Home Capital Group Inc. continued its outstanding financial performance
through the third quarter of 2002, with strong growth recorded in earnings,
earnings per share and total assets. Through its wholly-owned subsidiary, Home
Trust Company, Home Capital has now achieved 29 consecutive quarter-over-
quarter increases in net earnings.
During the past quarter, the economic environment in Canada remained
challenging. Despite this, the Company has stayed on track by adhering to its
proven strategy of offering financial services that meet the needs of
borrowers who are overlooked by the major financial institutions. By
understanding and serving this large target market effectively, Home Capital
has been able to sustain robust growth in its core mortgage lending operation
while successfully building new lines of business.
Net Earnings Increased by 31.8%
Net earnings for the three-month period ended September 30, 2002 rose
31.8% to $5.3 million from $4.0 million for the same period a year earlier.
Basic earnings per share were $0.32, an increase of 23.1% over $0.26 for the
third quarter of 2001, and on a fully-diluted basis $0.31, a 29.2% increase
over $0.24 for the same period last year. Return on equity was 24.1% in the
third quarter as compared to 25.1% recorded last year.
For the nine months ended September 30, 2002, net earnings rose 40.1% to
$15.1 million from the $10.7 million recorded for the first nine months of
2001. Net income per share increased from $0.72 to $0.92, and on a fully-
diluted basis from $0.66 to $0.87.
Growth in Total Assets
Total assets at the end of the quarter were $1.32 billion, an increase of
19.0% over total assets on September 30, 2001 and a 4.3% climb over the end of
the second quarter of 2002.
In addition, the Company continued to accelerate its mortgage
securitization program. During the third quarter, Home Trust issued $33.8
million in MBS pooled residential mortgages. This issue brings Home Trust’s
total sourced and managed MBS assets to $119.0 million.
Conservative Approach to Risk Management
Home Capital’s strong risk management policies and its adherence to
well-regarded underwriting techniques continued to serve it well. Net impaired
loans as at September 30, 2002, represented 0.46% of total loans outstanding,
compared to 0.52% on September 30, 2001 and 0.46% as of June 30, 2002.
Home Trust’s general allowances increased from $5.2 million at the end of
September 30, 2001 to $7.0 million at the end of the current quarter. This
represents 97.5 basis points of risk-weighted assets at that date, compared to
89.5 basis points on September 30, 2001 and 95.4 basis points at June 30,
2002. The Company’s objective is to reach 100 basis points of risk-weighted
assets by year-end 2002.
Continuing Development in Consumer Lending Programs
Encouraged by the enthusiastic market reception to its new Equity Plus
VISA product, the Company has expanded this offering to additional markets
across Ontario and also launched it in Alberta. Equity Plus VISA, which was
originally introduced in the first quarter as a pilot project in the Toronto
region, enables qualifying homeowners to access up to $50,000 equity in their
homes as needed through a VISA credit card. Equity Plus VISA has proven to be
popular with a wide range of customers.
Retail credit services continues to expand by providing financing for
clients purchasing products from various established merchants. Receivables
were $6.7 million at the end of the quarter.
Board Declares Dividend
The Board of Directors declared a quarterly dividend of $0.03 per share
payable on December 1, 2002 to shareholders of record at the close of business
on November 15, 2002.
Additional Developments
Subsequent to the end of the third quarter, in October the Company opened
a new office in Halifax to serve the Nova Scotia and New Brunswick markets.
Additional experienced underwriting and mortgage administration staff has been
hired in Home Trust’s other offices to support the strong growth in its
customer base and lending volumes.
Outlook Remains Excellent
In its 2001 Annual Report, the Company defined a number of performance
targets for the current business year. At the conclusion of the third quarter,
we are pleased to report the following:
Consumer demand for our products remains robust and we continue to
carefully contain the risks of our portfolio. Our strategy remains clear and
compelling and we believe that Home Capital’s prospects for the fourth
quarter, and beyond, are excellent.
GERALD M. SOLOWAY
President & Chief Executive Officer
October 24, 2002
Management’s Discussion and Analysis of Operating Performance
Financial Review
Home Capital Group Inc.’s increased profitability during the nine months
of 2002, as compared to the same period in 2001, is attributable to the
following factors:
– Total interest income reached $74.9 million at September 2002
compared to $61.0 million for the same period in 2001. Net interest
income increased by 48.5% to $34.1 million in 2002 compared with
$23.0 million in 2001. Non-interest income increased to $7.3 million
in 2002 from $5.8 million in 2001.
– The provision for credit losses amounted to $2.5 million for the nine
month period September 30, 2002, compared to $1.5 million in 2001.
– Non-interest expenses increased by $6.3 million (51.6%) to $18.5
million in 2002 over the $12.2 million reported in the same period of
2001. The increase in non-interest expenses was largely offset by the
increase in revenues. The productivity ratio increased slightly to
44.6% in 2002 from 42.3% in 2001.
Interest Income
Interest income in the third quarter of 2002 increased 16.2% or $3.5
million over the same quarter in 2001. For the nine months ending September 30
interest income grew by 22.8% or $13.9 million over September 2001. This
increase is largely attributable to growth in the residential mortgage
portfolio, which generated increased interest income of $2.7 million over the
three months ending September 2001 and $11.4 million over the same nine-month
period last year. The Company’s new consumer lending lines of business, which
include credit card and retail credit services, added $0.8 million in interest
income for the three months ended September 2002, and $2.5 million for the
nine-month period. Dividends from securities increased by $0.2 million over
the three months ending September 2001 and $2.9 million over the nine-month
period last year. In the second quarter the Company received a dividend of
$2.6 million on the redemption of preferred shares. This dividend income was
partially offset by a $2.1 million loss that was recognized on the redemption
of the securities. For further information refer to Note 5 of the Interim
Unaudited Consolidated Financial Statements.
Net Interest Income
Net interest income is the difference between income earned on
investments and the interest paid on deposits and any borrowings to fund those
investments. This income has been adjusted to a tax equivalent basis because
dividend income received by Home Trust is non-taxable. Net interest income on
a taxable equivalent basis was $11.6 million in the quarter and $35.4 million
for the nine months, an increase over 2001 of 30.7% for the third quarter and
43.4% for nine months (2001 third quarter-$8.9 million and nine months-$25.4
million).
This improvement was the result of increased margins on the core business
of loan lending over deposit taking, reflected by a 3.7% spread for both the
quarter and year-to-date versus 3.5% for the comparable quarter and 3.3% for
the nine-month period last year. The overall net investment spread for the
Company, which is the average rate of return on earning assets less the
average rate paid on interest bearing liabilities, was 3.3% for the nine-month
period, the same spread as first nine months of 2001.
Provision for Credit Losses
The Company expensed $1.0 million in the quarter and $2.5 million
year-to-date through the provision for credit losses compared to $0.8 and $1.5
million last year. Net impaired loans were $5.0 million or 0.46% of the gross
loan portfolio at the end of the quarter compared to $4.8 million or 0.52% as
at September 30, 2001. Therefore, the increased provision for credit losses
this year is attributable to the growth in the loan portfolio requiring
increased general allowances. The Company’s total general allowances amounted
to $7.0 million at the quarter end, a $0.5 million increase over June 30, 2002
and $1.8 million over September 2001.
Non-Interest Income
Other income was $4.1 million for the quarter and $7.3 million for the
nine months, an increase of $1.9 million (88.1%) and $1.5 million (25.7%) from
the same period last year. Consumer lending operations contributed $0.8
million in fee income this quarter and $2.5 million for the nine months. The
VISA credit card operation capitalized operating costs (net of fee income) in
the third quarter 2001 and first nine months of 2001 during the start-up phase
of this program. These costs are now being amortized commencing January 1,
2002.
The Company issued three Mortgage-Backed Security (MBS) pools in the
third quarter for a total of five pools issued in 2002. The Company has
securitized a total of $68.2 million in Canada Mortgage and Housing
Corporation insured mortgages during 2002. Gains of $1.7 million were realized
for the quarter and $2.9 million for the nine months. Total MBS pools under
administration at the end of the quarter were $119.0 million. These MBS
securities were sold without recourse and the Company continues to service
these mortgages.
Non-Interest Expenses
Total operating expenses for the three months ended September 30, 2002
increased to $6.4 million, up by 42.1% or $1.9 million over September 2001 and
by 51.6% or $6.3 million over the nine months ended September 2001. Operating
costs for the new consumer lending lines of business represented $1.3 million
for the quarter and $4.1 million for the nine months of this year.
Salaries and staff benefits rose by $0.4 million or 17.8% in the quarter
and $1.5 million or 25.5% for the nine months as compared to 2001. This
increase is related both to the growth in the core business of mortgage
lending, as well as staffing for the new consumer lending lines of business.
The number of full-time employees increased to 153 at the end of September
2002 compared to 120 a year ago.
The productivity ratio, defined as non-interest expenses as a percentage
of total revenues, was 42.7% for the quarter and 44.6% for the nine months
compared to 43.7% and 42.3% for the same periods of 2001. If the consumer
lending lines of business were to be excluded from the measurement, the
Company’s productivity ratio would be 38.4% for the quarter and 39.5% for the
nine months. As the consumer lending businesses continue to mature, it is
expected that the Company’s overall productivity ratio will return to previous
levels.
Balance Sheet
The balance sheet assets at September 30, 2002 reached $1.32 billion, an
increase of 19.0% or $210.1 million, over the $1.11 billion reported a year
ago. The loan portfolio increase of $177.2 million or 19.4% was the most
substantial contributor to asset growth. Residential mortgages contributed
$173.9 million to the loan portfolio growth and consumer lending added $8.7
million. These increases were offset by a decline in other mortgages (non-
residential) of $3.6 million and an increase in the general allowances of $1.8
million. Mortgage-Backed Securities receivables added $4.5 million, capital
assets grew $0.3 million, deferred development costs increased $0.3 million
and other assets increased by $2.5 million. The remaining asset growth of
$25.3 million was comprised of increased investment in the Company’s preferred
stock portfolio of $27.6 million, and cash resources of $19.4 million,
partially offset by a reduction in government guaranteed securities of $21.7
million.
Other assets consist of accrued interest receivable, deferred deposit
commissions, goodwill and other prepaid and deferred assets. Deferred agent
commissions have increased correspondingly with the increase in deposits and
borrowings. These commissions are amortized over the term of the deposit.
The balance sheet liabilities as at September 30, 2002 have increased to
$1.23 billion, an increase of $192.5 million or 18.6% over the $1.03 billion
reported at September 30, 2001. The majority of this increase is related to
the growth in deposits and borrowings of $175.2 million; this increase funded
most of the growth in the loan portfolio. On July 11, 2002 the Company
obtained a $10.0 million credit facility with Canadian Western Bank. The
proceeds were used to discharge $6.7 million of the senior term loan and $1.3
million was held in a deposit to discharge the remaining $1.3 million
subsequent to the end of the quarter, on the maturity date of October 16,
2002.
The remaining $2.0 million was added to the capital base of Home Trust
Company. Other liabilities increased $14.4 million or 29.1% over the $49.6
million reported at September 30, 2001. This increase was attributable to
accrued interest payable of $8.3 million, $4.3 million in future income taxes
and $1.8 million in deferred commitment fees, accounts payable and accrued
liabilities.
Shareholders’ equity climbed to $89.1 million at September 30, 2002, an
increase of $17.7 million or 24.8% over the balance of $71.4 million at
September of last year. This growth in equity is largely attributable to
internally generated earnings for the twelve-month period of $19.2 million
less $1.8 million dividends paid and payable to shareholders.
Credit Quality
Net impaired loans in the third quarter of 2002 were $5.0, million or
0.46% of the total loan portfolio compared to $4.8 million or 0.52% in the
third quarter of 2001. This ratio is unchanged from the second quarter, when
net impaired loans stood at 0.46% or $4.9 million. The Company closely
monitors impaired loans and has established a loan loss allowance on the loan
portfolio of $7.3 million versus $5.8 million in the same period of 2001.
The Company’s mortgage portfolio mix consists of 96.5 % residential, 2.7%
store and apartments and 0.8% non-residential. Of the 96.5% residential
mortgage portfolio, 3.0% is insured by Canada Mortgage and Housing
Corporation. First mortgages represent 99.8% of the total mortgage portfolio.
The credit card receivable balance is comprised of $7.5 million in
accounts secured by cash deposits or mortgage collateral and $7.0 million in
unsecured accounts. The total credit approved is comprised of $13.0 million in
secured and $9.8 million in unsecured credit lines. Segments of the unsecured
credit card portfolio experienced weaker credit performance than projected
and, as a result, unsecured credit card issuance was discontinued in the first
quarter of this year. The total allowance provided on the consumer lending
operation amounts to $0.6 million or 2.6% of the total receivable balance,
including those VISA cards secured by a cash deposit with the Company.
Security deposits on VISA cards amounted to $9.3 million and are included in
the Company’s deposits and borrowings. The newest product, Equity Plus VISA
credit cards, are secured by a collateral mortgage on customer’s equity in
their properties and this amounts to $2.6 million of the total receivable
balance.
Total Company losses realized on loans year-to-date are $1.3 million.
Almost all are related to the unsecured VISA operation (which we have
discontinued) with the mortgage lending operation experiencing a small
recovery. Last year losses totaled $258,000, which consisted of $85,000 for
the mortgage business with the credit card and retail consumer loan operations
realizing $173,000 in write-offs. The Company has increased the provision for
this quarter to $1.0 million totaling $2.5 million year-to-date, compared to
$0.8 million and $1.5 million in 2001. The Company has ensured that it is well
positioned for any future unforeseen losses by establishing general allowances
of $7.0 million at September 30, 2002 as compared to the general allowances of
$5.2 million at September 30, 2001.
The general allowances have increased to 97.5 basis points of the risk-
weighted assets at September 30, 2002 compared to 89.5 basis points as of
September 2001.
Capital Ratios (Based on the Operating Subsidiary Home Trust Company)
As at September 30, 2002, Home Trust’s Tier 1 capital ratio was 11.6%
compared to 10.6% at September 30, 2001. The growth in shareholders’ equity of
33.8% over September 2001 was greater than the 22.3% growth in the risk-
weighted assets, contributing to the strengthening of the Tier 1 capital
ratio. The total capital ratio increased to 14.6% at September 30, 2002
compared to 13.2% at September 30, 2001. This ratio for total capital exceeds
the minimum regulatory target of 10%. The Company’s borrowing multiple at
September 30, 2002 was 12.6 compared to 14.3 at September 30, 2001, well
within the regulatory authorization of 17.5 times.
Outlook
The Company will continue to explore additional opportunities in the
Canadian market that are not being served by the major financial institutions.
We will continue to enhance profitability and return on equity while matching
assets and liabilities to ensure that interest rate fluctuations will not
materially impact future earnings. Continued low interest rates, strong
employment growth and low vacancy rates suggest that the housing market will
remain strong. It is anticipated that the Bank of Canada will increase
interest rates during the next six months. However, even with the expected
increases, interest rates are still low by historical standards. The Company
agrees with the recent Canada Mortgage and Housing Corporation outlook that
the country’s housing market will remain strong throughout 2002.
