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.

W.E. Gettings, CEO, Street Capital Group Inc., [email protected]; Jonathan Ross, LodeRock Advisors Inc., Inv. Relations, [email protected], Tel: [phone]