Street Capital announces 2015 annual and fourth quarter results
Gain on sale of mortgages $164.8 million; Total revenue $75.0 million; adjusted shareholders' diluted EPS of $0.21
TORONTO, March 9, 2016 /CNW/ - Street Capital Group Inc. ("Street" or the "Company") (TSX: SCB), today announced financial results for the three months and year ended December 31, 2015.
Fiscal 2015 Financial Highlights
All comparisons below are to Fiscal 2014, unless otherwise noted
- Total revenue grew 20.5% to $75.0 million in 2015 from $62.3 million.
- Net gains on sale of mortgages grew 34.7% to $76.1 million in 2015 from $56.5 million.
- Adjusted shareholders' diluted earnings per share1 were $0.21, up 23.5% from $0.17.
- Street was #3 in the mortgage broker channel in 2015.
- Mortgages under administration were $24.75 billion, up 14.6% from $21.59 billion.
- Mortgages sold were $9.04 billion in 2015, up 16.6% from $7.75 billion.
- Renewals were 19.6% of total mortgages sold in 2015, compared to 11.5%.
- The serious arrears rate2 was 0.14% at the end of 2015 compared to 0.23%.
Q4-2015 Financial Highlights
All comparisons below are to Q4-2014, unless otherwise noted
- Total revenue was $15.1 million in Q4-2015 compared to $15.0 million.
- Net gains on sale of mortgages were $16.4 million, up 8.8% compared to $15.1 million.
- Adjusted shareholders' diluted earnings per share1 were unchanged at $0.04.
- Street was #4 in the mortgage broker channel in Q4-2015.
- Mortgages under administration were $24.75 billion, up 14.6% from $21.59 billion.
- Mortgages sold were $2.14 billion in Q4-2015, down 1.8% from $2.18 billion.
- Renewals were 27.5% of total mortgages sold in Q4-2015, compared to 12.4%.
- The serious arrears rate2 was 0.14% at the end of Q4-2015 compared to 0.23%.
"In 2015, we continued to demonstrate the strength of our core business by delivering our eighth straight year of growth in mortgages under administration and revenue," said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. "In 2015 we held the number three market share position in the broker channel, which participates in the overall $1.3 trillion Canadian mortgage market. Our credit quality and broker-facing strategy are sustainable competitive advantages on both ends of the origination pipeline that will allow us to continue to generate strong results, year-after-year. While we await a Schedule I bank license, we will continue to seek to grow our core prime business through current and new funding relationships as well as by a continued focus on generating a highly profitable renewal stream."
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 2015 Third 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.
The Company is currently implementing various operational changes in order to address OSFI observations. 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.
Intention to make Normal Course Issuer Bid
Street, subject to the approval of the Toronto Stock Exchange (the "Exchange") intends to make a normal course issuer bid (the "NCIB"), to purchase up to 2% of the Company's common shares outstanding for cancellation. Street, through its broker, will purchase the common shares on the open market through the facilities of the Exchange and otherwise in accordance with the rules and policies of the Exchange. Further details with respect to any future NCIB will be set out in a press release once the Exchange has reviewed it. Street, believes that the potential repurchase by Street, of a portion of outstanding common shares is an appropriate use of available cash and is in the best interests of Street and its shareholders. Although the Company intends to purchase common shares under its NCIB, there are no assurances that such purchases will be completed.
Financial Highlights
The following tables set out the financial highlights for the year ending December 31, 2015:
| For the three months ended |
% Change |
For the year ended |
% Change |
|||||||||
| (in thousands of $, except where defined) |
December 31, |
September 30, |
December 31, |
December 31, |
December 31, |
|||||||
| 2015 |
2015 |
2014 |
2014 to 2015 |
2015 |
2014 |
2014 to 2015 |
||||||
| Shareholders' net income (loss) |
$ |
(2,795) |
$ |
6,676 |
$ |
4,904 |
(157.0%) |
$ |
(30,035) |
$ |
12,929 |
(332.3%) |
| Adjusted shareholders' net income (i) |
$ |
4,792 |
$ |
6,909 |
$ |
3,834 |
25.0% |
$ |
23,773 |
$ |
17,435 |
36.4% |
| Shareholders' diluted earnings per share |
$ |
(0.02) |
$ |
0.06 |
$ |
0.05 |
(140.0%) |
$ |
(0.27) |
$ |
0.13 |
(307.7%) |
| Adjusted shareholders' diluted earnings per share (i) |
$ |
0.04 |
$ |
0.06 |
$ |
0.04 |
0.0% |
$ |
0.21 |
$ |
0.17 |
23.5% |
| Return on equity |
(9.4%) |
22.8% |
18.1% |
(151.8%) |
(25.9%) |
12.4% |
(309.8%) |
|||||
| Adjusted return on equity (i) |
16.0% |
23.5% |
14.1% |
13.5% |
20.5% |
16.7% |
23.2% |
|||||
| Mortgages sold |
$ |
2,140,617 |
$ |
2,284,829 |
$ |
2,180,330 |
(1.8%) |
$ |
9,037,178 |
$ |
7,753,292 |
16.6% |
| Gain on sale of mortgages |
$ |
35,729 |
$ |
41,197 |
$ |
38,299 |
(6.7%) |
$ |
164,796 |
$ |
138,965 |
18.6% |
| Gain as a % of mortgages sold |
1.67% |
1.80% |
1.76% |
(5.0%) |
1.82% |
1.79% |
1.7% |
|||||
| Acquisition expenses |
$ |
19,313 |
$ |
21,994 |
$ |
23,207 |
(16.8%) |
$ |
88,728 |
$ |
82,481 |
7.6% |
| Acquisition expenses as % of mortgages sold |
0.90% |
0.96% |
1.06% |
(15.2%) |
0.98% |
1.06% |
(7.7%) |
|||||
| Net gain on sale of mortgages |
$ |
16,416 |
$ |
19,203 |
$ |
15,092 |
8.8% |
$ |
76,068 |
$ |
56,484 |
34.7% |
| Net gain as a % of mortgages sold |
0.77% |
0.84% |
0.69% |
10.8% |
0.84% |
0.73% |
15.5% |
|||||
| Operating expenses |
$ |
11,434 |
$ |
10,385 |
$ |
9,806 |
16.6% |
$ |
42,789 |
$ |
37,792 |
13.2% |
| Operating expenses as % of mortgages sold |
0.53% |
0.45% |
0.45% |
18.8% |
0.47% |
0.49% |
(2.9%) |
|||||
| As at |
% Change |
||||||
| December 31, |
September 30, |
December 31, |
|||||
| 2015 |
2015 |
2014 |
2014 to 2015 |
||||
| Mortgages under administration in billions ("MUA") |
$ |
24.75 |
$ |
24.30 |
$ |
21.59 |
14.6% |
| Serious arrears rate % |
0.14% |
0.14% |
0.23% |
(39.1%) |
|||
| Shareholders' equity |
$ |
118,245 |
$ |
120,752 |
$ |
110,876 |
6.6% |
| Number of shares outstanding end of period |
121,226 |
120,866 |
99,358 |
22.0% |
|||
| Share price at close of market |
$ |
1.34 |
$ |
1.65 |
$ |
1.82 |
(26.4%) |
| Market capitalization |
$ |
162,443 |
$ |
199,429 |
$ |
180,832 |
(10.2%) |
| Book value per share |
$ |
0.98 |
$ |
1.00 |
$ |
1.12 |
(12.6%) |
(i) Adjusted shareholders' net income, adjusted shareholders' diluted earnings per share, and adjusted return on equity are non-GAAP measures the Company uses to measure its performance from continuing and recurring income from its core business.
Outlook
Note to readers: This section includes forward looking information and readers are reminded to refer to the discussion about forward looking information below.
Looking forward, management anticipates economic conditions in 2016 to include continued low interest rates and stable employment in most regions, with the exception of energy producing locations, along with continued positive demographic trends and immigration levels. These factors are expected to contribute to balanced housing markets in most of the Company's lending regions with the exception of energy producing regions where management expects softening of housing markets, with slowing purchase and sale activity and moderate increases in unemployment. This could lead to the risk of relatively higher arrears and slower mortgage volumes from these regions in 2016, but the negative trends are expected to be offset by stability and moderate growth in other regions of Canada.
The Company anticipates total sales of mortgages in 2016 to be in line with the higher than expected volumes experienced in 2015 but with lower relative renewal volumes as discussed below, leading to lower gain on sales than 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 in 2016 compared to the average experienced in 2015. The Company's 2015 mortgage lending results were very strong, with new mortgage origination volumes and margins better than expectations.
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 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 renewal volumes approximately 15% lower than 2015. Moving into 2017, renewal volumes are expected to increase over 2015 and 2016.
The Company is making significant investments in processes and people, including technology, risk management and internal audit, to both support its bank application, and realize on its strategic priorities. Moving forward 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.
Given relatively higher expenses combined with anticipated lower gains on sale in 2016, management expects slightly lower adjusted net income in 2016 compared to a very strong 2015, and improving earnings in 2017 compared to 2016. 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.
As discussed in the Bank Application section above, there remains uncertainly regarding the timing of the potential approval from Canada's Minister of Finance to operate as a federally regulated Schedule I bank. If the approval is granted management would introduce its deposit taking and uninsured mortgage products in a measured and prudent manner with the addition of other retail and consumer products following in future periods. Given the uncertainty of the timing of the bank application at this time, the Company is not expecting a material profit contribution from the launch of deposit taking and uninsured mortgage products in 2016. If the Company receives the approval in 2016, it anticipates that deposit taking and uninsured mortgage products could begin to contribute to revenue in 2017.
The Company's non-mortgage lending legacy businesses still include investments and assets associated with Private Equity, Real Estate and Case Goods which are in the process of being liquidated or run-off. In total these assets represent $1.6 million on the balance sheet at the end of 2015. These assets have associated fair value risk that could continue to create some minimal volatility in unadjusted earnings until they are realized. It is anticipated that the Private Equity investments and most of the Real Estate investments will be realized by the end of 2016 or early 2017.
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.
Conference Call
Street will host a conference call today, March 9, 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 |
||
| Replay (available for 2 weeks) |
416-849-0833; or 1-855-859-2056 |
56236684 |
Annual Meeting Notice
The Annual Meeting of Shareholders of Street Capital Group Inc. will be held at TMX Broadcast Centre, The Exchange Tower, 130 King Street West, Toronto, ON M5X 1J2 on Wednesday, June 15, 2016 at 4:00 p.m. local time. Shareholders and guests are invited to join Directors and Management for refreshments following the Annual Meeting. All shareholders are encouraged to attend.
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 December 31, 2015.
| (in thousands of $ except where defined) |
2014 |
2014 |
2014 |
2014 |
2015 |
2015 |
2015 |
2015 |
2013 |
2014 |
2015 |
|
| Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
|||||
| $ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||
| Revenue |
||||||||||||
| Net gain on sale of mortgages |
10,112 |
15,462 |
15,818 |
15,092 |
14,244 |
26,205 |
19,203 |
16,416 |
51,080 |
56,484 |
76,068 |
|
| Net interest and other income (loss) |
4,114 |
(34) |
1,760 |
(52) |
(106) |
151 |
227 |
(1,324) |
181 |
5,788 |
(1,052) |
|
| Total revenue |
14,226 |
15,428 |
17,578 |
15,040 |
14,138 |
26,356 |
19,430 |
15,092 |
51,261 |
62,272 |
75,016 |
|
| Expenses and fair value adjustments |
||||||||||||
| Operating expenses |
8,461 |
9,571 |
9,954 |
9,806 |
9,976 |
10,994 |
10,385 |
11,434 |
33,359 |
37,792 |
42,789 |
|
| Restructuring expenses |
- |
- |
- |
- |
- |
50,240 |
- |
- |
- |
- |
50,240 |
|
| Fair value (appreciation) depreciation |
(3,099) |
(6,420) |
(8,028) |
(9,436) |
2,710 |
(2) |
(2,783) |
11,967 |
(9,740) |
(26,983) |
11,892 |
|
| Income (loss) before income taxes, discontinued operations and |
8,864 |
12,277 |
15,652 |
14,670 |
1,452 |
(34,876) |
11,828 |
(8,309) |
27,642 |
51,463 |
(29,905) |
|
| Income taxes |
1,447 |
2,125 |
2,073 |
1,400 |
857 |
2,957 |
2,136 |
885 |
5,728 |
7,045 |
6,835 |
|
| Income (loss) from continuing operations |
7,417 |
10,152 |
13,579 |
13,270 |
595 |
(37,833) |
9,692 |
(9,194) |
21,914 |
44,418 |
(36,740) |
|
| Income (loss) from discontinued operations |
(11,782) |
169 |
11 |
8 |
8 |
(6) |
9 |
6 |
(8,649) |
(11,594) |
17 |
|
| Net (income) loss attributable to |
(2,061) |
(4,082) |
(5,378) |
(8,374) |
3,147 |
173 |
(3,025) |
6,393 |
(3,799) |
(19,895) |
6,688 |
|
| Net income (loss) attributable to shareholders |
(6,426) |
6,239 |
8,212 |
4,904 |
3,750 |
(37,666) |
6,676 |
(2,795) |
9,466 |
12,929 |
(30,035) |
|
| Basic and diluted net income (loss) per share |
||||||||||||
| Continuing operations |
0.07 |
0.06 |
0.08 |
0.05 |
0.04 |
(0.37) |
0.06 |
(0.02) |
0.16 |
0.25 |
(0.27) |
|
| Discontinued operations |
(0.13) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
(0.06) |
(0.12) |
0.00 |
|
| Basic and diluted net income (loss) per share |
(0.06) |
0.06 |
0.08 |
0.05 |
0.04 |
(0.37) |
0.06 |
(0.02) |
0.10 |
0.13 |
(0.27) |
|
| Adjusted net income |
4,318 |
3,732 |
5,551 |
3,834 |
3,305 |
8,767 |
6,909 |
4,792 |
12,174 |
17,435 |
23,773 |
|
| Adjusted net income per share |
0.04 |
0.04 |
0.05 |
0.04 |
0.03 |
0.09 |
0.06 |
0.04 |
0.12 |
0.17 |
0.21 |
|
| Return on equity |
(24.7%) |
26.3% |
32.2% |
18.1% |
13.3% |
(131.6%) |
22.8% |
(9.4%) |
9.4% |
12.4% |
(25.9%) |
|
| Adjusted return on equity |
16.6% |
15.7% |
21.8% |
14.1% |
11.7% |
30.6% |
23.5% |
16.0% |
12.1% |
16.7% |
20.5% |
|
| Net gain on sale as a % of mortgages sold |
0.74% |
0.80% |
0.70% |
0.69% |
0.88% |
0.88% |
0.84% |
0.77% |
0.66% |
0.73% |
0.84% |
|
| Assets under administration (in billions of $) |
18.21 |
19.27 |
20.38 |
21.59 |
22.16 |
23.38 |
24.30 |
24.75 |
17.52 |
21.59 |
24.75 |
|
| Mortgage sales (in billions of $) |
1.37 |
1.93 |
2.27 |
2.18 |
1.62 |
3.00 |
2.28 |
2.14 |
7.71 |
7.75 |
9.04 |
|
| Renewal volumes |
12.4% |
10.9% |
10.6% |
12.4% |
18.5% |
15.7% |
18.0% |
27.5% |
5.6% |
11.5% |
19.6% |
|
The following table sets out the Company's financial position as at December 31, 2015, September 30, 2015 and December 31, 2014.
| As at |
|||||||
| December 31, |
September 30, |
December 31, |
|||||
| (in thousands of $) |
2015 |
2015 |
2014 |
||||
| Assets |
|||||||
| Cash and cash equivalents |
$ |
8,846 |
$ |
10,325 |
$ |
23,022 |
|
| Restricted cash |
13,078 |
34,552 |
13,130 |
||||
| Deferred placement fees receivable |
46,442 |
45,236 |
38,749 |
||||
| Prepaid portfolio insurance |
66,672 |
64,776 |
50,888 |
||||
| Securitized mortgage loans |
167,762 |
101,837 |
50,318 |
||||
| Non-securitized mortgages and loans |
16,741 |
37,241 |
4,285 |
||||
| Portfolio Investments |
13,506 |
25,375 |
40,010 |
||||
| Deferred income tax assets |
14,135 |
13,163 |
9,939 |
||||
| Other assets |
13,333 |
17,274 |
17,994 |
||||
| Goodwill and intangible assets |
28,864 |
28,937 |
29,588 |
||||
| 389,379 |
378,716 |
277,923 |
|||||
| Assets of discontinued operations |
1,338 |
1,329 |
1,341 |
||||
| Total assets |
$ |
390,717 |
$ |
380,045 |
$ |
279,264 |
|
| Liabilities |
|||||||
| Bank facilities |
15,817 |
40,906 |
9,773 |
||||
| Loans payable |
8,972 |
9,553 |
9,134 |
||||
| Securitization liabilities |
167,380 |
101,213 |
50,546 |
||||
| Other liabilities |
75,013 |
95,939 |
77,091 |
||||
| 267,182 |
247,611 |
146,544 |
|||||
| Liabilities of discontinued operations |
1,166 |
1,167 |
1,167 |
||||
| Total liabilities |
268,348 |
248,778 |
147,711 |
||||
| Total shareholders' equity |
118,245 |
120,752 |
110,876 |
||||
| Non-controlling interests |
4,124 |
10,515 |
20,677 |
||||
| Total liabilities and equity |
$ |
390,717 |
$ |
380,045 |
$ |
279,264 |
|
SOURCE Street Capital Group Inc.
W.E. Gettings, CEO, Street Capital Group Inc., [email protected]; Jonathan Ross, CFA, LodeRock Advisors Inc., Inv. Relations, [email protected], Tel: (905) 334-0095
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