HCG Home Capital Group Inc

• Reported Net income up 22.1% for the year
• Adjusted Net income¹ up 11.9% for the year
• Dividend increased 10% to $0.22 quarterly, for a total dividend increase of 37.5% year over year
• Adjusted Return on Equity¹ of 22.0% for 2014, the 17th consecutive year over 20%

TORONTO, Feb. 11, 2015 /CNW/ - Home Capital Group Inc. (TSX: HCG) today reported positive results for the fourth quarter and for the year. 

"Management and the Board are very pleased with our results for the fourth quarter and the year," commented CEO Gerald Soloway. "Total revenue exceeded $1 billion in 2014, reaching a significant milestone, reflecting solid fundamentals, the commitment of the Home Capital team, and continued success in growing our market share."

The Company's Annual and Fourth Quarter Consolidated Financial Report, including Management's Discussion and Analysis, for each of the three- and twelve-month periods ended December 31, 2014 is available at www.homecapital.com and on the Canadian Securities Administrators' website at www.sedar.com.

The Company's results were affected by the following items of note that aggregated to a positive impact of $22.7 million and $0.32 diluted earnings per share in Q4 2014 and $24.8 million and $0.36 diluted earnings per share in 2014:

• $32.7 million prepayment income in Q4 2014 ($24.0 million after tax and $0.34 diluted earnings per share) related to the prepayment of $234.9 million of water heater loans. The prepayment income compensates the Company in excess of the future net interest margin that will be lost as a result of the sale.
  
  
• $5.3 million tax benefit recognized in the first nine months of 2014 ($3.9 million after tax and $0.06 diluted earnings per share) related to Scientific Research and Experimental Development Tax Credits for the development of the core banking system functionality and other technology.
  
  
• $1.7 million charge in Q4 2014, $4.3 million in 2014 ($1.3 million after tax and $0.02 diluted earnings per share in Q4 2014; $3.1 million after tax and $0.04 diluted earnings per share in 2014) for restructuring of certain derivative positions upon adoption of IFRS in 2011.

The Company's results were affected by the following items of note in Q4 2013 and 2013:

• $2.0 million tax benefit recognized in Q4 2013 and $8.4 million for 2013 ($1.5 million after tax and $0.02 diluted earnings per share in Q4 2013; $6.2 million after tax and $0.09 diluted earnings per share in 2013) related to Scientific Research and Development Tax Credits for the development of the core banking system functionality and other technology.
  
  
• $1.2 million charge in Q4 2013, $8.0 million in 2013 ($0.9 million after tax and $0.01 diluted earnings per share in Q4 2013; and $5.9 million after tax and $0.08 diluted earnings per share in 2013) for restructuring of certain derivative positions upon adoption of IFRS in 2011.
  
  
• $2.0 million of provision in 2013 ($1.5 million after tax and $0.02 diluted earnings per share) associated with the settlement of disputed loans to condominium corporations. 

The recent rapid decline in oil prices has increased uncertainty regarding Canadian economic performance into 2015. The Bank of Canada has warned of potentially negative effects on the broader Canadian economy in the near term and longer term negative effects for the energy producing regions. The Bank of Canada expects that the negative effects will be gradually mitigated by stronger US growth, the weaker Canadian dollar, the adjustment of the Bank's overnight rate and the beneficial impact of lower oil prices on global economic growth, however, substantial uncertainty exists. The Company's exposure to energy producing regions remains very limited with 3.8% or $440.7 million of outstanding uninsured single-family mortgage loans in those regions (regions included are Alberta, Saskatchewan, and Newfoundland and Labrador). The average LTV for uninsured single family mortgage loans in these regions is 64.8%.  In the commercial portfolio, the Company's exposure is 6.7% or $91.0 million, with an average LTV of 46.3%. Given the limited exposure, the Company does not expect a significant increase in its credit losses stemming from difficulties in these regions. The Company expects that its portfolios in Ontario and the rest of Canada, which represent 95.9% of the uninsured portfolios, will continue to experience relatively low credit losses, even with near term moderately negative economic conditions, given the current low interest rate environment and the expectation that housing prices will remain relatively stable or experience only modest declines.

Given the headwinds and uncertainty in the economy, the Company expects to remain very cautious, but diligent in pursuit of its strategies and will be prepared to react quickly to market and economic events in the short term and long term.

2014 Targets and Performance

The Company met or exceeded its annual targets with respect to return on shareholder's equity, efficiency ratio and credit performance.

The Company's 2014 earnings were below its target range by $2.9 million or 1.1% of 2013 adjusted net income. Results were affected by a number of factors, but primarily the Company experienced lower than planned insured mortgage originations at lower spreads resulting in lower gains on sale.  This experience reflects the very competitive market for prime insured mortgages.  Additionally, the Company also had lower net interest income in Q4 due to the prepayment of the water heater loans.  As a result, the Company was also below target for growth in loans under administration. The sale of the water heater loans also affected the growth in the loans under administration and, without the sale, growth would have been 14.3% in 2014. 

Growth and earnings in the traditional mortgage portfolio were positive and within the Company's expectations, reflective of its strong market position and high level of service.  Credit performance in 2014 exceeded the Company's target range based on strong credit profiles of mortgages combined with stable Canadian economic conditions. The Company's efficiency ratio remained in the lower end of its target range (the lower the better), demonstrating continued prudent cost management and a high level of efficiency.

The Company's Board of Directors has approved an increase in the Company's dividend payout ratio to 19% to 26% from 14% to 21%. The increased dividend payout target range is based on Home Capital's strong financial performance and liquidity position, and the anticipated formation of capital through future profitability. The Company's dividend payout target range is subject to review by the Company's Board of Directors on a quarterly basis and modified in accordance with the performance of the Company and then current market conditions.

FOURTH QUARTER AND 2014 HIGHLIGHTS

The Company recorded solid performance in the fourth quarter of 2014 and for the year. Key results and accomplishments for the fourth quarter of 2014 and the year are as follows:

• Reported net income was $95.9 million in the fourth quarter and $313.2 million for the year, increasing 39.4% over the comparable quarter of 2013 and 22.1% over 2013. Net income benefited in the current quarter as the Company recognized prepayment income of $24.0 million, net of tax, in relation to the prepayment of $234.9 million of water heater loans, as a result of the sale of a customer's business. 
• Adjusted net income, as defined in the Non-GAAP Measures section of the Company's 2014 Annual and Fourth Quarter Consolidated Financial Report, was $73.2 million in the fourth quarter and $288.4 million for the year, representing increases of 7.3% and 11.9% over the comparable periods of 2013 and 2.5% over Q3 2014.
• Adjusted diluted earnings per share were $1.04 for the fourth quarter and $4.09 for the year, an increase over the comparable periods of last year of 6.1% and 11.1%, respectively and 3.0% over Q3 2014.
• Adjusted return on equity was 20.8% for the quarter and 22.0% for the year.  Both measures are in excess of the Company's minimum performance objective of 20% for the 17^th consecutive year.
• Net interest income on non-securitized assets was $109.6 million in the fourth quarter and $425.3 million in 2014, increasing 9.9% and 13.7% over the comparable periods of 2014, and 1.6% over the $107.9 million in Q3 2014. Net interest margin on this portfolio was 2.79% in Q4 2014 and 2.83% for 2014. This is down from 2.94% and 3.01% in the comparable periods of 2013, and consistent with Q3 2014, reflecting both lower asset yields and relatively higher cost of funds compared to benchmark rates. Asset yields are down due to a combination of factors, including origination of higher credit quality borrowers over the last year and the current low rate environment.
• Total income earned from securitized assets, which includes net interest income from the on-balance sheet portfolio and securitization income from off-balance sheet sales was $11.8 million in Q4 2014 and $61.1 million for the year compared to $17.0 million and $60.8 million in the comparable periods of 2013 and $15.4 million in Q3 2014. Securitization income was $5.0 million in the quarter and $26.8 in 2014, compared to securitization income of $5.8 million and $12.6 million in the comparable periods of 2013 and $5.7 million in Q3 2014. Relative gains have declined year over year on lower spreads, reflective of a highly competitive market for prime insured mortgages. Net interest income on the on-balance sheet securitized portfolio declined to $6.8 million in the quarter and $34.3 million for the year, from $11.2 million and $48.1 million in the same periods of 2013 and from $9.7 million in Q3 2014. The decline reflects a decrease in net interest margin on the maturity of higher yielding portfolios along with a net run-off of the portfolio as the Company has sold the residual interests of most originated insured mortgages.
• The credit performance of the loans portfolio remained strong in the quarter and for the year and outperformed the Company's objectives. The annualized credit provision as percentage of gross uninsured loans was 0.09% in the quarter and 0.10% for the year, down from 0.14% in the comparable periods of 2013 and down from 0.11% in Q3 2014. The Company's objective was a provision as a percentage of gross uninsured loans ratio of between 0.15% and 0.25% for 2014. 
• Net non-performing loans ended 2014 at 0.30% of the total loans portfolio compared to 0.35% at the end of 2013 and 0.27% at the end Q3 2014.  The decrease is partially represented by a specific large commercial loan that was included in 2013, and subsequently collected.  Excluding this commercial loan would result in net non-performing loans ending 2013 at 0.31% of the total loans portfolio.  The ratio has remained stable despite the relatively higher proportion of uninsured mortgages in the total portfolio.
• Home Trust's Common Equity Tier 1 (CET 1) and Total capital ratios remained very strong at 18.30% and 20.94%, respectively, at December 31, 2014, and well above Company and regulatory minimum targets.  Home Trust's ACM was 12.47 at December 31, 2014 compared to 13.19 at December 31, 2013 and 12.88 at September 30, 2014.
• Total loans under administration, including off-balance sheet mortgages, increased by $2.62 billion in 2014 to $22.56 billion, an increase of 13.1% from $19.94 billion one year ago and up $410.1 million from Q3 2014.  Annual growth was below the Company's 2014 target range of 15-20% on less than planned growth in insured mortgage originations and the prepayment of the water heater portfolio.
• Total Q4 2014 mortgage originations were $2.29 billion and $8.85 billion for the year, compared to $1.91 billion and $6.92 billion in the same periods of 2013.  Total originations were $2.55 billion in the third quarter of 2014. The year-over-year increase in originations reflects increased focus on, and the increased demand for, the Company's traditional mortgage products and an increase in Accelerator originations. 
• Traditional (uninsured single-family) mortgage originations were $1.48 billion in Q4 2014 and $5.86 billion for the year, compared to $1.23 billion and $4.77 billion in the comparative periods of 2013 and $1.78 billion in Q3 2014. Compared to the third quarter, a decline in originations reflects normal and expected seasonal factors.   
• Accelerator (insured single-family) originations were $1.79 billion for the year, up 76.4% from $1.01 billion in 2013 reflecting the increased focus on this business in 2014. Originations were $353.0 million in Q4 2014, down slightly from $357.1 million originated in Q4 2013 and down from $522.9 million originated last quarter.  The market for insured prime mortgages has been highly competitive in 2014, resulting in relatively narrow spreads. Compared to the third quarter, the decline in originations reflects both expected seasonal factors and the competitive market.
• Multi-unit residential originations were $299.5 million in Q4 2014 and $718.4 million for the year, compared to $239.9 million and $823.2 million in the same periods of 2013 and up from $140.7 million in the third quarter of 2014. Multi-unit residential mortgage originations are mostly insured and subsequently securitized through programs that qualify for off-balance sheet accounting, resulting in a portion of the securitization gains discussed above.
• Commercial mortgage originations were $115.0 million in Q4 2014 and $319.5 million for the year, compared to $56.1 million and $180.1 million in the same periods of 2013, and $71.8 million in the third quarter of 2014.  Store and apartment advances were $24.1 million for the quarter and $118.3 million for the year, compared to $24.5 million and $100.0 million in the same periods in 2013, and $28.8 million in the third quarter of 2014.
• Consumer retail advances, including durable household goods, such as water heaters and larger ticket home improvement items, were $45.7 million in Q4 2014, up 27.4% from $35.9 million one year ago and down 10.9% from $51.3 million last quarter. 
• In Q4 2014, the Company finalized its agreement with a major customer for the prepayment of $234.9 million of water heater loans, due to the sale of a customer's business, resulting in receiving prepayment income of $32.7 million.  This prepayment income will compensate the Company for future interest margin lost as a result of the prepayment. 
• Total deposits reached $13.94 billion, up 9.2% over last year, and down 0.6% over Q3 2014.  Total deposits raised through the Company's deposit diversification initiatives, Oaken Financial, high-interest savings accounts and institutional deposit notes, now total $2.42 billion, an increase of $1.50 billion or 163.6% over last year, and $0.35 billion or 16.9% over last quarter. 
• Non-interest expenses were $39.9 million in the fourth quarter and $162.3 million in 2014, up from $37.9 million and $143.7 million in the same periods of 2013 and down from $42.9 million last quarter. Lower fourth quarter expenses reflect prudent expense management. In addition in Q4 2014, amortization expense decreased as a result of an increase in the estimated useful life of the Company's core banking system. The adjusted efficiency ratio was 28.5% for 2014, up slightly from 28.2% in 2013 and well within the 28% to 32% 2014 target.
• Subsequent to the end of the quarter, and in light of the Company's solid performance, profitability and strong financial position, the Board of Directors declared an increase in the quarterly dividend by $0.02 to $0.22 per Common share, payable on March 1, 2015 to shareholders of record at the close of business on February 23, 2015, representing an increase of 10% for a year over year increase of 37.5%. 

Conference Call and Webcast

Fourth Quarter Results Conference Call

The conference call will take place on Thursday, February 12, 2015, at 10:30 a.m. Participants are asked to call 5 to 15 minutes in advance, 647-427-7450 in Toronto or toll-free 1-888-231-8191 throughout North America. The call will also be accessible in listen-only mode via the Internet at www.homecapital.com.

Conference Call Archive

A telephone replay of the call will be available between 1:30 p.m. Thursday, February 12, 2015 and midnight Thursday, February 19, 2015 by calling 416-849-0833 or 1-855-859-2056 (enter passcode 66550042). The archived audio web cast will be available for 90 days on CNW Group's website at www.newswire.ca and Home Capital's website at www.homecapital.com.

Annual and Special Meeting Notice

The Annual and Special Meeting of Shareholders of Home Capital Group Inc. will be held at One King West, Grand Banking Hall, Toronto, Ontario, M5H 1A1, on Wednesday, May 13, 2015 at 11:00 a.m. local time. Shareholders and guests are invited to join Directors and Management for lunch and refreshments following the Annual and Special Meeting. All shareholders are encouraged to attend.