Street Capital Announces 2017 First Quarter Results
Posted May 10, 2017
TORONTO, ONTARIO, May 10, 2017 - Street Capital Group Inc. (“Street” or the “Company”) (TSX: SCB) today announced financial results for the three months ended March 31, 2017.
Q1-2017 Financial Highlights
All comparisons below are to Q1-2016, unless otherwise noted
- Total revenue was $10.8 million in Q1-2017 compared to $13.2 million.
- Net gain on sale of mortgages was $10.7 million, compared to $12.6 million.
- Shareholders’ loss per share was $0.02, compared to earnings per share of $0.02.
- Adjusted shareholders’ diluted earnings per share (i) were flat, compared to $0.02.
- Mortgages under administration were $27.81 billion, compared to $25.02 billion.
- Mortgages sold were unchanged at $1.52 billion.
- The serious arrears rate(iii) was 0.12% at the end of Q1-2017 compared to 0.13%.
“Street Capital Bank (the “Bank”, our wholly-owned subsidiary) continued to generate robust mortgage originations in Q1, while facing sustained margin pressure on new insured volumes into Q1 2017,” said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. “We view these challenges as temporary, as the market adjusts to the mortgage insurance rules announced by the Department of Finance in October 2016. We are an established participant in the insured segment and are set for measured growth in the uninsured segment of the market. The events in our industry over the past few weeks will present Street with several opportunities in the coming months and years. We plan to approach these opportunities with the prudence that has always been a hallmark of our strategy. As a well-capitalized Schedule I bank with a track record of industry-leading credit quality, Street Capital Bank is strongly positioned to generate significant shareholder value over the long term.”
Commentary Regarding Recent Market Developments
In the 10 years since Street Capital Bank’s founding, its management team and board of directors have built its reputation as a prudent lender, with a conservative approach to growth. Street Capital Bank has designed its business with a relentless focus on credit quality and a conservative funding approach. These elements have ensured that Street Capital Bank is well-positioned to capitalize on opportunities that may be generated by market changes. The Bank has not been affected by the recent funding and liquidity challenges experienced by some of the other regulated financial institutions in recent weeks. It should be noted that:
- Today, all prime mortgages that Street Capital Bank is originating are insurable and are sold at the commitment stage to our various liquidity providers. There has been no observed reduction in demand or available funding for prime insurable mortgages.
- In Q4 2016 we added two new liquidity providers for prime insured funding. Street Capital Bank is also an approved issuer of NHA MBS and an approved seller under the CMB program, which allows it to access the securitization market directly as a secondary source of liquidity for prime insured mortgages.
- Street Capital Bank has designed its uninsured funding structure to limit liquidity and funding risk. The Bank does not rely on demand deposits, which helps to prevent any sudden disruption in liquidity. Funding, which will be duration matched to the underlying assets, is composed exclusively of fixed-term GICs. Street Capital Bank’s deposit balance at May 4 was $28.4 million with the term structure as follows:
As at May 4, 2017
|Cashable*||Year 1||Year 2||Year 3||Year 4||Year 5||Total|
|*90-day cashable 1 year GIC|
- Street Capital Bank operates within a risk-based framework, with segregation of the sales and underwriting functions, and our underwriting practices adhere to all principles set forth in OSFI’s B-20 guidelines. As such, we validate income and down payments, along with collateral values, through multiple methods.
- The Bank allocates what it considers an industry-leading quantity of time and expense to thoroughly review its applications and ensure top quality credit. Street Capital Bank conducts rigorous quality assurance (“QA”), and its effective approach to underwriting and risk management resulted in a serious arrears rate of 0.12% at the end of Q1-2017, once again significantly outperforming the large Canadian banks*. Some of the QA measures the Bank currently takes to ensure top quality credit are:
- 100% QA with new brokers
- ~50% QA with known and trusted brokers
- when launched, 100% QA for uninsured loans
- The Company has a robust corporate governance framework. Five of its eight Board members are independent, with significant, industry-specific experience running solid financial institutions.
- Street Capital Bank’s management team is highly experienced and includes leaders that have run large mortgage and consumer credit portfolios and financial operations at other Canadian financial institutions.
The Company anticipates that it is well-positioned to be the recipient of additional uninsured demand in the coming years. Street will evaluate this opportunity in a measured fashion, within its risk management framework. Street’s prudent approach to risk management and quality underwriting will underpin our focus on fulfilling our vision for a consumer-centric financial institution.
* The Canadian Bankers Association reported a serious arrears rate of 0.26% at February 28, 2017 in the markets in which Street Capital Bank operates, based on % of total number of mortgages; mortgage arrears is three or more months.
Note to readers: This section includes forward looking information and is qualified in its entirety by the discussion about Forward Looking Information, below.
Regulatory and Policy Changes
Many housing markets in Canada are experiencing prolonged periods of house price appreciation that have led to concerns from many observers and market participants, resulting in an increased focus on the stability of the domestic housing market. Partly in response, the federal government has implemented regulatory changes that tightened the qualification criteria for insured loans, with the most recent being in October and November of 2016. OSFI’s introduction of higher regulatory capital requirements for mortgage insurers has increased the cost of insurance for some borrowers and for portfolio insurance. Additionally, the federal government has also proposed lender risk sharing arrangements that could further affect the insured mortgage market. Further, provincial governments in British Columbia and Ontario have recently introduced, and may introduce further, measures intended to slow house price appreciation in those provinces.
It will take some time to fully understand the combined effect that these changes will have on housing activity and prices, and ultimately on mortgage activity and mortgage rates. However, the Company believes directionally that prime insured mortgage activity and housing price appreciation will begin to slow in 2017. There remains a great deal of uncertainty in the markets, making it challenging to predict outcomes, and as a result the Company’s views can change over time in response to observed factors and market trends.
Other Business Developments
On March 21, 2017, the Company’s President, Lazaro DaRocha, announced his intention to retire from Street Capital Group Inc. and Street Capital Bank effective September 30, 2017. Effective April 1, 2017, as a result of a change to the initial arrangement, Mr. DaRocha resigned from both positions and entered into a consulting contract with the Company for the provision of certain services and deliverables, with an expected completion date of September 30, 2017. The contracted services were completed and reached a natural conclusion earlier than originally planned, and as a result the consulting contract was dissolved by mutual agreement, effective May 5, 2017.
Prime Mortgage Lending
Management expects that recent regulatory changes will reduce the volume of prime mortgages that qualify for insurance, thus reducing lending activity in the prime insured mortgage segment in 2017.
It remains difficult to estimate, with any level of certainty, the potential reduction in prime mortgage activity in the market and for the Bank. However, the Company anticipates being able to maintain strong origination volumes for prime insurable mortgages. These mortgages are not affected by the recent mortgage insurance rule changes. The Company has more than adequate funding and strong market demand, and the Bank remains competitive in this mortgage segment.
For mortgages that previously qualified for mortgage insurance, i.e.: prime uninsured mortgages, the Bank could access funding through one of its liquidity providers. It is now approaching the tail end of its current allotment. Management had believed that the Bank’s allotment would be increased, and that other funders would become available, but market conditions have evolved such that progress has slowed on this front. The Company is actively pursuing additional funding for this specific product and, with the Bank’s industry-leading credit quality, is in a strong position to attract it. The Company is also actively investigating the market for non-government-sponsored residential mortgage backed securities (“RMBS”), and is currently evaluating this opportunity. However, given the uncertainty of the timing of funding availability, and the uncertainty of the potential profitability of these mortgages, management is taking a more conservative view of new prime origination volumes and gain on sale rates in 2017, and is updating its guidance in this regard. The Company now expects that new volumes could be 20 – 30% below 2016, and it cannot currently provide a reasonable estimate of gain on sale rates. When market conditions stabilize, the Company hopes to resume providing guidance of this type moving forward.
Softness in new originations of prime mortgages will be partly offset by the Bank’s highly profitable renewal activity in 2017, 2018 and 2019. Based on the maturity profile of the MUA, the Bank will experience material increases in renewal activity in these years. To optimize this revenue stream, the Bank will continue to focus on its service and retention activities. The Bank’s almost $28 billion of MUA provides both a sustainable portfolio of quality revenue generating assets and a customer base to drive significant value over the coming years as it expands into additional product areas.
Uninsured Mortgage Lending
The Bank anticipates launching its uninsured mortgage product in Q2 2017. Discussions and observations in the market have been very positive, with many existing mortgage broker partners welcoming another provider in this segment. We are expecting demand to be very strong, based on both our solid relationships and recent market events with a specific lender in this space. As well, lower levels of prime insured mortgage activity in the market may provide additional support for the launch of this product. The Bank has relatively modest plans for uninsured lending origination in 2017, and will remain conservative in credit quality, as well as funding, and prudent with its growth to ensure it builds a sustainable and quality portfolio of assets and customers that drives profitability today and in the coming years.
The Bank began taking its first CDIC-insured GIC deposits in February 2017. The Company offers deposits, in the form of GICs, for fixed terms from 90 days cashable, and 1 year to 5 years, with fixed interest rates. Deposits are sourced through investment dealers with the distribution network growing each month. Deposits will be duration matched to underlying mortgages and other assets, with maturity gaps managed within the Bank’s conservative risk appetite. The Company did not observe any negative impacts to its deposit flows as a result of recent market disruption noted by certain regulated financial institutions, and is confident that it will achieve sufficient deposit flows to support $150-$200 million in uninsured mortgage funding in 2017.
The Bank continues to focus on infrastructure and the development of a compelling credit card offering to be launched in 2018. The product will initially be offered directly to both qualifying borrowers in our current base of more than 130,000 customers, and new mortgage clients. Credit cards are expected to add modestly to revenue in 2018.
Financial Expectations – 2017 to 2019
Note: The Bank may not realize the financial expectations indicated below if business or competitive conditions, the regulatory environment, the housing market, or general economic conditions change, or if any of the other management assumptions do not materialize in the amount or within the timeframes expected. Please refer to the Forward Looking Information, below.
The financial expectations below have been updated from the expectations presented on March 8, 2017 to reflect management’s most recent views.
1 Forecasting future prime insured originations remains challenging, given the recent regulatory changes, and competitors’ and consumers’ potential reactions thereto. The projections reflect management’s current views only and are subject to change over time.
2 As revenues from balance sheet lending begin to grow, the Bank will begin to measure itself on operating leverage.
3 Positive operating leverage is defined as: percentage growth in revenue, minus percentage growth in expenses, is greater than zero.
|2016 – Actual||2017||2018||2019|
|Prime New Originations1||$7.94 billion||20%-30% lower than 2016||Maintain market share||Maintain market share|
|Prime Renewal Volume||$1.43 billion||$1.80 - $1.90 billion||$2.40 - $2.60 billion||$2.60 - $2.70 billion|
|Uninsured Originations||nil||$150 - $200 million||$600 - $700 million||$850 - $950 million|
|Uninsured Net Interest Margin (net of provisions for credit losses)||N/A||2.0% -2.5%||2.0% -2.5%||2.0% -2.5%|
|Expense Ratio (% of originations and renewals)2||0.50%||N/A||Positive operating leverage3||Positive operating leverage3|
The following tables set out the financial highlights for the three months ended March 31, 2017:
(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 Q1-2017 Management’s Discussion and Analysis for a reconciliation of amounts to GAAP measures.
(ii) Operating expenses are net of any non-recurring items, including 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 for more detailed definitions of these metrics.
Reconciliation of Shareholders’ Net Income (Loss) to Adjusted Shareholders’ Net Income
Q1-2017 Results against Fiscal 2017 Objectives
|2017 Objectives||Q1 2017 Results or Status|
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 $331 million at March 31, 2017. 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.
The Company and its management are committed to consistently creating shareholder value. At this time, this means retaining our earnings and allocating capital to the business opportunities within the growing potential of the bank platform. Over the next few years, it is the Company’s intention that the creation of shareholder value will include consideration of an allocation between retaining and investing earnings, and distributing common shareholder dividends.
Update Regarding Normal Course Issuer Bid
The Company, with the approval of the Toronto Stock Exchange (the “Exchange”) commenced a normal course issuer bid (the “NCIB”) that became effective on March 23, 2016. It expired on March 22, 2017 and was subsequently renewed. The renewed NCIB will expire on March 22, 2018. Under the NCIB, the Company can purchase for cancellation up to 2% of its common shares outstanding. The Company makes those purchases on the open market through the facilities of the Exchange and otherwise in accordance with the rules and policies of the Exchange. The Company believes that the potential repurchase of a portion of its outstanding common shares is an appropriate use of available cash and is in the best interests of the Company and its shareholders.
During the period March 23, 2016 to December 31, 2016, the Company repurchased 630,132 of its common shares for $0.91 million, which reduced share capital by $1.27 million and increased contributed surplus by $0.36 million. Between December 31, 2016 and May 9, 2017, the Company did not purchase any additional common shares through the NCIB.
Please also refer to the Company’s Q1-2017 Financial Statements and First Quarter Ended March 31, 2017 Management’s Discussion and Analysis, which are available on the Company’s website (streetcapital.ca) and on SEDAR (sedar.com).
Street will host a conference call today, May 10, 2017 at 9:00 a.m. ET to discuss its financial results. Ed Gettings, Chief Executive Officer of Street and Marissa Lauder, Chief Financial Officer of Street, will chair the call.
|Participant Dial-in||Webcast||Reference Number|
|Conference Call||647-427-7450; or 1-888-231-8191||bit.ly/2q7qPDP|
|Replay (available for 2 weeks)||416-849-0833; or 1-855-859-2056||13558825|
About Street Capital Group Inc. (streetcapitalgroup.ca)
Street Capital Group Inc. (TSX: SCB) is a public company operating through its wholly-owned subsidiary, Street Capital Bank of Canada, a federally regulated Schedule I Bank offering residential mortgage loans with the strategic goal of introducing additional retail banking products in the coming years. Street Capital Bank of Canada sources its mortgage products primarily through a network of independent mortgage brokers across Canada with whom it has built relationships. Street Capital Bank of Canada offers a broad line-up of high ratio and conventional mortgages to borrowers and either sells the mortgages it underwrites to top tier financial institutions or holds them on balance sheet. Street Capital Bank of Canada lends throughout all of the provinces of Canada (other than Quebec) and has offices in Ontario, Alberta and British Columbia. For more information please visit streetcapital.ca.
This release contains certain forward-looking statements and forward-looking information (collectively, forward-looking statements) that are based on management’s exercise of business judgment as well as estimates, projections and assumptions made by, and information available to, management at the time the statement was made. When used in this document, the words “may”, "will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “forecast”, “project” and “plan”, 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 management’s current view of future events and are subject to certain risks and uncertainties as outlined in this MD&A and 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: expansion opportunities, technological changes, regulatory changes or regulatory requirements, changes to mortgage insurance rules, 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, which may impact the Company, its mortgage origination volumes, launch of new products at planned times, 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, the Company’s actual results could differ materially from those anticipated in these forward-looking statements. Management 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. Although management believes that its expectations are based on reasonable assumptions, management can give no assurance that its expectations will materialize.
For further information, please contact:
Chief Executive Officer, Street Capital
LodeRock Advisors Inc., Investor. Relations
Tel: (416) 283-0178
The following table sets out financial highlights of the Company's consolidated quarterly results of operations for the eight quarters ended March 31, 2017.
The following table sets out the Company’s consolidated financial position as at March 31, 2017 and December 31, 2016.