Street Capital Announces 2016 Second Quarter Results

Net gain on sale of mortgages $19.8 million; adjusted shareholders' diluted EPS of $0.05 

TORONTO, Aug. 10, 2016 /CNW/ - Street Capital Group Inc. ("Street" or the "Company") (TSX: SCB), today announced financial results for the three and six months ended June 30, 2016.

Q2-2016 Financial Highlights
All comparisons below are to Q2-2015, unless otherwise noted

  • Total revenue was $19.9 million in Q2-2016 compared to $26.4 million.
  • Net gains on sale of mortgages were $19.8 million, compared to $26.2 million.
  • Adjusted shareholders' diluted earnings per share (i) were $0.05, compared to $0.09.
  • Street was #4 in the mortgage broker channel in Q2-2016, with 8.4% market share, compared to #6 and 7.6% in Q1-2016.
  • Mortgages under administration were $25.67 billion, compared to $23.38 billion.
  • Mortgages sold were $2.54 billion in Q2-2016, compared to $3.00 billion.
  • The serious arrears rate (iii) was 0.11% at the end of Q2-2016 compared to 0.16%.

"Originations were slower than we would have liked during the quarter as our team continued to adjust to process modifications made in Q1 as part of our preparation to become a Schedule I bank. Toward the end of Q2, originations were recovering, as reflected in our share of the market, which increased to 8.4%, from 7.6% in Q1," said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. "Starting in 2017, we expect to drive solid earnings growth as the mortgage renewal cycle starts to track the growth in mortgage originations over the past five years. OSFI was on-site in July to review the operational changes we made in Q1 2016 and we are awaiting the results of that review. We remain confident that we will receive approval by the end of 2016, and that we are building a platform that will drive solid revenue and earnings growth for many years to come."

Financial Highlights

The following tables set out the financial highlights for the three and six months ended June 30, 2016:





(in thousands of $, except where defined)

For the three months ended or as at


For the six months ended or as at









June 30,

2016

March 31,

2016

June 30,

2015


June 30,

2016

June 30,

2015

Financial performance







Shareholders' net income (loss)

$

5,310

$

3,003

$

(37,666)


$

8,313

$

(33,916)

Adjusted shareholders' net income (i)

$

5,845

$

2,444

$

8,767


$

8,289

$

12,072

Shareholders' diluted earnings (loss) per share 

$

0.04

$

0.02

$

(0.37)


$

0.07

$

(0.34)

Adjusted shareholders' diluted earnings per share (i)

$

0.05

$

0.02

$

0.09


$

0.07

$

0.12

Return on equity

17.1%

10.0%

(131.6%)


13.6%

(60.3%)

Adjusted return on equity (i)

18.8%

8.1%

30.6%


13.5%

21.5%








Mortgages sold and assets under administration







Mortgages sold

$

2,536,376

$

1,518,423

$

2,994,642


$

4,054,799

$

4,611,732

Mortgages under administration (in billions of $)

$

25.67

$

25.02

$

23.38


$

25.67

$

23.38








Gain on sale of mortgages

$

46,797

$

26,883

$

56,749


$

73,680

$

87,870

Gain as a % of mortgages sold

1.85%

1.77%

1.90%


1.82%

1.91%

Acquisition expenses

$

27,009

$

14,286

$

30,544


$

41,295

$

47,421

Acquisition expenses as % of mortgages sold

1.06%

0.94%

1.02%


1.02%

1.03%

Net gain on sale of mortgages

$

19,788

$

12,597

$

26,205


$

32,385

$

40,449

Net gain as a % of mortgages sold

0.78%

0.83%

0.88%


0.80%

0.88%

Operating expenses (ii)

$

12,140

$

9,885

$

11,027


$

22,025

$

21,116

Operating expenses as % of mortgages sold

0.48%

0.65%

0.37%


0.54%

0.46%








Credit quality 







Total portfolio serious arrears rate (iii)

0.11%

0.13%

0.16%




Average beacon (iv)

749

743

746




Average loan to value ratio (iv)

81.2%

81.4%

82.0%




Average total debt service ratio (iv)

36.1%

36.2%

36.5%











Equity and share performance







Shareholders' equity

$

127,001

$

121,998

$

113,985




Number of shares outstanding end of period

121,876

122,154

120,866




Share price at close of market

$

1.25

$

1.29

$

2.35




Market capitalization 

$

152,345

$

157,579

$

284,035




Book value per share

$

1.04

$

1.00

$

0.94






(i)

Non-GAAP measure the Company uses to measure its performance from continuing and recurring income from its core business. Please see the section Non-GAAP Measures in the Company's Q2-2016 Management's Discussion and Analysis for a reconciliation of amounts to GAAP measures, and the reconciliation of Shareholders' Net Income to Adjusted Shareholders' Net Income in the table below.

(ii)

Operating expenses are net of any restructuring costs or recoveries.

(iii)

Defined as the number of mortgages that are greater than 90 days in arrears, plus the number of mortgages involved in legal action due to non-payment, divided by the number of mortgages under administration.

(iv) 

Calculated on a weighted average basis at origination. Please see the section Non-GAAP Measures in the Company's Q2-2016 Management's Discussion and Analysis for more detailed definitions of these metrics.

 

Reconciliation of Shareholders' Net Income to Adjusted Shareholders' Net Income






For the three months ended


For the six months ended

(in thousands of $, except per share data)

June 30,

2016

March 31,

2016

June 30,

2015


June 30,

2016

June 30,

2015

Net income (loss)

$

5,310

$

3,003

$

(37,666)


$

8,313

$

(33,916)

Restructuring recovery (net of applicable tax) 

-

(598)

46,602


(598)

46,602

Fair value adjustments (net  of non-controlling interest)

541

48

(175)


589

(612)

Discontinued operations

(6)

(9)

6


(15)

(2)

Adjusted net income 

$

5,845

$

2,444

$

8,767


$

8,289

$

12,072

 

Bank Application Update

In September 2012, Street Capital Financial announced its intention to apply to Canada's Minister of Finance for approval to operate as a federally regulated Schedule I bank, with its banking business primarily focused on residential mortgage lending, although also providing other consumer lending and related services. As discussed in the Company's 2016 First Quarter Report, Street Capital Financial is 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, has included an on-site review by the Office of the Superintendent of Financial Institutions Canada ("OSFI") to determine whether Street Capital Financial is sufficiently prepared to commence business operations as a federally regulated financial institution.

In Q1 2016, the Company implemented various operational changes in order to address OSFI observations. OSFI returned on-site in July 2016 to confirm that these changes have been adequately implemented. The Company is now awaiting the results of that on-site review. Once this process is completed, the Company anticipates that OSFI would make 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. While Street Capital Financial remains confident that it has the appropriate structure, processes, leadership, maturity and scale to complete this application process and subsequently operate as a bank, it cannot provide assurances that it will be successful. While the exact timing continues to be uncertain given the nature of the review process, the Company is confident that it will receive approval before the end of calendar year 2016. In the meantime, the Company will continue to grow its core insured mortgage lending business and generate highly profitable renewals, which are expected to drive earnings growth in 2017 and beyond.

Update Regarding Normal Course Issuer Bid

Up to July 31, 2016, under the Normal Course Issuer Bid that became effective on March 23, 2016, the Company purchased 327,106 of its common shares at an average price of $1.29 per share.

Outlook
Note to readers: This section includes forward looking information and readers are reminded to refer to the discussion about forward looking information at the end of this document.

Business Environment:

Looking forward, the Company continues to anticipate economic conditions in 2016 and into 2017 to include low interest rates and stable employment in most regions, along with continued positive demographic trends and immigration levels, with the likely exception of the energy producing regions. Relatively higher levels of housing price increases in Vancouver and the Greater Toronto Area tend to reflect a tight supply and the rate of price appreciation is likely not sustainable over the long run. These markets are being tempered by relatively stable to moderate decreases in housing activity in other regions of Canada. Overall the Company has observed relatively stable housing markets in the regions and locales where it lends. The Company continuously monitors market conditions through frequent evaluation of macro, regional and localized economic indicators and the credit performance of its mortgages under administration, 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. Management has observed some softening of housing markets in the energy producing regions, with slowing purchase and sale activity and moderate increases in unemployment. This has not translated into higher arrears at this point, but management is prepared for perhaps some moderate increases in arrears rates as the cycle continues. Management had already tightened some of the underwriting guidelines in these areas as the economic conditions were changing. Management continues to anticipate slower mortgage volumes from these regions in 2016, but this slowing is expected to mostly be offset by relative stability and moderate growth in other regions of Canada.

2016:

  • Despite a slower start than anticipated in the first half of 2016, management is expecting new prime mortgage originations in 2016 in line with new prime mortgage originations in 2015.

  • Margins earned on the sale of mortgages are subject to market conditions and as such are not reliably predictable but management expects a moderate contraction of spreads over the twelve months of 2016 compared to the higher average experienced in 2015, settling in the range of 178 – 182 basis points on average over twelve months.

  • Renewal volumes were higher in 2015 as they related to both 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. In 2016, renewal volumes will be limited to primarily 5-year terms originated in 2011, which will lead to 2016 renewal volumes approximately 15% lower than 2015.

  • The Company continues to anticipate moderately higher expenses in 2016, compared to the twelve months of 2015, in order to build the capabilities to support its strategic objective of building a multi-product, diversified financial institution and to support the operational changes made in the early part of 2016. Management expects an expense ratio (ratio of expenses over mortgage originations and renewals) of between 50-52 basis points for the full year 2016.

  • Given the investments in its future, combined with lower gains on sale this year, the Company anticipates lower adjusted net income in 2016 than 2015.

2017 & 2018:

  • As the Company targets to remain number three or number four in the mortgage broker market, management expects that moving into 2017 and 2018 its new prime mortgage origination volumes will reflect any changes in the mortgage market.

  • Management expects 2017 renewal volumes to exceed 2015 renewal volumes of $1.77 billion by 10-15%. 2018 renewal volumes are expected to increase by 30 - 40% over 2017.

  • Given the anticipated timing of the bank application approval, the Company does not expect a material profit contribution from the launch of bank activities in 2016. Assuming the Company launches the bank in late 2016, management estimates these activities could add 2 – 5% to revenue in 2017 and 10 – 20% in 2018 when compared to 2015.

  • Management is targeting an expense ratio (ratio of expenses over mortgage originations and renewals) of between 46-52 basis points, with 2016 being the higher point of this range.

  • Management expects higher profitability beyond 2016 as revenues grow to outpace expenditures.

Sustainable Tax Advantage

The Company continues to generate a sustainable tax advantage, given the differing treatment between accounting and income tax rules for gains on sale. Its tax loss carryforwards were approximately $315 million at the end of Q2 2016. This represents a real and sustainable tax advantage as the Company is not paying cash taxes and does not expect to pay cash taxes for many years.

Further Information

Please also refer to the Company's Second Quarter Report, including Financial Statements and Management's Discussion and Analysis, which are available on the Company's website (www.streetcapitalgroup.ca) and on SEDAR (www.sedar.com).

Conference Call

Street will host a conference call today, August 10, 2016 at 9:00 a.m. ET to discuss its financial results. Ed Gettings, Chief Executive Officer of Street, will chair the call and will be joined by Lazaro DaRocha, President of Street, and Marissa Lauder, Chief Financial Officer of Street.


Participant Dial-in

Webcast

Reference Number

Conference Call

 

647-427-7450; or

1-888-231-8191

http://bit.ly/2aec9fJ


Replay

(available for 2 weeks)

416-849-0833; or

1-855-859-2056


58558540

 

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, 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

This release contains certain forward-looking statements that are based on management's exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words "may", "will", "anticipate", "believe", "estimate", "expect", "intend", and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as outlined in the Company's Annual Information Form and other filings made with securities regulators, which are available on SEDAR (www.sedar.com). These factors include, without limitation: timing and results of banking application process, expansion opportunities, technological changes, regulatory changes, and changes to the business and economic environment, including, but not limited to, Canadian housing market conditions and activity, interest rates, mortgage backed securities markets, and employment conditions that may impact the Company, its mortgage origination volumes, investments and capital expenditures, and competitive factors that may impact revenue and operating costs. Any of these factors, amongst others, could cause actual results to vary materially from current results or from the Company's currently anticipated future results and financial condition. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do 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. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

The following table sets out the Company's consolidated quarterly results of operations for the eight quarters ended June 30, 2016.













Unaudited

(in thousands of $ except per share data

and as otherwise defined)

2014

Q3

$

2014

Q4

$

2015

Q1

$

2015

Q2

$

2015

Q3

$

2015

Q4

$

2016

Q1

$

2016

Q2

$


2015

YTD

$

2016

YTD

$













Revenue












Net gain on sale of mortgages 

15,818

15,092

14,244

26,205

19,203

16,416

12,597

19,788


40,449

32,385

Net interest and other income (loss)

1,760

(52)

7

184

200

(1,299)

628

136


191

764

Total revenue

17,578

15,040

14,251

26,389

19,403

15,117

13,225

19,924


40,640

33,149













Expenses and fair value adjustments












Operating expenses

9,954

9,806

10,089

11,027

10,358

11,459

9,885

12,140


21,116

22,025

Restructuring expenses (recoveries)

-

-

-

50,240

-

-

(813)

-


50,240

(813)

Fair value (appreciation) depreciation

(8,028)

(9,436)

2,710

(2)

(2,783)

11,967

352

1,810


2,708

2,162













Income (loss) before income taxes,
discontinued operations and non-
controlling interest

15,652

14,670

1,452

(34,876)

11,828

(8,309)

3,801

5,974


(33,424)

9,775

Income taxes 

2,073

1,400

857

2,957

2,136

885

1,111

1,939


3,814

3,050

Income (loss) from continuing operations

13,579

13,270

595

(37,833)

9,692

(9,194)

2,690

4,035


(37,238)

6,725













Income (loss) from discontinued operations

11

8

8

(6)

9

6

9

6


2

15

Net (income) loss attributable to
non-controlling interest

(5,378)

(8,374)

3,147

173

(3,025)

6,393

304

1,269


3,320

1,573

Net income (loss) attributable to shareholders

8,212

4,904

3,750

(37,666)

6,676

(2,795)

3,003

5,310


(33,916)

8,313













Basic and diluted net income (loss) per share 

0.08

0.05

0.04

(0.37)

0.06

(0.02)

0.02

0.04


(0.34)

0.07













Adjusted net income

5,551

3,834

3,305

8,767

6,909

4,792

2,444

5,845


12,072

8,289

Adjusted net income per share

0.05

0.04

0.03

0.09

0.06

0.04

0.02

0.05


0.12

0.07













Return on equity

32.2%

18.1%

13.3%

(131.6%)

22.8%

(9.4%)

10.0%

17.1%


(60.3%)

13.6%

Adjusted return on equity

21.8%

14.1%

11.7%

30.6%

23.5%

16.0%

8.1%

18.8%


21.5%

13.5%













Net gain on sale as a % of mortgages sold

0.70%

0.69%

0.88%

0.88%

0.84%

0.77%

0.83%

0.78%


0.88%

0.80%













Mortgages under administration (in billions of $)

20.38

21.59

22.16

23.38

24.30

24.75

25.02

25.67


23.38

25.67













Mortgage sales (in billions of $)

2.27

2.18

1.62

3.00

2.28

2.14

1.52

2.54


4.61

4.06













Renewal volumes

10.6%

12.4%

18.5%

15.7%

18.0%

27.5%

21.7%

15.0%


16.7%

17.5%

The following table sets out the Company's financial position as at June 30, 2016, March 31, 2016 and December 31, 2015.






As at








June 30,


March 31,


December 31,

(in thousands of $) 

2016


2016


2015







Assets






Cash and cash equivalents

$

5,514


$

7,836


$

8,846

Restricted cash

47,544


13,726


13,078

Deferred placement fees receivable 

48,242


46,328


46,442

Prepaid portfolio insurance

70,840


68,138


66,672

Securitized mortgage loans 

159,642


164,408


167,762

Non-securitized mortgages and loans

39,109


5,251


16,741

Portfolio investments

3,338


5,160


13,506

Deferred income tax assets

14,354


13,975


14,135

Other assets

24,732


17,329


13,333

Goodwill and intangible assets

28,610


28,678


28,864


441,925


370,829


389,379

Assets of discontinued operations

951


1,246


1,338

Total assets

$

442,876


$

372,075


$

390,717







Liabilities






Bank facilities

$

34,757


$

12,049


$

15,817

Loans payable

6,778


6,795


8,972

Securitization liabilities

158,630


163,028


167,380

Other liabilities

118,196


69,422


75,013


318,361


251,294


267,182

Liabilities of discontinued operations

1,166


1,166


1,166

Total liabilities

319,527


252,460


268,348







Total shareholders' equity

127,001


121,998


118,245

Non-controlling interests

(3,652)


(2,383)


4,124

Total liabilities and equity

$

442,876


$

372,075


$

390,717

 

SOURCE Street Capital Group Inc.

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


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