Home Capital Reports Solid Third Quarter Results: Net Income of $27.9 Million, up 22.3% for the Quarter; Return on Equity Reaches 27.6%

TORONTO, Nov. 3, 2008 (Canada NewsWire via COMTEX) -- HMCGF | Quote | Chart | News | PowerRating -- Home Capital Group Inc. (TSX: HCG | Quote | Chart | News | PowerRating) today announced positive financial results for the third quarter of 2008. Despite continued financial market turmoil, the Company's core business activities including residential and commercial mortgage lending, CMHC-insured Mortgage-Backed Securities, and Visa lending all generated solid earnings growth and returns.

<< Key results from the third quarter included: - Net income for the quarter was $27.9 million, an increase of 22.3% over $22.8 million recorded in the same period last year. Earnings for the nine months of 2008 reached $79.6 million, a rise of 20.7% over the comparable period in 2007. - Basic earnings per share were $0.81, 22.7% above $0.66 for the third quarter of 2007, and $2.31 for the nine-month period, 20.3% higher than the $1.92 recorded last year. Diluted earnings per share were $0.81, an increase of 24.6% from the $0.65 recorded in the third quarter of 2007; results for the nine months were $2.29, 21.2% above the same period last year. - Return on equity was 27.6% for the third quarter compared to 28.9% for the quarter ended September 30, 2007 and 27.8% for the nine months of 2008, versus 29.3% for the same period last year. - Total assets at September 30, 2008 reached $5.62 billion, 20.3% higher than the $4.67 billion reported one year earlier. Total assets, together with Mortgage-Backed Securities (MBS) originated and administered by the Company, grew to $7.74 billion, a rise of 28.5% from $6.02 billion at September 2007, and 20.3% from the $6.43 billion at December 31, 2007. - Total mortgage originations were $1.11 billion during the third quarter, an increase of 39.8% over the $791.0 million advanced during the same period in 2007. The Company advanced $816.3 million in residential mortgages, $175.4 million in CMHC-insured multi- residential properties, $70.8 million in commercial mortgages, $18.5 million in store and apartment properties and $24.5 million in warehouse commercial mortgages. Year-to-date, total mortgage originations were $2.86 billion, an increase of 45.9% over the $1.96 billion advanced during the same nine-month period in 2007. - The Company experienced strong mortgage securitization activity as the Company securitized and sold $544.7 million in CMHC-insured securities during the third quarter, compared to $208.4 million for the same period last year. Government-backed instruments, including CMHC-insured MBS and the Canada Mortgage Bond program, have been only modestly affected by current credit market conditions. - Outstanding balances on the Equityline Visa portfolio reached $339.3 million, a rise of 16.3% from the $291.8 million recorded in the same period last year. Net income from consumer lending reached $5.1 million for the third quarter, 37.8% over the $3.7 million recorded last year. - The efficiency ratio (TEB) was 27.1% in the third quarter, compared to 25.9% during the same period one year earlier. - Net impaired loans represented 0.72% of the total loans portfolio, consistent with the percentage of net impaired loans at the end of 2007. Non-performing mortgages continue to be professionally managed on a loan-by-loan basis by the Company, and write-offs to date have been modest. >>

The Company's Accelerator Program, launched in the second quarter of 2008, experienced significant growth during the period. This program offers a full range of insured mortgage products to a broad customer base, including individuals who have customarily been served by traditional financial institutions. The changing importance of mortgage insurance in our portfolio is reflected in the fact that as at October 31, 2008, 44% of all residential mortgage originations in the fiscal year have been insured. With a focus on enhanced credit quality, the Accelerator program has resulted in diminished risk on a growing segment of the mortgage portfolio.

Home Trust remains well capitalized with Tier 1 and Total capital ratios at 12.7% and 14.0% respectively, and has increased its liquidity reserve by 49.2% over the previous quarter to $716.9 million. Home Trust's Tier 1 and Total capital ratios have steadily increased during the past year. With strong capital ratios, increased liquid assets and no external debt, Home Trust is well positioned to withstand the current market turmoil.

Subsequent to the end of the third quarter, and in light of the Company's consistent growth and financial performance, the Board of Directors declared a quarterly cash dividend of $0.13 per Common Share payable on December 1, 2008 to shareholders of record at the close of business on November 14, 2008.

Home Capital produced solid third quarter results during a period of global market turbulence. The Company continues to manage its business with prudence and a focus on sustainability and accountability. In this time of economic uncertainty, Home Capital remains committed to measured growth, continued profitability and long-term shareholder value. Home Capital's Board of Directors and management remain confident that the Company is well positioned for the future and will meet or exceed its targets for 2008.

<< "signed" "signed" GERALD M. SOLOWAY NORMAN F. ANGUS Chief Executive Officer Chairman of the Board November 3, 2008 >>

Additional information concerning the Company's targets and related expectations for 2008, including the risks and assumptions underlying these expectations, may be found in Management's Discussion and Analysis for the Third Quarter 2008.

Third Quarter Results Conference Call

The conference call will take place on Monday, November 3, 2008 at 10:30 a.m. Participants are asked to call 5 to 15 minutes in advance, 416-644-3416 in Toronto or toll-free 1-800-732-9303 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 12:30 p.m. Monday, November 3, 2008 and midnight Monday, November 10, 2008 by calling 416-640-1917 or 1-877-289-8525 (enter passcode 21284997 followed by the number sign). The archive 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.

<< FINANCIAL HIGHLIGHTS For the Period Ended September 30 (Unaudited) Three Months Ended Nine Months Ended ------------------------------------------------------------------------- In Thousands of Dollars (Except Per Share and Percentage Amounts) 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING RESULTS Net Income $ 27,939 $ 22,837 $ 79,648 $ 66,013 Total Revenue 116,950 94,346 336,699 263,799 Earnings per Share - Basic $ 0.81 $ 0.66 $ 2.31 $ 1.92 Earnings per Share - Diluted 0.81 0.65 2.29 1.89 Return on Shareholders' Equity 27.6% 28.9% 27.8% 29.3% Return on Average Assets 2.0% 2.0% 2.0% 2.1% Efficiency Ratio 27.6% 26.4% 28.9% 27.2% Efficiency Ratio (TEB(2)) 27.1% 25.9% 28.4% 26.6% (Non-interest Expense/ Net Interest Income Plus Fee Income) ------------------------------------------------------------------------- BALANCE SHEET HIGHLIGHTS Total Assets $ 5,621,809 $ 4,674,468 Loans 4,515,017 3,740,268 Deposits 4,944,039 4,160,496 Shareholders' Equity 416,295 323,305 Mortgage-Backed Security Assets Under Administration 2,117,231 1,347,029 ------------------------------------------------------------------------- FINANCIAL STRENGTH Capital Measures(1),(3) Risk Weighted Assets(1),(3) $ 2,970,417 $ 2,534,056 Tier 1 Capital Ratio(1),(3) 12.7% 11.7% Total Capital Ratio(1),(3) 14.0% 13.1% Credit Quality Net Impaired Loans as a Percentage of Gross Loans 0.7% 0.6% Allowance as a Percentage of Gross Impaired Loans 78.0% 93.9% Annualized Provision as a Percentage of Gross Loans 0.1% 0.1% Share Information Book Value per Common Share $ 12.07 $ 9.38 Common Share Price - Close 31.50 34.50 Market Capitalization 1,085,984 1,188,685 Number of Common Shares Outstanding 34,476 34,455 ------------------------------------------------------------------------- (1) These figures relate to the Company's operating subsidiary, Home Trust Company. (2) See definition of Taxable Equivalent Basis (TEB) in this unaudited interim consolidated financial report. (3) Risk Weighted Assets, Tier 1 and Total Capital at September 30, 2008 are calculated under Basel II while the comparative periods are calculated under Basel I. See Capital Managment section for further details. ------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------------------------------------------- >>

Caution Regarding Forward-Looking Statements

From time to time Home Capital Group Inc. (the "Company" or "Home Capital") makes written and verbal forward-looking statements. These are included in the Annual Report, periodic reports to shareholders, regulatory filings, press releases, Company presentations and other Company communications. Forward-looking statements are made in connection with business objectives and targets, Company strategies, operations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. These statements regarding expected future performance are "financial outlooks" within the meaning of National Instrument 51-102. Please see the risk factors, which are set forth in detail on pages 24 through 30 of the Company's 2007 Annual Report, as well as its other publicly filed information, which may be located at www.sedar.com, for the material factors that could cause the Company's actual results to differ materially from these statements. Forward-looking statements can be found in the Message to the Shareholders and the Outlook Section in this quarterly report. Forward-looking statements are typically identified by words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "may," and "could" or other similar expressions. By their very nature, these statements require us to make assumptions and are subject to inherent risks and uncertainties, general and specific, which may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to, global capital market activity, changes in government monetary and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition and technological change. The preceding list is not exhaustive of possible factors. These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake to update any forward-looking statements, whether written or verbal, that may be made from time to time by it or on its behalf, except as required by securities laws.

Taxable Equivalent Basis (TEB)

Most banks and trust companies analyze and report their financial results on a 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 from certain securities. The adjustment to TEB 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. The TEB adjustments of $1.1 million for the third quarter, and $3.1 million for the nine months of 2008 ($1.1 million - Q3 2007 and $3.1 million - nine months 2007) increased reported interest income. TEB does not have a standard meaning prescribed by Canadian generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures used by other companies. Net interest income and income taxes are discussed on a TEB basis throughout this Management's Discussion and Analysis (MD & A).

Regulatory Filings

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 web site at www.homecapital.com, and on the Canadian Securities Administrators' website at www.sedar.com.

Management's Discussion and Analysis of Operating Performance

This MD & A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended September 30, 2008 included herein, and the audited consolidated financial statements and MD & A for the year ended December 31, 2007. These are available on the Canadian Securities Administrators' website at www.sedar.com and on pages 8 through 58 of the Company's 2007 Annual Report. Except as described in these unaudited interim consolidated financial statements and MD & A, all other factors discussed and referred to in the MD & A for fiscal 2007 remain substantially unchanged. These unaudited interim consolidated financial statements and MD & A have been prepared based on information available as at October 30, 2008. As in prior quarters, the Company's Audit Committee reviewed this document, and prior to its release the Company's Board of Directors approved it on the Audit Committee's recommendation.

2008 Objectives and Performance

Home Capital published its financial objectives for 2008 on page 10 of the Company's 2007 Annual Report. The following table compares actual performance to date against each of these objectives.

<< ------------------------------------------------------------------------- Nine-Month Period Ended September 30, 2008 2008 Objectives(1) Actual Results(1) ------------------------------------------------------------------------- Net Income $79.2 million $79.6 million, or 20.7% increase over the same period last year Diluted Earnings per Share $2.27 $2.29 per share, or 21.2% increase over the same period last year Total Assets and Assets Under Administration $7.23 billion $7.74 billion, or 28.5% increase over the same period last year Return on Shareholders' Equity 25.0% 27.8% Efficiency Ratio (TEB) 27.0% to 33.0% 28.4% Capital Ratios(2) Tier 1 Minimum of 10% 12.7% Total Minimum of 12% 14.0% Provision for Loan Losses as a Percentage of Total Loans 0.15% to 0.25% 0.14% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Objectives and results for net income and diluted earnings per share are for the current period relative to the same period in the prior year; asset growth is the change from twelve months prior; and ratios are based on the current period, annualized. (2) Based on the Company's wholly owned subsidiary, Home Trust Company. Capital Ratios have been calculated under Basel II requirements. See Capital Management section for additional details. ------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- Income Statement Highlights The Company continued to achieve positive results notwithstanding continuing uncertainty in Canadian and global capital markets and the broader economy. The Company continues to maintain a strong capital base and liquidity to navigate existing volatility in the global capital markets. The Company's key financial results are summarized below. - Net income rose 22.3% over the comparable quarter of 2007. - Non-interest income was up 92.4% over the third quarter of 2007, driven by robust growth in securitization gains of $13.1 million and increases in fees for the administration and servicing of the mortgage and Visa portfolios, offset by losses on the securities portfolio and losses on derivative mark-to-market values. - The efficiency ratio (TEB) (the lower the better) remained low, and in-line with the Company's objective, at 27.1%, compared to 25.9% in the same quarter of 2007. The increase year-over-year was due to increased salary and benefit expenses and higher general and administration costs associated with the growth of the Company's operations. - Diluted earnings per share for the quarter increased 24.6% to $0.81, compared to $0.65 in the third quarter of 2007. - Return on average shareholders' equity for the quarter was 27.6%, compared to 28.9% for the same period last year. - Net interest income remained unchanged from the comparable quarter in 2007. Growth in the Accelerator Program, and to a lesser extent the growth in the commercial mortgage lending, where both products attract lower spreads, combined with increases in the Company's lending costs had the impact of contracting net interest income overall. Balance Sheet Highlights - Total assets rose 20.3% year-over-year to reach $5.62 billion, compared to the $4.67 billion reported at September 30, 2007. This asset growth was primarily driven by expansion in the Company's residential mortgage portfolio which increased by $336.3 million, other non-residential mortgages which grew by $392.2 million, securities which were $100.6 million higher, partially offset by a drop in cash resources of $18.1 million. Although global markets continue to experience significant difficulties, the Company believes it is well positioned by remaining well capitalized with access to liquidity through the offering of term deposits. The Company has remained debt free since September 2006. - The Equityline Visa portfolio reached $339.3 million in receivables, representing growth of 16.3%, or $47.5 million, over the third quarter of 2007. - The Company continues to be able to access funds to accommodate the growth of the Company's loans portfolio. Liquid assets at September 30, 2008 were $716.9 million, compared to $627.1 million at December 31, 2007 and $626.8 million at September 30, 2007. - The Company continues to strengthen its capital position with Tier 1 capital climbing to 12.7% at the end of the quarter compared to 11.1% at December 31, 2007 and 11.7% at September 30, 2007. - Deposit liabilities as at September 30, 2008 grew 18.8% to reach $4.94 billion, as compared to $4.16 billion at September 30, 2007. These proceeds were deployed to fund the growth in the Company's loans portfolio, with excess funds invested in the Company's securities portfolio and cash resources. ------------------------------------------------------------------------- EARNINGS REVIEW ------------------------------------------------------------------------- >>

Net Interest Income

Net interest income was $38.3 million in the third quarter, and $115.3 million year-to-date, compared to $38.3 million for the comparable quarter in 2007 and $108.2 million for the nine-month period ended September 30, 2007. The increase over the comparable nine-month period reflects strong growth of interest-bearing assets, exceeding the growth in interest-bearing liabilities offset by contracted net interest margins. Net interest income was unchanged from the comparable quarter in 2007 due in part to the growth of the Accelerator Program and commercial mortgage lending, both attracting lower spreads and lower yields on the Company's securities portfolio. The net interest margin (TEB) for the third quarter was 2.9% and 3.0% year-to-date, down from 3.5% achieved in the comparable periods in 2007. The decrease in net interest margin over the comparable periods was due to a tightening of spreads that began in the latter half of 2007 as the global liquidity crisis unfolded and has since intensified in response to greater market uncertainties.

The interest spread between the loans portfolio and deposits ended the quarter at 3.1%, compared to 3.6% for the comparable quarter in 2007, and 3.3% year-to-date, compared to 3.7% for the same nine-month period in 2007. The decrease in interest spread over the prior periods was primarily the result of an increase in funding costs resulting from a tightening in availability of liquidity and broader lending conditions. The Company's average cost of funds increased 47 basis points year-over-year while the yield on the Company's loans portfolio remained consistent as the growth in the commercial lending portfolio and the new Accelerator Program, both of which attract lower spreads, had a moderating impact on yields. With challenging credit market conditions persisting, the Company expects to continue to maintain existing spreads for the remainder of 2008.

While the net interest spread on both the commercial mortgage lending and Accelerator Program are lower than the core residential mortgage portfolio due to reduced credit risk, both product offerings provide further diversification to the core residential lending business and also provide incremental net interest income and loan origination growth that would otherwise not exist.

Non-Interest Income

Total non-interest income was $23.0 million for the third quarter, a 92.4% increase over the comparable quarter in 2007 and $54.7 million for the nine-month period of 2008, or a 63.2% increase over the same nine-month period in 2007. Both the quarter-over-quarter and nine-month period increases were driven largely by the strong growth in securitization gains through the Company's participation in the Canada Mortgage Bond (CMB) program and additional short-term MBS securitizations. The increases in fees generated from the administration of the loans portfolio were offset by losses incurred on the securities portfolio, losses on the unwinding of short Government of Canada bonds and mark-to-market losses on the seller swaps and hedge swaps entered into through the CMB program.

The fees and other income components of non-interest income ended the quarter at $7.0 million and $21.3 million for the nine-month period of 2008, an increase of 29.9% over the comparable quarter of 2007 and 41.5% over the same nine-month period of 2007. The increases over the comparable periods were due to growth in the Company's loans portfolio and the associated fee income generated from the administration and servicing of these portfolios as well as fee income generated through Payment Services Interactive Gateway Inc. (PSiGate) which was acquired in October 2007.

The Company issued fifteen MBS pools during the third quarter of 2008, consisting of $544.7 million of Canada Mortgage and Housing Corporation (CMHC) insured residential mortgages for a year-to-date total issuance of $941.1 million. This represents an increase of $336.3 million from the $208.4 million in MBS pools issued in the comparable quarter of 2007 and an increase of $447.7 million over the $493.4 million in MBS pools that were issued during the nine-month period of 2007. Securitization gains were $18.2 million during the quarter and $35.6 million for the nine-month period of 2008, compared to $6.0 million for the third quarter of 2007 and $14.7 million for the comparable nine-month period of 2007 (refer to Note 5 of these unaudited interim consolidated financial statements). The increase in securitization gains during the quarter and nine-period ended September 30, 2008 compared to the prior periods was due to significant volume increases in securitization activity along with lower unscheduled prepayment rates and lower discount rates. The spread earned on the pools averaged 2.2% in the third quarter of 2008 and 2.6% for the pools issued year-to-date compared to 2.6% for the comparable quarter and nine-month period in 2007. The unscheduled prepayment rate was lower during the quarter and year-to-date as the Company issued several short-term MBS pools where the mortgages in the MBS pool were late in their term, and where the Company therefore expects less prepayment. Further, the Company issued a new pool type during the quarter where unscheduled prepayments are not permitted under the program. Of the $544.7 million MBS pools issued during the quarter, $268.6 million, or 50.7% were pools containing lower or prohibited unscheduled prepayments and the remaining pools had unscheduled prepayment rates in line with historic levels.

During the quarter, the Company participated in CMHC's CMB program, administered through Canada Housing Trust. This program provides the Company with an alternative distribution channel to diversify its funding stream for five-year MBS pools. Of the fifteen MBS pools issued during the quarter, nine MBS pool with a book value of $433.0 million were securitized through the CMB program resulting in gains of $16.0 million. Year-to-date, the Company has securitized $639.9 million through the CMB program and recognized gains of $26.1 million.

Non-Interest Expenses

Total non-interest expenses for the quarter were $17.0 million and $49.2 million for the nine-month period of 2008. This compares to $13.3 million for the third quarter of 2007 and $38.5 million for the nine-month period ended September 30, 2007. The increases over the comparable periods of 2007 were due to higher salary and benefit expenses, and the inclusion of the operating expenditures of PSiGate which was acquired in October 2007. Salaries and staff benefits expenses for the quarter increased by $1.6 million, or 20.6% over the third quarter of 2007 and up $5.6 million, or 25.4% over the comparable nine-month period of 2007. The Company ended the quarter with 407 employees, up from 377 employees at December 31, 2007 and 360 employees one year ago. Premises expenses increased from the prior year period as the Company entered into a new lease arrangement effective June 2008, expanding the head office space with 50% more square footage to enable continued future growth, including the accommodation of additional staff from the relocation of the St. Catharines branch to the Toronto head office.

General and administration expenses increased by $1.8 million, or 40.7% compared to the third quarter of 2007 and up $4.7 million, or 34.1% from the same nine-month period in 2007. The increase from the comparable periods of 2007 was primarily the result of the inclusion of operating expenditures of PSiGate and rising general operating costs as the Company continues to grow across all business lines.

The efficiency ratio (TEB) ended the quarter at 27.1% and 28.4% for the nine-month period of 2008, compared to 25.9% in the previous comparable quarter and 26.6% for the nine months of 2007. As the Company continues to grow, management remains focused on containing discretionary spending as part of its continuing efforts to achieve the efficiency ratio objectives set out for 2008.

Provision for Credit Losses

The Company expensed $3.4 million during the quarter and $4.7 million for the nine-month period of 2008, compared to $2.1 million in the third quarter of 2007 and $3.6 million in the comparable nine-month period of 2007 through the provision for credit losses. The quarter-over-quarter increase primarily relates to an increase in specific provisions identified on an isolated pocket of the Company's residential mortgage portfolio. This expense represented 0.1% (0.1% - Q3 2007) of total gross loans, on an annualized basis. The Company continues to add to the general allowance for credit losses due to relative shifts in the proportion of risk-weighted assets. The total general allowance amounted to $25.1 million at the end of the quarter, an increase of $1.7 million over the $23.4 million recorded at December 31, 2007 and a $3.0 million increase over the $22.1 million allowance recorded at September 30, 2007.

At September 30, 2008 net impaired loans amounted to $32.8 million (0.72% of gross loans), compared to $29.0 million (0.72% of gross loans) at December 31, 2007 and $23.6 million (0.63% of gross loans) at September 30, 2007 (refer to Note 4 of these unaudited interim consolidated financial statements). Total net loans written-off during the quarter were $0.4 million, compared to $0.5 million in the third quarter of 2007. Year-to-date, net loans written-off were $1.6 million, compared to $1.1 million for the comparable nine-month period of 2007. The Company continues to closely monitor non-performing loans and takes proactive measures to minimize losses, as described under the Credit Risk section of this MD & A and in the 2007 Annual Report under the heading Risk Management.

Income Taxes

The income tax expense amounted to $13.0 million (effective tax rate of 31.8%) for the third quarter and $36.6 million (effective tax rate of 31.5%) year-to-date, compared to $12.0 million (effective tax rate of 34.5%) for the comparable quarter of 2007 and $33.6 million (effective tax rate of 33.7%) for the nine-month period of 2007. Canadian dividend income is non-taxable to financial institutions, which resulted in a lower income tax rate. In the absence of tax-free dividends, the tax rates would have been 33.6% for the third quarter and 33.3% for the nine-month period of 2008, compared to 36.5% for the third quarter of 2007 and 35.7% for the comparable nine-month period in 2007.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income (OCI) and totaled $28.0 million for the third quarter and $82.6 million year-to-date, an increase of $8.8 million, or 46.0% over the $19.2 million recorded in the same quarter last year and a $26.6 million, or 47.5% increase over the same nine-month period in 2007. As previously noted net income increased 22.3%, or $5.1 million over the same quarter last year and increased 20.7%, or $13.6 million over the same nine-month period in 2007. The Company's OCI includes unrealized losses on available for sale securities, and securitization receivables from market revaluations at the end of the quarter. OCI for the period ended September 30, 2008 was a gain of $0.1 million, compared to a loss of $3.7 million in the comparable quarter in 2007. The change in OCI compared to prior quarters for available for sale securities and securitization receivables primarily reflects market fluctuations related to changes in interest rates, and general market conditions affecting certain market sectors in which the Company holds equity positions. During the quarter, the Company determined that certain equity holdings were permanently impaired and recognized a writedown of $0.2 million in losses from accumulated other comprehensive income in the consolidated statements of income. Further, the Company sold certain equity holdings realizing losses of $2.3 million. The Company believes the remaining unrealized losses represent temporary declines in value due to the current securities market conditions.

<< ------------------------------------------------------------------------- BALANCE SHEET REVIEW ------------------------------------------------------------------------- >>

Assets

Total assets as at September 30, 2008 were $5.62 billion, an increase of $646.7 million, or 13.0% over the $4.98 billion reported at December 31, 2007 and up by $947.3 million, or 20.3% over the September 30, 2007 asset balance of $4.67 billion.

The growth in total assets over December 31, 2007 was primarily generated from growth in the loans portfolio of $492.8 million. Residential mortgages contributed $157.3 million to the total loans portfolio growth, other non- residential mortgages contributed growth of $301.6 million, consumer lending contributed $38.9 million, offset by a reduction of $3.3 million in secured loans, while the general allowance for credit losses increased by $1.7 million. The residential mortgage portfolio growth excludes $544.7 million of loans securitized during the quarter. The Company's cash resources increased by $77.0 million from December 31, 2007 while the securities portfolio increased by $17.1 million. Other assets increased by $17.8 million from December 31, 2007, primarily driven by corporate income tax changes within the Company's tax balances and increased accrued interest earned on the Company's loans portfolio. Securitization receivables increased significantly from December 2007, growing by $41.2 million due to robust securitization activity over the nine-month period of 2008.

The growth in total assets since September 30, 2007 was primarily generated from growth in the loans portfolio of $774.7 million. The loans portfolio growth was driven by a $336.3 million increase in residential mortgages, growth of $392.2 million in other non-residential mortgages, a $52.0 million rise in consumer lending, offset by a reduction of $2.8 million in secured loans, while the general allowance for credit losses rose by $3.0 million. The Company's cash resources decreased by $18.1 million while the securities portfolio rose by $100.6 million over September 30, 2007. The decrease in cash resources was due to a shift in funds from cash resources to the securities portfolio and to support the loans portfolio growth. Other assets increased by $33.9 million, primarily resulting from the addition of goodwill and intangible assets acquired through the acquisition of PSiGate, corporate income tax changes within the Company's tax balances and accrued interest earned on the loans portfolio. Securitization receivables increased by $55.2 million over September 2007 resulting from higher securitization volumes year-over-year.

Liabilities

Liabilities at September 30, 2008 rose to $5.21 billion, an increase of $578.5 million, or 12.5% over the $4.63 billion reported at December 31, 2007 and up by $854.4 million, or 19.6% over the $4.35 billion recorded at September 30, 2007.

Most of the growth from December 2007 resulted from increased deposits of $530.1 million. The growth in the deposit liabilities funded the loans portfolio growth, with excess funds invested in the Company's cash resources and securities portfolio. Other liabilities (refer to Note 7 of these unaudited interim consolidated financial statements) increased by $49.4 million, or 23.7% over the $208.7 million reported at December 31, 2007. This growth was principally the result of increases in accrued interest of $23.5 million related to higher deposits, a net increase of $8.0 million in the Company's current and deferred corporate tax liabilities, and an increase of $14.7 million in other liabilities resulting from the timing of payments for administration of the off-balance sheet MBS portfolio.

The rise in liabilities from September 30, 2007 resulted primarily from increased deposits of $783.5 million. Higher deposit liabilities were the primary funding source for the loans portfolio growth, year-over-year. Other liabilities increased by $71.4 million, or 38.3% over September 30, 2007 primarily due to increases in accrued interest of $34.2 million, increases of $15.2 million in the Company's corporate future tax liabilities, and $18.7 million in other liabilities resulting from the timing of payments for administration of the MBS portfolio.

Shareholders' Equity

Total shareholders' equity increased by $68.3 million, or 19.6% over the $348.0 million reported at December 31, 2007. The increase since December 2007 was internally generated from net income $79.6 million over the nine-month period, less $13.5 million for dividends paid and payable to shareholders. The remaining increase was principally driven from the fair value amortization of employee stock options and movements in accumulated other comprehensive income of $2.9 million, arising from the Company's available for sale financial assets.

Total shareholders' equity rose by $93.0 million, or 28.8% over the $323.3 million reported at September 30, 2007. Most of this growth was internally generated from earnings for the twelve-month period ended September 30, 2008 of $103.8 million, less $17.3 million for shareholder dividends. The remaining increase resulted from proceeds received on the exercise of Company stock options, amortization of the fair value of stock options, and movements in the accumulated other comprehensive income (loss), offset by the Company's repurchase of capital stock through the Normal Course Issuer Bid. At September 30, 2008 the book value per common share was $12.07, compared to $10.08 at December 31, 2007 and $9.38 at September 30, 2007.

Derivatives and Off-Balance Sheet Arrangements

From time to time, the Company may enter into hedging transactions to mitigate the interest exposure on outstanding loan and deposit commitments. For example, the Company can utilize interest rate swaps or short sales of Government of Canada bonds to hedge the economic exposure to movements in interest rates between the time that mortgages are committed to being funded under asset securitization, and the time those mortgages are actually sold. The intent of the swap or short sales of Government of Canada bonds is to have the fair value movements of these instruments be effective in offsetting the fair value movements within a pool of mortgages over the period in which the fixed rate pool may be exposed to movements in the variable interest rate, generally 60 to 150 days. The counterparties with which the Company enters into such arrangements are Canadian chartered banks. During the third quarter of 2008, the Company entered into a $433.0 million short sale of Government of Canada bonds which was unwound during the quarter, resulting in a loss of $2.5 million. At September 30, 2008 the Company held notional short sales of Government of Canada bonds of $40.0 million and were marked-to-market for an unrealized gain of $0.1 million. No such arrangements were entered into during the comparable prior periods.

The Company participates in the CMB program sponsored by CMHC, and administered by Canada Housing Trust. Through this program, the Company must manage the mismatch and reinvestment risk between the amortizing five-year MBS pool and the five-year CMB. As part of this arrangement, the Company enters into a seller swap which has the effect of paying the fixed interest payments on the CMB and receiving the total return on the MBS pool and the reinvestment assets. As well, the Company entered into a hedge swap to manage the reinvestment risk between the amortizing MBS pool and the five-year CMB. These transactions do not qualify for hedge accounting under Canadian Institute of Chartered Accountants (CICA) Handbook Section 3865, Hedges and therefore the Company must mark-to-market the swaps through the consolidated statement of income. The notional values of the seller swaps and hedge swaps at September 30, 2008 were $760.9 million ($28.0 million - Q3 2007) and $24.4 million ($0.3 million - Q3 2007), respectively. These swaps were marked-to-market at September 30, 2008 for an unrealized gain of $1.0 million (unrealized gain of $0.1 million - Q3 2007), recorded in the consolidated statements of income. For additional information refer to Note 12 of these unaudited interim consolidated financial statements.

The Company originates and securitizes insured residential mortgage loans into special purpose entities for liquidity funding, and capital management purposes. When these assets are sold, the Company retains rights to certain excess interest spreads less servicing liabilities, which constitute retained interests. The Company periodically reviews the value of retained interests, and any permanent impairment in value is charged to income. The Company continues to administer all securitized assets after the sale and, upon maturity of the mortgage, will renew or refinance these mortgage loans whenever possible. As at September 30, 2008 outstanding securitized mortgage loans under administration amounted to $2.12 billion ($1.46 billion - Q4 2007 and $1.35 billion - Q3 2007) with retained interest of $107.0 million ($65.8 million - Q4 2007 and $51.8 million - Q3 2007). The off-balance sheet portfolio continues to perform well, with 97.4% of the portfolio current and 1.2% greater than 60 days in arrears. For additional information, refer to Note 6 in the consolidated financial statements of the 2007 Annual Report, and Note 5 of these unaudited interim consolidated financial statements.

In the normal course of its business, the Company offers credit products to meet the financial needs of its customers. Outstanding commitments for future advances on mortgage loans amounted to $424.9 million at September 30, 2008 compared to $447.3 million at December 31, 2007 and $288.0 million at September 30, 2007. Included within the outstanding commitments are unutilized commercial and residential mortgage advances of $151.3 million at September 30, 2008 compared to $238.0 million at December 31, 2007 and $149.9 million at September 30, 2007. Commitments for the loans remain open for various dates through October 2009. As at September 30, 2008 unutilized credit card balances amounted to $69.0 million, compared to $77.9 million at December 31, 2007 and $69.2 million at September 30, 2007. Outstanding commitments for the Equityline Visa portfolio were $3.0 million at September 30, 2008 compared to $5.9 million at December 31, 2007 and $4.3 million at September 30, 2007.

Contractual Arrangements

On March 25, 2008 Home Trust announced that it had entered into an agreement with Fidelity National Information Services, Inc. (FIS) relating to its merchant credit card services activities. FIS, a global leader in the payment processing industry, provides Home Trust with comprehensive back-office merchant processing services, including settlement, charge-back processing, retrieval services and customer support.

<< ------------------------------------------------------------------------- CAPITAL MANAGEMENT ------------------------------------------------------------------------- >>

Effective January 1, 2008 a new regulatory capital management framework was implemented in Canada. The International Convergence of Capital Measurement and Capital Standards: a Revised Framework, commonly known as Basel II, replaced Basel I, the framework utilized in the past. Basel II introduced several significant changes to the risk-weighting of assets and the calculation of regulatory capital. Home Trust subsequently implemented the standardized approach to calculating risk-weighted assets for credit risk and the basic indicator approach for operational risk. Changes for Home Trust under Basel II include a shift into lower risk-weighted categories for residential mortgages, and a new capital requirement related to operational risk.

Basel II had a modest, positive impact on the overall level of regulatory capital for Home Trust. New procedures and system enhancements were developed to conform to the new framework, including formalization of Home Trust's internal capital adequacy assessment process. The Risk and Capital Committee and the Board of Directors annually review the capital management policy, and monitor compliance with the policy on a quarterly basis.

The capital base of Home Trust continues to be strongly positioned. The Tier 1 capital ratio ended the quarter at 12.7%, up from the first and second quarters of 2008 of 12.0% and 12.5%, respectively, and up from 11.7% recorded at September 30, 2007. The total capital ratio was 14.0% at September 30, 2008, up from the first and second quarters of 2008 of 13.4% and 13.8%, respectively, and up from 13.1% achieved at September 30, 2007. The Company continues to build its capital base during a period of uncertainty in global capital markets. These ratios both continue to exceed Home Trust's minimum regulatory requirements of 7.0% for Tier 1 and 10.0% for total capital as well as Home Trust's internal capital targets.

Further information on Basel II can be found in the Company's 2007 Annual Report on page 22, and in Note 8 to these unaudited interim consolidated financial statements.

<< ------------------------------------------------------------------------- RISK MANAGEMENT ------------------------------------------------------------------------- >>

The Company is exposed to various types of risks owing to the nature of the business activities it conducts. The types of risk to which the Company is subject include credit, liquidity and interest rate risks. The Company has adopted enterprise risk management (ERM) as a discipline for managing risks. The Company's ERM structure is supported by a governance framework which includes policies, management standards, guidelines and procedures appropriate to each business activity. The policies are reviewed and approved annually by the Board of Directors. The Company's key risk management practices remain in place and unchanged from those outlined on pages 24 through 30 in the MD & A section of the Company's 2007 Annual Report.

Credit Risk

Credit risk management is the oversight of credit risk associated with the total loans portfolio. This is the risk of the loss of principal and/or interest from the failure of debtors, for any reason, to honour their financial or contractual obligations to the Company. The Company's exposure to credit risk is mitigated by senior management, the Audit Committee and the Risk and Capital Committee of the Board of Directors who undertake reviews of credit policies and lending practices. The Company's policy is that credit is approved by different levels of senior management, based upon the amount of the loan. The Risk and Capital Committee and the Board of Directors review compliance with credit risk requirements on a quarterly basis.

As at September 30, 2008 the composition of the total mortgage portfolio was 82.4% residential and 17.6% non-residential, compared to a composition of 88.5% residential and 11.5% non-residential at December 31, 2007 and a composition of 90.1% residential and 9.9% non-residential one year ago. Within the Company's residential mortgage portfolio, 9.0% of the loans were insured by CMHC at the end of the quarter, compared to 5.4% at December 31, 2007 and 5.9% one year ago. First mortgages represented 99.7% of the total mortgage portfolio at September 30, 2008, consistent with the comparable periods. Further, with the launch of the Accelerator Program in June 2008, the Company continues a trend of originating higher volumes of government-insured mortgages. Of all residential mortgage originations over the nine months of 2008, 43.6% were insured. At September 30, 2008 the average loan to value of the Company's mortgage loans portfolio was 66.4%, compared to 65.7% at December 31, 2007 and 65.8% one year ago. Refer to Note 4 of these unaudited interim consolidated financial statements for a further breakdown by geographic region. The mortgage loans portfolio continues to perform well despite uncertain economic conditions with 95.3% of the portfolio current and only 1.5% of the portfolio over 60 days in arrears at the end of September 2008. This is consistent with both December 31, 2007 and September 30, 2007 at which point 1.6% and 1.5% of loans were over 60 days in arrears, respectively. When the off-balance sheet mortgage portfolio of $2.12 billion is also factored in, the combined mortgage loans portfolio has shown no signs of performance deterioration with 95.4% of the combined portfolio current, and only 1.7% over 60 days in arrears.

As at September 30, 2008 the gross credit card receivable balance totaled $348.8 million, of which $348.2 million, or 99.8% of the portfolio was secured either by cash deposits or residential mortgage collateral, and $0.6 million, or 0.2% was unsecured. The total credit approved included $417.0 million in secured and $0.8 million in unsecured credit, compared to $391.0 million in secured, and $1.2 million of unsecured credit at December 31, 2007 and $371.3 million in secured, and $1.4 million of unsecured credit at September 30, 2007. Within the secured credit card portfolio Equityline Visa credit cards represent the principal driver of receivable balance growth. Equityline Visa credit cards are secured by collateral residential mortgages, and this portfolio segment amounted to $339.3 million of the total credit card receivable balance as at September 30, 2008 compared to $302.7 million at December 31, 2007 and $291.8 million at September 30, 2007. Cash deposits securing credit card accounts amounted to $15.3 million, and are included in the Company's deposits. Further, the Equityline Visa portfolio has a loan to value of 69.8% at September 30, 2008 compared to a loan to value of 69.7% at December 31, 2007 and 70.0% at September 30, 2007. At September 30, 2008 $6.8 million, or 1.9% of the credit card portfolio was over 60 days in arrears compared to $3.8 million, or 1.2% at December 31, 2007 and $4.1 million, or 1.4% at September 30, 2007. The Company continues to experience minimal losses on the credit card portfolio.

The secured loan portfolio of $79.0 million decreased by $3.3 million from the December 31, 2007 balance of $82.3 million, and decreased $2.8 million from the September 30, 2007 balance of $81.8 million. These loans are secured by second mortgages on residential property. Since commencing this program, the Company has experienced minimal losses on these loans. At September 30, 2008, 97.6% of the secured loan portfolio was current while $0.8 million, or 1.0% was over 60 days in arrears. This compares to 97.7% of the secured loan portfolio being current while $0.6 million, or 0.8% was over 60 days in arrears at December 31, 2007. As at September 30, 2007, 97.1% of the secured loan portfolio was current while $0.7 million, or 0.8% was over 60 days in arrears.

The Company experienced a small rise in net impaired loans, to $32.8 million at September 30, 2008 compared to $29.0 million at December 31, 2007 and $23.6 million at September 30, 2007. The loans portfolio continues to perform well, as net impaired loans at September 30, 2008 represented less than 1% of the gross loans portfolio. The Company tightened its underwriting criteria, taking into account local market conditions in order to minimize potential loss exposure. Experienced employees of the Company undertake reviews of all non-performing loans greater than 60 days to analyze patterns and drivers, and then reflect emerging drivers in the Company's lending criteria going forward. This analytical approach and attention to emerging trends has resulted in continued low write-offs relative to the gross loans portfolio. Write-offs net of recoveries applied against the accumulated allowance for credit losses realized on loans during the nine-month period ended September 30, 2008 totaled $1.6 million, up from both the comparable periods of December 2007 and September 2007. The Company continues to monitor this area, and is dealing prudently and effectively with impaired loans.

The Company continues to be well positioned to absorb all probable losses in its loans portfolio by increasing general allowances to $25.1 million at September 30, 2008 as compared to general allowances of $23.4 million at December 31, 2007 and $22.1 million at September 30, 2007. The Company routinely monitors the adequacy of the general allowance. The Company's actual loss experience on mortgages has amounted to 0.03% per annum over the past 15 years, 0.01% for the past 10 years, and 0.001% for the past 5 years. The Company has security in the form of real property or cash deposits against loans totaling 99.8% of the total loans portfolio. A methodology has been implemented by the Company to test the adequacy of the general allowance that takes into account asset quality, borrowers' creditworthiness, property location and past loss experience. The Company periodically reviews this general allowance methodology giving due consideration to changes in economic conditions, interest rates and local housing market conditions.

The total general allowance was 84.4 basis points of the Company's risk-weighted assets as at September 30, 2008 compared to 83.5 basis points at December 31, 2007 and 87.5 basis points at September 30, 2007. It should be noted that the measurement of risk-weighted assets for September 30, 2008 was based on the new Basel II computations. Refer to the Capital Management section and Note 8 for further details.

Liquidity Risk

The objective of liquidity management is to ensure the Company has the ability to generate or obtain cash or equivalents in a timely manner and at a reasonable cost to meet its commitments (both on- and off-balance sheet) as they become due.

The Company's liquidity management framework includes a policy relating to 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, the daily monitoring of the liquidity position by senior management, and quarterly reporting to the Risk and Capital Committee of the Board of Directors. The Company manages liquidity using a model which considers two stress scenarios. In the "immediate" scenario, the Company experiences a decline in new deposits over a one month-period. In the "ongoing" scenario, the situation is similarly stressed but is spread out over the course of one year. In each scenario, the Company must hold sufficient liquid assets to meet the potential and certain obligations for a period of one year beyond the time frame of the scenario. These scenarios require the Company to make assumptions regarding the probable behaviour and timing of cash flows for each type of asset and liability. The Company's liquidity ratio is the total of liquid assets, adjusted by the estimates in each scenario, divided by the adjusted liabilities. At September 30, 2008 liquid assets amounted to 150% (165% as at December 31, 2007 and 175% as at September 30, 2007) under the immediate scenario, and 136% (146% at December 31, 2007 and 148% as at September 30, 2007) under the ongoing scenario. The Company continues to monitor these scenarios and will take appropriate actions should the need arise.

The Company holds liquid assets in the form of cash and bank deposits, treasury bills, banker's acceptances, government bonds and debentures to comply with its liquidity policy. Due to the continuing liquidity crisis in Canadian and global credit markets, the Company has maintained more than sufficient liquidity to meet its obligations. At September 30, 2008 liquid assets amounted to $716.9 million, compared to $627.1 million recorded at December 31, 2007 and $626.8 million at September 30, 2007. The Company's policy is to maintain a minimum 20% of 100-day obligations in liquid assets. For the twelve months ended September 30, 2008 the Company maintained a monthly average of $571.3 million, or 46.9% of 100-day obligations in liquid assets compared to $463.7 million, or 48.9% for the twelve months ended December 31, 2007 and $401.9 million, or 45.7% for the twelve months ended September 30, 2007.

Structural Interest Rate Risk

Interest rate risk is the sensitivity of earnings to sudden changes in interest rates. The objective of interest rate risk management is to ensure that the Company is able to realize stable and predictable earnings over specific time periods despite interest rate fluctuations. The Company has adopted an approach to the management of its asset and liability positions to prevent interest rate fluctuations from materially impacting future earnings, and will attempt to match liabilities to assets through its actions in the deposit market in priority to accessing off-balance sheet solutions. The Company's Asset Liability Management Committee manages exposure arising from interest rate and liquidity risk, and reports quarterly to the Board of Directors.

The interest rate sensitivity position as at September 30, 2008 is presented under Note 13 in these unaudited interim consolidated financial statements. The table provided there represents these positions at a point in time, and the gap represents the difference between assets and liabilities in each maturity category. Note 13 summarizes both on- and off-balance sheet assets and liabilities, in terms of their contractual amounts. 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 extended but not materialize. In measuring its interest rate risk exposure, the Company will make assumptions about these factors, taking into account aspects such as past borrower history.

To assist in matching assets and liabilities, the Company utilizes two interest rate risk sensitivity models which measure the relationship between changes in interest rates and the resulting impact on both future net interest income and the economic value of shareholders' equity. The following table provides the potential after tax impact of an immediate and sustained 100 basis point, and 200 basis point increases and decreases in interest rates on net interest income and on the economic value of shareholders' equity.

<< ------------------------------------------------------------------------- September September September September In thousands of 30 30 30 30 dollars 2008 2007 2008 2007 ------------------------------------------------------------------------- Increase in interest Decrease in interest rates rates ------------------------------------------------------------------------- 100 basis point shift Impact on net interest income, after tax (for the next 12 months) $ 3,096 $ (5,717) $ (3,096) $ 5,717 Impact on net present value of shareholders' equity (6,591) 6,514 6,910 (6,830) 200 basis point shift Impact on net interest income, after tax (for the next 12 months) $ 6,191 $ (11,434) $ (6,191) $ 11,434 Impact on net present value of shareholders' equity (12,879) 12,726

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