Street Capital Announces 2015 Third Quarter Results

Gain on sale of mortgages $41.2 million; Total Revenue $19.4 million; adjusted shareholders' diluted EPS of $0.06 

TORONTO, Nov. 10, 2015 /CNW/ - Street Capital Group Inc. ("Street" or the "Company") (TSX: SCB), today announced financial results for the three months and nine months ended September 30, 2015.

Q3-2015 Highlights

  • Gain on sale of mortgages were $41.2 million in Q3-2015, up 3.5% from $39.8 million in Q3-2014
  • Total Revenue grew 10.2% to $19.4 million in Q3-2015 from $17.6 million in Q3-2014.
  • Adjusted shareholders' diluted earnings per share1 were $0.06, compared with $0.05 in Q3-2014.
  • Street was #4 in the mortgage broker channel in Q3-2015, compared to #3 in Q2-2015.
  • Mortgages under administration were $24.3 billion, up 19% from $20.4 billion in Q3-2014 and up from $23.4 billion in Q2-2015.
  • Mortgages sold were flat with Q3-2014, at $2.3 billion.
  • Renewals were 18.4% of total mortgages sold in Q3-2015, compared to 10.6% in Q3-2014.
  • The serious arrears rate2 was 0.14% at the end of Q3-2015 compared to 0.27% at the end of Q3-2014.

"During Q3, we continued to grow mortgages under administration through both new originations and renewals, while taking the necessary steps to position the business appropriately for its future as a diversified financial institution," said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. "New origination volumes in the quarter were impacted by the discontinuation of our Loyalty product, which paid trailer fees to brokers, and some normal course credit underwriting adjustments to maintain strong credit performance. Volumes have rebounded to normal levels in October and based on our pipeline, we anticipate that this will continue."

Bank Update

Street Capital is presently in the Pre-Commencement Review phase of its application to the Minister of Finance to continue as a Schedule I bank. This phase, which is one of the last stages of the continuation process, includes an on-site review by OSFI to determine whether Street Capital is sufficiently prepared to commence business operations as a federally regulated financial institution. Once the on-site review has been completed, Street Capital will be expected to address any concerns and material findings coming out of that review prior to OSFI making a recommendation to the Minister of Finance for Letters Patent of Continuation and to the Superintendent of Financial Institutions for an Order to Commence and Carry on Business.

Financial Highlights

The following table sets out the financial highlights as at and for the three and nine months ending September 30, 2015:


For the three months ended

For the nine months ended

(in thousands $, except where defined)

September 30,

June 30,

September 30, 

September 30,

September 30,



2015


2015


2014


2015


2014

Shareholders' net income (loss)

$

6,676

$

(37,666)

$

8,212

$

(27,240)

$

8,025

Adjusted shareholders' net income ¹   


6,909


8,767


5,551


18,981


13,601

Shareholders' diluted earnings per share 


0.06


(0.37)


0.08


(0.25)


0.08

Adjusted shareholders' diluted earnings per share ¹


0.06


0.09


0.05


0.17


0.13

Adjusted return on equity


23.5%


30.6%


21.8%


22.0%


17.6%

Mortgages sold

$

2,284,829

$

2,994,642

$

2,261,258

$

6,896,561

$

5,572,962

Gain on sale of mortgages

$

41,197

$

56,749

$

39,774

$

129,067

$

100,666

Gain as a % of mortgages sold


1.80%


1.90%


1.76%


1.87%


1.81%

Acquisition expenses

$

21,994

$

30,544

$

23,956

$

69,415

$

59,274

Acquisition expenses as % of mortgages sold


0.96%


1.02%


1.06%


1.01%


1.06%

Operating expenses

$

10,385

$

10,994

$

9,954

$

31,355

$

27,986

Operating expenses as % of mortgages sold


0.45%


0.37%


0.44%


0.45%


0.50%








As at


September 30,

June 30,

Dec 31,

September 30,



2015


2015


2014


2014

Mortgages under administration in billions ("MUA")

$

24.30

$

23.38

$

21.59

$

20.38

Serious arrears rate %²


0.14%


0.16%


0.23%


0.27%

Shareholders' equity

$

120,752

$

113,985

$

110,876

$

106,191

Number of shares outstanding end of period


120,866


120,866


99,358


99,101

Share price at close of market

$

1.65

$

2.35


$ 1.82

$

1.60

Market capitalization

$

199,429

$

284,035

$

180,832

$

158,562

Book value per share

$

1.00

$

0.94

$

1.12

$

1.07

¹

Adjusted shareholders' net income , adjusted  diluted shareholders' earnings per share  and adjusted return  on equity are Non-GAAP measures that the Company uses to measure its performance. These measures are not calculated in accordance with GAAP and are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability among companies using these measures.  The adjusted results are intended to give readers a view of the core operating business of  the Company by removing restructuring expenses incurred in Q2 2015, net of applicable taxes,  given their non-recurring nature , along with fair value adjustments and the results of discontinued operations associated with the legacy businesses.

Reconcilation of Shareholders' Net Income to Adjusted Shareholders' Net Income 






For the three months ended

For the nine months ended

(in thousands $, except where defined)

September 30,

June 30,

September 30, 

September 30,

September 30,



2015


2015


2014


2015


2014

Net Income 

$

6,676

$

(37,666)

$

8,212

$

(27,240)

$

8,025

Restructuring expenses (net of applicable tax) 

$

-

$

46,602

$

-

$

46,602

$

-

Fair value adjustments net  of non-controlling interest

$

242

$

(175)

$

(2,650)

$

(370)

$

(6,026)

Discontinued Operations

$

(9)

$

6

$

(11)

$

(11)

$

11,602

Adjusted Net Income 

$

6,909

$

8,767

$

5,551

$

18,981

$

13,601

Adjusted diluted EPS is calculated using adjusted net income. Adjusted ROE is calculated using adjusted net income with no adjustment to shareholders' equity.

²

Serious arrears rate is defined as the number of mortgages that are greater than 90 days in arrears divided by the number of mortgages under administration . The calculation includes mortgages that  have been sold to institutional investors.

Outlook

Note to readers: This section includes forward looking information and readers are reminded to refer to the discussion about forward looking information on page 2 of the Company's Management's Discussion & Analysis, for the three and nine months ended September 30, 2015.

Looking forward, management expects market conditions to include continued low interest rates with perhaps marginal increases in late 2016, stable employment and economic conditions in most regions, with the exception of oil producing locations, along with positive demographic trends and immigration levels. These factors are expected to contribute to relatively stable housing markets for the last quarter of 2015 and into 2016.

The Company will continue to focus on realizing the significant renewal opportunities in the Company's MUA that lead to higher net gains on sale than new originations, and contribute to sustainable profitability. Renewal volumes in 2015 relate both to 5 year terms originated in 2010 and to higher than usual 4 and 3 year terms originated in 2011 and 2012, which reflected investor demand at that time. Moving into 2016, renewal volumes will be limited to primarily 5 year terms originated in 2011, which will lead to renewal volumes approximately 15% lower than 2015.

The Company is anticipating total sales of new and renewal mortgages in 2016 to be in line with the higher than expected volumes experienced in 2015 but with lower relative renewal volumes discussed above, leading to lower gain on sales than 2015. The Company's 2015 results have been very strong, with new mortgage origination volumes and spreads coming in better than expectation.

The Company has made significant investments in processes and people, including technology, risk management and internal audit, to both support its bank application, and to realize on its growth strategies. The Company will continue to build on, and invest in, its processes and capabilities in anticipation of, and to support, its future growth and product diversification strategies. In the shorter term in 2016, this will lead to some disciplined increases in expenditures ahead of expansion and revenue growth that will increase the Company's relative cost structure in 2016 as the processes, people and infrastructure are put in place to support strategic objectives.

Given relatively higher expenses combined with anticipated lower gains on sale in 2016, management expects lower net income in 2016 compared to a very strong 2015. Management is committed to process efficiency, along with product diversification and sales growth as strategic objectives and expects to drive higher profitability beyond 2016 as revenue begins to grow to match the expenditures required to build a diversified financial institution.

If the Company receives approval from Canada's Minister of Finance to operate as a federally regulated Schedule I bank in 2016, management expects to introduce its deposit taking and uninsured mortgage products in a measured and prudent manner over 2016 with the addition of other retail products in future years. Given the uncertainty of the potential timing of the launch of deposit and uninsured mortgage lending, along with the measured approach to launching the products, the profit contribution of the uninsured mortgage lending is not expected to contribute materially to results in 2016. 

The Company continuously monitors market conditions though frequent evaluation of macro, regional and localized economic indicators and the credit performance of its MUA. The Company is also engaged in ongoing dialogue with its business partners about market conditions, credit performance and other observations, and will adjust lending criteria, as required, to ensure the quality of the mortgage portfolio reflects both the Company's and its business partners' risk appetite.

Mortgage Sales

Compared to Q3 2014 net gains on sale are up $3.39 million or 21.4% in Q3 2015 on slightly higher volumes sold, improved spreads and higher relative proportion of renewals (18.4% of total in Q3 2015 versus 10.6% in Q3 2014). Renewals have lower acquisition costs leading to higher net gains on sale.  

Year to date net gains on sale increased $18.26 million or 44.1% compared to the first nine months of 2014, reflecting an increase in mortgages sold of 23.9%, combined with higher spreads and a higher proportion of renewal mortgages sold.

Net gains on sale are down $7.0 million from Q2 2015 due to lower gains on sale on lower mortgage sales volume and slight margin compression compared to the prior quarter. Spreads reflect market rates and the duration of the underlying mortgages sold. The decline in mortgage sales compared to Q2 2015 reflects certain combined factors. In July the Company discontinued its Loyalty product, which offered trailer fee commissions, and in Q3 2015 there were some normal course credit underwriting adjustments to maintain strong credit performance. These actions led to some softening in new mortgage origination volumes over the short term. Management has observed a rebound in origination volumes into the beginning of Q4 2015 and anticipates new mortgage origination volumes will have returned to expected seasonally adjusted levels in Q4 2015.  

Conference Call

Street will host a conference call tomorrow, November 11, 2015 at 9:00 a.m. ET to discuss its financial results. Ed Gettings, Chief Executive Officer of Street, and Lazaro DaRocha, President of Street, will chair the call.


Participant Dial-in

Webcast

Reference Number

Conference Call

November 11, 2015 at 9:00AM

647-427-7450; or

1-888-231-8191

http://bit.ly/1PLoyHD


Replay

(available for 2 weeks)

416-849-0833; or

1-855-859-2056


67261606

About Street Capital Group Inc. (www.streetcapitalgroup.ca)

The Company (TSX: SCB)  is a financial services company operating in residential mortgage lending through its wholly owned subsidiary Street Capital Financial Corporation (www.streetcapital.ca), one of the largest non-bank mortgage lenders in Canada. Founded in 1979 and a public company for more than a quarter century, the Company's goal is to create shareholder value by building a substantial, diversified financial services organization. Street Capital Financial Corporation sources its mortgages primarily through a network of independent, high quality mortgage brokers across Canada with whom it has built relationships. Street Capital Financial Corporation offers a broad lineup of high ratio and conventional mortgages, predominantly to prime borrowers, and sells the mortgages it underwrites to top-tier financial institutions. Business revenues are almost entirely from the gain on sale of mortgages.

Forward-Looking Statements

The statements made in this release that are not historical facts contain forward-looking information that involves risks and uncertainties. All statements, other than statements of historical facts, which address Street Capital Group Inc.'s expectations, should be considered as forward-looking statements and therefore subject to various risks and uncertainties. The words "may", "will", "could", "should", "would", "suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect", "intend", "forecast", "objective", "hope" and "continue" (or the negative thereof), and words and expressions of similar import, are intended to identify forward-looking statements.

Such statements are based on knowledge of the environment in which the Company currently operates, but because of the factors listed herein, as well as other factors beyond the Company's control, actual results may differ materially from the expectations expressed in the forward-looking statements. The Company undertakes no obligation, and does not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events.

The following table sets out the Company's consolidated quarterly results of operations for the eight quarters ended September 30, 2015.  








Unaudited 

2013

2014

2014

2014

2014

2015

2015

2015


2014

2015

(in thousands of $)

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3


YTD

YTD


$

$

$

$

$

$

$

$


$

$













Revenue












Gain on sale of mortgages 

26,605

25,357

35,535

39,774

38,298

31,121

56,749

41,197


100,666

129,067

Acquistion costs 

(13,773)

(15,245)

(20,073)

(23,956)

(23,207)

(16,877)

(30,544)

(21,994)


(59,274)

(69,415)

Net gain on sale of mortgages 

12,832

10,112

15,462

15,818

15,091

14,244

26,205

19,203


41,392

59,652













Net interest and other income (loss)

1,248

4,114

(34)

1,760

(51)

(106)

151

227


5,840

272













Total revenue

14,080

14,226

15,428

17,578

15,040

14,138

26,356

19,430


47,232

59,924













Expenses












Salaries and benefits

5,679

5,592

6,130

6,253

6,081

6,936

7,200

7,039


17,975

21,175

Selling, general and admininstrative expenses

2,916

2,869

3,441

3,701

3,725

3,040

3,794

3,346


10,011

10,180

Operating Expenses

8,595

8,461

9,571

9,954

9,806

9,976

10,994

10,385


27,986

31,355

Income before restructuring expenses and fair value adjustments

5,485

5,765

5,857

7,624

5,234

4,162

15,362

9,045


19,246

28,569













Restructuring expenses

-

-

-

-

-

-

(50,240)

-


-

(50,240)

Fair value adjustments 

4,813

3,099

6,420

8,028

9,436

(2,710)

2

2,783


17,547

75

Income (loss) before income taxes and discontinued operations

10,298

8,864

12,277

15,652

14,670

1,452

(34,876)

11,828


36,793

(21,596)













Income taxes 

2,297

1,447

2,125

2,073

1,400

857

2,957

2,136


5,645

5,950

Income (loss) from continuing operations

8,001

7,417

10,152

13,579

13,270

595

(37,833)

9,692


31,148

(27,546)













Income (loss) from discontinued operations

(6,156)

(11,782)

169

11

8

8

(6)

9


(11,602)

11

Net income (loss)

1,845

(4,365)

10,321

13,590

13,278

603

(37,839)

9,701


19,546

(27,535)













Net (income) loss attributable to non-controlling interest

(1,190)

(2,061)

(4,082)

(5,378)

(8,374)

3,147

173

(3,025)


(11,521)

295

Net income (loss) attributable to shareholders

655

(6,426)

6,239

8,212

4,904

3,750

(37,666)

6,676


8,025

(27,240)













The following table sets out the Company's MUA and Mortgage Sales for the last eight quarters.














(in billions $)























As at





Dec 31,

Mar 31,

Jun 30,

Sep 30,

Dec 31,

Mar 31, 

June 30, 

Sep 30, 





2013

2014

2014

2014

2014

2015

2015

2015

Mortgages under administration 




17.52

18.21

19.27

20.38

21.59

22.16

23.38

24.30

















2013

2014

2014

2014

2014

2015

2015

2015





Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Mortgages sold - orginations




1.19

1.21

1.73

2.03

1.96

1.32

2.52

1.86

Mortgages sold - renewals




0.19

0.17

0.21

0.24

0.27

0.30

0.47

0.42

Total mortgages sold




1.38

1.38

1.94

2.27

2.23

1.62

2.99

2.28

% Renewals




13.8%

12.3%

10.8%

10.6%

12.1%

18.5%

15.7%

18.4%

 

The following table sets out the Company's financial position as at September 30, 2015, June 30, 2015 and September 30, 2014.







As at 

Unaudited 

September 30


June 30


December 31

(in thousands of $) 

2015


2015


2014








Assets






Cash and cash equivalents

$                            44,877


$                            40,340


$                       36,152

Deferred placement fees receivable 

45,236


43,806


38,749

Prepaid portfolio insurance

64,776


60,239


50,888

Securitized mortgage loans 

101,837


45,975


50,318

Non-securitized mortgages and loans

37,241


27,013


4,285

Portfolio Investments

25,375


22,595


40,010

Other assets

59,110


69,482


57,521



378,452


309,450


277,923

Assets of discontinued operations

1,329


1,346


1,341

Total assets

$                         379,781


$                         310,796


$                    279,264








Liabilities






Bank facilities and loans payable

50,459


31,544


18,907

Securitization liabilities

101,213


46,830


50,546

Other liabilities

95,675


109,877


77,091



247,347


188,251


146,544

Liabilities of discontinued operations

1,167


1,167


1,167

Total liabilities

248,514


189,418


147,711








Total shareholders' equity

120,752


113,985


110,876

Non-controlling interests

10,515


7,393


20,677

Total liabilities and equity

$                         379,781


$                         310,796


$                    279,264

SOURCE Street Capital Group Inc.

For further information: W.E. Gettings, CEO, Street Capital Group Inc., Ed.Gettings@streetcapital.ca; Jonathan Ross, CFA, LodeRock Advisors Inc., Inv. Relations, jon.ross@loderockadvisors.com; Tel: (905) 334-0095


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