Street Capital Announces 2017 Second Quarter Results
Posted August 3, 2017
TORONTO, ONTARIO, August 3, 2017 - Street Capital Group Inc. (“Street” or the “Company”) (TSX: SCB), today announced its financial results for the three and six months ended June 30, 2017.
Q2-2017 Financial Highlights
All comparisons below are to Q2-2016, unless otherwise noted
- Total revenue (net of acquisition costs) was $16.1 million in Q2-2017 compared to $19.9 million.
- Net gains on sale of mortgages were $15.7 million, compared to $19.8 million.
- Adjusted shareholders’ diluted earnings per share (i) were $0.02, compared to $0.05.
- Mortgages under administration were $27.81 billion, compared to $25.67 billion.
- Total prime originations and renewals were $1.96 billion, compared to $2.54 billion.
- Total Street Solutions originations were $10.2 million.
- The total portfolio serious arrears rate (iii) was 0.11% at the end of Q2-2017, unchanged from Q2-2016.
“Q2 was a pivotal period for Street Capital Bank (the “Bank”, our wholly-owned subsidiary) as we launched our Street Solutions Program, a suite of mortgage products tailored to address the needs of customers in the growing uninsured segment,” said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. “As expected, Q2 new prime originations remained under pressure industry-wide due to the mortgage insurance rules announced in October 2016. Street Capital Bank is not immune to these challenges; however we are solidly positioned to grow as we build our uninsured book and begin to prudently expand our product suite to better serve our valued customers and mortgage broker partners. With a Schedule I bank licence as a foundation, a stable and conservative funding approach, and a relentless focus on generating industry-leading credit quality, we are positioned to generate substantial value for our shareholders over time.”
"As Ed prepares to retire as the CEO of Street Capital, I would like to take this opportunity to extend my sincere thanks to him for his dedication and fundamental contribution to the growth of Street Capital Bank over the past 10 years," said Allan Silber, Chairman of Street Capital’s Board of Directors. "Along with my fellow Board members, I appreciate that Ed will remain as a Director and we look forward to continuing to work with him. His leadership and the team he has built have brought the Bank to its current position of strength. Ed's experience and track record of success leading consumer lending businesses will continue to be an important resource for the Board and the management team in the coming years, as the Bank grows and diversifies."
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 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, as well as the cost of portfolio insurance. The federal government has also proposed lender risk sharing arrangements that could further affect the insured mortgage market, and provincial governments in British Columbia and Ontario have recently introduced, and may further introduce, measures intended to slow house price appreciation in those provinces. Additionally, in July 2017, OSFI released draft amendments to Guideline B-20–Residential Mortgage Underwriting Practices and Procedures (“Guideline B-20”) for public consultation. The basic framework of Guideline B-20 has not changed: the five fundamental principles for sound residential mortgage underwriting remain. However, OSFI is proposing to tighten and clarify its expectations, and introduce new expectations, including:
- Requiring a GDS/TDS stress test for all uninsured mortgages of at least 2.00% above the contractual interest rate;
- Requiring that Loan-to-Value (LTV) measurements remain dynamic and adjust for local market conditions where they are used as a risk control, such as for qualifying borrowers;
- Expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements; and
- Additional requirements with respect to income verification.
It will take some time to fully understand the complete effect that the combination of these changes would 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 during the remainder of 2017, as we have seen in some markets in Q2 2017.
Changes proposed in Guideline B-20 have the potential to reduce the size of mortgage a borrower may qualify for and require more documentation for self-employed borrowers, and therefore perhaps reduce the level of lending activity in uninsured mortgages originated by OSFI-regulated financial institutions. While the Company is in the preliminary stages of reviewing the potential implications of proposed changes to Guideline B-20 and developing its comments to OSFI on the proposals, management is maintaining its previously outlined origination targets for Street Solutions, given that they are relatively modest compared to the size of the market.
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 June 29, 2017 the Company’s CEO and acting President, Mr. W. Edward Gettings, announced his intention to retire from Street Capital Group Inc. and Street Capital Bank effective September 1, 2017. Mr. Gettings will continue to serve as a member of the Company’s Board of Directors.
Concurrently, the Company also announced that Duncan Hannay, a seasoned financial services and technology executive leader, has been appointed President and CEO of both the Company and Street Capital Bank. Mr. Hannay will assume these responsibilities subsequent to the retirement of Mr. Gettings, on September 1, 2017.
During Q2 2017, the Company initiated a business restructuring that involved the reduction of approximately 10% of its workforce. An action plan was developed during the quarter and selected reductions were implemented beginning July 5, 2017. Associated reorganization expenses of $2.5 million, pre-tax, were recorded as a component of operating expense in Q2 2017. Together with the $3.6 million retiring allowance recorded in Q1 2017 for Mr. DaRocha, the former President, total pre-tax reorganization expenses in 2017 are $6.1 million. The anticipated ongoing expense savings from the staff reduction is between $1.5 to $2.0 million per year. Over time, and as the Bank more formally develops its mid- and long-term strategy, the Company expects to add additional staff with the relevant skills and experience to execute that strategy. The Bank is still targeting positive operating leverage beginning in 2018.
Prime Mortgage Lending
Recent regulatory changes, discussed above, have reduced the volume of prime mortgages that qualify for insurance, leading to a decline in lending activity in the prime insured mortgage segment in 2017.
While it remains difficult to estimate, with any level of certainty, the potential reduction in prime mortgage activity in the market and for the Bank, the Company has been 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 is offering these mortgages on a very limited basis. The Company remains active in pursuing additional funding for this specific product and has made good progress on this front during Q2 2017. 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. The Company still expects that new prime originations 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 expected 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 and as we have seen in this quarter. 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 launched its uninsured mortgage product, Street Solutions, 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. Management deliberately limited the launch of Street Solutions to a handful of brokers and geographic regions in order to manage demand and monitor our underwriting processes. After a successful test run we have expanded our broker reach and geographic regions, and are expecting to make the origination targets as set out in the guidance. The Bank has relatively modest plans for uninsured lending origination in 2017, and will remain conservative in both credit quality and funding, and prudent with 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 of 90 days cashable, and 1 year to 5 years, with fixed interest rates. Deposits are sourced through investment dealers and the distribution network has been growing each month. As banking operations continue to expand, deposits will be cash flow duration matched to underlying mortgages and other assets, with maturity gaps managed within the Bank’s conservative risk appetite. The Company is confident that it will achieve sufficient deposit flows to support $150-$200 million in uninsured mortgage funding in 2017.
Near-term Strategic Priorities
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.
Management’s financial expectations, below, are unchanged since they were originally presented on May 10, 2017.
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.
The following tables set out the financial highlights for the three and six months ended June 30, 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 Measure in the Company’s Q2-2017 Management’s Discussion and Analysis for a reconciliation of amounts to GAAP measures, and the reconciliation of Shareholders’ Net Income (Loss) 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 Q2-2017 Management’s Discussion and Analysis for more detailed definitions of these metrics
Reconciliation of Shareholders’ Net Income (Loss) to Adjusted Shareholders’ Net Income
YTD 2017 Results against Fiscal 2017 Objectives
|2017 Objectives||YTD 2017 Results or Status|
|Launch uninsured mortgage product, with $150 to $200 million in new originations in 2017.||Street Solutions launched in Q2 2017 with $10 million in new originations in the quarter, and is on track to meet the target.|
|Maintain broker market share at #4.||The Bank’s market share in the mortgage broker channel was 7.4% and sixth place for the quarter ended March 31, 2017. Market share data for Q2 2017 was not available at the date of this MD&A.|
|Maintain renewal volumes of 75 – 80% of mortgages eligible for renewal.||Q2 2017 – renewed approximately 72% of the mortgages eligible for renewal.
YTD 2017 – renewed approximately 75%.
|Build credit card capability and be ready to launch the product in 2018.||On track to launch in 2018.|
|Maintain credit quality, with serious arrears and early delinquency rates better than industry averages.||The Bank’s serious arrears rate at June 30, 2017 was 0.11%, as compared to 0.12% at March 31, 2017 and 0.11% at December 31, 2016. The rate was 0.24% at May 31, 2017 in the markets in which the Company operates.|
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 June 30, 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 June 30, 2017, the Company did not purchase any additional common shares through the NCIB.
Please also refer to the Company’s Q2-2017 Financial Statements and Second Quarter Ended June 30, 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, August 3, 2017 at 7:30 a.m. ET to discuss its financial results. Ed Gettings, Chief Executive Officer of Street, will chair the call with 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/2uJOBMH|
|Replay (available for 2 weeks)||416-849-0833; or 1-855-859-2056||58546601|
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 (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.