Home Capital Group Inc. (HMCBF) Q2 2017 Results Earnings Conference Call August 3, 2017 8:30 AM ET
Executives
Laura Lepore - Head, IR
Yousry Bissada - President and CEO
Bonita Then - Interim President and CEO
Robert Blowes - Interim CFO
Chris Whyte - COO
Pino Decina - EVP, Residential Mortgages
Benjy Katchen - EVP, Deposits and Consumer Lending
Analysts
Graham Ryding - TD Securities
Dylan Steuart - Industrial Alliance Securities
Jaeme Gloyn - National Bank Financial
Brenna Phelan - Raymond James
Alex Witten - Nomura
Marco Giurleo - CIBC
Justin Church - TD Canada Trust
Operator
Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Home Capital Group Second Quarter 2017 Earnings Results Conference Call. [Operator Instructions] Thank you.
Laura Lepore, Head of Investor Relations, you may begin your conference.
Laura Lepore
Thank you, operator, and good morning, everyone. Thank you for joining us to hear about our financial results for the second quarter of 2017. I’m very pleased to introduce to you with me on the call today our incoming President and Chief Executive Officer, Yousry Bissada; Interim President and Chief Executive Officer, Bonita Then; and Robert Blowes, Interim Chief Financial Officer. We also have several members of our management team on the call this morning Chris Whyte, our Chief Operating Officer; David Cluff, Chief Risk Officer; Pino Decina, Executive Vice President of Residential Mortgages; and Benjy Katchen, Executive Vice President of Deposits and Consumer Lending.
Now, before we begin, I’d like to caution listeners that this conference call provides management with the opportunity to discuss the financial performance and conditions of Home Capital, and as such, comments may contain forward-looking information about strategies and expected financial results. Various factors, many difficult to project and control, could cause actual results to differ materially from results projected in forward-looking statements. Accordingly, the audience is cautioned against undue reliance on these remarks.
Now with that, I’ll turn the call over to Bonita Then.
Bonita Then
Thank you, Laura, and thanks to all of you for joining us. We have a number of speakers today, so I’ll keep it brief as I run through some of the recent highlights of the business since we spoke in May. We hired a CEO, Yousry Bissada, a well known mortgage industry veteran who brings a great deal of relevant experience in areas such as finance, operations, fintech and digital that are going to be key to our future plan. You’ll hear from him shortly.
We closed the first tranche of the equity investments from Berkshire Hathaway. We repaid the Berkshire Hathaway credit line, which should significantly help our net interest margin going forward. We are focused on bringing money in via GICs, which are safest from the liquidity point of view, and it’s working.
Daily inflows are now once again at levels that are in line with historical norms, demonstrating that the confidence people have in us is growing. We’ve seen a significant buildup in liquidity through deposit flows and asset sales. We now have total liquidity of $3.9 billion, which includes the $2 billion undrawn backstop line with Berkshire. This improvement in our funding situation enables us to increase our origination. I’m not sure I’d classify [Indiscernible] last quarter as a highlight, so I’ll leave those to Bob to discuss later in the call; but I will note that once again our portfolio performed strongly, with low loss rates, and we remain well capitalized, well in excess of regulatory minimums.
There was obviously a lot more that happened, but what I think that these points drive home is that we have made a tremendous amount of progress in recent months. The common theme here is building liquidity and building for the future, which sets us up to move the business ahead through the balance of 2017 and into next year. Certainly challenges remain, but we are now well positioned to face them. And while Home Capital today looks different after the events of early 2017, I think there are many positives that we can take away. We have the renewed board that’s stronger than ever, we have partnership with Warren Buffett and we have an experienced and capable new CEO who’s focused on getting us back to business. So perhaps it’s time you heard from him. I’ll now turn it over to Yousry.
Yousry Bissada
Good morning. It’s great to be here. As you likely know, today is officially day 1 on the job, but I’ve been getting steadily more involved leading up to today so I can share with you some preliminary impressions.
First off, I’d like to thank Bonita, the rest of the management and the board. They’ve done a terrific job putting this company on sounder footing. I also want to thank Bob Blowes, who stepped into the role of CFO over the last few months and has had such an important contribution in that time.
Let me also thank the very many hardworking people at Home Trust, who stepped up when they were needed the most. I know it could not have been an easy job these last few months, but our people are -- really rose to the occasion, and I know I speak for the entire board and many outside the company when I say thank you for doing so.
We still have a lot of hard work ahead of us, but it’s going to be a different kind of challenge. We’re in a position where we can look forward and make fresh decisions about the kind of company we want to be, and now we want to achieve our goals.
You’ll appreciate that I am not yet in a position to expand on exactly what that may look like, but let me tell you how I am approaching this. I plan to have a number of discussions over the coming weeks about our plans and strategic direction. I’ll be talking to employees, customers, brokers, regulators, investors and many of our stakeholders, and I’ll be listening closely. Then I’ll use the information to work with the team to create a new plan.
I expect to have a lot of good things to work with. I have also found that Home is a terrific company with a strong foundation and a great deal of opportunity. It plays a really important role in the mortgage market and there are existing prospects in the segments we serve. My initial impressions confirm that this is a good business. There are excellent people here -- people who know this market and know how best to serve it. The nucleus is strong.
For me, ensuring that we have the right culture is critical. This is key. So our commitment to doing the right thing -- that’s got to be front and center. We’re also going to make sure this company is innovative and delivers the best customer service. We look to be innovative in how we fund while always keeping in mind that job 1 is stable funding. The company’s experience in this year leaves no doubt about that. We will be looking to see what will work best as we move ahead, which will mean exploring options on mortgages, our [indiscernible] sell them as whole loans, new securitization and other ideas that we think may have merit. We have a lot of important decisions to make and I’m -- excuse me -- and while I have every intention of moving quickly, at the same time I want to ensure to take the right time to get it done.
So maybe this is a good place to stop and just say, by the time we talk next quarter I’ll have a lot more to talk about. I’ll turn it over to Bob now.
Robert Blowes
Thanks, Yousry. And first of all, I want to welcome you to the team. I know everybody’s looking forward to working with you and realizing on some of the plans that we all have and know can be for the benefit of all of our stakeholders.
First of all, I’m going to focus on reviewing our performance in the quarter, and specifically why we reported a loss, the steps taken to address the issues we faced and our outlook for the balance of 2017. I will then turn it over to Benjy for a quick update on our deposit business, and then to Pino to give us an update on our mortgage side of the business.
Before I get into numbers, I’m quite pleased to report that after reviewing the company’s business plan and our cash flow forecast at the end of the quarter, this all suggests that the company’s current liquidity level and current facilities for credit are sufficient for the ongoing business for the foreseeable future.
Consequently, we are all of a view that there is no longer a material uncertainty that casts significant doubt as to the ability of the company to continue as a going concern, and we’ve removed that language from our quarterly report. We are grateful for the support of the terrific business partners who were critical to our success over the past few months, including the key investment by Berkshire Hathaway, and this was obviously critical to the removal of the doubt and attests to the quality of our underlying business.
Turning to our results for the second quarter, on June 29 we announced second quarter operating results would be significantly lower and include much higher expenses as a result of the significant liquidity event that we faced late in April and early May. Management and the board acted swiftly and took deliberate measures to stabilize the company’s liquidity position following the precipitous redemption of demand deposits, mainly high-interest savings accounts, which stood at $2.4 billion at the end of the first quarter and today are slightly under $400 million.
In addition to having to fulfill the redemption of these demand deposits, we also needed to increase our liquidity to repay $325 million of deposit notes which fell due in May. Of course, we had our regular GIC maturities, and we had to ensure that we could deal with a significant amount of mortgage commitments and renewals that were already in process and in our pipeline.
We took the important step of securing a $2 billion emergency line of credit and we liquidated some assets. We sold most of our book of preferred shares and some of our uninsured residential portfolio, approximately $300 million. We also arranged for the sale of $1.2 billion of our large commercial mortgage assets and closed about $190 million of that [indiscernible] Q2. We also closed additional tranches of that mortgage sale in July, bringing the total cash proceeds from commercial mortgages to date to just about $1.13 billion.
We have since replaced the emergency line of credit with a new $2 billion backstop credit from Berkshire Hathaway on better terms, including a standby fee which is less than half of the standby fee that was in place, and we have now fully repaid the outstanding balance, so we are now dealing with the standby fee and not interest on an outstanding balance.
Today I’m very pleased to report a significantly strengthened liquidity position, just under $2 billion in cash in addition to $2 billion of undrawn credit facility. Now that also includes the proceeds of the initial investment from Berkshire Hathaway of 153 million. While all of these steps were deliberate and necessary, we did incur significant costs in addition to our normal operating costs. We also announced the global settlement of the OSC and class action matters, which added to our expenses. Net of insurance, we have increased the provision for costs associated, sorry, net of expenses on the class action and OSC matters, we incurred costs of about $7 million.
We also increased the provision for costs associated with the repositioning of the business. These elevated costs totaled $234 million for about $174 million net of tax, which reduced our earnings per share by $2.70, and that created a loss of $111 million, or $1.73 per share. The elevated costs included the following. About $131 million in commitment fees and interest related to the emergency line of credit and a small amount paid to Berkshire Hathaway for the -- a good standing line at the end of the quarter. Approximately $73 million was realized on losses on preferred shares, but I’ll note that about $46 million of this had previously been recorded in comprehensive income but not taken through the P&L. We also took a chance to look at our side PsiGate business and our prepaid card business and made the decision to exit this activity. The result is an asset impairment charge including the write-down of remaining goodwill, intangible assets and other assets within these units of $7.3 million, or $6 million after tax, or also $0.10 per share. Our expenses also included additional restructuring costs related to Project Expo, the company’s cost-saving initiative. We took a charge of $5.8 million, or $4.2 million after tax, or also would be $0.07 a share. Lastly, costs related to the OSC matter, as I said, were $7 million, and that translated to $0.09 per share, net of insurance recoveries.
As we move into the second half of the year, we do expect expenses to moderate. However, we will continue to experience some elevated costs associated with the liquidity event. These will include the standby fee on our new credit facility at 1% annually; a $15 million loss on the sale of the commercial mortgages that I described earlier; some other professional fees, and that’s generally costs associated with regaining the confidence of our stakeholders. Looking ahead, we expect that Q3 will result -- Q3’s results will be impacted by a reduction of interest income due to our reduced lending activity in the second quarter and the asset sales that closed late in the second quarter and through the last month. Our third quarter will see reduced interest expense as we have repaid the credit line, and this will be partly offset by new rates -- new higher rates on GICs, which we hope to moderate.. [Technical Difficulty] ..coming days and months. We will be working to reduce the impact of these factors.
Turning to our loan book, total loans under administration declined 4.8% to $25.9 billion from $27.2 billion at the end of Q1, and down 2.1% from the end of 2016. At the end of May we announced that we expected non-securitized single family residential balances to decline by the year-end to somewhere in the range of $10 billion to $11 billion. This is where we saw the most significant decline during the quarter, with non-securitized traditional single family residential mortgages down 6% to $10.7 billion from $11.4 billion at the end of Q1. This was mainly due to a steep decline in originations during the second quarter. This decline in originations reflected the measures we took to manage our liquidity. It also included the excellent support that we received from our partners as we diverted new mortgage originations to other lenders and to other -- and to mortgage finance companies. I’ll also note that there was a significant decline in our Accelerator product for prime customers, as we saw the full effect of mortgage rule changes announced last October and we lacked the effective -- we lacked effective funding for such originations.
During the second quarter, funding costs increased as a result of the cost of the emergency line of credit, and deposit rates were increased to attract deposits, which together increased our cost of funding. As a result, we revised our lending criteria, which increased lending rates to new commitments and reflects the higher costs. While we did see an increase in lending rates during the second quarter compared to the first quarter, these were not enough to significantly offset the increased costs, which were very high, given the cost of the emergency credit line.
Turning now to credit losses, overall our mortgage portfolio continues to perform well. We continue to see provisions for credit losses that are very low and stable. During the quarter, the provisions for credit losses as a percent of gross uninsured loans was 7 basis points compared to 8 basis points a year ago. We did see an increase in our collective allowance of $1 million, and this was due to the growth of our lending of -- in our land and construction loans in our commercial portfolio.
Looking ahead, we are focused on maintaining our liquidity and deposit stability. While it’s too early to tell when we will be able to get back to historical levels in terms of performance, we have been encouraged by the healthy level of mortgage renewal activity that we’ve seen and we’ve started to rebuild our mortgage pipeline. That said, we’ll continue to be constrained by our deposit balances and flow, and will determine lending capacity and then drive loan originations based on that capability.
We have also been encouraged by the recent level of deposit inflows and we are seeing our term deposit balances growing. Yesterday we provided some information that indicated that our deposits have been growing in the range of $10 to $15 a day on a net basis. In our deposit maturity schedule, we have approximately $1.6 billion of deposits maturing in the third quarter. They will need to be replaced.
We have already made excellent progress on this front, albeit at higher rates. As of the end of July, we have rolled over about half of the maturing deposits. Our $2 billion credit facility is in place until the end of June 2018. We do not intend to draw on this any further, but it’s there in case we need it. We will assess the ongoing need for this facility later in the year. However, we are keenly focused on evaluating all opportunities to increase our funding sources.
In the meantime, we continue to see good momentum on our deposit activity. There are a number of reasons why depositors felt a renewed sense of confidence in our company, and certainly a key to this was the investment by Berkshire Hathaway. To date, Berkshire has acquired just under 20% stake in the company and shareholders will have a chance to approve an additional $247 million investment later this -- early this fall, bringing Berkshire’s total holding to 38.4%.
Home’s board has unanimously recommended to shareholders that this be approved, and we continue to see a potential for enhanced shareholder value while providing the company with strong sponsorship that can help reduce risks associated with the future as well as risks associated with policy and regulatory changes.
And that brings me to Guideline B-20. Guideline B-20 was revised and released for comment in July. The direct revisions include qualifying stress tests for uninsured mortgages, a prohibition on certain co-lending arrangements, and additional guidance on income verification as well as expectation to account for property price inflation when determining a loan to value for collateral security.
Based on our preliminary analysis and our interpretation, the revisions to B-20, if they were implemented as proposed, would reduce, and possibly materially, the size of the uninsured mortgage market available to Home and also to our federally regulated competitors. We can also see that there will likely be an increase in the rate of renewals of mortgages with the existing lenders.
I’d like to stress that the guidance -- the guidelines are still in the consultation stage and may be further revised before implementation. It is unclear in any event what the impact of B-20 will be on the real estate and the mortgage markets as a whole. We believe that if B-20 is implemented as proposed, it could well have a material effect on our business strategy going forward. Today, however, we cannot be certain of the final revisions and we’ll just have to wait and see.
With that said, I’ll turn it over to Benjy to talk about our deposits activities.
Benjy Katchen
Thank you, Bob. As Bonita said earlier, daily deposit flows have returned to historic norms. We are really focused here on our GIC business because we want to be term funded. It’s predictable, safe and matched with our lending book. So that’s what we want going forward. We saw, as you know if you were following our disclosure, a decline through April and May and then a stabilization in June.
The turning point where we began to see growth was a number of corporate changes we made, including the governance changes and then the Berkshire investment in late June. Combined with the rate premium we offered, deposits started coming back. Now our deposit flows are at normal pre-crisis levels and it’s allowing us to start growing the balance sheet, albeit modestly. Moving ahead, there are several factors that will influence the path of deposit growth.
On the positive side, we’ve been pleased by the support of deposit brokers and financial advisors over the last several months and our access to the channel remains largely intact. Our GICs continue to be offered on all the major boards, and continue to be offered by over 200 firms nationally. Consumers across the country have responded well to the boost in rates at Oaken Financial and the marketing campaign to support that. Oaken has been steadily adding new customers and has been growing at a healthy rate since the middle of May.
On the limiting side, consumers and brokers are much more aware of the $100,000 CDIC limits and generally are ensuring that their deposits stay below that level. Additionally, we and other smaller banks are subject to a $100,000 limit on some deposit boards. These factors will tend to limit the amount of deposits we and other smaller financial institutions can raise from the deposit broker channel, though having Home Bank as a second issuer provides us with a significant advantage because we can offer 2 CDIC members to clients.
Of course, the big factor as we move ahead will be rates. Our GIC rates in both the broker channel and at Oaken remain elevated. We’ve started to gradually reduce the rates to more normalized level. Also, as the bond market responded to the recent Bank of Canada increase in rates, we’ve seen competitors start to raise their GIC rates as well.
Gradually, over the next several weeks, we will adjust our rates by balancing several factors, including ensuring sufficient flow of deposits, managing our liquidity via the term structure of new deposits and reducing the rates that we pay to be more in line with relevant competitors.
Thank you, and I will now turn the call over to Pino.
Pino Decina
Thank you, Benjy. The residential mortgage originations are beginning to move in a positive direction as well. Though certainly we are in the early stages, mortgage brokers and referral partners are certainly sending us deals, reflecting their confidence in Home and the fact that we’re an important provider in this underserved market. And we want to be there for our brokers and customers by originating more loans, so we’ll continue to make strides towards coming back to market across much of our product offering.
The first major step in this process occurred on July 17 when we revised our matrix of pricing and lending criteria for our traditional business, the classic uninsured program, to have a more competitive offering. We are, however, continuing to apply a prudent, conservative, cautious approach to our underwriting and loan adjudication. From a credit risk perspective, I can tell you that we have held loan-to-value levels at or below our risk appetite. We have not been moving up the loan-to-value levels to get deals done. We’re very pleased with the response to our classic program revisions, the quality of the loan submissions and the growth of the pipeline.
Next we will look to revise the pricing of our insured loan program and come back to market with a more competitive Accelerator product. We have, however, discontinued the ACE Plus product, as the pricing was no longer economical. However, we do believe we can still capture a portion of this market segment through properly priced loans under our classic program. So that’s where we stand on our return to the market. We’re still hard at work and focused on further rebuilding our mortgage pipeline, and it could take 60 to 90 days before we start seeing any impact in originations, and I’d say by the fourth quarter we would expect to have a better sense of whether we are back to normal levels.
So with that, I’ll now turn it over to the operator to start the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Graham Ryding from TD Securities. Your line is open.
Graham Ryding
So you mentioned in your MD&A that in early 2008 you’re hoping to put out a three year target. Am I correct in that it looks like you’re basically going to assess your business through the second half of 2017 in terms of traction in building your deposits and also traction on regaining your positioning on the lending side, and then from there you’ll be able to put out a -- what you think is a reasonable estimate of what the company can earn and produce?
Robert Blowes
So Graham, it’s Bob. I’ll answer the first part of that, and Yousry is the person who will be at the helm for -- at that time, so definitely want to have him join in the answer. I think you’re absolutely right in terms of the next six months. It’s probably going to take six months for us to understand where we’re going to be able to function in the deposit market and in the lending market. As Benjy and Pino said, signs today are quite positive. I think our overall evaluation is, there’s a shortfall of funds into that segment of the market, and so therefore there should be good opportunity for us to expand our mortgage business back to more reasonable levels, and hopefully we’ll continue to have good access to the deposit market. In terms of where we’re going to land, we’re of course uncertain, and I think the company is going to reassess its views in terms of the extent of guidance, the term of guidance, et cetera. Maybe this is a good time for Yousry to have a few words on that.
Yousry Bissada
I don’t have much more to add than what Bob just said. It’s -- on the funding side, it’s step by step. We’ll see how it goes on the deposits and mortgage, and mash away, and as we go we’ll be able to be in a better position to forecast, as we’ve said.
Graham Ryding
If I could follow up then, just on the business that you’re doing today, the renewals and modest originations, it sounds like, can you give us a little bit of color on what the net interest margin is today on the business that you’re writing, and perhaps with your plans on the deposit side with your GIC rates -- where you think you can move that net interest margin to by the end of the year?
Robert Blowes
So maybe I’ll -- again, I’ll start and I’ll invite the guys to pitch in. So over the last month, six weeks, we have been attracting deposits at rates somewhere between 50 and 70 basis points higher than where we would like to be. So that’s been eating into our margin on new business. And as I said, we rolled over about $800 million of GIC deposits, and they’ve been rolled over at those higher rates. So you’d want to take that into account in your thinking. We have been successful at looking at the higher rates than we had experienced prior to our liquidity events, and I think those are again in the range of 50 to 100 basis points, depending on the situation. But that flow has not been all that significant. So as we move into the next quarter, we’ll be looking to bring down the rates on GICs and maintain as much of the pricing on the mortgages as we can. So there’s definitely going to be some erosion there, but we don’t expect that’s going to continue for more than a quarter or two. Pino, any...
Pino Decina
Yes. Just to add to that -- so we’ve mentioned our -- we discontinued our ACE Plus product, and you may remember that was the -- sort of the starting point, from a rate perspective, in our traditional mortgage program. And today, effectively, our rate starts some 50 basis points above where that used to be. So to Bob’s point, it’s -- we’re certainly trying to match it up with the increased cost of the GICs.
Graham Ryding
And I assume that’s both on renewals and new originations, the same rates apply?
Robert Blowes
That’s correct.
Operator
Your next question comes from the line of Dylan Steuart from Industrial Alliance Securities. Your line is open.
Dylan Steuart
A quick question on just the B-20 guidelines. The co-lending or bundled restriction -- just wondering if you can speak to, I guess, how prevalent that was in your recent originations, and sort of what your view on that is, if it goes through as implemented, or as proposed.
Robert Blowes
Oh, and maybe I’ll have a couple of remarks, Dylan, and then I think Pino’s probably the best suited to give you more color on that. But co-lending has been [indiscernible] a part of our business for some time. I think it would be -- as said earlier today, it would be hard for a lot of people in the major markets, Toronto and Vancouver, to have the size of down payment that would be required to buy a house if they didn’t have some kind of assistance. Often it’s from family or other friends, but sometimes it comes through some kind of secondary financing. And we have had a program over the last few years where we’ve made referrals to parties that would provide second charge lending. We ended that earlier this quarter, or last quarter. And so, we don’t have a structured program on that, but it is part of the business. And maybe I’ll let Pino talk about the -- sort of, the extent of that.
Pino Decina
Yes. So we discontinued the program Bob was referring to, which we called our bundled program, back in May. And this is where we had certain partners that lent secondary lending behind us. So that’s discontinued. What we do need to know now is -- and we’re trying to gain this information during the current discussion period of B-20 -- the long-term impact to co-lending as a whole. So a, what is the definition in -- as referenced in B-20; and then, of course, what impact that will have. Because certainly we do have a group of customers that on their own will seek to gain secondary lending behind our Home Trust mortgage. So we’ll get that clarity. We just don’t have it today.
Robert Blowes
I think it today would be -- or in the past would be roughly 1 in 10 or 1 in 8 of our customers would have some kind of co-lending structure, that we’re aware of.
Pino Decina
Yes. I mean, if we applied the same sort of numbers that we’ve seen in the past, our bundled program itself, I think, last check, was 5% or somewhere around there -- our origination. At -- then roughly another 10% to 15% would gain financing on their own where need be, so certainly that sounds about right, 10% to 15%.
Dylan Steuart
Okay. Perfect. And just one more question, if I can. Just as the identified, I guess, onetime or unusual costs subsequent to quarter -- I believe you identified about $15 million of losses on the commercial asset sale -- is there anything else that you can identify at this time, what we should looking out for, for the upcoming back half of the year?
Robert Blowes
There’s no individually big item, Graham. That $15 million is the loss that we would take on the commercial loans that -- we talked about that when we had a press release earlier this year. And a lot of that is the deferred costs associated with originating those loans when they were put on the book, as a small concession interest wise to the purchaser, just to bring a mark-to-market adjustment. But a lot of it’s just the deferred costs of origination. We will have some additional professional fees through the next quarter or two as we deal with some of these things that have been issue for us in Q2. They tend to have tails on them, but they are not individually large, but have -- I’ve said that we’ll be having -- experiencing elevated costs because on an aggregate basis they’re going to push our cost structure up for a period of a couple of quarters, I would think.
Operator
Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Please go ahead.
Jaeme Gloyn
The first one, just a quick follow up to one of your statements. The July 17 changes to the traditional product to be more competitive -- what does that mean exactly?
Pino Decina
Jaeme, that’s a couple of things, or actually a few things. We looked at our loan-to-value offerings. We looked at, in certain markets, without certainly increasing them, but coming back in certain geographic areas that we had pulled back a bit on. The pricing itself is more competitive, and the dollar amount. So obviously, with the increased liquidity, we had the opportunity to be more competitive in markets like the GTA, for example.
Jaeme Gloyn
Okay. So it sounds like you’re just getting a little bit more aggressive, I guess, in terms of those products. How are you balancing that with your credit risk guidelines? Where we see other players sort of pulling back a little bit in GTA, you guys seem to be going the other way, based on some of these changes you just described.
Pino Decina
Yes. So maybe aggressive is not the right word, but certainly I think we pulled back more than we would have liked. I mean, certainly we always apply credit risk perspective to our lending offerings, but we pulled back even further than that, given the liquidity issue. So it’s going to give us the opportunity to get back to the levels that we’re comfortable with, keeping in mind the current climate of the real estate market as well.
Jaeme Gloyn
Okay. Next question -- I appreciate the acknowledgement in the operational risk disclosures around broker and borrower misrepresentations. Can you talk about what drove that inclusion? Is there anything you’re seeing today versus your past experience, for example in 2014? And if you can maybe speak to some of the main changes that you’ve made as a result of reviewing what occurred in 2014 and 2015, that give you confidence around your controls and systems in place?
Robert Blowes
Okay. I’ll -- it’s Bob, Jaeme. I’ll start with that, and then I’ll let Chris Whyte, our Chief Operating Officer, talk about the specific changes. So on the first instance, I guess I’m the person who inserted that into the MD&A, and I think that’s just an acknowledgement that this risk exists. I think we all knew that the risk existed in the overall market, but we were the victim of some problems in 2014, and of course that had the impact on the company, and so, clearly a risk, and we wanted to make sure that that was laid out in the document. And we have not seen anything recently that would give us any concern, or no significant issue. There’s always an undercurrent of people trying to portray themselves as something more creditworthy than they are and we have a lot of controls to detect that, and we do pick up items from time to time, but nothing systemic or significant. But as I said, we had a more significant issue in ‘14 which we did not believe was material itself but led to lots of other things, and maybe I’ll turn this now over to Chris to talk about the things we’ve done since the end of 2014.
Chris Whyte
Thanks, Bob. Yes. I think since 2014 I categorize it sort of in 2 main areas. We’ve made some very material and significant technology investments in our origination platform, largely around inserting automated governance and control features and accessing the data in a more timely fashion, so we have a better handle on the document flow that’s coming in and the ability to sort of assess whether they need certain criteria.
But in addition to that, we didn’t feel that was enough in and of itself. We’ve also materially invested in, kind of, a secondary-level quality control document and application overview by a different group of people. So we now have, I’d say, a much more robust quality control/quality assurance process that is also part of our normal business flow.
Jaeme Gloyn
Okay. And if I could just sneak in one more quick one just on this topic, Bob, you made the statement that Home Capital was a victim. In the OSC statements it suggested that there were some learned behaviors that may have contributed to that. I’m just wondering, what maybe changes you’ve made in your training systems or training of individuals and systems? And following on along that, with the OSC settlement coming up, is there any sort of statement of agreed facts or anything around that that we’re going to learn or confirm, of what the OSC was allegedly accusing Home Capital of during that period?
Robert Blowes
So Jaeme, I’ll answer the last part of that question and then Chris will address the earlier part. So the settlements that are subject to the OFC approval later this month, and also a court approval, so there will be undoubtedly some discussion of what has been determined and agreed and so on at that time. I’m not party to that. It’s a confidential discussion between the company and the individuals and the commission and the representatives of the class. So we’ll just have to wait to see what it said later this month. So Chris, do you want to talk about the earlier part of that?
Chris Whyte
Sure. Actually, it’s a very good point. So I think since those events back in 2014, the entire mortgage origination and underwriting process has effectively been reorganized. There’s been a significant amount of separation of duties built into the system which was probably not in place to the same extent prior to that. In addition to that, there’s been a coaching and feedback program that’s built off the data that we get from some of this new technology, so that there’s ongoing feedback and coaching both through the data that comes through the system as well as from the commentary that comes from our quality control and quality assurance people, and that’s fed back to the line managers at the front line to ensure that they can sort of adjust their processes accordingly.
Bonita Then
Chris, should you mention comp?
Chris Whyte
Yes, that’s probably a good point as well. As part of that division of duties, we made sure that our staff that are responsible for decisioning and underwriting are not really incented on volume anymore; they’re incented on the quality of the work that they do, so that there’s a lot of feedback from the quality assurance people and our internal compliance and governance people to ensure that that’s really the factor in driving our compensation is not how many deals or how much volume they do, but the quality of work they do in the decisioning process.
Robert Blowes
So I think that’s all we can say on that, Jaeme.
Operator
[Operator Instructions] Your next question comes from the line of Brenna Phelan from Raymond James. Your line is open.
Brenna Phelan
I just have a quick question on the securitized balances on your balance sheet. They increased by quite a bit sequentially and I don’t see a commensurate increase in Accelerator origination, so I was just wondering if you could explain where that increase came from.
Robert Blowes
Yes. That increase -- a lot of that increase came from the maturity of securitized portfolios. And so, we would have the Accelerator Programs that matured and the assets came back onto the balance sheet. So there is actually a reconciliation of the mortgage continuity on Page 17. And the other -- Page 17, which will show mortgages coming back onto our balance sheet from maturity of programs. And then we are no longer selling the residual interest, so we’re not taking new programs off our balance sheet or rolling over programs [indiscernible] are not being picked off our balance sheet. So that’s the reason that you see the growth without the growth in originations.
Brenna Phelan
So because you’re not getting derecognition from selling the residual interest anymore, it’s bringing -- as -- okay. So as it matures from the off balance sheet portfolio, it comes back on balance sheet.
Robert Blowes
Right.
Brenna Phelan
And is that an area that you expect to continue to participate in, these CMHC-sponsored programs?
Robert Blowes
Yes, we will. We -- it depends on the availability of our funding for that, but we would think that that would be part of the future business model. I’ll just add to that, Brenna, that we likely would not sell the residual interests in the future, but rather keep them on our balance sheet and enjoy the spread income on those assets. We did start that several years ago when we had a significant constraint on our leverage, but that is no longer an issue for us as a result of some regulatory changes and the size of our capital [Technical Difficulty]
Operator
Your last question comes from the line of Jaeme Gloyn from National Bank Financial. Please go ahead.
Jaeme Gloyn
A quick follow-up on one of the comments in the outlook regarding non-interest expenses, and maybe being elevated here in the near future, related to a wide -- or, sorry, subject to scrutiny from a wide range of stakeholders. I’m wondering if you can explain what that means. What is the scrutiny? Why is it driving higher expenses? If you can give some color on that.
Robert Blowes
Yes. I can respond to that, Jaeme. So pretty much everybody that we’re doing business right now wants to have an extra look at us. They’re asking for more information that -- whether it’s a trade supplier, or new arrangements with brokers on both sides of the business, the -- all the oversight bodies all want additional reporting because they’ve seen us get to this very, very difficult situation, which we’ve recovered from [indiscernible], I think, remarkably well. But nevertheless, there’s an ongoing monitoring by everybody we do business with. So that’s going to take a while until it settles down and gets back to sort of normal trade -- terms of trade with everybody that we deal with.
Jaeme Gloyn
Okay. And so, that should probably continue at least through the second half here and maybe into 2018 as stakeholders get comfort.
Robert Blowes
Yes, I would think so.
Jaeme Gloyn
Yes. Since I’m last person on the line here, maybe I’ll ask you a few more. I noticed an uptick in credit card delinquencies, rising from half a percentage point this time last year to 1.3% in this quarter. Can you outline, what do you think is happening there? Is there any geographic explanations or is this maybe a sign that some of your borrowers are under a little bit more stress than they were this time last year?
Robert Blowes
I’ll let Benjy respond to that.
Benjy Katchen
No, there’s nothing of the unusual sort. Over a year ago we acquired CFF Bank which is now Home Bank and migrated the lines of credit that CFF Bank had at the time over to our credit card portfolio. There was an elevated rate of arrears and delinquencies in that portfolio that’s worked its way through -- that’s just working its way through the interest statement. The majority of our credit card business is the Equityline Visa, and that business continues to perform extremely well.
Jaeme Gloyn
Okay. And just...
Benjy Katchen
And so, as soon as [Indiscernible] one other thing. The other part of that is -- has to do with the prepaid and PsiGate business which, as Bob had said earlier, we plan to exit that business. So there was a bit of cleanup with that business that also was taken in the delinquency arrears write-off area.
Jaeme Gloyn
Okay. And last one from me. Looking at the interest rate sensitivity, pretty large uptick in floating rate assets this quarter, and in fact a complete reversal in terms of that interest rate-sensitive gap, which is -- seems to be driving a lot more sensitivity to moving interest rates. Can you explain what’s happening with floating rate assets? And do you expect that gap to continue? So this sensitivity that’s posted in Table 22 -- do you expect those sensitivities to actually materialize given the higher interest rate environment we’re seeing today?
Robert Blowes
Look, the reason that -- for the change is the sale of term dated assets and the fact that we have not been in the market writing new mortgages which would have a longer term, and we’ve got cash that we have on -- well, cash that’s put into short term securities. So that’s why we have a greater exposure. And we’re accepting that right now as we go through, sort of, the restructuring and repositioning. But we will be looking at how we deal with that risk. We’re not concerned about it in the very short term. But as we work through the model for the next year, we’ll be addressing that, Jaeme.
Jaeme Gloyn
Okay. And maybe I’ll just get one last one in here. Going back to the 2014 broker fraud incident, and some questioning around the underwriting standards and quality of mortgages underwritten through, let’s say, end of 2014, how much of that book would still be on balance sheet as a result of renewing mortgage borrowers, and maybe if you can give some guidance around that.
Robert Blowes
Yes. So that -- there were really, as you know, two parts of the business, the insured prime business, which tends to be five-year instruments; and then the noninsured all-pay [ph] business, which tends to be short-term instruments. So those short-term instruments would be pretty much rolled off the book. And as I think we’ve said in the past, we reassessed them as they became -- there was a portfolio which was not the ultimate portfolio that was problematic, but was the portfolio in which problems may have occurred. So as we worked -- we worked through a process to reassess those loans in much greater detail, and some were renewed and a significant portion were just rolled off. And that’s in the noninsured portion. In the insured portion, a considerable amount has matured and we just let them fall away. So the exposure is low, and we’ve had really no credit events associated with any of that portfolio. I think, in fact, it’s performed as well or better than the rest of the portfolio. So [it’s given]. Our view is that it was people who had money, had income, wanted homes, and portrayed themselves to be somewhat different than their real situation, but they had no intention of defaulting on their mortgages.
Jaeme Gloyn
So if I understand this right, the -- let’s say the individuals or the underlying borrowers that existed in 2014 in the uninsured book -- none of those individuals or borrowers would still be a Home Capital client today? Or -- that’s -- well, that’s kind of what I’m trying to understand is, [indiscernible].
Robert Blowes
Yes. Right. None that we actually believe were problematic. So we identified a large part or population that had come through brokers that might have had -- that we had identified issues with, and then we narrowed that down. So a small portion would be borrowers today, but they were requalified, and no reason to think there was anything problematic with them. Ones where we thought on further investigation it might be problematic, we did not renew.
Operator
Your next question comes from the line of Alex Witten from Nomura.
Alex Witten
I just wanted to ask or -- we’re almost through with this call, and no one’s really addressed the other elephant in the room, which is that Toronto home sales are down 40% year-over-year in July and prices appear to be down anywhere from 10% to 20% from their recent peak. So I just wanted to get some comments on the overall operating environment outside of the operational issues. How are you guys expecting to stem the drop in originations given the overall environment is very anemic right now?
Robert Blowes
Pino will comment on that.
Pino Decina
Yes. Thanks, Alex. So first of all, I’d say -- I should just mention that we welcome what we see right now. I mean, that -- from the lender standpoint, there’s nothing better than a nice, controlled leveling off of the real estate market. We’ve always applied a very conservative approach to our lending, and that includes the GTA and the Greater Vancouver area as well. We are monitoring the GTA very closely, both the 416 and the 905, right down to various postal code levels, and applying the right lending matrix to those areas. So at this point we’re very comfortable with what we’re seeing. The quality of the borrowers in our space continues to improve. The majority of the business that’s coming in right now is purchase-type business, which certainly performs better. And obviously, on the refinance side, we’re taking a very cautious approach. So you’re absolutely right. It’s something that we’ve got in the forefront of our minds as we move forward in the balance of this year and into 2018. But certainly at this point we’re comfortable with what we’re seeing.
Robert Blowes
And I might just add to that, that we are currently growing slowly. We expect that that will be controlled because of the limit on our capacity through deposit-taking. So it’s a time when we would be conservative in any case, so we just take extra measure of caution.
Alex Witten
Okay. And just a quick follow-up on the home price declines from the peak that we’re seeing in the GTA. If you take a 65% to 75% average LTV, any of these loans that were originated in the first quarter, if these home price declines continue at this pace, I mean, you’re going to be staring at a lot of loans that are potentially underwater. So while your loss rate right now is extremely low, would you expect to see that pick up as some of these loans go underwater on the equity side?
Robert Blowes
We don’t normally see people defaulting because the price of their home has declined. Usually, the driver is employment issues. Like, they just don’t have the income. So while there could be an increase in losses given a default, home prices in themselves don’t typically drive defaults. So we’re being very cautious, careful and we’ve been positioning the book against a potential issue in the hot real estate market. We’ve been doing that for some time. And we hold a lot of capital to be sure that we can withstand an unexpected event. And as I say, we’re proceeding with caution.
Operator
Your next question comes from the line of Marco Giurleo from CIBC. Your line is open.
Marco Giurleo
I just wanted to follow up on the B-20 question. Is...
Robert Blowes
Sorry, we can’t hear you, Marco.
Marco Giurleo
Can you hear me now? Hello?
Robert Blowes
Operator, I think we have to move to the next question. We can’t hear him. And that will be our last question.
Operator
Your last question comes from the line of Justin Church from TD Canada Trust. Your line is open.
Justin Church
So I’m young. I have a lot of time horizon on my hands. And I see a steep discount in Home Capital Group. I’m just wondering, how likely is it that you guys will top the $2 billion credit facility in quarter four?
Robert Blowes
We’re -- our plan certainly is to stay out of the credit facility, and that all depends on deposit taking, of course, and mortgage lending. And deposit taking has been favorable over the last six weeks, and our lending is lagging the deposit taking purposely. So we’re proceeding with a lot of care there. We have, and we have been building a considerable amount of liquidity so that we would be prepared should deposit taking start to fall back. So we can’t see the future any better than anyone else, but we’ve taken a lot of steps to prevent a need to dip back into the credit line.
Justin Church
And just to follow up there, with Home Capital being at such a discount and Warren Buffett having a meeting in September, do you think it’s likely that you guys will prove the dilutive preferred shares?
Robert Blowes
Well, the -- that will be up to the shareholders, and I wouldn’t want to predict what shareholders will ultimately determine. The board is supporting it. We believe it’s good for the company. We are looking forward a stronger alliance with the Berkshire Hathaway Group and we think that builds substantial sponsorship for our company and then helps us to prepare, should things go in a sideways direction.
Thanks, everyone, and we look forward to speaking next quarter, although I probably won’t be a speaker. It’ll be...
Yousry Bissada
Well, then, I look forward to it. It’s Yousry speaking.
Operator
This concludes today’s conference call. You may now disconnect.
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