Street Capital Announces 2016 First Quarter Results
Gain on sale of mortgages $26.9 million; adjusted shareholders' diluted EPS of $0.02
TORONTO, May 11, 2016 /CNW/ - Street Capital Group Inc. ("Street" or the "Company") (TSX: SCB), today announced financial results for the three months ended March 31, 2016.
Q1-2016 Financial Highlights
All comparisons below are to Q1-2015, unless otherwise noted
- Total revenue was $13.2 million in Q1-2016 compared to $14.1 million.
- Net gains on sale of mortgages were $12.6 million, compared to $14.2 million.
- Adjusted shareholders' diluted earnings per share (i) were $0.02, compared to $0.03.
- Street was #6 in the mortgage broker channel in Q1-2016, with 7.6% market share.
- Mortgages under administration were $25.02 billion, up 12.9% from $22.16 billion.
- Mortgages sold were $1.52 billion in Q1-2016, compared to $1.62 billion.
- Renewals were 21.7% of total mortgages sold in Q1-2016, compared to 18.5%.
- The serious arrears rate (iv) was 0.13% at the end of Q1-2016 compared to 0.21%.
"As a management team, we are heavily invested in this company for a very good reason. We are confident that we are building a platform that will drive solid revenue and earnings growth for many years to come," said Ed Gettings, Chief Executive Officer of Street Capital Group Inc. "While Q1 mortgage sales were lower than last year, as we implemented underwriting adjustments during the quarter in preparation to become a Schedule I bank, we have seen strong momentum building for the spring and summer markets. As a company, we are already looking out to 2017. We expect solid earnings growth as the mortgage renewal cycle starts to track the growth in mortgage sales over the past five years."
Financial Highlights
The following tables set out the financial highlights for the three months ended March 31, 2016:
| (in thousands of $, except where defined) |
For the three months ended or as at |
% Change |
||||||
| March 31, |
December 31, |
March 31, |
March 2015 to |
|||||
| 2016 |
2015 |
2015 |
March 2016 |
|||||
| Financial performance |
||||||||
| Shareholders' net income (loss) |
$ |
3,003 |
$ |
(2,795) |
$ |
3,750 |
(19.9%) |
|
| Adjusted shareholders' net income (i) |
$ |
2,444 |
$ |
4,792 |
$ |
3,305 |
(26.0%) |
|
| Shareholders' diluted earnings (loss) per share |
$ |
0.02 |
$ |
(0.02) |
$ |
0.04 |
(50.0%) |
|
| Adjusted shareholders' diluted earnings per share (i) |
$ |
0.02 |
$ |
0.04 |
$ |
0.03 |
(33.3%) |
|
| Return on equity |
10.0% |
(9.4%) |
13.3% |
(24.8%) |
||||
| Adjusted return on equity (i) |
8.1% |
16.0% |
11.7% |
(30.8%) |
||||
| Mortgages sold and assets under administration |
||||||||
| Mortgages sold |
$ |
1,518,423 |
$ |
2,140,617 |
$ |
1,617,090 |
(6.1%) |
|
| Mortgages under administration (in billions of $) |
$ |
25.02 |
$ |
24.75 |
$ |
22.16 |
12.9% |
|
| Gain on sale of mortgages |
$ |
26,883 |
$ |
35,729 |
$ |
31,121 |
(13.6%) |
|
| Gain as a % of mortgages sold |
1.77% |
1.67% |
1.92% |
(7.8%) |
||||
| Acquisition expenses |
$ |
14,286 |
$ |
19,313 |
$ |
16,877 |
(15.4%) |
|
| Acquisition expenses as % of mortgages sold |
0.94% |
0.90% |
1.04% |
(9.6%) |
||||
| Net gain on sale of mortgages |
$ |
12,597 |
$ |
16,416 |
$ |
14,244 |
(11.6%) |
|
| Net gain as a % of mortgages sold |
0.83% |
0.77% |
0.88% |
(5.7%) |
||||
| Operating expenses (ii) |
$ |
9,885 |
$ |
11,434 |
$ |
9,976 |
(0.9%) |
|
| Operating expenses as % of mortgages sold |
0.65% |
0.53% |
0.62% |
4.8% |
||||
| Credit quality |
||||||||
| Total portfolio serious arrears rate (iv) |
0.13% |
0.14% |
0.21% |
(38.1%) |
||||
| Average beacon (iii) |
743 |
742 |
739 |
0.5% |
||||
| Average loan to value ratio (iii) |
81.4% |
81.7% |
82.4% |
(1.2%) |
||||
| Average total debt service ratio (iii) |
36.2% |
36.2% |
36.1% |
0.3% |
||||
| Equity and share performance |
||||||||
| Shareholders' equity |
$ |
121,998 |
$ |
118,245 |
$ |
115,024 |
6.1% |
|
| Number of shares outstanding end of period |
122,154 |
121,226 |
99,903 |
22.3% |
||||
| Share price at close of market |
$ |
1.29 |
$ |
1.34 |
$ |
2.11 |
(38.9%) |
|
| Market capitalization |
$ |
157,579 |
$ |
162,443 |
$ |
210,795 |
(25.2%) |
|
| Book value per share |
$ |
1.00 |
$ |
0.98 |
$ |
1.15 |
(13.0%) |
|
| (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. |
| (ii) |
Operating expenses are net of any restructuring costs or recoveries. |
| (iii) |
Calculated on a weighted average basis at origination. |
| (iv) |
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. |
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 Fourth Quarter and Annual 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 has implemented various operational changes in order to address OSFI observations and is now awaiting confirmation that these changes have been adequately implemented. 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
Between March 31, 2016 and April 30, 2016, under the Normal Course Issuer Bid that became effective on March 23, 2016, the Company purchased 97,616 of its common shares at an average price of $1.31 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 below.
Economic Conditions:
Looking forward, management continues to anticipate 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. 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 stability and moderate growth in other regions of Canada.
2016:
- The Company still anticipates total sales of mortgages in 2016 to at least be in line with the volumes experienced in 2015, but with lower relative renewal volumes as discussed below, which will perhaps lead to lower gains on sale 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 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 12 months.
- 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 to build capabilities in support of its strategic objective of building a multi-product, diversified financial institution. Given these investments in its future, combined with perhaps lower gains on sale this year, the Company anticipates slightly lower adjusted net income in 2016 than 2015.
- 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.
2017:
- Looking to 2017, the Company expects growth in prime mortgage volumes in line with market growth.
- In 2017, renewal volumes are expected to increase by about 10 – 15% over 2015.
- The Company expects higher profitability beyond 2016 as revenue begins to match expenditures related to building a multi-product, diversified financial institution.
- If the Company receives approval in 2016 to operate as a Schedule I bank, it anticipates that deposit taking and uninsured mortgage products could begin to contribute to revenue in 2017. Assuming the Company launches bank activities in late 2016, management estimates these activities could add 2-5% to revenue in 2017 and 10-20% in 2018 when compared to 2015.
Tax loss carryforwards:
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 $307 million at the end of Q1 2016, and the Company does not expect to pay income tax for many years.
Non-mortgage lending legacy businesses
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 $2.6 million on the balance sheet at March 31, 2016. 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 in 2017.
Shareholders' Equity and Updated Share Information
At April 30, 2016, the Company had 122,064,310 common shares issued and outstanding. In addition, there were 3,138,031 unexercised stock options, which are, or will be, exercisable to purchase common shares for maximum proceeds of $3.59 million.
Conference Call
Street will host a conference call today, May 11, 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 |
1967898 |
Annual Meeting Notice
The Annual Meeting of Shareholders of Street Capital Group Inc. will be held at the 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 March 31, 2016.
| (in thousands of $ except where defined) |
2014 |
2014 |
2014 |
2015 |
2015 |
2015 |
2015 |
2016 |
2015 |
2016 |
|
| Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q1 |
Q1 |
||
| $ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||
| Revenue |
|||||||||||
| Net gain on sale of mortgages |
15,462 |
15,818 |
15,092 |
14,244 |
26,205 |
19,203 |
16,416 |
12,597 |
14,244 |
12,597 |
|
| Net interest and other income (loss) |
(34) |
1,760 |
(52) |
(106) |
151 |
227 |
(1,324) |
628 |
(106) |
628 |
|
| Total revenue |
15,428 |
17,578 |
15,040 |
14,138 |
26,356 |
19,430 |
15,092 |
13,225 |
14,138 |
13,225 |
|
| Expenses and fair value adjustments |
|||||||||||
| Operating expenses |
9,571 |
9,954 |
9,806 |
9,976 |
10,994 |
10,385 |
11,434 |
9,885 |
9,976 |
9,885 |
|
| Restructuring expenses (recoveries) |
- |
- |
- |
- |
50,240 |
- |
- |
(813) |
- |
(813) |
|
| Fair value (appreciation) depreciation |
(6,420) |
(8,028) |
(9,436) |
2,710 |
(2) |
(2,783) |
11,967 |
352 |
2,710 |
352 |
|
| Income (loss) before income taxes, |
12,277 |
15,652 |
14,670 |
1,452 |
(34,876) |
11,828 |
(8,309) |
3,801 |
1,452 |
3,801 |
|
| Income taxes |
2,125 |
2,073 |
1,400 |
857 |
2,957 |
2,136 |
885 |
1,111 |
857 |
1,111 |
|
| Income (loss) from continuing operations |
10,152 |
13,579 |
13,270 |
595 |
(37,833) |
9,692 |
(9,194) |
2,690 |
595 |
2,690 |
|
| Income (loss) from discontinued operations |
169 |
11 |
8 |
8 |
(6) |
9 |
6 |
9 |
8 |
9 |
|
| Net (income) loss attributable to |
(4,082) |
(5,378) |
(8,374) |
3,147 |
173 |
(3,025) |
6,393 |
304 |
3,147 |
304 |
|
| Net income (loss) attributable to |
6,239 |
8,212 |
4,904 |
3,750 |
(37,666) |
6,676 |
(2,795) |
3,003 |
3,750 |
3,003 |
|
| Basic and diluted net income (loss) per share |
|||||||||||
| Continuing operations |
0.06 |
0.08 |
0.05 |
0.04 |
(0.37) |
0.06 |
(0.02) |
0.02 |
0.04 |
0.02 |
|
| Discontinued operations |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
| Basic and diluted net income (loss) per share |
0.06 |
0.08 |
0.05 |
0.04 |
(0.37) |
0.06 |
(0.02) |
0.02 |
0.04 |
0.02 |
|
| Adjusted net income |
3,732 |
5,551 |
3,834 |
3,305 |
8,767 |
6,909 |
4,792 |
2,444 |
3,305 |
2,444 |
|
| Adjusted net income per share |
0.04 |
0.05 |
0.04 |
0.03 |
0.09 |
0.06 |
0.04 |
0.02 |
0.03 |
0.02 |
|
| Return on equity |
26.3% |
32.2% |
18.1% |
13.3% |
(131.6%) |
22.8% |
(9.4%) |
10.0% |
13.3% |
10.0% |
|
| Adjusted return on equity |
15.7% |
21.8% |
14.1% |
11.7% |
30.6% |
23.5% |
16.0% |
8.1% |
11.7% |
8.1% |
|
| Net gain on sale as a % of mortgages sold |
0.80% |
0.70% |
0.69% |
0.88% |
0.88% |
0.84% |
0.77% |
0.83% |
0.88% |
0.83% |
|
| Mortgages under administration (in billions of $) |
19.27 |
20.38 |
21.59 |
22.16 |
23.38 |
24.30 |
24.75 |
25.02 |
22.16 |
25.02 |
|
| Mortgage sales (in billions of $) |
1.93 |
2.27 |
2.18 |
1.62 |
3.00 |
2.28 |
2.14 |
1.52 |
1.62 |
1.52 |
|
| Renewal volumes |
10.9% |
10.6% |
12.4% |
18.5% |
15.7% |
18.0% |
27.5% |
21.7% |
18.5% |
21.7% |
The following table sets out the Company's financial position as at March 31, 2016 and December 31, 2015.
| As at |
|||||
| March 31, |
December 31, |
||||
| (in thousands of $) |
2016 |
2015 |
|||
| Assets |
|||||
| Cash and cash equivalents |
$ |
7,836 |
$ |
8,846 |
|
| Restricted cash |
13,726 |
13,078 |
|||
| Deferred placement fees receivable |
46,328 |
46,442 |
|||
| Prepaid portfolio insurance |
68,138 |
66,672 |
|||
| Securitized mortgage loans |
164,408 |
167,762 |
|||
| Non-securitized mortgages and loans |
5,251 |
16,741 |
|||
| Portfolio Investments |
5,160 |
13,506 |
|||
| Deferred income tax assets |
13,975 |
14,135 |
|||
| Other assets |
17,329 |
13,333 |
|||
| Goodwill and intangible assets |
28,678 |
28,864 |
|||
| 370,829 |
389,379 |
||||
| Assets of discontinued operations |
1,246 |
1,338 |
|||
| Total assets |
$ |
372,075 |
$ |
390,717 |
|
| Liabilities |
|||||
| Bank facilities |
12,049 |
15,817 |
|||
| Loans payable |
6,795 |
8,972 |
|||
| Securitization liabilities |
163,028 |
167,380 |
|||
| Other liabilities |
69,422 |
75,013 |
|||
| 251,294 |
267,182 |
||||
| Liabilities of discontinued operations |
1,166 |
1,166 |
|||
| Total liabilities |
252,460 |
268,348 |
|||
| Total shareholders' equity |
121,998 |
118,245 |
|||
| Non-controlling interests |
(2,383) |
4,124 |
|||
| Total liabilities and equity |
$ |
372,075 |
$ |
390,717 |
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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