Home Capital Group Inc. reported a decline in first-quarter profit on Thursday and said the damage to its reputation that the business has sustained in recent weeks had resulted in "material uncertainty" about its ability to secure funding in the future.
The alternative mortgage lender's profit fell to $58-million, or 90 cents a share, in the first three months of the year. That was down from $64.2-million, or 92 cents a share one year earlier. The company had delayed releasing its earnings by more than a week and said results were prepared on a "going-concern basis," but added that issues such as regulatory proceedings, credit-rating downgrades and vacancies in the roles of CEO and CFO had "understandably shaken the confidence of the company's stakeholders."
"Potential future impact resulting from reputational concerns is inherently difficult to predict," Home Capital said. "Therefore management believes that material uncertainty exists that may cast significant doubt on the company's ability to continue as a going concern."
These issues have resulted in a hit to Home Capital's liquidity position and its ability to fund mortgages, the company said.
"We are taking the steps required to regain the full confidence of Home's stakeholders, most notably by adding four outstanding new directors with considerable expertise in governance and business," said Brenda Eprile, chair of Home Capital, in a statement. "We will continue to look at every opportunity to strengthen Home as we move ahead."
Home Capital said new traditional single-family residential mortgages hit a record in the first quarter of the year, up 3.6 per cent in that period to a total of $11.42-billion. But the company has already signalled to the market that the volume of new mortgage transactions and renewals will likely shrink in the coming months as the company tightens its lending standards and cuts back on some broker incentive programs.
In a release early Friday, the company said high interest savings account (HISA) balances at Home Trust are now at approximately $125-million, versus $128-million on Thursday. About six weeks ago, the company had roughly $2-billion in those accounts. The company had liquid assets of roughly $962-million as of Thursday night, versus $1.02-billion 24 hours earlier - a drawdown of 2.8 per cent.
Home Capital said it is planning to sell loan portfolios to pay down the emergency $2-billion credit line it took out late last month, which came with a punishing interest rate of 10 per cent and an upfront fee of $100-million. The credit line came from a consortium led by Healthcare of Ontario Pension Plan (HOOPP) and is secured against a portfolio of mortgages totalling $5.4-billion. Home Capital has used $1.4-billion so far.
The company said that repaying the amounts it has borrowed through this line of credit and ending that deal in a "timely fashion" were key parts of its plans. According to a news report from Reuters, the sales could include commercial mortgages and Home Capital's consumer finance division. Prospective buyers identified in the report were U.S. firms Fortress Investment Group, Cerberus Capital Management and Apollo Global Management.
With its earnings, Home Capital stressed its commitment to its traditional single-family residential mortgages and keeping its relationships within the mortgage broker network.
Since Home Capital's entire loan portfolio is valued at about $18.5-billion, investors are waiting to see if the company can secure a less onerous funding solution.
"Management's focus is on finding more sources of funding in the near term so we can be more active serving our customers, and on seeking longer-term solutions that put the business back on track," Bonita Then, Home Capital's interim CEO, said in a statement.
Earlier this week, Home Capital said an "independent third party" intends to buy up to $1.5-billion of its commitments to new mortgages, as well as some existing mortgages and home loans that are up for renewal. That deal will be facilitated by mortgage finance firm MCAP Corp.
Home Capital's stock climbed 23 per cent to close at $10.81 per share on the Toronto Stock Exchange on Thursday, although shares have still declined by 54 per cent over the past month.