Laurentian Bank of Canada says it found "client misrepresentations" in $89 million worth of mortgages it sold to a third party earlier this year, and will as a result buy back the loans where it found documentation issues.

The lender revealed the news in its annual report on Tuesday, in which it separately announced quarterly profit more than doubled to $58.6 million from $18.4 million a year earlier.

Laurentian, Canada's seventh largest bank in terms of assets, also hiked its dividend by a penny per share.

Mortgage issues

But in a subsection of its annual report, the Montreal-based bank revealed that it will repurchase a chunk of mortgages it sold to an unnamed third party which were found to have what the bank is calling "documentation issues" after an audit.

All in all, the affected mortgages which will be repurchased were worth $89 million. That's almost five per cent of all the mortgages the bank sold to the unnamed buyer.

"No employees were implicated in any misrepresentations and the documentation issues appear to have been unintentional," the bank said, without elaborating.

The portion of the business where the mortgages originated is known as B2B Bank, which provides financial services to financial advisers and mortgage brokers. Part of that business caters to non-prime borrowers, and as such it competes with alternative lenders such as Home Capital.

In the summer of 2015, Home Capital announced it had cut ties with about 45 mortgage brokers for fudging the numbers as to how much prospective borrowers were earning when they applied for a mortgage.

Then this year, Home Capital faced an investigation by the Ontario Securities Commission into how the company informed investors about issues at the time, followed by a run on deposits as investors pulled out their money.

More loans may be included

While the price tag of the loans Laurentian's audit of itself has already found is $89 million, more problematic loans could yet be uncovered, Laurentian warned. That's because the bank said it conducted a "limited sample file audit" of $1.1 billion more worth of loans originated in its branch network, and found similar instances of documentation issues.

"Over the coming months, the bank intends to perform an in-depth review of the mortgages originated in its branch network that have been sold to the third party," the bank said, "and to work with such purchaser to resolve any issues it identifies, including repurchasing any problematic mortgages if required."

If the same ratio holds true in the branch network, the bank warned that another $124 million of problematic loans could be uncovered, "although the definitive amount will only be determinable upon completion of the audit."

All in all, the bank expects the total price tag for mortgage buybacks "to be in the range of $304 million."

In addition, the bank also said that the same audit uncovered an additional $91 million worth of mortgages that shouldn't have been sold to the unnamed buyer but were. And there was yet another mortgage-related revelation, too — the audit "identified a number of mortgage loans that were also inadvertently portfolio insured while they may not have been eligible for insurance."

Those improperly insured mortgages were worth about $76 million.

But "all of the mortgages to be repurchased are performing in line with the bank's overall mortgage portfolio," Laurentian said.

After the quarterly earnings came out, Laurentian Bank shares briefly hit a 52-week high of $62.92 per share, but that was before Bloomberg first reported on the mortgage audit.

Within minutes, the shares were off by more than five per cent to below $58 a share on the TSX.