.6 million in 2017. 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. These asset
sales were made to raise liquidity following the liquidity event of 2017. Included in non-interest income in 2018 are gains of $1.0 million
on the sale of debt securities and $4.5 million of recovery of losses on the commercial mortgages sold last year. The decrease in fees
and other income from last year reflects the sale of the Company’s PSiGate and prepaid card business in Q1 2018. The associated
decrease in expenses resulting from the sale of this business substantially reduced the impact on the Company’s net income.
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 $5.9 million, compared to $7.1 million last year. Securitization income also included gains of
$4.6 million recorded on sales of $650.7 million of insured multi-unit residential mortgages in 2018 compared to gains of $5.7 million
recorded on sales of $799.3 million of both insured multi-unit residential mortgages and residual interests in single-family residential
mortgage securitizations last year. There were no sales of residual interests in 2018. 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.
Please see the discussion below on Derivatives and Hedging related to net realized and unrealized loss on derivatives.
28 Home Capital Group Inc.
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 and Hedging Activities, 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 ineffectiveness
Derivative instruments marked-to-market gains (losses)1
Net realized and unrealized gains (losses) on derivatives
1 Included in derivative instruments marked to market are swaps and bond forwards.
Cash Flow Hedging
2018
(410) $
2,099
1,689 $
2017
(1,482)
(528)
(2,010)
$
$
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 share-based 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.
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 gain for 2018 for fair value changes in both the outstanding derivatives and the loans held for sale was
$8 thousand (2017 – unrealized loss of $247 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.
2018 Annual Report 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
Table 8A: Provision for Credit Losses and Net Write-Offs as a Percentage of Gross Loans, Under IFRS 9
(000s, except %)
Provision
Single-family residential mortgages
Commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
Total provision
Net Write-Offs
Single-family residential mortgages
Commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
Net write-offs
Amount
5,480
10,392
2,108
2,397
20,377
1,874
4,134
2,389
565
8,962
$
$
$
$
Table 8B: Provision for Credit Losses and Net Write-Offs as a Percentage of Gross Loans, Under IAS 39
(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
2018
% of Gross
Loans
0.04%
0.52%
0.52%
0.75%
0.13%
0.01%
0.21%
0.59%
0.18%
0.06%
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%
—
—
$
$
$
Amount
1,891
16
3,196
5,387
526
—
—
11,016
(3,500)
7,516
2,467
16
96
5,710
666
—
—
$
8,955
0.06%
1 Gross loans used in the calculation of total Company ratio include securitized on-balance sheet loans.
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 include $2.3 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.
Provisions for credit losses were calculated under IFRS 9 for 2018 and under IAS 39 for 2017. As provisions for credit losses for 2017
were not restated, comparability is reduced to some extent. Please see Note 5(C) to the consolidated financial statements included in
this report for more information on the provision for credit losses and a continuity of the allowance for credit losses for the year. Refer
to Note 5(D) to the consolidated financial statements included in this report for a distribution of the gross carrying value of loans by
product across five internal risk ratings for each of the IFRS 9 stages.
The Company continues to have strong credit performance with total provision for credit losses of $20.4 million in 2018. Provision
as a percentage of gross uninsured loans remained low at 0.16% compared to 0.07% in 2017. Provision for credit losses for the year
resulted primarily from growth in the mortgage portfolio and from specific non-performing commercial loans included in Stage 3
under IFRS 9. A specific commercial loan that was provided for during the year was written off by the end of 2018.
30 Home Capital Group Inc.
Total provision for credit losses in 2017 included a reduction of $3.5 million in the collective allowance for credit losses. This reduction
resulted from a release of $6.5 million in the collective allowance for the commercial mortgage portfolio following the sale of
mortgages from that portfolio. The release in the collective allowance was offset by a corresponding increase to the loss on the sale of
those mortgages included in non-interest income in 2017.
As a part of periodic review and quarterly updates, certain revisions may be made to reflect updates in model-derived loss estimates
to incorporate recent loss experience of the Company’s credit portfolios and forward-looking assumptions, which may cause a change
to the allowance for expected credit losses.
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, unchanged from 2017.
Net non-performing loans (represented by Stage 3 loans under IFRS 9) as a percentage of gross loans remained low at 0.47% at the
end of 2018 compared to 0.30% at the end of 2017. Non-performing loans were determined under IFRS 9 for 2018 and under IAS 39
for 2017, reducing comparability to some extent. 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.
Non-Interest Expenses
Table 9: Non-Interest Expenses
(000s, except % and number of employees)
Salaries and benefits
Premises
Other operating expenses
Efficiency Ratio (TEB)
Average number of active employees during the year
2018
$
76,924
$
10,168
130,981
2017
98,595
13,878
162,407
$
218,073
$
274,880
52.0%
704
94.0%
793
Non-interest expenses decreased by $56.8 million or 20.7% from the end of 2017, resulting primarily from decreases in salaries and
benefits and other operating expenses. The decrease in expenses combined with higher revenue resulted in an improved efficiency
ratio (TEB) of 52.0% compared to 94.0% last year.
Salaries and benefits decreased by $21.7 million or 22.0% from last year. The decrease in salaries and benefits reflects a decline in the
average number of active employees resulting from the impact of Project EXPO and voluntary attrition following the liquidity event.
Salary expense in 2017 also included severance expense in connection with Project EXPO.
Other operating expenses decreased by $31.4 million or 19.4% from last year, as operating expenses in 2017 included write-downs
related to goodwill, intangible and other assets within the Company’s PSiGate and prepaid card business, along with elevated legal and
other professional fees connected with the liquidity event and the OSC and class action matter that occurred in 2017. The decrease
in other operating expenses also reflects the sale of the Company’s PSiGate and prepaid card business in Q1 2018. Other operating
expenses in 2018 included an impairment loss of $0.5 million and incremental amortization of $1.1 million related to the Company’s
internally developed software. Please see Note 9 to the consolidated financial statements included in this report for further information.
Taxes
Table 10: Income Taxes
(000s, except %)
Current
Deferred
Total income taxes
Effective income tax rate
$
$
2018
2017
43,103
$
(2,475)
4,696
47,799
$
3,863
1,388
26.50%
15.57%
The provision for income taxes for the year ended December 31, 2018 amounted to $47.8 million, reflecting an effective tax rate of
26.50% ($1.4 million and 15.57% in 2017).
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.
2018 Annual Report
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Comprehensive Income
Table 11: Comprehensive Income
(000s)
Net income
Total other comprehensive (loss) income
Comprehensive income
2018
132,603
(4,591)
128,012
$
$
$
$
2017
7,527
49,171
56,698
Comprehensive income is the aggregate of net income and other comprehensive income (OCI). Comprehensive income for the year
was $128.0 million compared to $56.7 million in 2017.
OCI for the year was a loss of $4.6 million compared to a gain of $49.2 million in 2017. The other comprehensive loss primarily resulted
from decreases in the fair value of the Company’s securities and unrealized losses related to cash flow hedges. The 2017 gain 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 in connection with the 2017 liquidity event.
Financial Position Review
Assets
Table 12: Loan Portfolio (Gross of Allowance for Credit Losses)
(000s, except % and number of loans)
2018
% of Total
2017
% of Total
CMHC-sponsored securitized single-family
residential mortgages
$
2,441,279
CMHC-sponsored securitized multi-unit residential mortgages
310,652
Bank-sponsored securitization conduit single-family
residential mortgages
Traditional single-family residential mortgages
Accelerator single-family residential mortgages
Residential commercial mortgages
Non-residential commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
Total loan portfolio
Loans held for sale
Total on-balance sheet loans
Off-balance sheet loans
10.6% $
1.4%
2,291,066
558,042
0.2%
45.9%
2.3%
1.0%
6.3%
1.8%
1.4%
70.9%
0.6%
144,142
9,633,919
403,332
114,357
1,045,603
352,062
361,166
14,903,689
165,947
48,692
10,535,512
533,076
219,395
1,451,706
405,051
319,024
16,264,387
130,351
$ 16,394,738
71.5% $ 15,069,636
Single-family residential mortgages
$
2,700,339
11.8% $
3,972,249
Multi-unit residential mortgages
Total off-balance sheet loans
Total loans under administration
Total insured mortgages under administration
Total uninsured mortgages under administration
3,838,197
6,538,536
$ 22,933,274
$ 10,046,097
12,163,102
16.7%
28.5%
3,476,790
7,449,039
100.0% $ 22,518,675
45.2% $ 11,014,393
10,791,054
54.8%
Total mortgages under administration
$ 22,209,199
100.0% $ 21,805,447
Number of loans outstanding under administration
Mortgages
Credit card loans and lines of credit
Other consumer retail loans
Total number of loans outstanding
51,970
77,613
107,155
236,738
54,595
41,736
109,179
205,510
32 Home Capital Group Inc.
10.2%
2.5%
0.6%
42.8%
1.8%
0.5%
4.6%
1.6%
1.6%
66.2%
0.7%
66.9%
17.7%
15.4%
33.1%
100.0%
50.5%
49.5%
100.0%
Total loans under administration were $22.93 billion at the end of 2018, an increase of $414.6 million or 1.8% from the end of 2017. The
increases in total loans under administration resulted from an increase in the on-balance sheet portfolio, partially offset by a decrease
in off-balance sheet loans. On-balance sheet loans were up 8.8% from the end of 2017, while off-balance sheet loans were down 12.2%
from the end of 2017. The increase in on-balance sheet loans reflects the Company’s origination and retention efforts. The decrease in
off-balance sheet loans has resulted from the Company retaining its residual interests in securitized insured single-family residential
mortgages. The increase in the number of credit card loans and lines of credit resulted primarily from an increase in unsecured credit
cards. As these cards have relatively low authorized limits and balances outstanding, the impact on the total credit card loans and lines
of credit balance was not proportionate to the increase in number of cards issued.
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
2018
Total
Balance at the beginning of the year
$ 12,472,459
$
838,346
$
1,045,603
$ 14,356,408
Originations
Renewal of mortgages previously derecognized1
Scheduled payments and prepayments2
Discharges
Capitalization and amortization of fees and other
Sales of mortgages and residual interests
3,995,078
610,537
(321,064)
(3,212,972)
14,521
—
679,509
58,856
(20,047)
(246,359)
768
(650,675)
764,806
5,439,393
—
(44,632)
(319,511)
5,440
—
669,393
(385,743)
(3,778,842)
20,729
(650,675)
Balance at the end of the year
$ 13,558,559
$
660,398
$
1,451,706
$ 15,670,663
(000s)
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-
Residential
Commercial
Mortgages
2017
Total
Balance at the beginning of the year
$ 14,330,599
$
1,003,299
$
1,954,850
$ 17,288,748
Originations
Renewal of mortgages previously derecognized1
Scheduled payments and prepayments2
Discharges
Capitalization and amortization of fees and other
Sales of mortgages and residual interests
3,342,591
547,178
(336,610)
(4,849,952)
44,390
(605,737)
678,512
19,199
(20,826)
(162,776)
(1,277)
699,746
4,720,849
—
(60,783)
(541,606)
1,478
566,377
(418,219)
(5,554,334)
44,591
(677,785)
(1,008,082)
(2,291,604)
Balance at the end of the year
$ 12,472,459 $
838,346
$
1,045,603
$ 14,356,408
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.
2018 Annual Report 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Table 14: Mortgage Originations by Type and Province
(000s, except %)
Single-family residential mortgages
Traditional
Accelerator
Residential commercial mortgages
Multi-unit uninsured residential mortgages
Multi-unit insured residential mortgages
Other1
Non-residential commercial mortgages
Stores and apartments
Commercial
Total mortgage originations
(000s, except %)
British Columbia
Alberta
Ontario
Quebec
Other
2018
% of Total
2017
% of Total
$
3,757,685
69.1% $ 3,060,818
237,393
4.3%
281,773
131,468
516,133
31,908
68,696
696,110
2.4%
9.5%
0.6%
1.3%
12.8%
71,854
599,843
6,815
45,499
654,247
$
5,439,393
100.0% $ 4,720,849
64.8%
6.0%
1.5%
12.7%
0.1%
1.0%
13.9%
100.0%
2018
% of Total
2017
% of Total
$
698,714
12.8% $
326,081
144,365
4,066,454
293,410
236,450
2.7%
74.8%
5.4%
4.3%
71,070
4,057,887
167,631
98,180
6.9%
1.5%
85.9%
3.6%
2.1%
Total mortgage originations
$
5,439,393
100.0% $ 4,720,849
100.0%
1 Other residential commercial mortgages include mortgages such as builders’ inventory.
Mortgage Lending
Uninsured Residential Mortgages – Traditional Mortgages
The Company’s uninsured residential mortgage portfolio is represented by its traditional mortgage portfolio, which includes its
ACE Plus product. Traditional single-family residential mortgages of $10.54 billion represent the largest portfolio within loans under
administration and on-balance sheet loans at 45.9% and 64.3%, respectively. Mortgage originations of $3.76 billion in 2018 were up
$696.9 million or 22.8% from 2017. The Company continues its efforts to improve its mortgage originations following the decline in
originations that occurred in 2017 as a result of the liquidity event.
Insured Residential Mortgages
Insured residential loans under administration, which include both insured single-family and multi-unit residential mortgages, were
$10.05 billion at the end of 2018, a decrease of 8.8% from the balance of $11.01 billion at the end of 2017. Of this total, $6.54 billion were
accounted for off-balance sheet, down $910.5 million or 12.2% from 2017.
The Company originated $237.4 million in insured single-family Accelerator mortgages in 2018, down $44.4 million or 15.8% from 2017.
The Company views its Accelerator product offering as complementary to its traditional portfolio.
In 2018, the Company originated $516.1 million of insured multi-unit residential mortgages and sold $650.7 million that qualified for
off-balance sheet treatment, resulting in $4.6 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. As these MBS are not sold, they are carried on the balance sheet at amortized cost as part of residential
mortgage loans (see Table 35: Liquidity Resources).
Residential Commercial Mortgages
Residential commercial mortgages include commercial mortgages that are secured by residential property such as non-securitized
multi-unit residential mortgages and builders’ inventory. Insured multi-unit residential mortgages are included in this portfolio until
they are securitized.
34 Home Capital Group Inc.
Non-residential Commercial Mortgages
Non-residential commercial originations were $764.8 million in 2018 compared to $699.7 million in 2017. 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 continue conservatively
participating in appropriate commercial mortgage opportunities as they arise.
Geographic Concentration
Mortgage originations 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(B) to the consolidated
financial statements included in this report for the geographic distribution of the portfolio.
Table 15: Consumer Lending Continuity
(000s)
2018
2017
Credit Card
Loans and
Lines of
Credit
Other
Consumer
Retail Loans
Total
Consumer
Lending
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
Total
Consumer
Lending
Balance at the beginning of the year $
352,062
$
361,166
$
713,228
$
370,458
$
379,312
$
749,770
Advances and draw-downs
334,771
115,733
450,504
218,377
197,962
416,339
Repayments
(323,856)
(210,863)
(534,719)
(274,744)
(270,424)
(545,168)
Capitalization of interest and fees,
portfolio sales and other
42,074
52,988
95,062
37,971
54,316
92,287
Balance at the end of the year
$
405,051
$
319,024
$
724,075
$
352,062
$
361,166
$
713,228
Authorized limit on new credit card
and line of credit issuances
$
362,510
$
128,897
Consumer Lending
Consumer lending, comprising credit cards, lines of credit and other consumer retail loans, continues to be an important source of
loan assets with attractive returns. While representing 4.4% of total gross on-balance sheet loans, these assets generated 8.6% of the
interest income from loans for the year.
Gross credit card and lines of credit balances increased to $405.1 million at the end of 2018 from $352.1 million at the end of 2017.
Equityline Visa (HELOC) accounts represent 87.6% of the total credit card and lines of credit balance.
The balance of other consumer retail loans decreased to $319.0 million at the end of 2018 from $361.2 million at the end of 2017.
The decrease resulted from the early payout of $38.4 million on certain portfolios of consumer retail loans. The Company expects
additional early payouts in the future. These assets are typically generated through dealer programs which continue to be in place. The
Company ceased the origination of HVAC rental loans in 2018.
Cash Resources and Securities
Combined cash resources and securities of $1.05 billion at the end of 2018 decreased by $616.3 million from $1.67 billion at the end
of 2017, reflecting a decrease in cash resources, resulting primarily from the maturity of institutional deposit notes of $475 million
and the repurchase of $300 million of shares under the Company’s SIB. The Company maintains sufficient liquidity to meet its future
commitments and expected business volumes.
The Company has a $500 million committed secured standby credit facility with a syndicate of Canadian chartered banks, which
is undrawn.
The Company has a $300 million secured warehouse credit facility with a syndicate of Canadian chartered banks. The balance at
December 31, 2018 included in credit facilities on the consolidated balance sheets was $261.5 million.
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 the above 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.
2018 Annual Report 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
The securities portfolio consists of bonds and preferred shares. Government bonds represented 93.2% of the securities portfolio (2017 –
90.4%). The entire bond portfolio of $360.0 million (2017 – $300.6 million) is investment grade. At December 31, 2018, the preferred
share portfolio was $26.4 million or 6.8% of the Company’s securities compared to $30.9 million or 9.3% at the end of 2017. Investment-
grade preferred shares represented 97.0% of the preferred share portfolio (2017 – 96.9%). The Company had no residual interests of
underlying securitized insured fixed-rate residential mortgages at December 31, 2018 (2017 – 0.3% 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
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
2018
2017
$
262,215
$
254,134
46,990
8,925
55,469
2,895
162,256
8,665
37,282
72,420
3,489
2,324
83,432
182,877
7,325
49,651
3,644
182,930
10,431
13,340
76,774
9,577
2,324
98,669
$
746,362
$
891,676
Total other assets decreased by $145.3 million from the end of 2017 primarily as a result of a decrease of $135.9 million in acceptable
securities assigned as replacement assets in the CMB program, reflecting the Company’s increased use of securitized mortgage pools
relative to securities as replacement assets. In general, as CMB maturities approach, the Company has historically replaced maturing
securitized mortgages with 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.
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 GICs1
Oaken GICs1
Institutional deposit notes
Total deposits
Securitization liabilities
CMHC-sponsored mortgage-backed security liabilities
CMHC-sponsored Canada Mortgage Bond liabilities
Bank-sponsored securitization conduit liabilities
2018
% of Totals
2017
% of Totals
$
147,183
1.2% $
194,218
95,645
437,046
10,053,280
2,486,764
—
12,540,044
12,977,090
1,573,216
1,239,331
46,779
1.5%
0.7%
3.4%
77.4%
19.2%
—
96.6%
100.0%
55.0%
43.4%
1.6%
138,948
229,511
170,905
539,364
9,350,235
1,805,332
475,523
11,631,090
12,170,454
1,562,152
1,473,318
142,279
1.1%
1.9%
1.4%
4.4%
76.9%
14.8%
3.9%
95.6%
100.0%
49.1%
46.4%
4.5%
100.0%
Total securitization liabilities
Total number of deposit accounts
$
2,859,326
100.0% $ 3,177,749
439,761
391,182
1 Included in Brokered and Oaken GICs presented above as payable on fixed dates are $148.8 million of cashable GICs that have reached the required
number of days to be payable on demand. In the absence of such demand, the GICs have a remaining contractual term to maturity of within one year.
36 Home Capital Group Inc.
Table 18: Non-Securitized Loans and Deposits by Remaining Contractual Term to Maturity
(000s)
Non-securitized loans
Payable
on Demand
0–3 Months
3–12 Months
1 to 3 Years
Over 3 Years
Total
December 31, 2018
Single-family residential mortgages $
— $ 1,985,929 $ 6,357,844 $ 2,381,298 $
343,517
$ 11,068,588
Residential commercial mortgages
Non-residential commercial
mortgages
Credit card loans and lines of credit
Other consumer retail loans
—
—
—
—
—
36,625
33,920
143,434
5,416
219,395
269,268
405,051
5,722
429,636
724,765
28,037
1,451,706
—
—
—
25,814
75,914
211,574
405,051
319,024
2,702,595
6,847,214
3,325,411
588,544
13,463,764
Deposits1
Net maturity
437,046
1,491,049
4,378,240
4,667,035
2,003,720
12,977,090
$
(437,046) $ 1,211,546 $ 2,468,974 $ (1,341,624) $ (1,415,176) $
486,674
1 Included in deposits presented above as payable within one year are $148.8 million of cashable GICs that have reached the required number of days to be
payable on demand. In the absence of such demand, the GICs have a remaining contractual term to maturity of within one year.
The Company’s deposit portfolio primarily provides funding for the non-securitized loan portfolio and principally comprises fixed-
term deposits, which represent 96.6% 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 $12.98 billion increased 6.6% from the end of 2017. Deposits raised through the Company’s direct-to-consumer
brand, Oaken Financial represented 20.7% of total deposits at the end of 2018 compared to 16.7% at the end of 2017. The balance of
Oaken deposits at the end of 2018 was $2.68 billion, reflecting an increase of 31.8% over the balance at the end of 2017. In addition,
the Company repaid all of its $475 million of institutional deposit notes in 2018 on their maturity dates.
Securitization liabilities, including both CMHC- and bank-sponsored liabilities, decreased $318.4 million from the end of 2017 due to
the maturity of CMB liabilities as well as a decrease in bank-sponsored securitization conduit liabilities. CMB liabilities are bullet bonds
and only decline when the underlying bonds mature.
Table 19: Other Liabilities
(000s)
Credit facilities
Derivative liabilities
Other liabilities
Accrued interest payable on deposits
Accrued interest payable on securitization liabilities
Securitization servicing liability
Other, including accounts payable and accrued liabilities
Deferred tax liabilities
2018
$
261,506
$
35,975
155,112
7,808
21,178
154,246
28,838
2017
—
38,728
125,965
7,923
20,924
205,665
30,230
$
664,663
$
429,435
Total other liabilities increased $235.2 million from the end of 2017. The increase in other liabilities resulted primarily from amounts
drawn on the new secured warehouse credit facility. Accrued interest payable on deposits also increased, reflecting the growth in
deposits and increase in deposit rates. The increase in other liabilities was partially offset by a decrease in accounts payable and
accrued liabilities, which fluctuates based on timing of the payment of associated liabilities.
2018 Annual Report 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Shareholders’ Equity
Table 20: Shareholders’ Equity
(000s)
Shareholders' equity at the beginning of the year
Net income
Other comprehensive (loss) income
Amounts related to stock-based compensation
Repurchase of shares
Issuance of shares
Dividends
2018
2017
$
1,813,505
$ 1,632,587
132,603
(4,591)
(395)
(300,512)
—
—
7,527
49,171
964
(5,999)
145,965
(16,710)
Shareholders' equity at the end of the year
$
1,640,610
$ 1,813,505
The decrease of $172.9 million in total shareholders’ equity since December 31, 2017 resulted primarily from the repurchase of
$300 million of shares under the Company’s SIB along with $0.5 million (net of tax) of transaction costs associated with the SIB. The
decrease was partially offset by internally generated net income of $132.6 million. Please see Notes 13 and 14 to the consolidated
financial statements included in this report for more information.
At December 31, 2018, the book value per common share was $26.43, compared to $22.60 at December 31, 2017. The increase in
book value per common share from the end of 2017 resulted from the repurchase of shares following the completion of the SIB as well
as from net income.
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, 2018.
Table 21: Contractual Obligations
(000s)
2019
2020
2021
2022
2023
Thereafter
Total
Minimum lease payments
$
11,698 $
9,336 $
8,838 $
7,487 $
6,652 $
18,261 $
62,272
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 MD&A 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 $1.00 billion at December 31, 2018 ($875.9 million – December 31, 2017). These amounts include 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 $386.7 million at December 31, 2018 ($196.7 million – December 31, 2017). Offers for
the loans remain open for various periods. As at December 31, 2018, unutilized credit card balances amounted to $355.8 million
($145.5 million – December 31, 2017). Included in the outstanding amounts for future advances of mortgage loans are outstanding
future advances for the Equityline Visa portfolio of $28.6 million at December 31, 2018 ($16.1 million – December 31, 2017). The
unutilized credit and offers to extend credit are in the normal course of business and are considered through the Company’s liquidity
and capital management processes.
The Company has $6.54 billion (2017 – $7.45 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.
38 Home Capital Group Inc.
Quarterly Financial Highlights
Table 22: Summary of Quarterly Results1
(000s, except per share amounts and %)
Q4
Q3
Q2
2018
Q1
Q4
Q3
Q2
2017
Q1
Net interest income (loss) (TEB2)
$
90,449 $
89,962 $
84,240 $
88,204 $
91,818 $
88,853 $
(3,298) $ 126,682
Less: TEB adjustment
Net interest income (loss) per
financial statements
Non-interest income (loss)
Non-interest expense
Total revenue
Net income (loss)
125
115
111
104
100
91
109
825
90,324
18,052
55,658
89,847
15,239
55,602
84,129
17,496
55,426
88,100
15,665
51,387
91,718
17,737
65,490
108,376
105,086
101,625
103,765
109,455
88,762
(3,407)
125,857
6,645
(57,886)
85,001
21,885
64,465
(61,293)
147,742
59,924
95,407
35,811
32,600
29,606
34,586
30,619
29,983
(111,116)
58,041
Return on shareholders’ equity
Return on average total assets
8.1%
0.8%
6.9%
0.7%
6.4%
0.7%
7.6%
0.8%
6.8%
0.7%
6.8%
0.6%
(25.9)%
(2.2)%
14.0%
1.1%
Total assets under administration
24,680,225
24,657,402
25,001,732
24,776,803
25,040,182
26,659,330
28,292,436
29,583,545
Total loans under administration
22,933,274
22,818,087
22,513,861
22,541,079
22,518,675
23,238,410
25,868,248
27,169,129
Earnings (loss) per common share
Basic
Diluted
Book value per common share
Efficiency ratio (TEB2)
Common equity tier 1 ratio3
Tier 1 capital ratio3
Total capital ratio3
Net non-performing loans as
a % of gross loans
Annualized provision as
a % of gross uninsured loans
Annualized provision as
a % of gross loans
$
$
$
0.46 $
0.41 $
0.37 $
0.46 $
0.41 $
0.37 $
0.43 $
0.43 $
0.38 $
0.37 $
(1.73) $
0.38 $
0.37 $
(1.73) $
0.90
0.90
26.43 $
23.82 $
23.40 $
23.04 $
22.60 $
22.20 $
21.82 $
26.18
51.3%
52.9%
54.5%
49.5%
59.8%
62.7%
(138.9)%
43.4%
18.94%
23.27%
23.21%
23.64%
23.17%
21.25%
18.93%
23.27%
23.21%
23.64%
23.17%
21.25%
19.38%
23.74%
23.67%
24.12%
23.68%
21.74%
17.06%
17.06%
17.54%
16.34%
16.34%
16.77%
0.47%
0.34%
0.34%
0.29%
0.30%
0.28%
0.23%
0.24%
0.12%
0.13%
0.22%
0.20%
0.12%
(0.14)%
0.07%
0.16%
0.10%
0.10%
0.17%
0.16%
0.09%
(0.11)%
0.05%
0.13%
1 The amounts pertaining to 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated and have been prepared in
accordance with IAS 39. Please see Note 2 to the audited consolidated financial statements included in this report for further information.
2 See definition of Taxable Equivalent Basis (TEB) under Non-GAAP Measures in this report.
3 These figures relate to the Company’s operating subsidiary, Home Trust Company.
The Company’s key financial measures for each of the last eight quarters are summarized in the table above. These highlights
illustrate the Company’s profitability, return on equity, efficiency measures and capital ratios. Most of the above financial measures
subsequent to Q1 2017 were significantly impacted by the liquidity event experienced in Q2 2017. The quarterly results are modestly
affected by seasonal factors, with first quarter mortgage originations typically impacted by winter weather conditions, while the
second and third quarters have traditionally experienced higher levels of originations. First-quarter credit statistics may experience a
decline reflecting post-holiday arrears increases.
2018 Annual Report 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fourth Quarter 2018
Table 23: Fourth Quarter Financial Results
(000s, except % and per share amounts)
INCOME STATEMENT SUMMARY
Net interest income non-securitized assets1
Net interest income securitized loans and assets1
Total net interest income1
Provision for credit losses1
Non-interest income
Non-interest expenses
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
FINANCIAL MEASURES
Return on shareholders’ equity (annualized)
Return on average assets (annualized)
Total net interest margin (TEB)
Net interest margin non-securitized interest-earning assets (TEB)
Net interest margin CMHC-sponsored securitized assets
Provision as a percentage of gross uninsured loans (annualized)
Provision as a percentage of gross loans (annualized)
Efficiency ratio (TEB)
MORTGAGE ORIGINATIONS
Single-family residential mortgages
Residential commercial mortgages
Non-residential commercial mortgages
Total mortgage originations
For the three months ended
December 31
2018
September 30
2018
December 31
2017
$
86,066
$
85,944
$
89,088
4,258
90,324
3,932
86,392
18,052
55,658
48,786
12,975
35,811
3,903
89,847
3,990
85,857
15,239
55,602
45,494
12,894
32,600
$
$
0.46
0.46
$
$
0.41
0.41
$
$
8.1%
0.8%
1.99%
2.33%
0.54%
0.12%
0.10%
51.3%
6.9%
0.7%
2.03%
2.42%
0.48%
0.13%
0.10%
52.9%
2,630
91,718
3,434
88,284
17,737
65,490
40,531
9,912
30,619
0.38
0.38
6.8%
0.7%
2.02%
2.46%
0.30%
0.12%
0.09%
59.8%
$ 1,160,051
$ 1,015,998
$
566,047
237,609
216,504
207,596
212,199
194,792
111,213
$ 1,614,164
$ 1,435,793
$
872,052
1 The amounts pertaining to 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated and have been prepared in
accordance with IAS 39. Please see Note 2 to the audited consolidated financial statements included in this report for further information.
Income Statement Summary
> Net income of $35.8 million in Q4 2018 was 17.0% higher than the $30.6 million net income recorded in Q4 2017 and 9.8% higher
compared to $32.6 million in Q3 2018.
> Diluted earnings per share for the fourth quarter were $0.46, compared to $0.38 in Q4 2017 and $0.41 in Q3 2018. The increase
in earnings per share resulted primarily from the increase in net income. The reduction in average number of common shares
outstanding following the repurchase of shares under the Company’s SIB in December 2018 also contributed to the increase in
earnings per share.
> Return on shareholders’ equity was 8.1% in Q4 2018, compared to 6.8% in Q4 2017 and 6.9% in Q3 2018. The improvement
in return on equity resulted from the increase in net income combined with the reduction in shareholders’ equity following the
completion of the SIB.
> Total net interest income of $90.3 million for the quarter declined by 1.5% from Q4 2017, reflecting the decrease in total net interest
margin (TEB) to 1.99% from 2.02% last year. Total net interest income for the quarter increased by 0.5% from Q3 2018, while
the net interest margin (TEB) decreased from 2.03% last quarter. The decreases in total net interest margin from both last year
and last quarter resulted from decreases in net interest margin on the non-securitized portfolio offset partially by increases in net
interest margins on the securitized portfolios.
40 Home Capital Group Inc.
> Net interest margin non-securitized interest-earning assets (TEB) decreased to 2.33% in Q4 2018 from 2.46% in Q4 2017 and
2.42% in Q3 2018. The decrease in non-securitized net interest margin from both last year and last quarter reflects the impact
of increased funding costs resulting from increases in market rates without a commensurate increase in mortgage rates. In
addition, in order to raise liquidity to fund the repurchase of common shares under its SIB and to repay the remaining institutional
deposit notes, the Company increased inflows of GIC deposits in Q4 2018 by offering more attractive deposit rates. Both this
increase in rates and volume of GIC deposits contributed to the increased funding costs in Q4 2018. While the Company earned
prepayment income on the early payout of certain portfolios of consumer retail loans in both Q4 2018 and Q4 2017, the amount
of such prepayment income earned in 2018 was significantly less than that earned in 2017. This decrease in prepayment penalty
income contributed to the decline in net interest margin from last year. As there was no such prepayment income in Q3 2018, the
prepayment income earned in Q4 2018 helped to partially offset the decline in net interest margin from last quarter. During the
year, the Company replaced its previous $2 billion standby credit facility with a new $500 million facility, significantly reducing
standby fees, and partially offsetting the decline in net interest margin from 2017.
> 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 $6.9 million in
Q4 2018, up from $4.3 million in Q4 2017 and consistent with the $7.0 million in Q3 2018. The increase over last year resulted from
improved securitized net interest margins and an increase in the securitization and sale of insured multi-unit residential mortgages.
> Fees and other income of $12.5 million in Q4 2018 were down from $16.3 million in Q4 2017 and up from $11.8 million in Q3 2018.
The decrease in fees and other income from Q4 2017 reflects the sale of the Company’s PSiGate and prepaid card business in
Q1 2018.
> 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 $3.9 million, compared to $3.4 million in Q4 2017 and $4.0 million in
Q3 2018. The annualized credit provision as a percentage of gross uninsured loans for the quarter was 0.12%, unchanged from
Q4 2017 and down slightly from 0.13% in Q3 2018. Net non-performing loans as a percentage of gross loans ended 2018 at 0.47%,
compared to 0.30% at the end of 2017 and 0.34% at the end of Q3 2018. Provision for credit losses was calculated under IFRS 9 for
2018 and under IAS 39 for 2017. As provision for credit losses was not restated for 2017, comparability is reduced to some extent.
> Non-interest expenses were $55.7 million in Q4 2018, down from $65.5 million in Q4 2017 and consistent with $55.6 million in
Q3 2018. The decrease in non-interest expenses from last year resulted from a decrease in other operating expenses. Other
operating expenses for Q4 2017 included impairment losses on intangible assets along with costs related to the exit of the PSiGate
and prepaid card business and litigation-related costs. The decrease in other operating expenses was partially offset by an increase
in salaries and benefits reflecting an increase in the average number of employees.
Financial Position Summary
> Total loans under administration, which includes securitized mortgages that qualify for off-balance sheet accounting, increased by
$115.2 million or 0.5% from $22.82 billion at the end of Q3 2018, reflecting an increase in total on-balance sheet loans. Total loans
were $16.39 billion at the end of 2018, an increase of $352.0 million or 2.2% from $16.04 billion at the end of Q3 2018, reflecting
the Company’s originations and retention efforts. The increase in on-balance sheet loans was offset partially by a decrease in off-
balance sheet mortgages resulting from the Company retaining its interests in securitized single-family residential mortgages.
> The total value of mortgages originated in Q4 2018 was $1.61 billion, compared to $872.1 million in Q4 2017 and $1.44 billion in
Q3 2018.
> The Company originated $1.11 billion of traditional single-family residential mortgages in Q4 2018, compared to $537.4 million in
Q4 2017 and $959.1 million in Q3 2018.
> Accelerator (insured) single-family residential mortgage originations were $48.0 million in Q4 2018, compared to $28.6 million in
Q4 2017 and $56.9 million in Q3 2018.
> Residential commercial originations were $237.6 million in the quarter, compared to $194.8 million in Q4 2017 and $207.6 million
in Q3 2018. Multi-unit residential mortgage originations are mostly insured and subsequently securitized through programs that
qualify for off-balance sheet accounting.
> Non-residential commercial mortgage originations, which include store and apartment mortgages, were $216.5 million in Q4 2018,
compared to $111.2 million in Q4 2017 and $212.2 million in Q3 2018.
> Liquid assets were $1.29 billion, compared to $1.38 billion at the end of Q3 2018. The Company maintains a prudent level of
liquidity, given the current level of operations and the Company’s obligations.
> Deposits were $12.98 billion, up from $12.36 billion at the end of Q3 2018. Deposits raised through the Company’s direct-to-
consumer brand, Oaken Financial represented 20.7% of total deposits at the end of 2018 consistent with the end of Q3 2018.
> Home Trust’s Common Equity Tier 1 (CET 1) and Total capital ratios remained strong at 18.94% and 19.38%, respectively, at
December 31, 2018, compared to 23.27% and 23.74%, respectively, at September 30, 2018. The decrease in capital ratios resulted
from a combination of reduced capital and an increase in risk-weighted assets. The reduction in Home Trust regulatory capital
resulted from the declaration of dividends from Home Trust to the Company in support of the SIB. The increase in risk-weighted
assets reflects growth in the mortgage portfolio. The capital ratios remain well above Company and regulatory minimum targets.
Home Trust’s Leverage ratio was 7.54% at December 31, 2018, also well above regulatory minimums.
2018 Annual Report 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Management
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 enable the allocation of
capital for maximum economic benefit. The Capital Management Committee reviews compliance with the policy at minimum on a
monthly basis, while the Risk and Capital Committee and the Board 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 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 is regulated under the Trust and Loan
Companies Act (Canada) (TLCA) and Home Bank is regulated under the Bank Act (Canada), Home Trust’s ability to accept deposits
is limited primarily by its permitted Leverage ratio (see Table 24). In addition, the declaration and payment of dividends by Home Trust
to Home Capital are subject to restrictions under the TLCA.
42 Home Capital Group Inc.
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 24: 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
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
2018
December 31
2017
$
38,497 $
38,497
951
951
1,437,629
1,604,357
(10,485)
1,606
(5,897)
1,189
(96,295)
(125,768)
1,371,903
1,513,329
—
—
1,371,903
1,513,329
32,671
32,671
33,563
33,563
1,404,574
1,546,892
6,397,266
5,580,361
840,763
942,038
7,238,029
6,522,399
7,280
8,650
7,245,309
6,531,049
7,553
9,251
7,245,582
6,531,650
7,826
9,731
$
7,245,855 $
6,532,130
18.94%
18.93%
19.38%
7.54%
7.00%
8.50%
10.50%
3.00%
23.17%
23.17%
23.68%
8.70%
7.00%
8.50%
10.50%
3.00%
1 Regulatory deductions 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 eligible allowances 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, 2018, the Company’s eligible allowances represented
0.51% of total credit risk-weighted assets, inclusive of total CVA.
3 CVA – Credit Valuation Adjustment.
Home Trust’s Total regulatory capital ratios have decreased from the end of 2017, resulting from a combination of changes in
regulatory capital and risk-weighted assets. Regulatory capital decreased as a result of Home Trust dividends that were declared
in support of Home Capital’s repurchase of 18,181,818 common shares under the SIB which reduced capital by $300 million. The
increase in risk-weighted assets resulted primarily from growth in both the residential and commercial mortgage portfolios.
The Leverage ratio is a non-risk-adjusted view of a company’s leverage. 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 Tier 1 capital of Home Trust. The Exposure
Measure consists of on-balance sheet exposures, potential future exposure amounts on derivatives, credit equivalent amounts of
certain off-balance sheet 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.
2018 Annual Report 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 that ended 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
was required. The regulatory capital ratios as at December 31, 2017 and the national regulatory minimum presented in the above table
are on an all-in basis.
Table 25: Risk-Weighted Assets (RWA) (Based only on Home Trust Company consolidated financial position)
(000s, except %)
Balance
Sheet
Amounts
Effective
Risk
Weight1
2018
Risk-
weighted
Amount
Balance
Sheet
Amounts
Effective
Risk
Weight1
2017
Risk-
weighted
Amount
Cash and cash equivalents
$
644,517
20.0% $
128,903
$ 1,146,147
20.0% $
229,229
Restricted assets
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
309,205
386,333
3,507,280
17.0%
6.8%
0.4%
52,443
26,353
15,116
437,011
331,500
3,565,354
11.6%
9.3%
0.5%
50,827
30,936
18,867
10,495,553
35.3%
3,709,808
9,637,873
35.2%
3,393,375
209,024
100.0%
209,025
105,849
100.0%
105,849
1,441,896
100.8%
1,453,353
1,042,853
100.7%
1,049,722
403,370
318,595
347,037
41.8%
93.5%
74.9%
35.0%
168,459
297,911
259,848
351,605
360,890
341,345
6,321,219
17,320,427
42.2%
75.0%
71.4%
32.0%
148,506
270,668
243,844
5,541,823
Total assets subject to risk rating
18,062,810
Deferred tax assets for loss
carryforwards
Intangible assets
Allowance for credit losses
Total assets
Off-balance sheet items
Loan commitments
Total credit risk
Operational risk
Total risk-weighted assets,
before CVA
—
83,432
(32,671)
—
—
—
—
—
—
6,390
98,669
(33,563)
—
—
—
—
—
—
18,113,571
34.9%
6,321,219
17,391,923
31.9%
5,541,823
1,194,097
19,307,668
—
6.4%
76,047
799,892
4.8%
38,538
6,397,266
18,191,815
840,763
—
5,580,361
942,038
$ 19,307,668
$ 7,238,029
$ 18,191,815
$ 6,522,399
1 The effective risk weight represents the weighted average of the risk weights for each asset category prescribed by OSFI weighted based on the Company’s
balance sheet classification.
Risk-weighted assets are determined by applying the OSFI-prescribed rules to on-balance sheet and off-balance sheet exposures.
The Company’s securitization activities are not subject to the Basel II securitization framework as they are all within the NHA MBS
program and do not involve tranching of credit risk.
Capital Management Activity
During the fourth quarter of 2018, the Company repurchased 18,181,818 common shares for $300 million, under its SIB, thereby
reducing retained earnings by $248.1 million and share capital by $52.4 million. Included in the amount allocated to retained earnings
is $0.5 million (net of tax) for transaction costs associated with the SIB.
The Company implemented an NCIB on January 2, 2019, which allows it to purchase up to 4,753,517 of its common shares. As at
February 21, 2019, the Company has purchased 735,050 common shares under the NCIB. Please refer to the press release issued
by the Company on December 24, 2018 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.
Home Capital has entered into an automatic purchase plan with a broker in connection with its NCIB. From time to time, when Home
Capital does not possess material non-public information about itself or its securities, it may direct its broker to allow for the purchase
of common shares at times when Home Capital ordinarily would not be active in the market due to its own internal trading blackout
periods, insider trading rules or otherwise. Any such plans entered into with Home Capital’s broker will be adopted in accordance with
applicable Canadian securities laws.
44 Home Capital Group Inc.
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 26: Credit Ratings
Long-term rating
Short-term rating
Outlook
Share Information
Table 27: 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
B
R-5
Stable
Standard
& Poor’s
BB-
B
Stable
DBRS
BB (low)
R-4
Stable
Standard
& Poor’s
BB+
B
Stable
Number of
Shares
2018
Amount
Number of
Shares
2017
Amount
62,065
$
178,782
80,246
$
231,156
898
471
N/A
16,730
840
511
N/A
18,333
1 Please see Note 13(B) of the consolidated financial statements included in this report for details on shares repurchased during 2018 and issued during 2017.
2 Please see Note 14(C) of the consolidated financial statements included in this report for further information. 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.
As of February 21, 2019, the total number of common shares issued and outstanding was 61,329,481. The reduction in number of
shares outstanding from the end of 2018 resulted from the repurchase of common shares under the NCIB.
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, 2018.
Risk Overview
Risk management is an essential component of the Company’s strategy, directly affecting the Company’s profitability and return on
equity. 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 and senior management;
> Extensive risk identification, assessment, measurement and monitoring practices and controls executed by experienced personnel
and supported by appropriate processes and technology;
2018 Annual Report 45
MANAGEMENT’S DISCUSSION AND ANALYSIS
> 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 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
the Company’s mortgage originations. Risks associated with high Canadian household indebtedness remain elevated, particularly
considering the rising interest rate environment. The Company expects moderate price appreciation in 2019, reflecting ongoing
adjustments of regulatory changes and potentially rising interest rates, which could worsen affordability, especially in the GTA and the
Golden Horseshoe area. Stable employment conditions and high levels of immigration are expected to continue to provide support to
the Company’s primary markets.
The Company continues to apply conservative credit risk management practices, which includes establishing and monitoring prudent
risk limits and regular performance of stress tests. The Company believes the risk of a severe housing correction in its 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.
Regulatory and Political Risk
The Company is subject to a variety of regulations and related oversight. Regulatory reforms, at the federal and provincial levels of
government, aimed at cooling the housing market and strengthening underwriting practices remain a key risk for the Company.
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.
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 is 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.
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
Change Management Risk
The Company is embracing new technologies 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.
46 Home Capital Group Inc.
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 the Board, 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 frequency and severity of unanticipated
events 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.
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.
> Appropriate 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 and 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.
2018 Annual Report 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 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.
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
S
E
E
T
T
I
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
48 Home Capital Group Inc.
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 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, and 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.
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.
2018 Annual Report 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
> 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
Disclosure Committee
Executive Project Review Committee
Compliance
Corporate Compliance Policy
Key Risk Indicators
Executive Committee
Strategic
Reputational
Capital Adequacy
Anti-Money Laundering and
Anti-Terrorist Financing Policy
Strategic and Financial
Planning Policy
Risk Appetite Statement
Executive Committee
Reputational Risk Policy
Risk Appetite Statement
Executive Committee
Capital Management Policy
Key Risk Indicators
Capital Management Committee
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. 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.
50 Home Capital Group Inc.
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 by business and support groups (e.g., products, services or technologies), 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, 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 and interest
rate shock. 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 RCC 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.
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 and limits delegated by ERM. 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 RCC of the Board as required.
2018 Annual Report
51
MANAGEMENT’S DISCUSSION AND ANALYSIS
Table 28: Credit Risk Portfolio Metrics
(000s, except % and number of credit cards and lines of credit issued)
2018
2017
2016
Total loans balance (gross of allowance for credit losses)
$ 16,264,387
$ 14,903,689
$ 17,960,600
Mortgage Portfolio1
Total mortgage balance (gross of allowance for credit losses)
$ 15,540,312
$ 14,190,461
$ 17,210,830
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
90.7%
9.3%
21.7%
99.0%
0.39%
16.1%
67.6%
92.6%
7.4%
24.0%
99.4%
0.27%
20.3%
68.9%
88.6%
11.4%
20.0%
98.5%
0.34%
27.7%
65.0%
Total credit card and lines of credit balance (gross of allowance for credit losses)
$
405,051
$
352,062
$
370,458
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
87.6%
3.4%
98.1%
0.6%
61.0%
87.7%
4.3%
98.1%
0.7%
61.2%
86.6%
3.9%
98.6%
0.4%
63.2%
$
$
$
20,514
760,290
77,613
$
$
21,580
497,475
41,736
$
$
21,253
515,947
42,707
10
$
12
$
12
1 Residential mortgages include single-family residential mortgages, multi-unit residential mortgages 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 ratio includes both the first mortgage and the secured Equityline Visa balance.
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 metric used in the Company’s underwriting process. Please see Tables 31
and 32 for further information.
The Company separately monitors segments of its portfolio for indications of deterioration in performance. The Company continues
to closely monitor market conditions and the performance of the high-rise condominium market. High-rise condominiums represent
7.7% of the residential mortgage portfolio and, of these, 24.8% are insured. The average current LTV of the high-rise condominium
portfolio was 54.2% at the end of 2018. The credit performance of the high-rise condominium portfolio is strong and within the
Company’s expectations, with 99.1% of the portfolio current and 0.1% over 90 days past due.
The level of non-residential mortgages increased during the year. The proportion is well within the policy limits.
Consumer Lending
Credit card and Equityline Visa balances were $405.1 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 60.4% at the end of the year compared to 57.2% at the end of 2017. 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 continued to perform well, with arrears well within expected levels. As of December 31, 2018, $2.4 million or 0.6% of the
credit card and line of credit portfolio was over 90 days in arrears, compared to $2.3 million or 0.7% at December 31, 2017.
52 Home Capital Group Inc.
Other consumer retail loans are primarily secured by charges on financed assets or homes in which the financed assets are present,
primarily automobiles and fixtures and/or improvements to residential property. These portfolios continued to perform well and
within expected levels. Certain loans within the other consumer retail loan portfolio are advanced to the vendors who have underlying
loans receivable from the end consumer. These loans are considered as commercial loans for purposes of underwriting and capital
treatment. The Company holds a portion of the advanced amount on these loans as cash collateral.
Refer to Note 5(B) in the consolidated financial statements included in this report for a breakdown of the overall loan portfolio by
geographic region.
Non-performing Loans, Credit Provisions and Allowances
The Company adopted IFRS 9 on January 1, 2018, which resulted in significant changes to what the Company considers as non-
performing loans and how provisions and allowances for credit losses are determined. The determination of allowances for credit
losses under IFRS 9 involves a three-stage expected credit loss model. Stage 1 represents loans that are considered to be performing
well with no significant deterioration in the risk of default. Stage 2 represents loans that are still considered to be performing but
where there has been a significant increase in the risk of default. Stage 3 represents impaired (non-performing) loans where payments
are generally more than 90 days past due or where there is other objective evidence of impairment. The determination of whether
loans are considered as Stage 3 under IFRS 9 is similar conceptually to the determination of whether loans were non-performing
under IAS 39. Please see Note 2 to the consolidated financial statements included in this report for more information on the
determination of allowance for credit losses under IFRS 9.
Net non-performing loans remained within expected and acceptable ranges representing 0.47% of gross loans at the end of 2018.
Write-offs, net of recoveries, during the year totalled $9.0 million or 0.06% of gross loans in 2018.
The Company has security in the form of real property or cash deposits for virtually the entire loan portfolio. Expected and unexpected
future losses are mitigated with a combination of conservative loan-to-value ratios, risk-based pricing and a strong capital position.
The Company maintains an allowance for credit losses in accordance with IFRS 9 which represents management’s best estimate of
expected credit losses in the loan portfolio. The allowance is reviewed quarterly, at a minimum. Note 5 to the consolidated financial
statements included in this report provides a continuity of the allowance for credit losses during the period by product and IFRS 9
Stage, indicating components of the provision for credit losses as well as write-offs and recoveries. The continuity disclosure also
provides information pertaining to the movements between the IFRS 9 stages. Note 5 also provides a distribution of the gross carrying
value of loans by product across five internal risk ratings for each of the IFRS 9 stages.
In addition to the allowance for credit losses, the risk of future losses 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 24) 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, 2018, the Company held total regulatory capital at 185% of the regulatory minimum. A substantial portion of this is
appropriated for credit risk.
2018 Annual Report 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 29: Single-family Residential Loans by Province (Gross of Allowance for Credit Losses)
(000s, except %)
Insured
Residential
Mortgages1
Percentage
of Total for
Province
Uninsured
Residential
Mortgages
Percentage
of Total for
Province
British Columbia
$
246,999
23.3% $
804,847
76.1% $
Alberta
Ontario
Quebec
Other
528,233
1,794,870
127,308
358,777
66.3%
16.2%
32.8%
259,776
8,964,756
260,034
62.5%
212,959
32.6%
80.8%
67.0%
37.1%
Percentage
of Total for
Province
2018
Total
0.6% $ 1,058,353
1.1%
796,868
3.0% 11,095,692
0.2%
0.4%
388,277
574,193
Equityline
Visa2
6,507
8,859
336,066
935
2,457
$ 3,056,187
22.0% $ 10,502,372
75.4% $
354,824
2.6% $ 13,913,383
(000s, except %)
Insured
Residential
Mortgages1
Percentage
of Total for
Province
Uninsured
Residential
Mortgages
Percentage
of Total for
Province
British Columbia
$
255,452
33.8% $
498,570
65.9% $
Alberta
Ontario
Quebec
Other
387,436
1,834,007
113,804
242,158
59.2%
17.2%
33.7%
63.0%
257,339
8,520,469
222,702
140,522
39.4%
80.0%
66.0%
36.5%
Percentage
of Total for
Province
2017
Total
0.3% $
756,412
1.4%
653,832
2.8% 10,649,098
0.3%
0.5%
337,564
384,483
Equityline
Visa2
2,390
9,057
294,622
1,058
1,803
$ 2,832,857
22.2% $ 9,639,602
75.4% $
308,930
2.4% $ 12,781,389
1 See definition of insured loans under the Glossary of Terms in this report.
2 Equityline Visa is an uninsured product.
Table 30: Insured and Uninsured Single-Family Residential Mortgages by Effective Remaining Amortization Period
(Gross of Allowance for Credit Losses)
(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
Total
$ 1,333,431
$ 2,666,307
$ 9,547,074
$
10,501
$
1,246
$ 13,558,559
9.8%
19.7%
70.4%
0.1%
0.0%
100.0%
2018
≤ 20 Years
> 20 and ≤ 25
Years
> 25 and ≤ 30
Years
> 30 and ≤ 35
Years
> 35 Years
2017
Total
Balance outstanding
Percentage of total
$
882,444
$ 2,460,171
$ 9,092,962
$
35,597
$
1,285
$ 12,472,459
7.1%
19.7%
72.9%
0.3%
0.0%
100.0%
54 Home Capital Group Inc.
Table 31: Weighted-Average Loan-to-Value Ratios for Uninsured Single-family Residential Mortgages Originated
During the Year
British Columbia
Alberta
Ontario
Quebec
Other
Total
2018
2017
Uninsured
Residential
Mortgages1
Equityline Visa1
Uninsured
Residential
Mortgages1
Equityline Visa1
64.2%
69.6%
69.8%
70.8%
70.7%
69.2%
60.8%
63.3%
61.2%
68.4%
50.2%
61.1%
63.0%
68.8%
70.9%
69.2%
69.6%
70.3%
47.1%
56.3%
56.6%
24.5%
58.6%
56.5%
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 $13.91 billion as of December 31, 2018, of which
$3.06 billion was insured against credit losses.
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, 2018, the weighted-average LTV of the
uninsured portfolio against the estimated current market value was 59.0% compared to 55.3% at the end of 2017. 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 an estimate of 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 available. 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.
Table 32: Weighted-Average Loan-to-Value Ratios for Uninsured Residential Mortgages
2018
2017
Weighted-
average
Current LTV1
Percentage of
Total Value of Outstanding
Mortgages with Current
LTV Less Than or Equal To
Weighted-
average
Current LTV1
Percentage of
Total Value of Outstanding
Mortgages with Current
LTV Less Than or Equal To
55.9%
64.1%
58.9%
61.0%
65.0%
59.0%
75%
95.1%
83.1%
84.6%
91.3%
75.7%
85.3%
65%
72.2%
51.7%
63.9%
62.4%
43.9%
63.8%
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%
British Columbia
Alberta
Ontario
Quebec
Other
Total
1 Weighted-average LTV is calculated by dividing the sum of the products of LTVs and loan balances by the sum of the loan balances.
2018 Annual Report 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 93.2% of the
portfolio and preferred shares at 6.8% of the portfolio. The total balance was $386.3 million at December 31, 2018 compared to
$332.5 million at the end of 2017.
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, 2018, the Company assessed its securities portfolio for evidence of impairment and did not identify any negative
credit events during the year in relation to its debt holdings (Refer to Note 4(C) in the consolidated financial statements included in
this report).
56 Home Capital Group Inc.
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. Please see the Non-Interest
Income section of this MD&A and Note 18 to the consolidated financial statements included in this report for further information
on the Company’s use of derivatives and hedging activities.
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, 2018 and December 31, 2017 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.
2018 Annual Report
57
MANAGEMENT’S DISCUSSION AND ANALYSIS
Table 33: Interest Rate Sensitivity
(thousands of Canadian dollars, except %)
As at December 31, 2018
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
Assets
Cash and cash
equivalents
Weighted-average
interest rate
Securities
Weighted-average
interest rate
Loans held for sale
Weighted-average
interest rate
Securitized
mortgages
Weighted-average
interest rate
Non-securitized
mortgages
and loans
Weighted-average
interest rate
Other assets
Weighted-average
interest rate
Total
Weighted-average
interest rate
Weighted-average
interest rate
Securitization
liabilities
Weighted-average
interest rate
Other liabilities
Weighted-average
interest rate
Shareholders’ equity
Weighted-average
interest rate
Total
Weighted-average
interest rate
—
—
—
—
—
—
—
—
—
—
—
$ 206,043
$ 459,904
$
— $
— $
— $
— $
— $ 665,947
1.7%
—
1.7%
—
—
—
—
—
—
—
4,905
—
381,428
—
—
3.6%
—
—
2.8%
—
—
130,351
—
3.0%
—
—
—
—
—
1.7%
386,333
2.8%
130,351
3.0%
—
—
—
976,053
87,162
159,913
1,577,495
3.4%
2.4%
2.4%
3.0%
—
—
(692)
2,799,931
—
3.1%
—
3,470,576
2,218,503
4,472,544
3,220,110
37,160
(6,128)
13,412,765
—
120,905
5.4%
174,836
4.6%
2,230
5.1%
6,050
5.2%
—
1.9%
0.5%
2.1%
2.3%
—
9.6%
—
—
—
5.1%
442,341
746,362
—
0.5%
$ 326,948
$ 5,081,369
$ 2,307,895
$ 4,643,412
$ 5,179,033
$ 167,511
$ 435,521
$ 18,141,689
1.8%
4.5%
4.5%
5.0%
4.4%
4.5%
—
4.4%
Liabilities and
shareholders’ equity
Deposits
$ 341,401
$ 1,491,050
$ 1,587,819
$ 2,790,420
$ 6,670,755
$
— $
95,645
$ 12,977,090
2.1%
2.1%
2.4%
2.6%
2.7%
1,186,666
47,983
23,350
1,601,327
2.0%
297,481
2.7%
—
—
1.3%
—
—
—
—
$ 1,635,802
2.0%
—
2.4%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2.6%
2,859,326
2.2%
367,182
664,663
—
1.2%
1,640,610
1,640,610
—
—
$ 341,401
$ 2,975,197
$ 2,813,770
$ 8,272,082
$
— $ 2,103,437
$ 18,141,689
2.1%
2.1%
2.4%
2.6%
2.7%
—
—
2.2%
$
Credit commitments
Weighted-average
interest rate
Interest rate
sensitivity gap
Cumulative gap
$
$
Cumulative gap as
a percentage of
total assets
(14,453) $ 2,106,172
(957,344)
—
$ 672,093
227
$ 1,829,642
23,125
$ (3,093,049) $ 167,511
83,149
850,843
—
5.5%
7.0%
5.9%
5.3%
2.9%
$ (1,667,916) $
—
—
(14,453) $ 1,148,828
$ 672,320
$ 1,852,767
$ (2,242,206) $ 250,660
$ (1,667,916) $
(14,453) $ 1,134,375
$ 1,806,695
$ 3,659,462
$ 1,417,256
$ 1,667,916
$
— $
(0.1)%
6.3%
10.0%
20.2%
7.8%
9.2%
—
—
—
—
—
—
—
58 Home Capital Group Inc.
Table 33: Interest Rate Sensitivity (Continued)
(thousands of Canadian dollars, except %)
As at December 31, 2017
Floating
Rate
0 to 3
Months1
3 to 6
Months
6 to 12
Months
1 to 5
Years
Over
Non-interest
5 Years
Sensitive
Total
Assets
Cash and cash
equivalents
Weighted-average
interest rate
Securities
Weighted-average
interest rate
Loans held for sale
Weighted-average
interest rate
Securitized
mortgages
Weighted-average
interest rate
Non-securitized
mortgages
and loans
Weighted-average
interest rate
Other assets
Weighted-average
interest rate
Total
Weighted-average
interest rate
$ 562,185
$ 773,953
$
— $
— $
— $
— $
— $ 1,336,138
1.3%
—
—
—
—
—
—
1.2%
10
9.9%
—
—
—
—
—
—
—
—
3,147
—
329,311
—
—
6.4%
—
—
1.6%
—
—
165,947
—
2.9%
1,297,012
145,838
301,889
1,248,511
2.7%
3.1%
4.7%
3.1%
—
—
—
—
—
—
—
—
—
1.3%
332,468
1.8%
165,947
2.9%
2,993,250
3.1%
—
2,664,609
2,044,506
4,252,340
2,903,822
17,987
(11,600)
11,871,664
—
59,402
5.0%
367,877
4.8%
9,146
5.2%
7,911
4.9%
—
1.0%
1.4%
0.5%
1.6%
—
8.7%
—
—
—
5.0%
447,340
891,676
—
0.7%
$ 621,587
$ 5,103,461
$ 2,199,490
$ 4,565,287
$ 4,481,644
$ 183,934
$ 435,740
$ 17,591,143
1.3%
3.6%
4.6%
5.1%
4.2%
3.5%
—
4.1%
Liabilities and
shareholders’ equity
Deposits
$ 368,459
$ 1,606,093
$ 1,404,164
$ 2,715,166
$ 5,905,667
$
— $ 170,905
$ 12,170,454
Weighted-average
interest rate
Securitization
liabilities
Weighted-average
interest rate
Other liabilities
Weighted-average
interest rate
Shareholders’ equity
Weighted-average
interest rate
Total
Weighted-average
interest rate
Credit commitments
Weighted-average
interest rate
1.4%
1.8%
2.2%
2.4%
2.4%
1,324,280
162,538
303,047
1,387,884
1.7%
38,728
—
—
—
2.1%
—
—
—
—
$ 1,566,702
3.7%
—
2.3%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2.3%
3,177,749
2.1%
390,707
429,435
—
—
1,813,505
1,813,505
—
—
$ 368,459
$ 2,969,101
$ 3,018,213
$ 7,293,551
$
— $ 2,375,117
$17,591,143
1.4%
1.7%
2.2%
2.5%
2.4%
—
—
1.9%
$ 253,128
—
$ 2,134,360
(844,583)
$ 632,788
18,643
$ 1,547,074
25,887
$ (2,811,907) $ 183,934
26,259
773,794
$ (1,939,377) $
—
—
—
5.6%
5.7%
4.3%
4.5%
3.1%
Interest rate
sensitivity gap
$ 253,128
$ 1,289,777
$ 651,431
$ 1,572,961
$ (2,038,113) $ 210,193
$ (1,939,377) $
Cumulative gap
$ 253,128
$ 1,542,905
$ 2,194,336
$ 3,767,297
$ 1,729,184
$ 1,939,377
$
— $
Cumulative gap as
a percentage of
total assets
1.4%
8.8%
12.5%
21.4%
9.8%
11.0%
—
1 Total assets in the 0–3 month category above included $1.77 billion in variable rate mortgages (2017 – $1.48 billion).
—
—
—
—
—
—
2018 Annual Report 59
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.
Table 34: Impact of Interest Rate Shifts
(thousands of Canadian dollars)
100 basis point shift
Impact on net interest income, after tax
(for the next 12 months)
December 31
2018
December 31
2017
December 31
2018
December 31
2017
Increase in interest rates
Decrease in interest rates
Impact on net present value of shareholders’ equity
Impact on other comprehensive income
17,688
2,670
(2,448)
2,243
(19,171)
(2,670)
$
5,039 $
2,418 $
(5,039) $
(2,418)
1,952
(2,243)
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 interest rate sensitivity becomes more pronounced and, for this reason, the Company’s ALCO manages this
to within authorized limits.
60 Home Capital Group Inc.
Liquidity and Funding Risk
Liquidity and funding risk 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 is within the Company’s
current risk appetite. The Company has a $500 million committed secured standby credit facility from a syndicate of Canadian
chartered banks to strengthen its liquidity position. Please see Note 4(A) to the consolidated financial statements included in
this report for details on this credit facility. 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 18, maturities of non-securitized loans are in excess
of deposit maturities for the next 12 months. The Company strategically limits demand deposits to an appropriate level that is
aligned with the Company’s liquidity and funding limits, 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.
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 35: Liquidity Resources
(000s, except %)
Cash and cash equivalents per balance sheet
Securities per balance sheet
Add: MBS and CMB 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
2018
2017
$
665,947
$ 1,336,138
386,333
262,005
1,314,285
(26,352)
332,468
17,046
1,685,652
(30,934)
$
$
1,287,933
$ 1,654,718
1,290,857
$ 1,654,665
7.1%
9.4%
2018 Annual Report 61
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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 other impacts. 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, and 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 Committee and RCC 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 that 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.
62 Home Capital Group Inc.
> 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 EC and senior management that require the Company to do certain things, including conducting
its affairs in a particular manner, and where non-compliance could have an impact on the Company’s reputation and/or safety and
soundness.
While all business units 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.
Home Capital is subject to the continuous disclosure requirements of applicable Canadian provincial and territorial securities
legislation and the rules of the Toronto Stock Exchange (TSX) and, in accordance therewith, files periodic reports and other
information with Canadian provincial and territorial securities regulators and the TSX relating to its business, financial condition
and other matters. These reports and information may be accessed through SEDAR at www.sedar.com. Under the TLCA, regulated
entities like Home Trust are prohibited from disclosing, directly or indirectly, any “prescribed supervisory information” relating to it
or its affiliates, with certain limited exceptions. “Prescribed supervisory information” is defined broadly in terms of (i) assessments,
recommendations, ratings and reports concerning the Company that are made by or at the request of OSFI; (ii) any category in which
the Company is classified under the CDIC Differential Premiums By-Laws, any premium rate assigned to it and any annual premium
determined for it under that By-law; and (iii) certain regulatory actions taken with respect to the Company.
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 RCC 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 EC. On a regular basis, the EC 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 EC and the RCC of
the Board.
2018 Annual Report 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Management has exercised judgement in the process of applying the Company’s accounting policies. Some of the Company’s
accounting policies require subjective, complex judgements and estimates relating to matters that are inherently uncertain. The
preparation of the 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.
Derecognition of Financial Assets
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 IFRS 9. 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.
Impairment of Financial Assets
Under IFRS 9, the expected credit loss (ECL) model requires management to make judgements and estimates in a number of areas.
Management must exercise significant judgement in determining whether there has been a significant increase in credit risk (SICR)
since initial recognition and in estimating the amount of expected credit losses. The calculation of expected credit losses includes the
incorporation of forward-looking information, which requires significant judgement to determine the forward-looking variables that
are relevant for each portfolio and the scenarios and probability weights that should be applied. Management also exercises expert
credit judgement in determining the amount of ECLs at each reporting date by considering reasonable and supportable information
that is not already incorporated in the quantitative modelling process. Changes in these inputs, assumptions, models and judgements
directly impact the measurement of ECLs.
Impairment of Intangible Assets
In applying judgement in its assessment of impairment of intangible assets, 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 were recognized on intangible assets 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 as at the date
of the 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.
Other Judgements and Estimates
Other key areas where management has applied judgement and made estimates include fair values, 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.
Further information can be found under Notes 2, 4, 5, 6, 9, 10, 13, 16, 17, 18 and 20 to the consolidated financial statements included in
this report.
Current and Future Changes in Accounting Standards
Changes in accounting policies applied in 2018 along with the impact on the consolidated financial statements are discussed in Note 3
to the consolidated financial statements included in this report. The new IFRS pronouncements that have been issued but are not yet
effective and may have a future impact on the Company are also discussed in Note 3 to the consolidated financial statements included
in this report.
Comparative Consolidated Financial Statements
The comparative consolidated financial statements included in this report have been reclassified from statements previously
presented to conform to the presentation of the 2018 consolidated financial statements. In particular, loan balances previously
presented net of individual allowances have been reclassified to a gross presentation. Similar reclassifications to a gross presentation
have been made in this MD&A.
64 Home Capital Group Inc.
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, 2018. 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, 2018.
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 controls 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 controls 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) 2013 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,
2018. 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, 2018.
Changes in Internal Control over Financial Reporting
There were no significant changes in 2018 that have affected or could reasonably be expected to materially affect internal control over
financial reporting.
2018 Annual Report 65
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 Non-Performing Gross Loans
Allowance as a percentage of gross loans is calculated as the total allowance divided by the gross on-balance sheet non-performing
loans outstanding, which includes all on-balance sheet loans except for loans held for sale.
Common Equity Tier 1, Tier 1, and Total Capital Ratios
The capital ratios provided in this MD&A are those of the Company’s wholly owned subsidiary Home Trust. The calculations are in
accordance with guidelines issued by OSFI. Refer to the Capital Management section of this MD&A and Note 13(F) 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 looks at the 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. 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. The Exposure Measure consists
of on-balance sheet assets, derivative, securities financing transactions and off-balance sheet exposures.
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 (non-TEB) is calculated by taking net interest income
divided by the average total assets.
Net Interest Margin (TEB)
Net interest margin is a measure of profitability of assets. Net interest margin (TEB) is calculated by taking net interest income, on a
taxable equivalent basis, divided by the average total assets.
66 Home Capital Group Inc.
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 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 provision expense divided by the gross on-
balance sheet uninsured loans outstanding.
Return on Average Assets (ROA)
Return on average assets is a profitability measure that presents the annualized net income as a percentage of the average total
assets for the period.
Return on Shareholders’ Equity (ROE)
ROE is calculated on an annualized basis and is defined as net income available to common shareholders as a percentage of average
common 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. The calculations
are in accordance with guidelines issued by OSFI. Refer to the Capital Management section in this MD&A and Note 13(F) 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 $0.5 million for 2018 ($1.1 million – 2017) 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.
2018 Annual Report 67
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.
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.
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. The Company considers its non-performing loans to be those determined as Stage 3 under IFRS 9. Please see Note 2 to the
consolidated financial statements included in this report for more information.
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 comprises 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.
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.
68 Home Capital Group Inc.
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
N/A – Not Applicable for the respective period
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
TLCA – Trust and Loan Companies Act (Canada)
2018 Annual Report 69
CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Management’s Responsibility for Financial Information
Independent Auditor’s Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
1. Corporate Information
2. Summary of Significant Accounting Policies
3. Current and Future Changes in Accounting Policies
4. Cash Resources, Credit Facilities and Securities
5. Loans
6. Securitization Activity
7. Restricted Assets
8. Other Assets
9. Intangible Assets
10. Goodwill
11. Deposits by Remaining Contractual Term to Maturity
12. Other Liabilities
13. Capital
14. Employee Benefits
15. Accumulated Other Comprehensive Income
16. Income Taxes
17. Commitments and Contingencies
18. Derivative Financial Instruments and Hedging Activities
19. Current and Non-Current Assets and Liabilities
20. Fair Value of Financial Instruments
21. Related Party Transactions
22. Disposal of PSiGate and Prepaid Card Business
23. Risk Management
24. Subsequent Events
71
72
74
75
76
77
78
79
79
89
91
93
100
102
103
103
104
104
104
104
106
108
109
110
111
115
116
118
118
118
118
70 Home Capital Group Inc.
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
The consolidated financial statements and Management’s Discussion and Analysis (MD&A) of Home Capital Group Inc. (the
“Company”) 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 being 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, 2018, 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
Brad Kotush, CPA, CA
President and Chief Executive Officer
Chief Financial Officer
Toronto, Canada
February 21, 2019
2018 Annual Report
71
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Home Capital Group Inc.
Opinion
We have audited the consolidated financial statements of Home Capital Group Inc. (the Company), which comprise the consolidated
balance sheets as at December 31, 2018 and 2017, and the consolidated statements of income, consolidated statements of
comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the
years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows
for the years then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section
of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of
the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
> Management’s Discussion and Analysis
> The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any
form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to
read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed,
we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report.
We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform
on this other information, we conclude that there is a material misstatement of this other information, we are required to report that
fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated
Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
IFRSs, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
72 Home Capital Group Inc.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing
standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on
the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
> Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
> Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
> Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
> Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our
auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Company to cease to continue as a going concern.
> Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Helen Mitchell.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 21, 2019
2018 Annual Report
73
CONSOLIDATED BALANCE SHEETS
thousands of Canadian dollars
ASSETS
Cash and Cash Equivalents (note 4(A))
Securities (notes 4(B) and (C))
Loans Held for Sale
Loans (note 5)
Securitized mortgages (note 6(A))
Non-securitized mortgages and loans
Allowance for credit losses1 (note 5(C))
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)
Securitization Liabilities (note 6(B))
CMHC-sponsored mortgage-backed security liabilities
CMHC-sponsored Canada Mortgage Bond liabilities
Bank-sponsored securitization conduit liabilities
Other
Credit facilities (note 4(A))
Derivative liabilities (note 18)
Other liabilities (note 12)
Deferred tax liabilities (note 16(C))
Shareholders’ Equity
Capital stock (note 13)
Contributed surplus
Retained earnings
Accumulated other comprehensive loss (note 15)
As at
December 31
2018
December 31
2017
$
665,947 $
1,336,138
386,333
130,351
332,468
165,947
2,800,623
2,993,250
13,463,764
11,910,439
16,264,387
14,903,689
(51,691)
(38,775)
16,212,696
14,864,914
309,205
8,925
338,987
3,489
85,756
746,362
437,011
7,325
336,770
9,577
100,993
891,676
$ 18,141,689 $ 17,591,143
$ 12,977,090 $ 12,170,454
1,573,216
1,239,331
46,779
1,562,152
1,473,318
142,279
2,859,326
3,177,749
261,506
35,975
338,344
28,838
664,663
—
38,728
360,477
30,230
429,435
16,501,079
15,777,638
178,782
4,583
231,156
4,978
1,467,730
1,583,265
(10,485)
(5,894)
1,640,610
1,813,505
$ 18,141,689 $ 17,591,143
¹ The allowance for credit losses as at December 31, 2018 represents expected credit losses and has been prepared in accordance with IFRS 9 Financial
Instruments (IFRS 9). The allowance for credit losses as at December 31, 2017 represents the total of individual and collective allowances on loan principal
as prepared in accordance with the incurred loss model under IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). Please see Note 2
for further information including information on reclassification of comparative balances.
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
74 Home Capital Group Inc.
CONSOLIDATED STATEMENTS OF INCOME
thousands of Canadian dollars, except per share amounts
Net Interest Income Non-Securitized Assets
Interest from loans1 (note 5(H))
Dividends from securities
Other interest
Interest on deposits and other
Interest and fees on line of credit facilities (note 4(A))
Net interest income non-securitized assets
Net Interest Income Securitized Loans and Assets
Interest income from securitized loans and assets1 (note 5(H))
Interest expense on securitization liabilities
Net interest income securitized loans and assets
Total Net Interest Income
Provision for credit losses1 (note 5(C))
Non-Interest Income (Loss)
Fees and other income
Securitization income (note 6(C))
Gain on sale of PSiGate (note 22)
Net realized and unrealized gains (losses) on securities and loans (notes 4(C) and 5(J))
Net realized and unrealized gains (losses) on derivatives (note 18)
Non-Interest Expenses
Salaries and benefits
Premises
Other operating expenses (note 9)
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
Total number of outstanding common shares (note 13(B))
Book value per common share
For the year ended
December 31
2018
December 31
2017
$
644,370 $
710,926
1,255
24,735
670,360
314,496
17,310
338,554
94,537
80,691
13,846
352,400
20,377
332,023
47,806
10,540
950
5,467
1,689
66,452
398,475
76,924
10,168
130,981
218,073
180,402
43,103
4,696
47,799
132,603 $
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)
283,795
98,595
13,878
162,407
274,880
8,915
(2,475)
3,863
1,388
7,527
1.66 $
1.66 $
0.10
0.10
$
$
$
79,748
79,748
62,065
$
26.43 $
72,349
72,358
80,246
22.60
¹ The amounts pertaining to 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated and have been prepared in
accordance with IAS 39. Please see Note 2 for further information.
The accompanying notes are an integral part of these consolidated financial statements.
2018 Annual Report
75
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
thousands of Canadian dollars
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS)
ITEMS THAT WILL NOT BE SUBSEQUENTLY RECLASSIFIED TO NET INCOME
Equity Securities Designated at FVOCI1
Change in net unrealized gains or losses
Income tax recovery
ITEMS THAT WILL BE SUBSEQUENTLY RECLASSIFIED TO NET INCOME
Available for Sale Securities and Retained Interests1
Net change in unrealized gains or losses
Net losses reclassified to net income
Income tax expense
Debt Instruments at FVOCI1
Net change in unrealized gains or losses
Net gains reclassified to net income
Income tax recovery
Cash Flow Hedges (note 18)
Net change in unrealized gains or losses
Net losses reclassified to net income
Income tax (recovery) expense
Total other comprehensive (loss) income
COMPREHENSIVE INCOME
For the year ended
December 31
2018
December 31
2017
$
132,603 $
7,527
(4,583)
(1,222)
(3,361)
N/A
N/A
N/A
N/A
N/A
(2,024)
918
(1,106)
(293)
(813)
(1,278)
710
(568)
(151)
(417)
(4,591)
$
128,012 $
N/A
N/A
N/A
19,878
46,650
66,528
17,644
48,884
N/A
N/A
N/A
N/A
N/A
(721)
1,120
399
112
287
49,171
56,698
¹ The amounts pertaining to 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated and have been prepared
in accordance with IAS 39. N/A indicates not applicable under the accounting policy for the respective period. FVOCI indicates fair value through other
comprehensive income. Please see Note 2 for further information.
The accompanying notes are an integral part of these consolidated financial statements.
76 Home Capital Group Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY1
Capital
Stock
Contributed
Surplus
Retained
Earnings
Net Unrealized Gains (Losses), After Tax, on:
Equity
Securities
Designated at
FVOCI
Debt
Instruments
at FVOCI
Cash Flow
Hedges
Total
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
$ 231,156 $
4,978 $ 1,583,265 $
(6,902) $
2,197 $
(1,189) $
(5,894) $ 1,813,505
—
132,603
(3,361)
(813)
(417)
(4,591)
128,012
(395)
—
(52,374)
—
(248,138)
—
—
—
—
—
—
—
—
(395)
(300,512)
$ 178,782 $
4,583 $ 1,467,730 $
(10,263) $
1,384 $
(1,606) $
(10,485) $ 1,640,610
thousands of Canadian dollars
Balance at
January 1, 20182
Comprehensive income
Amortization of fair value
of employee stock options
(note 14(C))
Repurchase of shares
(note 13(C))
Balance at
December 31, 2018
—
—
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
$
84,910 $
4,562 $ 1,598,180
$
(53,589) $
(1,476) $
(55,065) $ 1,632,587
Comprehensive income
—
—
7,527
48,884
287
49,171
56,698
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)
Balance at
December 31, 2017
548
(141)
—
557
—
—
(267)
145,965
—
—
—
—
(5,732)
—
(16,710)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
407
557
(5,999)
145,965
(16,710)
$ 231,156 $
4,978 $ 1,583,265
$
(4,705) $
(1,189) $
(5,894) $ 1,813,505
¹ The amounts pertaining to 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated and have been prepared in
accordance with IAS 39.
2 Please see Note 2 for information on transition of balances as at December 31, 2017 to balances as at January 1, 2018 upon adoption of IFRS 9.
The accompanying notes are an integral part of these consolidated financial statements.
2018 Annual Report
77
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 premium (discount) on securities
Provision for credit losses
(Recovery) loss on sale of loan portfolios
Gain on sale of PSiGate
Gain on sale of mortgages or residual interest
Net realized and unrealized (gains) 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
Credit facilities
Securitization liabilities
Taxes receivable or payable and other
Cash flows used in operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares
Repurchase of shares
Exercise of employee stock options
Dividends paid to shareholders
Cash flows (used in) provided by financing activities
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities
Purchases
Proceeds from sales
Proceeds from maturities
Net proceeds from the sale of PSiGate
Purchases of capital assets
Capitalized intangible development costs
Cash flows (used in) provided by investing activities
Net (decrease) 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
2018
December 31
2017
$
132,603 $
7,527
398
20,377
(4,451)
(950)
(4,633)
(1,016)
23,049
(395)
4,696
(330)
7,516
18,160
—
(5,695)
71,910
34,345
557
3,863
(1,327,930)
2,947,462
127,806
(171,637)
(4,921)
(5,818)
29,032
806,636
261,506
(318,423)
(42,405)
(304,839)
65,836
10,613
3,666
(3,715,576)
—
528,100
13,086
(180,597)
—
145,965
(300,512)
—
—
(300,512)
(472,349)
412,407
838
310
(1,622)
(4,424)
(64,840)
(670,191)
(5,999)
407
(16,710)
123,663
(378,123)
491,883
84,919
—
(1,715)
(9,286)
187,678
130,744
$
$
1,336,138
1,205,394
665,947 $
1,336,138
1,281 $
4,542
758,196
383,465
65,379
825,030
512,643
3,002
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.
78 Home Capital Group Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
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 Bank, a wholly owned subsidiary of Home Trust, is a federally regulated retail bank offering mortgage
lending and securitization of insured residential mortgages. Home Trust and Home Bank also offer deposits via brokers and financial
planners, and through a direct-to-consumer deposit brand, Oaken Financial. The Company’s former subsidiary, Payment Services
Interactive Gateway Inc. (PSiGate), provided payment services. On February 1, 2018, the Company closed the sale of PSiGate.
Licensed to conduct business across Canada, Home Trust and Home Bank have 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, 2018 were authorized for issuance by the Board of Directors
(the Board) of the Company on February 21, 2019. 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 (please see Current Period Changes
to Accounting Policies below for more information). The significant accounting policies used in the preparation of these consolidated
financial statements are summarized below.
Comparative Consolidated Financial Statements
The comparative consolidated financial statements have been reclassified from statements previously presented to conform to
the presentation of the 2018 consolidated financial statements. In particular, loan balances previously presented net of individual
allowances have been reclassified to a gross presentation.
Use of Judgement and Estimates
Management has exercised judgement in the process of applying the Company’s accounting policies. Some of the Company’s
accounting policies require subjective, complex judgements and estimates relating to matters that are inherently uncertain. The
preparation of these 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.
Derecognition of Financial Assets
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 IFRS 9 Financial Instruments (IFRS 9).
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.
Impairment of Financial Assets
Under IFRS 9, the expected credit loss (ECL) model requires management to make judgements and estimates in a number of areas.
Management must exercise significant judgement in determining whether there has been a significant increase in credit risk (SICR)
since initial recognition and in estimating the amount of expected credit losses. The calculation of expected credit losses includes the
incorporation of forward-looking information, which requires significant judgement to determine the forward-looking variables that
are relevant for each portfolio and the scenarios and probability weights that should be applied. Management also exercises expert
credit judgement in determining the amount of ECLs at each reporting date by considering reasonable and supportable information
that is not already incorporated in the quantitative modelling process. Changes in these inputs, assumptions, models and judgements
directly impact the measurement of ECLs.
2018 Annual Report
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Impairment of Intangible Assets
In applying judgement in its assessment of impairment of intangible assets, 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 were recognized on intangible assets 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 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.
Other Judgements and Estimates
Other key areas where management has applied judgement and made estimates include fair values, 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.
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 structured entities included in the consolidated financial statements are those created in connection with
the Company’s credit facilities as described in Note 4(A). The subsidiaries included in the consolidated financial statements are Home
Trust and Home Bank. 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 and was included in the consolidated financial statements
prior to its sale, which closed on February 1, 2018, as described in Note 22.
Financial Instruments
On January 1, 2018, the Company adopted IFRS 9 Financial Instruments (IFRS 9), which replaces IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39). IFRS 9 includes requirements for classification and measurement of financial assets and
liabilities, impairment of financial assets and general hedge accounting. Please see Note 3 for more information including the impact
of adoption of IFRS 9 on the consolidated financial statements.
The Company, as permitted, did not restate comparative period financial information upon adoption of IFRS 9. Accordingly, where
applicable, the accounting policies pertaining to financial instruments presented below specify both the accounting policies followed
under IFRS 9 for 2018 and the accounting policies followed under IAS 39 for periods prior to 2018, along with information on the
comparison of IFRS 9 and IAS 39 where relevant. Unless specified, the Company’s accounting policies for financial instruments under
IFRS 9 remain unchanged from IAS 39.
Classification and Measurement of Financial Instruments
Under IFRS 9, all financial assets are classified at initial recognition based on the Company’s business model under which the financial
assets are managed and the nature and characteristics of its contractual cash flows. These factors 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 replaced the IAS 39 classifications of held for trading, available for sale, loans and receivables, and held
to maturity. Please see Note 15 for illustration of the reclassification to the new IFRS 9 categories that pertain to accumulated other
comprehensive income (AOCI) and Note 20 for the categorization and fair value of financial assets and liabilities under IFRS 9 for
2018 and IAS 39 for 2017.
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 is determined based on the business
model under which the instruments are managed. Debt instruments that are managed on a hold to collect basis are classified
at amortized cost, debt instruments that are managed on a held for trading or fair value basis are classified as FVTPL, and debt
instruments that are managed on a held to collect and for sale basis are classified as FVOCI.
The Company has assessed the cash flow characteristics for in scope financial assets and defined its significant business models.
In determining its business models, the Company considers a variety of factors at a portfolio level including management intent
and strategic objectives, measurement and reporting of performance, frequency and volume of sales activity, and risk management
methodology. The Company has determined the following business models:
> Held to collect: the objective is to collect contractual cash flows, sales are incidental to the objective of the model.
> Held to collect and for sale: the objective is to both collect contractual cash flows and sell the financial asset, and there is an
expectation of higher frequency and volume of sales occurring than held to collect.
> Held for sale and other: the objective is neither of the first two business models, the collection of contractual cash flows is incidental.
80 Home Capital Group Inc.
Debt Instrument Financial Assets Measured at Amortized Cost
Debt instrument financial assets are managed on a held to collect basis, where their contractual cash flows meet the SPPI test and are
measured at amortized cost. These financial assets are initially recognized at fair value plus direct and incremental transaction costs,
and are subsequently measured at amortized cost, using the effective interest rate method, net of an allowance for expected credit
loss. Debt instrument financial assets measured at amortized cost include most loans that were previously classified as loans and
receivables under IAS 39, including residential and commercial mortgages, credit cards and other consumer retail loans. Mortgages
that are securitized but do not receive off-balance sheet treatment are also measured at amortized cost. Debt instrument financial
assets measured at amortized cost also include acceptable securities assigned as replacement assets in the Company’s Canada
Mortgage Bond program, which were previously recognized as available for sale securities under IAS 39. The replacement assets are
investment-grade instruments similar to Government of Canada bonds and no credit losses are expected.
Debt Instrument Financial Assets Measured at FVOCI
Debt instrument financial assets measured at FVOCI are non-derivative financial assets with contractual cash flows that meet the
SPPI test and are managed on a held to collect and for sale basis. FVOCI debt instruments are measured initially at fair value plus
direct and incremental transaction costs. Subsequent to initial recognition, similarly to available for sale debt instruments under
IAS 39, under IFRS 9 cumulative gains or losses from changes in fair value are recognized in AOCI and changes in expected credit
loss allowances are recognized in the consolidated statements of income. Upon derecognition of the debt instrument, cumulative
gains or losses are transferred from AOCI to the consolidated statements of income. Debt instrument financial assets measured at
FVOCI include debt securities, acquired residual interests of underlying securitized residential mortgages and the Company’s retained
interest held on mortgages that are securitized and sold. Government of Canada bonds and equivalents that are investment-grade are
included under debt securities and no credit losses are expected.
Equity Financial Instruments Designated at FVOCI
Equity financial instruments are measured at FVTPL unless an irrevocable designation is made to measure them at FVOCI. Gains or
losses from changes in the fair value of equity instruments designated at FVOCI are recognized in other comprehensive income (OCI).
In contrast to available for sale equity securities under IAS 39, amounts recognized as OCI are not subsequently recycled to profit or
loss, with the exception of interests and dividends. Instead, cumulative gains or losses upon derecognition of the equity instrument
are transferred within shareholders’ equity from AOCI to retained earnings and presented in the consolidated statements of changes
in shareholders’ equity. Consequently, the recognition of impairment losses is not required. Equity financial instruments designated at
FVOCI include non-trading equity securities held by the Company and consist primarily of preferred shares.
Financial Instruments Measured at FVTPL (Trading and Non-trading)
Trading financial instruments are measured at FVTPL as they are held for trading purposes. Non-trading financial assets are also
measured at FVTPL if their contractual cash flow characteristics do not meet the SPPI test or if they are managed on a fair value basis.
Trading and non-trading financial assets are remeasured at each reporting date. Gains and losses on disposition and the associated
unrealized gains and losses as a result of remeasurement are recognized in the consolidated statements of income as non-interest
income. Interest income and expenses recognized on trading and non-trading financial instruments are recognized in net interest
income. Financial instruments measured at FVTPL include cash and cash equivalents, derivative instruments held, and mortgages
originated or purchased with the intention of being securitized and sold.
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 and classified as financial instruments measured at FVTPL, as indicated above. 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.
Loans
As indicated above, most loans are classified as debt instrument financial assets measured at amortized costs. 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 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 (see below for the impact of impairment on the accrual of interest
under IFRS 9 for 2018 and IAS 39 for periods prior to 2018).
2018 Annual Report
81
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 carried at fair value and, as indicated above, are classified as financial instruments measured at FVTPL
under IFRS 9 for 2018 (classified as held for trading under IAS 39 for periods prior to 2018). 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.
Financial Liabilities
The classification of financial liabilities is largely unchanged under IFRS 9. Deposits, securitization and other liabilities continue to be
measured at amortized cost, and derivative liabilities are measured at FVTPL.
Classification and Measurement of Securities under IAS 39 for Periods Prior to 2018
Securities were classified as either held for trading or available for sale, based on management’s intentions. All debt and equity
instruments were recognized on the settlement date at their fair value.
Held for trading securities were financial assets purchased for resale, generally within a short period of time and primarily held for
liquidity purposes. Interest earned was included in other interest income. Held for trading securities were measured at fair value, using
published bid prices, as at the consolidated balance sheet dates. All realized and unrealized gains and losses were reported in income
under non-interest income. Transaction costs were expensed as incurred. The Company had not elected under the fair value option to
designate any financial asset or liability as held for trading, nor did the Company have any securities classified as held for trading.
Available for sale securities were 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 were accrued as earned with the passage of time and were
included in dividends from securities or other interest income. Available for sale securities were measured at their fair value, using
published bid prices where market value was readily available, as at the consolidated balance sheet dates. Unrealized gains and
losses, net of related taxes, were included in AOCI until the security was sold or an impairment loss was recognized, at which time the
cumulative gain or loss was transferred to net income. Transaction costs were capitalized.
Impairment of Financial Instruments – Expected Credit Loss Model
IFRS 9 introduced 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. The ECL model applies to all financial assets
that are debt instruments classified as amortized cost or FVOCI, and for all loan commitments and financial guarantees not measured
at FVTPL. The application of the new ECL model represents a significant change from the incurred loss model under IAS 39, and
lifetime credit losses are expected to be recognized earlier. Significant judgements are made in order to incorporate forward-looking
information into the estimation of ECL allowances which were not required under IAS 39.
The ECL model consists of the following three stages:
> Stage 1 includes performing financial assets and is measured using a 12-month ECL, with interest income being recognized on the
gross carrying value of the asset.
> Stage 2 includes financial assets that have experienced a SICR since initial recognition and is measured using a lifetime ECL, with
interest income being recognized on the gross carrying value of the asset.
> Stage 3 includes financial assets that are impaired and is measured using a lifetime ECL, with interest income being recognized on
the net carrying value of the asset.
Lifetime ECL is the expected credit losses that result from all possible default events over the expected life of a financial instrument.
A 12-month ECL is the portion of lifetime ECL that represents the expected credit losses that result from default events on the
financial instrument that are possible within the 12 months following the reporting date. The ECL allowances are calculated through
three probability-weighted forward-looking scenarios including base, optimistic, and pessimistic, that measure the expected cash
shortfalls on the financial assets related to default events either (i) over the next 12 months or (ii) over the 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 are updated at each reporting date, and the probability weights and the associated scenarios are determined
through a management review process that involves significant judgement and review by the Company’s Allowance Committee
consisting of representatives from Finance, Enterprise Risk Management and Operations. The Company has engaged an external
service provider for forward-looking economic scenarios. The key macroeconomic factors include unemployment rates, housing price
index and mortgage rates. In addition, the Allowance Committee exercises expert credit judgements in assessing exposures that have
experienced a SICR and in determining the amount of ECL allowances required at each reporting date by considering reasonable
82 Home Capital Group Inc.
and supportable information that is not already included in the quantitative models. Expert credit judgements are performed by
considering emergence of economic, environmental or political events, as well as expected changes to parameters, models or data
that are not currently incorporated. Significant judgements made by the Allowance Committee may impact the amount of ECL
allowances recognized.
Measurement of Expected Credit Loss
The Company calculates ECL allowances through the following key inputs over the remaining expected life of the financial asset and
discounted to the reporting date at the respective effective interest rate.
> Probability of Default (PD) measures the estimated likelihood of default over a given time period. PD estimates are updated for
each scenario at each reporting date and are based on current and forward-looking information.
> Loss Given Default (LGD) provides the estimate of loss when default occurs at a given time, and is determined based on historical
write-off events, recovery payments, borrower specific attributes and direct costs. The estimate is updated at each reporting date
for each scenario based on current and forward-looking information.
> Exposure At Default (EAD) estimates the exposure at the future default date.
Significant Increase in Credit Risk
Upon initial recognition of financial assets, the Company recognizes a 12-month ECL allowance which represents the portion of lifetime
ECL that result from default events that are possible within the next 12 months (Stage 1). If there has been a SICR, the Company then
recognizes a lifetime ECL allowance resulting from possible default events over the expected life of the financial asset (Stage 2). The
SICR is determined through changes in the lifetime 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 presumption
that credit risk has increased significantly when contractual payments are more than 30 days past due. This assessment considers
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. Criteria for assessing SICR are defined at a portfolio level and vary
based on the risk of default at the origination of the portfolio. If credit quality subsequently improves such that the increase in credit
risk since initial recognition is no longer significant, the loss allowances will revert back to be measured based on a 12-month ECL, and
the financial asset will transfer from Stage 2 back to Stage 1. Stages 1 and 2 comprise all non-impaired financial assets.
Objective Evidence of Impairment
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 lifetime ECL allowances with interest revenue recognized based
on the carrying amount of the asset, net of the allowances, rather than its gross carrying amount (Stage 3). Deterioration in credit
quality is considered objective evidence of impairment and includes observable data that comes to the attention of the Company,
such as significant financial difficulty of the borrower. Under IFRS 9, all financial assets on which repayment of principal or payment
of interest is contractually 90 days in arrears are presumed to be impaired. Accordingly, the Company defines default as the earlier
of identification of objective evidence of impairment or delinquency of 90 days or more. A financial asset is no longer considered
impaired when all past due amounts have been recovered and the objective evidence of impairment is no longer present. In contrast,
under IAS 39, impairment was determined based on the number of days payments were in arrears with default considered when
payments ranged from 90 to 365 days past due.
Write-offs
Financial assets are written off, either partially or in full against the related allowances for credit losses when the Company believes
there are no reasonable expected future recoveries. Any recoveries of amounts previously written off are credited against provision for
credit losses in the consolidated statements of income.
Loan Modification
The Company defines loan modification as changes to the original contractual terms of the financial asset that represents a
fundamental change to the contract or changes that may have a significant impact on the contractual cash flow of the asset. The
Company derecognizes the original asset when the modification results in significant change or expiry in the original cash flows; a new
asset is recognized based on the new contractual terms. The new asset is initially recognized in Stage 1, and then assessed for SICR
on an ongoing basis. If the Company determines the modifications do not result in derecognition, then the asset will retain its original
staging and SICR assessments.
2018 Annual Report 83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Impairment of Securities under IAS 39 for Periods Prior to 2018
At the end of each reporting period, the Company conducted a review to assess whether there was any objective evidence that an
available for sale security was impaired. Objective evidence of impairment resulted from one or more events that occurred after the
initial recognition of the security and which event (or events) had an impact that could be reliably estimated on the estimated future
cash flows of the security. A deterioration in credit quality was considered objective evidence of impairment for available for sale debt
securities. Such objective evidence included observable data that came to the attention of the Company, such as significant financial
difficulty of the issuer of the security, indication that the issuer would 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 was considered objective evidence of impairment for
available for sale equity securities. Management would perform a detailed assessment if there had 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 were assessed for
impairment using a debt impairment model.
When there was objective evidence of an impairment of an available for sale security, any cumulative loss that had been recognized
in OCI was reclassified from AOCI to net income. The amount of the cumulative loss reclassified was 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 could be objectively related to an event occurring after
the impairment loss was recognized resulted in a reversal of the impairment loss through net income. Impairment losses on equity
securities were not subsequently reversed through net income.
Impairment of Loans under IAS 39 for Periods Prior to 2018
A loan was recognized as being impaired (non-performing) when there was objective evidence of deterioration in credit quality to the
extent that the Company was 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 was deemed to be impaired
at the earlier of the date it had been individually provided for or when it had been in arrears for 90 days. Single-family and multi-unit
residential mortgages (including securitized mortgages) guaranteed by the Government of Canada were not considered impaired until
payment was contractually 365 days past due. Material credit losses are generally not anticipated on insured mortgages. Secured
and unsecured credit card balances that had a payment that was contractually 120 days in arrears were individually provided for, and
those that had a payment that was 180 days in arrears were written off.
When loans were classified as impaired, the book value of such loans was 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. Interest income continued to accrue when a loan was considered impaired with an
appropriate allowance for credit loss, also discussed below.
An impaired loan was not returned to an unimpaired status unless all principal and interest payments were up to date and
management was reasonably assured of the recoverability of the loan.
An allowance for credit losses was maintained at an amount that, in management’s opinion, was considered adequate to absorb
all credit-related losses that had occurred in the portfolio whether or not detected at the period end, including accrued interest on
impaired loans. Allowances were mainly related to loans but could also apply to other assets. The allowance consisted of accumulated
individual and collective allowances, each of which was reviewed at least quarterly. The collective allowance was deducted from total
loans on the consolidated balance sheets. The allowance was increased by the provision for credit losses and decreased by write-offs,
net of recoveries.
Individual allowances were determined on an item-by-item basis and reflected the associated estimate of credit loss. The individual
allowances were 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 was used to estimate the realizable amount of the receivable. The
allowance was the difference between the receivable’s carrying value, including accrued interest, and its estimated realizable amount.
Collective allowances were established to absorb credit losses on the aggregate exposures in each of the Company’s loan portfolios
for which losses had been incurred but not yet individually identified. The collective allowance took 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, was applied to each pool of loans with
common risk characteristics. This estimate included consideration of economic and business conditions.
84 Home Capital Group Inc.
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.
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 IFRS 9. 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 carried at fair value and classified as debt instrument financial assets measured at FVOCI (classified as
available for sale assets under IAS 39 for periods prior to 2018). The fair value of the retained interests is estimated using discounted
cash flow methodology. Retained interests are revalued quarterly to assess for impairment.
The Company may sell 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 previously transferred 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 acceptable securities pledged as
CMB replacement assets. The accounting treatment for cash and securities is described above. Mortgages assigned as collateral in
the Company’s securitization programs or as collateral for the Company’s credit facilities are included in loans on the consolidated
balance sheets. Please see Notes 4(A), 6(A) and 7 for more information.
Derivatives Held for Risk Management Purposes
The Company utilizes derivatives to manage interest rate risk and equity price risk. Derivatives are recognized on the trade date
and carried at fair value. Derivatives 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.
2018 Annual Report 85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Hedge Accounting
As indicated above and as permitted, the Company elected to continue to apply 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. Any cumulative gain or loss recognized at that time remains in AOCI until the forecasted
transaction impacts the consolidated statements of income. When the forecasted transaction is no longer expected to occur, the
cumulative gain or loss that was recognized 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
Computer equipment and purchased software
Leasehold improvements are amortized on a straight-line basis over the remaining term of the lease.
3 to 10 years
3 to 7 years
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.
86 Home Capital Group Inc.
Intangible Assets
The Company’s intangible assets comprise internally developed software costs. An intangible asset is recognized only when its cost
can be measured reliably and it is probable that the expected future economic benefits that are attributable to the asset will flow
to the Company. In addition, the Company capitalizes borrowing costs directly attributable to the intangible assets flowing to the
Company by applying a capitalization rate to the expenditures on the intangible assets. Following initial recognition, intangible assets
are carried at cost less any accumulated amortization and any accumulated impairment losses.
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. 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.
2018 Annual Report 87
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. Commencing with options granted in September 2017, the Company uses 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 and DSUs or only DSUs. The Company accounts for the DSUs as cash-settled
transactions. Under the plan, the obligations for the DSUs are accrued quarterly based on the Directors’ remuneration for the quarter.
Each reporting period, the obligations are adjusted for fluctuations in the market price of the Company’s common shares and allow
for dividend equivalents. Changes in obligations under the plan are recorded as salaries and benefits expense in the consolidated
statements of income, with a corresponding increase in other liabilities on the consolidated balance sheets.
The Company grants restricted share units (RSUs) 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 150% and are recognized in the consolidated statements of income as
salaries and benefits expense.
88 Home Capital Group Inc.
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 acquisitions 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. Current and Future Changes in Accounting Policies
Current Period Changes in Accounting Policies
IFRS 9 Financial Instruments
On January 1, 2018, the Company adopted IFRS 9 Financial Instruments (IFRS 9), which replaces IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39). IFRS 9 includes requirements for classification and measurement of financial assets and
liabilities, impairment of financial assets and general hedge accounting. Please see Note 2 for a description of the accounting policies
for financial instruments under IFRS 9 along with information on the comparison of IFRS 9 and IAS 39 where relevant.
IFRS 9 is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with certain exceptions.
The Company, as permitted, did not restate comparative period financial information. Amendments were also made to IFRS 7
Financial Instruments: Disclosures (IFRS 7) introducing expanded qualitative and quantitative disclosures related to IFRS 9, which the
Company has also adopted for the annual period beginning January 1, 2018.
An adjustment to opening retained earnings and AOCI was not required on adoption of IFRS 9 on January 1, 2018 as there were no
measurement differences as a result of changes in classification of financial instruments and no measurement differences in the
overall allowance for credit losses. There were also no measurement differences within AOCI on transition. However, there were
changes to how the allowance for credit losses are allocated to each of the Company’s underlying loan portfolios.
2018 Annual Report 89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Please see the table below for the reconciliation of allowance for credit losses from IAS 39 to IFRS 9 for more information.
thousands of Canadian dollars
Allowance for credit losses on principal at
December 31, 2017 under IAS 39
Allowance for credit losses on accrued interest
receivable at December 31, 2017 under IAS 39
Total allowance for credit losses at
December 31, 2017 under IAS 39
Collective allowance under IAS 39
Stage 1 allowance under IFRS 9
Stage 2 allowance under IFRS 9
Individual allowances on principal and accrued
interest receivable under IAS 39
Stage 3 allowance under IFRS 9
Net remeasurements upon adoption of IFRS 9
Allowance for credit losses as at
January 1, 2018 under IFRS 9
Single-family
Residential
Mortgages
Commercial
Mortgages
Credit Card
Loans and
Lines of
Credit
Other
Consumer
Retail Loans
Total
$
22,069
$
9,077
$
3,553
$
4,076
$
38,775
1,016
478
—
7
1,501
23,085
(20,340)
11,610
7,280
(2,745)
3,563
(632)
9,555
(6,327)
3,898
3,318
(3,228)
3,300
961
3,553
(3,096)
823
1,965
(457)
1,196
431
4,083
(3,800)
565
2,199
(283)
559
(760)
40,276
(33,563)
16,896
14,762
(6,713)
8,618
—
$
22,453
$
10,516
$
3,984
$
3,323
$
40,276
IFRS 9 also introduced a new general hedge accounting model that aims to better align accounting with risk management activities.
The Company had 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 elected to continue to apply the hedge accounting
requirements under IAS 39. The Company has implemented the revised annual hedge accounting disclosures that are required under
IFRS 7 in these consolidated financial statements.
IFRS 15 Revenue from Contracts with Customers
On January 1, 2018, the Company adopted IFRS 15 Revenue from Contracts with Customers (IFRS 15). IFRS 15 supersedes IAS 11
Construction Contracts, IAS 18 Revenue and related interpretations and it applies to all revenue arising from contracts with customers.
IFRS 15 establishes the principles for recognizing revenue and cash flows arising from contracts with customers and prescribes the
application of a five-step recognition and measurement model. IFRS 15 does not apply to financial instruments and other contractual
rights and obligations under the scope of IFRS 9 and did not have a financial impact on the Company upon transition.
Amendments to IFRS 2 Share-based Payment
On January 1, 2018, the Company adopted the narrow scope amendments to IFRS 2 Share-based Payment related to the classification
and measurement of share-based payment transactions and has applied the standard prospectively. The amendment clarified the
accounting for cash-settled share-based payment transactions that include a performance condition, the classification of share-
based payment transactions with net settlement features for withholding tax obligations, and the accounting for modifications of
share-based payment transactions from cash-settled to equity settled. There was no impact on the consolidated financial statements
as a result of the adoption of the new amendments.
Future Changes in Accounting Policies
The following accounting pronouncements issued by the IASB were not effective as at December 31, 2018 and therefore have not been
applied in preparing these consolidated financial statements.
Amendments to IFRS 9 Financial Instruments
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
applications permitted. Based on preliminary assessments, the amendments are not expected to materially impact the Company’s
consolidated financial statements.
90 Home Capital Group Inc.
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases (IFRS 16) which sets out the principles for the recognition, measurement,
presentation and disclosure of leases. The standard removes the current requirements under IAS 17 Leases (IAS 17) and related
interpretations for lessees to classify leases as finance leases or operating leases by introducing a single lessee accounting model
that requires the recognition of lease assets and lease liabilities on the balance sheet for most leases. Lessees will also recognize
depreciation expense on the right-of-use asset, interest expense on the lease liability, and shift the timing of expense recognition
in the consolidated statements of income. There are no significant changes to lessor accounting aside from enhanced disclosure
requirements. IFRS 16 is effective for the Company on January 1, 2019. The Company plans to adopt IFRS 16 using the modified
retrospective approach by adjusting the consolidated balance sheet at January 1, 2019, the date of initial application, with no
restatement of comparative periods. The Company will elect to apply practical expedients allowing the use of a single discount rate
to a portfolio of leases with similar characteristics; the exclusion of initial direct costs from the measurement of the right-of-use asset
at the date of initial application; the exclusion of short-term leases, which are defined as those that have a lease term of 12 months or
less; and the exclusion of leases for low-value items.
The Company has completed the process of assessing existing contractual relationships to identify leases that would be recorded
on the consolidated balance sheets under IFRS 16. The Company continues to evaluate the potential impact to the existing systems
and processes, and the additional disclosures required by the new standard. Initial quantification indicates that the Company’s lease
liability will be in the range of $28 million to $32 million exceeding the right-of-use asset which will be in the range of $25 million to
$28 million. This excess of the liabilities over the assets will result in a reduction in retained earnings in the range of $3 million to
$4 million upon adoption of IFRS 16 on January 1, 2019.
4. Cash Resources, Credit Facilities and Securities
(A) Cash Resources and Credit Facilities
thousands of Canadian dollars
Cash and cash equivalents
Committed Secured Standby Credit Facility
December 31
2018
December 31
2017
$
665,947 $
1,336,138
Home Trust has a $500 million secured committed standby credit facility with a syndicate of Canadian chartered banks (the
“lenders”), which was undrawn as at December 31, 2018. Should an amount be drawn, the transaction would be accounted for as
secured financing in the consolidated financial statements of the Company. As required under the terms of the facility, Home Trust
created a bankruptcy remote special purpose entity (SPE), which is a consolidated entity of Home Trust. The facility is limited to
$500 million and is subject to Home Trust transferring eligible collateral to the SPE. To preserve the available credit amount,
Home Trust would need to replace assets that no longer meet the eligibility requirements. Under the terms of the facility, the lenders
cannot require the transfer of eligible assets from the SPE back to Home Trust. As at December 31, 2018, the facility is secured against
a portfolio of eligible mortgages with a carrying value totalling $598.8 million, which were legally transferred from Home Trust to the
SPE along with the related security. The Company and Home Trust do not guarantee any debt obligations of the SPE and the lenders
have recourse only to the assets of the SPE and not to the general assets of Home Trust or the Company. The Company also provides
a performance guarantee of Home Trust’s obligations required under the facility.
Under the terms of the facility, Home Trust paid a non-refundable upfront commitment fee of $3.75 million. The interest rate on any
drawn portion is equal to 3-month CDOR plus 150 basis points, subject to certain terms. The annual standby fee on undrawn funds is
0.60%. The facility matures on June 29, 2020, and any advances that are outstanding on that date fully mature on June 29, 2022. Funds
drawn on the facility are repayable at any time. Amortization of the upfront commitment fee, the standby fee and interest expense on
any drawn amounts are included in interest and fees on line of credit facilities 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 facilities.
The Company had a $2 billion line of credit facility with a wholly owned subsidiary of Berkshire Hathaway Inc., a major US investment
firm. The facility matured at the end of June 2018 and there were no amounts outstanding at that time. Interest expense on drawn
amounts and the standby fee on drawn amounts are included in interest and fees on line of credit facilities in the consolidated
statements of income. Transaction costs on the facility were amortized over the life of the facility and are also included in interest and
fees on line of credit facilities.
The initial draw on the $2 billion line of credit facility referred to above was used to repay and terminate an 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 was included in interest and fees on line of credit facilities in the
consolidated statements of income.
2018 Annual Report 91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Secured Warehouse Credit Facility
Home Trust has a $300 million secured warehouse credit facility with a syndicate of Canadian chartered banks. The balance at
December 31, 2018 included in credit facilities on the consolidated balance sheets was $261.5 million. As at December 31, 2018, the
facility is secured against insured mortgages with a carrying value totalling $269.7 million. The interest rate on any drawn amount is
variable. Any undrawn amounts are subject to a fixed-rate commitment fee. The facility expires on October 31, 2019, and amounts
drawn on the facility are payable within 180 days from the date of draw.
Interest expense is included in interest and fees on line of credit facilities 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 facilities.
Uncommitted Secured Credit Facility
The Company also has an uncommitted secured credit facility with a Canadian chartered bank in the amount of $20 million, subject to
letters of credit issued against the facility. As at December 31, 2018, the facility is undrawn.
(B) Securities at Fair Value by Type and Remaining Term to Maturity and Rate Reset Date
The following table presents the Company’s securities at fair value by type and remaining term to maturity or rate reset date. Debt
securities presented in the following table are classified as debt securities measured at FVOCI under IFRS 9 for 2018. Preferred
shares are classified as equity securities designated at FVOCI under IFRS 9 for 2018. Both debt securities and preferred shares were
classified as available for sale under IAS 39 in 2017.
thousands of Canadian dollars
Debt securities
Preferred shares
December 31
2018
December 31
2017
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
Fair Value
Total
Total
Fair Value
$
$
— $
50,440
$
309,541
$
— $
359,981
$
301,534
4,905
17,317
4,130
—
26,352
30,934
4,905
$
67,757
$
313,671
$
— $
386,333
$
332,468
(C) Securities – Net Unrealized Gains and Losses
thousands of Canadian dollars, except %
Debt securities measured at FVOCI
Preferred shares designated at FVOCI
thousands of Canadian dollars, except %
Debt securities available for sale
Preferred shares available for sale
As at December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Total
Fair Value
Weighted-
Average
Yield
$
359,753
$
228
$
— $
359,981
40,340
—
(13,988)
26,352
$
400,093
$
228
$
(13,988) $
386,333
2.4%
3.4%
As at December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Total
Fair Value
$
300,037
$
1,497
$
— $
301,534
40,339
—
(9,405)
30,934
$
340,376
$
1,497
$
(9,405) $
332,468
Weighted-
Average
Yield
1.7%
2.7%
The unrealized gains or losses included above represent the differences between the cost of a security and its current fair value.
Included in securities are preferred shares with a carrying amount of $24.1 million and government bonds with a carrying amount of
$10.1 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 and government bonds as security for the credit facility
with other acceptable forms of security.
During the year, the Company sold government bonds for proceeds of $412.4 million (2017 – $338.1 million) and recognized gains
of $1.0 million (2017 – $1.0 million). There were no sales of preferred shares in 2018. In 2017, the Company sold preferred shares for
proceeds of $154.2 million resulting in the realization of losses of $72.9 million.
Debt Securities Measured at FVOCI
Net unrealized gains and losses (excluding impairment losses, which are recognized in the consolidated statements of 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.
92 Home Capital Group Inc.
As of December 31, 2018, there were no allowances for credit losses recognized on debt securities. All debt securities held are
Government of Canada debt securities and are classified as Stage 1.
Interest income earned on debt securities measured at FVOCI was $6.0 million for the year and is included in other interest in the
consolidated statements of income.
Equity Securities Designated at FVOCI
Equity securities designated at FVOCI include non-trading equity securities and, for the Company, consist entirely of preferred shares.
Net unrealized gains and losses 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.
All dividend income was earned on equity securities designated at FVOCI still held at the end of the reporting period.
5. Loans
(A) Loans by Product1
thousands of Canadian dollars
Securitized single-family residential mortgages2
Securitized multi-unit residential mortgages
Total securitized mortgages
Single-family residential mortgages
Commercial mortgages3
Credit card loans and lines of credit
Other consumer retail loans
Total non-securitized mortgages and loans4
As at December 31, 2018
Gross
Carrying
Amount
Allowance
for Credit
Losses
Net
Carrying
Amount
$ 2,489,971 $
310,652
2,800,623
11,068,588
1,671,101
405,051
319,024
271
421
692
25,788
16,353
3,703
5,155
$ 2,489,700
310,231
2,799,931
11,042,800
1,654,748
401,348
313,869
13,463,764
50,999
13,412,765
$ 16,264,387 $
51,691
$ 16,212,696
1 The balances as at December 31, 2018 have been prepared in accordance with IFRS 9.
2 Securitized single-family residential mortgages include both CMHC-sponsored securitized insured mortgages and bank-sponsored securitization conduit
uninsured mortgages.
3 Commercial mortgages include both non-residential commercial mortgages and residential commercial mortgages. Residential commercial mortgages
include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential property types.
4 Loans exclude mortgages held for sale.
(B) Loans by Geographic Region and Type (Gross of Allowance for Credit Losses)
thousands of Canadian dollars, except %
As at December 31, 2018
British
Columbia
Alberta
Ontario
Quebec
Other
Total
Securitized single-family
residential mortgages1
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
Total non-securitized mortgages
and loans3
$
207,915
$
406,894
$ 1,517,977
$
93,869
$
263,316
$ 2,489,971
65,326
273,241
843,931
43,688
98,889
13,475
1,600
14,723
421,617
381,115
7,307
45,751
16,932
10,688
159,923
1,677,900
9,241,649
158,799
1,266,194
366,214
288,556
18,399
112,268
293,473
6,653
35,692
1,836
132
52,281
310,652
315,597
2,800,623
308,420
11,068,588
2,948
5,180
6,594
18,048
219,395
1,451,706
405,051
319,024
1,001,583
461,793
11,321,412
337,786
341,190
13,463,764
$ 1,274,824
$
883,410
$ 12,999,312
$
450,054
$
656,787
$ 16,264,387
As a % of portfolio
7.8%
5.4%
80.0%
2.8%
4.0%
100.0%
2018 Annual Report 93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
(B) Loans by Geographic Region and Type (Gross of Allowance for Credit Losses) (Continued)
thousands of Canadian dollars, except %
As at December 31, 2017
British
Columbia
Alberta
Ontario
Quebec
Other
Total
Securitized single-family
residential mortgages1
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
$
228,024 $
278,110 $ 1,666,337 $
84,977 $
177,760 $ 2,435,208
84,860
312,884
525,998
9,819
18,853
6,221
1,950
44,728
227,686
45,664
155,104
558,042
322,838
1,894,023
366,665
8,688,139
1,924
10,888
17,263
11,543
96,817
989,223
321,390
330,323
130,641
251,529
3,037
24,190
1,515
198
332,864
2,993,250
204,920
10,037,251
2,760
2,449
5,673
17,152
114,357
1,045,603
352,062
361,166
Total non-securitized mortgages and loans3
562,841
408,283
10,425,892
280,469
232,954
11,910,439
$
875,725 $
731,121 $ 12,319,915 $
411,110 $
565,818 $ 14,903,689
As a % of portfolio
5.9%
4.9%
82.6%
2.8%
3.8%
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.
(C) Allowance for Credit Losses
The allowance for credit losses under IFRS 9 requires the consideration of forward-looking information. Forward-looking information is
incorporated in both the determination of whether there has been a significant increase in credit risk (SICR) since initial recognition of
the financial asset and in the measurement of ECL allowances.
The Company has determined that the following forward-looking macroeconomic factors are the key drivers that contribute to credit
losses: unemployment rates, housing price index and interest rates. These macroeconomic factors are forecasted at the provincial
and national level.
The ECL allowances are calculated through three probability-weighted forward-looking scenarios including base, optimistic, and
pessimistic, which are chosen from a number of scenarios provided by an external service provider engaged by the Company to
provide this forward-looking macroeconomic information. The three scenarios are reviewed and updated, as necessary at each
reporting date, and the probability weights and the associated scenarios are determined through a management review process
that involves significant judgement and review by the Company’s Allowance Committee consisting of representatives from Finance,
Enterprise Risk Management and Operations.
The following table provides the values of the forward-looking macroeconomic inputs at the national level over the next twelve months
for each of the scenarios.
Average unemployment rate
Housing price index (annual change)
Average mortgage one-year rate
Base
Optimistic
Pessimistic
6.04%
2.47%
4.55%
5.37%
5.01%
4.73%
7.30%
(4.15)%
3.23%
The allowance for credit losses is sensitive to the inputs used in models, including macroeconomic variables in the forward-looking
scenarios and their respective probability weightings, among other factors. Changes in any of these variables could have a material
impact on the assessment of SICR and the measurement of allowance for expected credit losses.
The following table compares the probability weighted ECL (determined as the reported allowance for credit losses) against the
base case ECL to illustrate the impact of applying probability weights to each of the scenarios in the determination of allowance for
credit losses.
The differences presented in the following table is isolated to the measurement of ECL without considering the impact of migration
between stages.
thousands of Canadian dollars
Probability-weighted ECL (reported allowance for credit losses)
Base case ECL
Difference
94 Home Capital Group Inc.
As at December 31, 2018
$
$
51,691
37,462
14,229
The following table presents the allowance for credit losses as at December 31, 2018 for all performing loans (total of Stage 1 and
Stage 2 allowance for credit losses) compared to the allowance for credit losses that would result if all performing loans were
measured as Stage 1 loans using 12-month ECL. The difference reflects the estimated impact of Stage 2 loans being measured using a
lifetime ECL instead of a 12-month ECL, holding all risk profiles constant.
thousands of Canadian dollars
Reported allowance for credit losses for performing loans (Stage 1 and Stage 2)
Allowance for credit losses for performing loans if all measured as 12-month ECL
Remeasurement difference resulting from transfers from Stage 1 to Stage 2
As at December 31, 2018
$
$
32,671
28,437
4,234
The following table provides a continuity of the allowance for credit losses during the year by product and IFRS 9 Stage indicating
components of the provision for credit losses as well as write-offs and recoveries.
thousands of Canadian dollars
Single-family residential mortgages
Balance at the beginning of the year
New assets originated or purchased
Transfer from Stage 1
Transfer from Stage 2
Transfer from Stage 3
Remeasurement due to transfers
Change in risk parameters and models
Assets derecognized or repaid (excluding write-offs)
Provision for credit losses
Write-offs
Recoveries
Balance at the end of the year
of which is securitized
of which is non-securitized
Commercial mortgages1
Balance at the beginning of the year
New assets originated or purchased
Transfer from Stage 1
Transfer from Stage 2
Transfer from Stage 3
Remeasurement due to transfers
Change in risk parameters and models
Assets derecognized or repaid (excluding write-offs)
Provision for credit losses
Write-offs
Recoveries
Balance at the end of the year
of which is securitized
of which is non-securitized
For the year ended December 31, 2018
Stage 1
Stage 2
Stage 3
Total
$
11,610 $
7,280 $
3,563 $
22,453
34,844
(6,903)
8,568
1,563
(3,389)
(25,181)
(5,913)
3,589
(458)
—
14,741
148
14,593
3,898
5,205
(2,594)
3,490
550
(910)
(4,195)
(920)
626
(2)
—
4,522
421
4,101
—
6,469
(11,244)
2,301
1,793
290
(2,665)
(3,056)
(6)
—
4,218
123
4,095
3,318
—
2,413
(3,771)
238
1,008
(201)
(563)
(876)
—
—
2,442
—
2,442
—
434
2,676
(3,864)
2,027
13,746
(10,072)
4,947
(2,021)
611
7,100
—
7,100
3,300
—
181
281
(788)
274
11,251
(557)
10,642
(4,161)
29
9,810
—
9,810
34,844
—
—
—
431
(11,145)
(18,650)
5,480
(2,485)
611
26,059
271
25,788
10,516
5,205
—
—
—
372
6,855
(2,040)
10,392
(4,163)
29
16,774
421
16,353
2018 Annual Report 95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
(C) Allowance for Credit Losses (Continued)
thousands of Canadian dollars
Credit card loans and lines of credit
Balance at the beginning of the year
New credit cards issued
Transfer from Stage 1
Transfer from Stage 2
Transfer from Stage 3
Remeasurement due to transfers
Change in risk parameters and models
Draws and repayments (excluding write-offs)
Provision for credit losses
Write-offs
Recoveries
Balance at the end of the year
Other consumer retail loans
Balance at the beginning of the year
New assets originated or purchased
Transfer from Stage 1
Transfer from Stage 2
Transfer from Stage 3
Remeasurement due to transfers
Change in risk parameters and models
Assets derecognized or repaid (excluding write-offs)
Provision for credit losses
Write-offs
Recoveries
Balance at the end of the year
Total allowance for credit losses
Total provision for credit losses
For the year ended December 31, 2018
Stage 1
Stage 2
Stage 3
Total
$
823 $
1,965 $
1,196 $
3,984
289
(444)
1,401
273
(406)
—
396
(3,662)
732
70
(1,063)
2,452
(45)
5
(145)
—
683
565
649
(654)
1,045
13
(675)
158
(388)
148
(6)
—
707
(463)
(475)
(151)
—
1,339
2,199
—
651
(1,331)
213
1,077
2,810
(1,566)
1,854
(34)
—
4,019
—
48
2,261
(1,005)
266
884
124
2,578
(2,251)
158
1,681
559
—
3
286
(226)
13
638
(319)
395
(527)
2
429
289
—
—
—
(70)
2,273
(384)
2,108
(2,547)
158
3,703
3,323
649
—
—
—
415
3,606
(2,273)
2,397
(567)
2
5,155
$
$
20,653 $
12,018 $
19,020 $
51,691
4,368 $
(2,553) $
18,562 $
20,377
1 Commercial mortgages include both non-residential commercial mortgages and residential commercial mortgages. Residential commercial mortgages
include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential property types.
The following provides explanations of the lines presented above:
> Transfers between stages are presumed to occur before any corresponding remeasurement of the allowance.
> New assets originated or purchased reflect the allowance related to assets newly recognized during the year, including renewals.
> Assets derecognized or repaid (excluding write-offs) reflect the allowance related to assets derecognized during the year including
loans subsequently renewed.
> Remeasurement due to transfers represents the remeasurement between 12-month and lifetime ECLs due to stage transfers,
excluding the changes to risk, parameters and models during the year.
> Changes in risk parameters and models represent the change in the allowance related to the impact of macroeconomic factors,
risk parameters, and changes to models. The change in risk parameters also includes the impact on ECL of the change in
probability of default and loss given default that occurs with the passage of time as the loan approaches the end of its contractual
term. This impact is more significant for loans with shorter contractual terms. In addition, the change in risk parameters includes
the impact on ECL of the probability of default increasing to 100% when loans become non-performing and transfer into Stage 3.
96 Home Capital Group Inc.
(C) Allowance for Credit Losses (Continued)
The changes to the Company’s allowance for credit losses under IAS 39, for the year ended December 31, 2017 are presented below.
thousands of Canadian dollars
Individual allowances
Allowance on loan principal
Single-family
Residential
Mortgages
Residential
Commercial
Mortgages
Non-residential
Commercial
Mortgages
Credit Card
Loans and
Lines of Credit
Other
Consumer
Retail Loans
Balance at the beginning of the year $
1,980
$
— $
30
$
780
$
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
2,216
(3,120)
653
1,729
1,341
(325)
1,016
2,745
23,032
(2,692)
20,340
Total allowance
Total provision
$
$
23,085
$
(801) $
16
(21)
5
—
—
—
—
—
327
—
327
327
16
2,816
(103)
7
2,750
98
380
478
3,228
9,500
(3,500)
6,000
$
$
9,228
$
(304) $
5,387
(5,968)
258
457
—
—
—
457
3,904
(808)
3,096
3,553
4,579
$
$
300
3,500
3,800
4,083
4,026
$
$
411
531
(847)
181
276
12
(5)
7
283
2017
Total
$
3,201
10,966
(10,059)
1,104
5,212
1,451
50
1,501
6,713
37,063
(3,500)
33,563
40,276
7,516
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(J) 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 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 under IAS 39.
(D) Credit Risk Exposure by Internal Risk Rating
The following table presents the gross carrying amounts of loans subject to IFRS 9 impairment requirements by internal risk ratings
used by the Company for credit risk management purposes. The gross carrying amount of loans represents the maximum exposure
to credit risk at the end of the reporting period without taking into account any collateral or other credit enhancements.
The internal risk ratings presented in the table below are defined as follows:
Very low: Loans that have significantly below average probability of default with credit risk that is significantly lower than the
Company’s risk appetite and risk tolerance levels. While the Company does originate loans under this category, these loans may have
lower yield due to high credit quality.
Low: Loans that have below average probability of default with credit risk that is lower than the Company’s risk appetite and risk
tolerance levels. While the Company does originate loans under this category, these loans may have lower yield due to high
credit quality.
2018 Annual Report 97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
Medium: Loans that have an average probability of default with credit risk which is within the Company’s risk appetite and risk
tolerance. The Company actively originates loans under this category due to higher yields.
High: Loans that were originated within the Company’s risk appetite but have subsequently experienced an increase in credit risk
which is outside of the Company’s typical risk appetite and risk tolerance levels. The Company will generally not originate loans
in this category.
Default: Loans that are over 90 days past due or loans for which there is objective evidence of impairment.
thousands of Canadian dollars
Single-family residential mortgages
Very Low
Low
Medium
High
Default
Gross carrying amount
Allowance for credit losses
Net carrying amount
Commercial mortgages1
Very Low
Low
Medium
High
Default
Gross carrying amount
Allowance for credit losses
Net carrying amount
Credit card loans and lines of credit
Very Low
Low
Medium
High
Default
Gross carrying amount
Allowance for credit losses
Net carrying amount
Other consumer retail loans
Very Low
Low
Medium
High
Default
Gross carrying amount
Allowance for credit losses
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
As at December 31, 2018
$ 1,192,297 $
— $
— $ 1,192,297
8,267,116
2,958,261
413,871
65,745
298,139
304,737
—
—
—
—
—
58,393
8,332,861
3,256,400
718,608
58,393
12,831,545
668,621
58,393
13,558,559
(14,741)
(4,218)
(7,100)
(26,059)
12,816,804
664,403
51,293 13,532,500
213,674
—
—
213,674
892,157
509,514
4,293
—
1,619,638
(4,522)
97,474
215,648
16,271
—
329,393
(2,442)
—
—
—
32,722
32,722
(9,810)
989,631
725,162
20,564
32,722
1,981,753
(16,774)
1,615,116
326,951
22,912 1,964,979
106,780
—
—
106,780
137,079
112,602
3,185
—
359,646
(683)
2,817
27,832
10,713
—
41,362
(1,339)
—
—
—
4,043
4,043
139,896
140,434
13,898
4,043
405,051
(1,681)
(3,703)
358,963
40,023
2,362
401,348
19,122
—
—
19,122
102,628
74,001
5,348
—
21,323
51,039
45,048
—
201,099
117,410
—
—
—
515
515
123,951
125,040
50,396
515
319,024
(707)
(4,019)
(429)
(5,155)
$
200,392 $
113,391 $
86 $
313,869
1 Commercial mortgages include both non-residential commercial mortgages and residential commercial mortgages. Residential commercial mortgages
include non-securitized multi-unit residential mortgages and commercial mortgages secured by residential property types.
98 Home Capital Group Inc.
(E) Collateral
The Company holds collateral on all of its mortgage portfolio in the form of real property. 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, 2018, the total appraised value of the collateral held for impaired mortgages (Stage 3), as determined when the
mortgages were originated, was $135.8 million (2017 – $76.5 million).
The credit card loans and lines of credit portfolio comprises the Company’s Equityline Visa (ELV), which is a home equity line of
credit product, as well as secured and unsecured credit card loans. The Company’s ELV loans are secured by residential property
and represent 87.6% of the total credit card loans and lines of credit portfolio at December 31, 2018. Secured credit card loans are
secured by cash deposits and represent 3.4% of the portfolio at December 31, 2018. Unsecured credit cards represent 9.0% of the
portfolio at December 31, 2018.
Other consumer retail loans are primarily secured by charges on financed assets, primarily fixtures and/or improvements to
residential property. Certain loans within the other consumer retail loan portfolio are advanced to the vendors who have underlying
loans receivable from the end consumer. The Company holds a portion of the advanced amount on these loans as cash collateral.
(F) Past Due Loans That Are Not Impaired – Comparative Information Required under IAS 39
thousands of Canadian dollars
As at December 31, 2017
Securitized single-family residential mortgages1
$
7,826
$
824
$
172
$
—2 $
8,822
Securitized multi-unit residential mortgages
—
—
—
—
—
1 to 30 Days
31 to 60 Days
61 to 90 Days
Over 90 Days
Total
Single-family residential mortgages
Residential commercial mortgages
Non-residential commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
130,553
27,561
5,932
3,1382
167,184
833
9,812
2,361
236
—
2,023
1,051
40
823
—
883
119
—
—
253
—
1,656
11,835
4,548
395
$
151,621
$
31,499
$
7,929
$
3,391
$
194,440
1 Securitized single-family residential mortgages include both CMHC-sponsored securitized insured mortgages and bank-sponsored securitization conduit
uninsured mortgages.
2 Insured residential mortgages were considered impaired when they were 365 days past due under IAS 39.
(G) Impaired Loans and Individual Allowances for Credit Losses – Comparative Information under IAS 39
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
$
— $
16,489
$
2,038
$
276
$
50,639
(1,729)
—
(2,750)
(457)
(276)
(5,212)
30,107
$
— $
13,739
$
1,581
$
— $
45,427
(H) Interest Income by Product
thousands of Canadian dollars
Traditional single-family residential mortgages
Accelerator single-family residential mortgages
Residential commercial mortgages
Non-residential commercial mortgages
Credit card loans and lines of credit
Other consumer retail loans
Total interest income on non-securitized loans
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
2018
2017
$
477,612
$
514,562
16,109
11,527
75,823
32,420
30,879
13,974
13,173
97,421
33,328
38,468
644,370
710,926
65,683
24,166
1,550
3,138
94,537
52,053
30,782
943
6,151
89,929
$
738,907
$
800,855
2018 Annual Report 99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
(I) Loans by Remaining Contractual Term to Maturity (Gross of Allowance for Credit Losses)
thousands of Canadian dollars
Securitized single-family
residential mortgages1
Securitized multi-unit
residential mortgages
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
December 31
2018
December 31
2017
Total
Book Value
Total
Book Value
$
561,351
$ 1,299,941
$
628,679
$
— $ 2,489,971
$ 2,435,208
Single-family residential mortgages
8,343,773
2,381,298
Residential commercial mortgages
70,545
143,434
28,706
281,946
—
332,586
5,416
—
310,652
558,042
10,931
11,068,588
10,037,251
—
219,395
114,357
Non-residential commercial
mortgages
Credit card loans and lines of credit
Other consumer retail loans
698,904
405,051
31,536
724,765
26,795
1,242
1,451,706
1,045,603
—
—
—
75,914
181,188
30,386
405,051
319,024
352,062
361,166
$ 10,139,866
$ 4,907,298
$ 1,174,664
$
42,559
$ 16,264,387
$ 14,903,689
1 Securitized single-family residential mortgages include both CMHC-sponsored securitized insured mortgages and bank-sponsored securitization conduit
uninsured mortgages.
(J) Sale of Loan Portfolios
The Company did not sell any mortgages in 2018. In 2017, the Company sold mortgages for proceeds of $1.49 billion resulting in the
recognition of $18.2 million of losses included in non-interest income (loss) in the consolidated statements of income.
During 2018, the Company recognized a recovery of $4.5 million of losses on the 2017 sale of commercial mortgages in non-interest
income (loss) in the consolidated statements of income.
(K) Revenue from Contracts with Customers
Included within fees and other income in the consolidated statements of income is $47.1 million (2017 – $66.5 million) of revenue
recognized from contracts with customers. The associated receivables from contracts with customers of $29.3 million (2017 –
$22.8 million) are included within loans on the consolidated balance sheets.
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.
The Company previously participated in a bank-sponsored securitization conduit program to provide for cost-effective funding of the
Company’s ACE Plus product. Under the program, 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. Currently,
the conduit is not 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 acceptable securities assigned as replacement assets
Mortgages derecognized2
Maturity, amortization and changes in mortgages assigned as CMB replacement assets
2018
2017
$ 3,176,127
$ 2,648,882
1,062,428
2,007,633
(135,887)
(650,675)
(604,380)
60,799
(799,271)
(741,916)
Ending balance of on-balance sheet assets assigned as collateral for securitization1
$ 2,847,613
$ 3,176,127
1 Included in the on-balance sheet assets assigned as collateral at December 31, 2018 is $47.0 million (2017 – $182.9 million) in acceptable securities
assigned as replacement assets and $2.80 billion (2017 – $2.99 billion) of securitized mortgages.
2 Mortgages are derecognized upon the sale of residual interests in insured single-family residential mortgages and the securitization and sale of multi-unit
residential mortgages.
100 Home Capital Group Inc.
Acceptable securities assigned as collateral were accounted for as debt instrument financial assets measured at amortized cost
(available for sale assets under IAS 39 in 2017) and included in restricted assets on the consolidated balance sheets. Please see
Note 7 for more information. Additionally, off-balance sheet mortgage loans of $6.54 billion (2017 – $7.44 billion) were assigned as
collateral related to CMHC for sponsored securitization programs. Included in this amount is $0.33 billion (2017 – $0.82 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
1 Other includes premiums, discounts, transaction costs and changes in the mark to market of hedged items.
The following table provides the remaining contractual term to maturity of securitization liabilities.
thousands of Canadian dollars, except %
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
2018
2017
$ 3,177,749
$ 2,649,649
411,753
1,496,819
(732,207)
(966,328)
2,031
(2,391)
$ 2,859,326
$ 3,177,749
$ 1,047,258
$ 1,980,441
December 31
2018
December 31
2017
Total
Book Value
Total
Book Value
CMHC-sponsored mortgage-backed
security liabilities
$
235,668
$
657,843
$
679,705
$
— $ 1,573,216
$ 1,562,152
Contractual yield
2.1%
1.7%
2.2%
CMHC-sponsored Canada Mortgage
Bond liabilities
Contractual yield
Bank-sponsored securitization
conduit liabilities
Contractual yield
—
—
1,105,982
133,349
2.6%
1.7%
39,775
7,004
2.1%
2.1%
—
—
—
—
—
—
—
2.0%
1.6%
1,239,331
1,473,318
2.5%
2.8%
46,779
142,279
2.1%
2.1%
$
275,443
$ 1,770,829
$
813,054
$
— $ 2,859,326
$ 3,177,749
(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.
2018
$
4,633
$
8
5,899
2017
5,695
(247)
7,081
$
10,540
$
12,529
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.
2018 Annual Report 101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
In 2017, 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 were derecognized and a gain on sale was recognized.
The gains on both of the above transaction types are included in non-interest income under securitization income in the consolidated
statements of income.
The following table provides additional quantitative information about these securitization and sales activities during the year.
thousands of Canadian dollars
2018
Single-family
Residential
MBS
Multi-unit
Residential
MBS
Single-family
Residential
MBS
Multi-unit
Residential
MBS
Total MBS
2017
Total MBS
Carrying value of underlying
mortgages derecognized
Net gains on sale of mortgages
or residual interest1
Retained interests recorded
Servicing liability recorded
$
— $
650,675
$
650,675
$
288,458
$
510,813
$
799,271
—
—
—
4,633
24,981
5,008
4,633
24,981
5,008
2,084
—
—
3,611
20,815
4,943
5,695
20,815
4,943
1 Gains on sale of mortgages or residual interest are net of hedging impact.
7. Restricted Assets
thousands of Canadian dollars
Restricted cash
December 31
2018
December 31
2017
Restricted cash – CMHC- and bank-sponsored securitization programs
$
162,535
$
158,569
Restricted cash – derivatives
Restricted cash – other programs
Total restricted cash
Acceptable securities assigned as replacement assets
Total restricted assets
77,350
22,330
262,215
46,990
59,391
36,174
254,134
182,877
$
309,205
$
437,011
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 and acceptable securities assigned as CMB
replacement assets. Please see Note 6(A) for more information.
thousands of Canadian dollars
Within 1 Year
1 to 3 Years
3 to 5 Years
Over 5 Years
December 31
2018
December 31
2017
Total
Fair Value
Total
Fair Value
Restricted cash
$
262,215
$
— $
— $
— $
262,215
$
254,134
Acceptable securities assigned as
replacement assets
46,990
—
—
—
46,990
182,877
$
309,205
$
— $
— $
— $
309,205
$
437,011
102 Home Capital Group Inc.
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
2018
December 31
2017
$
55,469
$
49,651
2,895
162,256
8,665
37,282
72,420
3,644
182,930
10,431
13,340
76,774
$
338,987
$
336,770
The following table presents the net carrying amount of the Company’s intangible assets as at December 31, 2018 and 2017, along
with the changes in net carrying amount for the years ended December 31, 2018 and 2017.
thousands of Canadian dollars
Cost
Balance at the beginning of the year
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
Carrying amount at the end of the year
2018
2017
$
162,363
$
161,426
4,424
—
(537)
166,250
63,694
19,124
82,818
$
83,432
$
8,952
334
(8,349)
162,363
46,423
17,271
63,694
98,669
The net carrying amounts of the Company’s intangible assets at December 31, 2018 and 2017 relate solely to internally developed
software costs. As at December 31, 2018, there was $3.0 million (2017 – $7.0 million) in work in progress on internally developed
software that was not being amortized.
The Company performed an impairment assessment for its intangible assets by estimating the recoverable amount of the CGU to
which the assets belong and comparing to carrying value. The recoverable amount of the CGU was determined using an internally
developed discounted cash flow model that considers various assumptions such as the Company’s forecasted earnings, growth rate,
and discount rate. The impairment assessment concluded that the recoverable amount closely approximated carrying value as at
December 31, 2018. As a result, no impairment charge was recognized. Estimation of the recoverable amount is an area of significant
judgement. Reductions in the estimated recoverable amount could arise from various factors, such as reductions in forecasted
earnings and any adverse changes to the discount rate or the long-term growth rate.
During 2018, the Company recognized a total impairment loss on intangible assets of $0.5 million 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. In addition, upon a reassessment
of useful lives, amortization on a number of assets was accelerated on a prospective basis as it was determined that their remaining
effective useful life was shorter than originally estimated. Incremental amortization of $1.1 million resulting from the change in
estimated useful life and the impairment loss are included in other operating expenses on the consolidated statements of income.
During 2017, the Company recognized a total impairment loss on specific intangible assets of $8.3 million. An impairment loss of
$6.3 million was recognized on components of the Company’s internally developed software that had become obsolete. It was
determined that the benefits from these components would not be realized and the capitalized amount was 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 former prepaid card business. The net carrying value
of other acquired intangible assets was $nil at December 31, 2017. The $8.3 million impairment loss was included in other operating
expenses on the consolidated statements of income. In 2017, the Company also revised the estimated useful life of a substantial
component of its internally developed software from 15 years to 14 years as a result of expected future upgrades, and this change in
estimate was applied prospectively.
2018 Annual Report 103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
10. Goodwill
Goodwill as at December 31, 2018 and 2017 of $2.3 million relates entirely to Home Trust. There were no additions, disposals or
impairments of goodwill for the year ended December 31, 2018.
During 2017, the Company determined that it would exit its payment processing and prepaid card business through a sale transaction.
This included the Company’s former 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 was included in other operating expenses in the consolidated statements of income. On February 1, 2018, the Company
completed its sale of PSiGate. See Note 22 for more information.
11. Deposits by Remaining Contractual Term to Maturity
thousands of Canadian dollars, except %
Deposits payable on demand
Payable
on Demand Within 1 Year
1 to 3 Years
3 to 5 Years
Total
Total
December 31
2018
December 31
2017
High-interest savings accounts
$
147,183
$
— $
— $
— $
147,183
$
138,948
Oaken savings accounts
Other deposits payable on demand
Deposits payable on fixed dates
Brokered GICs1
Oaken GICs1
Institutional deposit notes
194,218
95,645
437,046
—
—
—
—
—
—
—
—
—
—
—
—
—
194,218
95,645
437,046
4,453,892
3,895,915
1,703,473
10,053,280
1,415,397
771,120
300,247
2,486,764
—
—
—
—
229,511
170,905
539,364
9,350,235
1,805,332
475,523
5,869,289
4,667,035
2,003,720
12,540,044
11,631,090
Total deposits
$
437,046
$ 5,869,289
$ 4,667,035
$ 2,003,720
$ 12,977,090
$ 12,170,454
Average contractual yield
1.6%
2.4%
2.6%
3.0%
2.6%
2.2%
1 Included in Brokered and Oaken GICs presented above as payable within one year are $148.8 million of cashable GICs that have reached the required
number of days to be payable on demand. In the absence of such demand, the GICs have a remaining contractual term to maturity of within one year.
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
13. Capital
(A) Authorized
December 31
2018
December 31
2017
$
155,112
$
125,965
7,808
21,178
154,246
7,923
20,924
205,665
$
338,344
$
360,477
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
104 Home Capital Group Inc.
(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.
(C) Repurchase of Shares
Number of
Shares
2018
Amount
Number of
Shares
80,246 $
231,156
64,388 $
—
—
(18,181)
(52,374)
16
(203)
2017
Amount
84,910
548
(267)
—
—
16,045
145,965
62,065 $
178,782
80,246 $
231,156
On December 21, 2018, the Company repurchased for cancellation 18,181,818 common shares at a price of $16.50 per share totalling
$300 million under its substantial issuer bid (SIB). The purchase price of shares acquired through the SIB is allocated between capital
stock and retained earnings. The reduction to capital stock for the year ended December 31, 2018 was $52.4 million. The balance
of the purchase price of $247.6 million was charged to retained earnings along with $0.5 million (net of tax) for transaction costs
associated with the SIB.
During 2017, 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.
Subsequent to the end of 2018, the Company implemented an NCIB that was approved by the Toronto Stock Exchange and has
commenced repurchases of common shares under the NCIB. Please see Note 24 for more information.
(D) Issuance of Shares
The Company did not issue new common shares in 2018. 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 $1.66 (2017 – $0.10) is determined as net income for the year divided by the average number of
common shares outstanding of 79,748,217 (2017 – 72,348,998).
Diluted earnings per common share of $1.66 (2017 – $0.10) is determined as net income for the year divided by the average number
of common shares outstanding of 79,748,217 (2017 – 72,348,998) plus the stock options potentially exercisable, as determined under
the treasury stock method, of nil (2017 – 8,871) for a total of 79,748,217 (2017 – 72,357,869) diluted common shares.
(F) 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, the
declaration and payment of dividends by Home Trust to Home Capital are subject to restrictions under the Trust and Loan Companies
Act (Canada).
2018 Annual Report 105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
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
2018
December 31
2017
National
Regulatory
Minimum
18.94%
18.93%
19.38%
23.17%
23.17%
23.68%
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
allowed for the transition of certain capital deductions over a period ending January 1, 2018, whereas the all-in basis included all
applicable deductions immediately. For purposes of meeting minimum regulatory capital ratios prescribed by OSFI, the all-in basis
was required. The regulatory capital ratios as at December 31, 2017 and the national regulatory minimum presented above are on an
all-in basis. Home Trust is required to meet a minimum Leverage ratio determined by OSFI. As at December 31, 2018, the Leverage
ratio was 7.54% (2017 – 8.70%), which exceeds OSFI’s minimum requirements.
Home Trust’s Common Equity Tier 1, Total Tier 1, and Total capital ratios exceed OSFI’s regulatory targets, as well as Home Trust’s
internal capital targets. The Company’s capital position was reduced through the repurchase of shares for cancellation under the SIB
(please see Note 13(C)).
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 $1.0 million for 2018 (2017 – $1.3 million).
(B) Employee Retirement Savings Plan
During the year, Home Trust contributed $1.1 million (2017 – $1.3 million) to the employee group registered retirement savings plan.
(C) Stock Options
The details and changes in the issued and outstanding options are as follows:
thousands, except per share amounts and years
2018
Number of
Shares
Weighted-
average
Exercise Price
Number of
Shares
2017
Weighted-
average
Exercise Price
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
840
211
—
(153)
—
898
471
$
$
$
$
33.40
15.20
—
37.30
—
28.45
35.48
N/A
2.3
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
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 2018 or 2017. 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.
As at December 31, 2018, the maximum number of options on common shares that could be issued was 10,670,396, representing
approximately 17.2% of the aggregate number of common shares. The exercise price of the options is fixed by the Board at the time of
grant at the market price of such shares, subject to all applicable regulatory requirements. The exercise period of any vested option is
106 Home Capital Group Inc.
limited to a period of five or seven years from the date of grant of the option as 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, provided that 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, 2018, the weighted-average exercise prices for stock options outstanding to acquire common shares ranged from
$14.96 to $46.98. 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.
Stock options outstanding
Stock options exercisable
As at December 31, 2018
Weighted-
average
Contractual
Life
Remaining in
Years
Weighted-
average
Exercise Price
Number
Exercisable
Weighted-
average
Exercise Price
4.1 $
0.6
1.8
1.9
1.9
—
0.9
2.3 $
14.96
23.25
28.83
31.98
39.65
—
46.98
28.45
2,047 $
46,500
164,046
26,250
130,000
—
102,624
471,467 $
14.99
23.25
29.31
32.00
39.65
—
46.92
35.48
Number
Outstanding
268,374
46,500
297,897
38,750
130,000
—
116,450
897,971
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 – $45.00
Over $45.00
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 $4.01 (2017 – $4.67).
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 years 1
$
$
$
Forfeiture rate
Expected dividend yield
Risk-free rate of return
Valuation model
1 Exercisable upon vesting.
May
2018
3.74 $
14.03 $
14.15 $
39.0%
4.0
—
3.26%
2.73%
March
2018
December
2017
September
2017
4.03 $
15.43 $
15.25 $
38.4%
4.0
—
3.26%
2.45%
4.40 $
16.85 $
17.36 $
38.7%
3.8
—
3.53%
2.05%
4.23 $
14.00 $
13.90 $
42.7%
3.8
—
3.60%
2.15%
February
2017
4.94
27.65
27.65
32.7%
3.8
5.0%
3.95%
1.01%
Binomial
Binomial
Binomial
Binomial
Black Scholes
The above assumptions for expected volatility were determined on the basis of historical volatility.
The Company determines the fair value of stock options on the grant date and records this amount as compensation expense over
the period that the stock options vest, with a corresponding change to contributed surplus. In 2018, $0.4 million was recognized as
a net reduction to compensation expense resulting from grants cancelled by forfeiture where certain vesting conditions were not
satisfied (2017 – compensation expense of $0.6 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 (2018 – $nil; 2017 – $0.4 million).
(D) Deferred Share Units (DSUs)
The Company grants DSUs to non-employee Directors of the Company. Under the plan, the non-employee Directors may elect
annually to accept remuneration in the form of cash and DSUs or only DSUs. 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, 2018 was $2.7 million (2017 – $4.0 million). As of December 31, 2018, there
were 187,861 DSUs outstanding (2017 – 217,791).
2018 Annual Report 107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
(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, 2018 was $592 thousand (2017 – $277 thousand). As of December 31, 2018, there were
76,467 RSUs outstanding (2017 – 60,705 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 150%. The fair value of the PSU liability as at December 31,
2018 was $0.6 million, and there were 146,250 PSUs outstanding (2017 – $1.2 million and 76,598 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
2018
(Decrease) increase to expense arising from equity-settled share-based payment transactions
$
(395) $
DSUs, RSUs and PSUs (representing all expenses arising from cash-settled
share-based payment transactions)
104
$
(291) $
2017
557
2,065
2,622
15. Accumulated Other Comprehensive Income
The following table presents the components of AOCI. The balances pertaining to 2018 are presented according to their classifications
under IFRS 9. The balances as at December 31, 2017 are presented according to their classification under IAS 39. N/A indicates not
applicable under the accounting policy for the respective period. As indicated in Note 2, there was no adjustment to opening AOCI
upon adoption of IFRS 9 as the adoption of IFRS 9 did not result in a measurement difference. Accordingly, the impact of adoption of
IFRS 9 was limited to the reclassification to the IFRS 9 categories from the previous IAS 39 categories. The balances as at January 1,
2018 have been presented below to illustrate these reclassifications from the December 31, 2017 classifications under IAS 39.
thousands of Canadian dollars
Unrealized losses on
Equity securities designated at FVOCI
Income tax recovery
Unrealized gains on
Debt instruments at FVOCI
Income tax expense
Unrealized losses on
Available for sale securities and retained interests
Income tax recovery
Unrealized losses on
Cash flow hedges
Income tax recovery
December 31
2018
January 1
2018
December 31
2017
$
(13,988) $
(9,405) $
(3,725)
(10,263)
(2,503)
(6,902)
1,874
490
1,384
N/A
N/A
N/A
(2,174)
(568)
(1,606)
2,980
783
2,197
N/A
N/A
N/A
(1,606)
(417)
(1,189)
N/A
N/A
N/A
N/A
N/A
N/A
(6,425)
(1,720)
(4,705)
(1,606)
(417)
(1,189)
(5,894)
Accumulated other comprehensive loss
$
(10,485) $
(5,894) $
108 Home Capital Group Inc.
16. Income Taxes
(A) Reconciliation of Income Taxes
The combined federal and provincial income tax rate varies each year depending on changes in the statutory tax rate imposed by
the federal and provincial governments. The effective rate of income tax in the consolidated statements of income is the same as the
statutory tax rate of 26.50% (2017 – 26.50%).
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 items
Scientific research and experimental development investment tax credits
Other
Income tax
(B) Reconciliation of Income Tax Rates
Statutory income tax rate
Increase (reduction) in income tax rate resulting from
Tax-exempt income
Non-deductible items
Scientific research and experimental development investment tax credits
Other
Effective income tax rate
(C) Sources of Deferred Tax Balances
thousands of Canadian dollars
Deferred tax liabilities
Commissions
Finders' fees, net of commitment fees
Securitization transaction costs
Swaps
Development costs
Other
Deferred tax assets
Allowance for credit losses
Loss carryforwards
Deferred share unit plan expenses
Deferred financing costs
Capital assets
Net deferred tax liability
2018
$
$
180,402
47,807
$
$
(334)
—
(575)
901
$
47,799
$
2018
26.50%
(0.18)%
—
(0.32)%
0.50%
26.50%
2017
8,915
2,362
(873)
2,085
(1,483)
(703)
1,388
2017
26.50%
(9.79)%
23.39%
(16.63)%
(7.90)%
15.57%
December 31
2018
December 31
2017
$
$
7,028
2,056
5,100
541
22,182
1,946
38,853
8,991
1,248
1,034
2,144
87
6,690
3,693
4,659
541
26,244
607
42,434
9,432
8,341
1,448
2,040
520
13,504
21,781
$
25,349
$
20,653
Net deferred tax liabilities on the consolidated balance sheets were $28.8 million (December 31, 2017 – $30.2 million) and deferred
tax assets were $3.5 million (December 31, 2017 – $9.6 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
includes deferred financing costs related to share issuance costs, which were accounted for as a deduction from shareholders’ equity.
Capital losses totalling $1.2 million for Home Capital (December 31, 2017 – $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.
2018 Annual Report 109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
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.
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
2018
December 31
2017
$
11,698
$
32,313
18,261
$
62,272
$
12,862
19,734
21,803
54,399
Lease payments recognized as an expense in the consolidated statements of income amounted to $23.0 million in 2018 (2017 –
$25.3 million).
(B) Credit Commitments
Outstanding amounts for future advances on mortgage loans amounted to $1.00 billion as at December 31, 2018 (2017 –
$875.9 million). These amounts include offers made but not yet accepted by the customers as of the reporting date. Also, included
within the outstanding amounts are unutilized non-residential commercial loan advances of $386.7 million at December 31, 2018
(2017 – $196.7 million). Offers for loans remain open for various periods. The average rate on mortgage offers is 5.22% (2017 – 4.57%).
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, 2018, these contractual amounts in aggregate were $760.3 million
(2017 – $497.5 million), of which $355.8 million (2017 – $145.5 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 $28.6 million at
December 31, 2018 (2017 – $16.1 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
During 2017, the Company recorded total restructuring charges of $13.2 million in relation to its expense savings initiative, Project
EXPO. 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 were included in salaries and benefits. The remaining restructuring
charges were included in premises and other operating expenses. The Company completed Project EXPO in 2017. The balance of the
restructuring provision at December 31, 2017 was $4.8 million. During 2018, $2.1 million was utilized (2017 – $8.4 million). In addition,
the Company reversed $1.8 million of the restructuring provision in 2018 due to a change in estimates and recorded a corresponding
credit to salaries and benefits. The remaining balance at December 31, 2018 was $0.9 million.
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.
110 Home Capital Group Inc.
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 Cayman Islands 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 are expensed in the period in which they are incurred.
Putative Class Action Related to Consumer HVAC Equipment Financing
A claim has been filed in the Ontario Superior Court of Justice against Home Trust, 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 would 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 judgment, which are pending. Home
Trust considers that it has good defences to the action.
18. Derivative Financial Instruments and Hedging Activities
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. The main sources of ineffectiveness can be attributed to differences between hedging
instruments and hedged items such as differences in discounting factors when derivatives are discounted using indexed swap curves,
and mismatch in critical terms such as tenor and timing of cashflows between hedging instrument and hedged items.
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.
2018 Annual Report
111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
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 gains of $2.1 million (2017 – net
losses of $528 thousand) were recorded in income through net realized and unrealized gain or loss on derivatives.
For cash flow hedges, the Company uses the hypothetical derivative having terms that identically match the critical terms of the
hedged item as the proxy for measuring the change in fair value or cash flows of the hedged item.
The following table presents the effects of cash flow hedges on the consolidated statements of income and the consolidated
statements of comprehensive income:
thousands of Canadian dollars
For the year ended December 31, 2018
Change in
value of hedged
items for
ineffectiveness
measurement
Change in
fair value
of hedging
instruments for
ineffectiveness
measurement
Hedging gains
(losses)
recognized
in OCI
(pre-tax basis)
Amount
reclassified
from AOCI to
net income
(pre-tax basis)
Effect on OCI
(pre-tax basis)
Hedge
ineffectiveness
Liabilities
Interest rate risk
Equity price risk
Total cash flow hedges
For the year ended
December 31, 2017
$
$
$
(1,417) $
1,417 $
— $
(1,417) $
139
(139)
—
139
(1,278) $
1,278 $
— $
(1,278) $
729 $
(19)
710 $
(688)
120
(568)
(721) $
721 $
— $
(721) $
1,120 $
399
The following table provides a reconciliation of AOCI related to cash flow hedges on a pre-tax basis:
thousands of Canadian dollars
For the year ended December 31, 2018
Liabilities
Interest rate risk
Equity price risk
Total cash flow hedges
Fair Value Hedging Relationships
AOCI at the
beginning
of the year
Other
comprehensive
income (loss)
AOCI at
the end
of the year
AOCI on
designated
hedges
AOCI on
de-designated
hedges
$
$
(1,466) $
(688) $
(2,154) $
(166) $
(1,988)
(140)
120
(20)
(117)
97
(1,606) $
(568) $
(2,174) $
(283) $
(1,891)
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 liabilities, which include deposits, deposit notes and
securitization liabilities. The Company assesses and measures the hedge effectiveness of fair value hedges based on the change in the
fair value of the derivative hedging instrument relative to the change in the fair value of the hedged item attributable to benchmark
interest rate risk.
The following table presents the effects of fair value hedges on the consolidated balance sheets and the consolidated statements
of income:
thousands of Canadian dollars
For the year ended or as at December 31, 2018
Change in
value of hedged
items for
ineffectiveness
measurement
Change in
fair value
of hedging
instruments for
ineffectiveness
measurement
Hedge
ineffectiveness
gain (loss)
Carrying
amounts
for hedged
items
Accumulated
amount of fair
value hedge
adjustments on
hedged items
$
$
$
(14,371) $
14,663 $
292 $
3,761,562 $
(23,619)
379
(1,081)
(702)
60,267
528
(13,992) $
13,582 $
(410) $
3,821,829 $
(23,091)
62,493 $
(63,975) $
(1,482) $
3,900,659 $
(34,611)
Liabilities
Interest rate risk
Deposits
Securitization liabilities
Total liabilities
For the year ended December 31, 2017
112 Home Capital Group Inc.
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.
The following table presents the derivative financial instruments outstanding as at December 31, 2018 distinguishing between those
designated in qualifying hedging relationships and those that are not in qualifying hedging relationships:
thousands of Canadian dollars, except average rate/price
As at December 31, 2018
Notional
Amount
Average Rate
on Interest
Rate Swaps
Current
Replacement
Cost1
Credit
Equivalent
Amount1
Risk-
weighted
Balance1
Derivative
Asset
Derivative
Liability
Net
Fair Market
Value
Term (years)
Derivatives in qualifying
hedging relationships
Interest rate risk
Interest rate swaps
designated in
fair value hedges2
< 1 year
1 to 5 years
Bond forwards
designated as
cash flow hedges3
1 to 5 years
Total interest rate
contracts
Equity price risk
$ 1,252,000
1.70% $
— $
— $
— $
— $
(5,090) $
(5,090)
2,669,000
3,921,000
1.89%
1.83%
8,886
8,886
22,229
22,229
10,984
10,984
8,886
8,886
(28,014)
(19,128)
(33,104)
(24,218)
25,000
25,000
N/A
N/A
—
—
125
125
63
63
—
—
(166)
(166)
(166)
(166)
3,946,000
8,886
22,354
11,047
8,886
(33,270)
(24,384)
Total return swaps
designated as
cash flow hedges
< 1 year
1 to 5 years
Total derivatives in
qualifying hedging
relationships
585
425
1,010
N/A
N/A
N/A
15
24
39
50
58
108
25
29
54
15
24
39
(155)
—
(155)
(140)
24
(116)
3,947,010
8,925
22,462
11,101
8,925
(33,425)
(24,500)
Derivatives not in qualifying
hedging relationships
Bond forwards3
1 to 5 years
> 5 years
6,800
110,900
117,700
N/A
N/A
N/A
—
—
—
34
1,664
1,698
34
1,664
1,698
—
—
—
(58)
(2,492)
(2,550)
(58)
(2,492)
(2,550)
Total
$ 4,064,710
$
8,925 $
24,160 $
12,799 $
8,925 $
(35,975) $
(27,050)
1 The values are calculated based on the capital adequacy requirements required by OSFI.
2 Average rate for interest rate swaps represents the weighted average received fixed rate.
3 The term of the bond forward contract is based on the term of the underlying bonds.
2018 Annual Report 113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
(unless otherwise stated, all amounts are in Canadian dollars)
As at December 31, 2017, 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)
(38,728)
(34,895)
(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)
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.
Derivative-Related Risks
The potential for derivatives to increase or decrease in value as a result of changes in relevant factors, such as interest rate, equity or
indice changes, is referred to as market risk. Credit risk on derivatives, also known as counterparty credit risk, is the risk of a financial
loss occurring as a result of the failure of a counterparty to meet its obligation to the Company. These risks are actively managed by
the Company and are monitored independently by the Enterprise Risk Management group.
114 Home Capital Group Inc.
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, 2018 and 2017.
thousands of Canadian dollars
As at December 31, 2018
As at December 31, 2017
Within 1 Year
After 1 Year
Total
Within 1 Year
After 1 Year
Total
Assets
Cash and cash equivalents
$
665,947
$
— $
665,947
$ 1,336,138
$
— $ 1,336,138
Securities
Loans held for sale
Securitized mortgages
Non-securitized mortgages
and loans
Allowance for credit losses
Restricted assets
Derivative assets
Other assets
Deferred tax assets
Goodwill and intangible assets
Total assets
Liabilities
Deposits
CMHC-sponsored mortgage-backed
security liabilities
CMHC-sponsored Canada Mortgage
Bond liabilities
Bank-sponsored securitization
conduit liabilities
Credit facilities
Derivative liabilities
Other liabilities
Deferred tax liabilities
Total liabilities
Net
4,905
130,351
833,220
381,428
—
386,333
130,351
1,967,403
2,800,623
3,157
165,947
841,273
329,311
—
332,468
165,947
2,151,977
2,993,250
9,948,721
3,515,043
13,463,764
9,113,500
2,796,939
11,910,439
(30,681)
309,205
15
(21,010)
—
8,910
221,877
117,110
—
—
3,489
85,756
(51,691)
309,205
8,925
338,987
3,489
85,756
(24,904)
437,011
2,584
220,811
—
—
(13,871)
—
4,741
115,959
9,577
100,993
(38,775)
437,011
7,325
336,770
9,577
100,993
$ 12,083,560
$ 6,058,129
$ 18,141,689
$ 12,095,517
$ 5,495,626
$ 17,591,143
$ 6,306,335
$ 6,670,755
$ 12,977,090
$ 6,264,787
$ 5,905,667
$ 12,170,454
382,799
1,190,417
1,573,216
321,667
1,240,485
1,562,152
—
1,239,331
1,239,331
231,886
1,241,432
1,473,318
40,545
6,234
46,779
102,718
39,561
142,279
261,506
5,245
317,166
—
—
30,730
21,178
28,838
261,506
35,975
338,344
28,838
—
303
339,553
—
—
38,425
20,924
30,230
—
38,728
360,477
30,230
$ 7,313,596
$ 9,187,483
$ 16,501,079
$ 7,260,914
$ 8,516,724
$ 15,777,638
$ 4,769,964
$ (3,129,354) $ 1,640,610
$ 4,834,603
$ (3,021,098) $ 1,813,505
2018 Annual Report 115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
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.
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 and 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 and liabilities arising from credit facilities.
The following table presents the fair value of financial instruments across the levels of the fair value hierarchy. Balances for 2018
are presented according to their classification under IFRS 9. Balances for 2017 are presented according to their classification under
IAS 39.
thousands of Canadian dollars
As at December 31, 2018
Financial assets at FVTPL
Cash and cash equivalents
Loans held for sale
Derivative assets
Restricted assets
Total financial assets at FVTPL
Financial assets at FVOCI
Debt securities
Equity securities (designated at FVOCI)
Retained interest owned
Total financial assets at FVOCI
Financial assets at amortized cost
Securitized mortgages
Non-securitized mortgages and loans
Restricted assets
Securitization receivables
Other
Total financial assets at amortized cost
Total
Financial liabilities at amortized cost
Deposits
Securitization liabilities
Other
Total financial liabilities at amortized cost
Financial liabilities at FVTPL
Derivative liabilities
Total
116 Home Capital Group Inc.
Level 1
Level 2
Level 3
Fair Value
Carrying
Value
$
665,947 $
— $
— $
665,947 $
665,947
—
—
262,215
928,162
130,351
8,925
—
139,276
—
359,981
26,352
—
—
—
26,352
359,981
—
—
—
—
—
—
108,445
108,445
130,351
130,351
8,925
8,925
262,215
262,215
1,067,438
1,067,438
359,981
359,981
26,352
108,445
494,778
26,352
108,445
494,778
—
—
—
—
—
—
—
2,771,406
2,771,406
2,799,931
— 13,338,215
13,338,215
13,412,765
46,990
—
—
—
56,706
92,751
46,990
56,706
92,751
46,990
56,706
92,751
46,990
16,259,078
16,306,068
16,409,143
$
954,514 $
546,247 $ 16,367,523 $ 17,868,284 $ 17,971,359
$
— $
— $ 13,003,402 $ 13,003,402 $ 12,977,090
—
—
—
—
—
—
2,859,905
2,859,905
2,859,326
599,850
599,850
599,850
— 16,463,157
16,463,157
16,436,266
35,975
—
35,975
35,975
$
— $
35,975 $ 16,463,157 $ 16,499,132 $ 16,472,241
thousands of Canadian dollars
As at December 31, 2017
Financial assets held for trading
Cash and cash equivalents
Loans held for sale
Derivative assets
Restricted assets
Total financial assets held for trading
Financial assets available for sale
Debt securities
Equity securities
Restricted assets
Retained interest owned
Total financial assets available for sale
Loans and receivables
Securitized mortgages
Non-securitized mortgages and loans
Securitization receivables
Other
Total loans and receivables
Total
Financial liabilities at amortized cost
Deposits
Securitization liabilities
Other
Total financial liabilities at amortized cost
Financial liabilities at fair value
Derivative liabilities
Total
Level 1
Level 2
Level 3
Fair Value
Carrying
Value
$ 1,336,138 $
— $
— $ 1,336,138 $ 1,336,138
—
—
254,134
165,947
7,325
—
1,590,272
173,272
—
—
—
—
165,947
165,947
7,325
7,325
254,134
254,134
1,763,544
1,763,544
—
300,566
968
301,534
301,534
30,934
—
—
—
182,877
—
30,934
483,443
—
—
105,528
106,496
30,934
182,877
105,528
620,873
30,934
182,877
105,528
620,873
—
—
—
—
—
—
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
$ 1,621,206 $
656,715 $ 15,215,055 $ 17,492,976 $ 17,393,368
$
— $
— $ 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
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, 2018 or December 31, 2017.
The following methods and assumptions were used to estimate the fair values of financial instruments:
> The fair value of cash and cash equivalents, restricted assets, other assets and other liabilities approximate their carrying values
due to their short-term nature.
> Debt and equity 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 was
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.
> 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 was 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 the interest rate swap curve.
2018 Annual Report
117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unless otherwise stated, all amounts are in Canadian dollars)
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
$
$
2018
5,601
3,484
253
$
9,338
$
2017
7,057
1,275
183
8,515
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.
22. Disposal of PSiGate and Prepaid Card Business
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 entered into a transition services agreement and will continue to provide services for certain clients for a limited time, after
which the Company will have completely exited this business line. The Company received net proceeds of $310 thousand on the sale
and recognized a resulting gain of $950 thousand included in non-interest income. The sale did not have a material impact on the
Company’s consolidated balance sheet.
23. 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.
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.
24. Subsequent Events
The Company implemented an NCIB on January 2, 2019, which allows it to purchase up to 4,753,517 of its common shares prior
to January 1, 2020. During 2019, the Company executed a portion of the NCIB through an automatic purchase plan with a broker,
repurchasing 735,050 shares at market prices.
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118 Home Capital Group Inc.
CORPORATE DIRECTORY AND SHAREHOLDER INFORMATION
HOME CAPITAL GROUP INC.
145 King Street West
Suite 2300
Toronto, Ontario M5H 1J8
BRANCHES
Toronto
145 King Street West
Suite 2300
Toronto, Ontario M5H IJ8
Tel: 416-360-4663
800-990-7881
Fax: 416-363-7611
888-470-2092
Calgary
517-10th Avenue SW
Calgary, Alberta T2R 0A8
Tel: 403-244-2432
866-235-3081
Fax: 403-244-6542
866-544-3081
Vancouver
200 Granville Street
Suite 1288
Vancouver, British Columbia V6C 1S4
Tel: 604-484-4663
866-235-3080
Fax: 604-484-4664
866-564-3524
OAKEN FINANCIAL STORES
Toronto
145 King Street West
Concourse Level
Toronto, Ontario M5H IJ8
Calgary
517-10th Avenue SW
Calgary, Alberta T2R 0A8
Auditors
Ernst & Young LLP
Toronto, Ontario
Transfer Agent
Computershare Investor
Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
Tel: 800-564-6253
Halifax
1949 Upper Water Street
Suite 101
Halifax, Nova Scotia B3J 3N3
Tel: 902-422-4387
888-306-2421
Fax: 902-422-8891
888-306-2435
Montreal
2020 Boulevard Robert-Bourassa
Suite 2420
Montreal, Quebec H3A 2A5
Tel: 514-843-0129
866-542-0129
Fax: 514-843-7620
866-620-7620
Winnipeg
201 Portage Avenue
Suite 830
Winnipeg, Manitoba R3B 3K6
Tel: 204-220-3400
Fax: 204-942-1638
Capital Stock
As at December 31, 2018
there were 62,064,531
Common Shares outstanding
Stock Listing
Toronto Stock Exchange
Ticker Symbol: HCG
Options Listing
Montreal Stock Exchange
Ticker Symbol: HCG
For Shareholder Information,
Please Contact:
Mark Hemingway
General 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.
Vancouver
200 Granville Street
Suite 1288
Vancouver, British Columbia V6C 1S4
Tel:
855-OAKEN-22 (625-3622)
Email:
service@oaken.com
2018 Annual Report 119
2018 Annual Report 119
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145 King Street West, Suite 2300, Toronto, Ontario M5H 1J8
Tel: 416-360-4663 Toll Free: 800-990-7881