Street Capital Announces 2017 Annual and Fourth Quarter Results

TORONTO, Feb. 28, 2018 /CNW/ - Street Capital Group Inc. ("Street Capital" or the "Company") (TSX: SCB), today announced its financial results for the three months and year ended December 31, 2017.

Fiscal 2017 Financial Highlights

All comparisons below are to Fiscal 2016, unless otherwise noted

• Total revenue (net of acquisition costs) was $60.2 million, compared to $68.3 million.
• Reported shareholders' diluted earnings per share were $0.02, compared to $0.13.
• Adjusted shareholders' diluted earnings per share ⁽ⁱ⁾ were $0.06, compared to $0.13.
• Adjusted return on tangible equity ⁽ⁱ⁾ was 7.7%, compared to 17.0%.
• Book value per share was $1.13, compared to $1.11.
• Mortgages under administration were $28.02 billion, compared to $27.70 billion.
• Total prime originations and renewals were $7.23 billion, compared to $9.37 billion.
• Total Street Solutions originations were $203.7 million in 2017.

Q4-2017 Financial Highlights

All comparisons below are to Q4-2016, unless otherwise noted

• Total revenue (net of acquisition costs) was $14.1 million, compared to $13.1 million.
• Reported shareholders' diluted earnings per share were $0.01 compared to $0.00.
• Adjusted shareholders' diluted earnings per share ⁽ⁱ⁾ were $0.01, compared to $0.02.
• Adjusted return on tangible equity ⁽ⁱ⁾ was 6.1%, compared to 7.6%.
• Total prime originations and renewals were $1.67 billion, compared to $2.46 billion.
• Total Street Solutions originations were $62.1 million in Q4-2017.

"2017 was a challenging year for small and mid-cap Canadian mortgage lenders, with pervasive regulatory change and market dynamics impacting the competitive landscape, operating results and sector valuations," said Duncan Hannay, Chief Executive Officer of Street Capital Group Inc. "Despite these headwinds, 2017 was a year of substantial progress for Street Capital. We launched Canada's newest Schedule I bank on February 1st and proceeded to generate strong early results from our Street Solutions uninsured mortgage program, growing from a standing start to over $200 million in originations for the year. We anticipate continued volatility in the mortgage market in the short-term, as lenders and borrowers adjust to regulatory changes and the impact on the new competitive dynamic. We are not immune to these challenges; however, we view these pressures as transitory as we transform from a mono-line prime insurable mortgage model to a diversified, modern, digitally-enabled banking platform. The management team and Board of Directors are aligned with shareholders and squarely focused on optimizing and leveraging Street Capital's strengths to drive sustained earnings growth, ROE and shareholder returns in the mid and long term."

Business Outlook

Note to readers: This section includes forward-looking information and is qualified in its entirety by the discussion about Forward-Looking Information, below.

2017 marked another year of change in the mortgage industry, and for the Company and its wholly owned subsidiary, Street Capital Bank of Canada ("Street Capital Bank" or "the Bank"). While dealing with changes in mortgage insurance rules, a new bank license, and new leadership, the Company was able to successfully launch its deposit platform and its Street Solutions uninsured mortgage offering, and also developed a set of strategic priorities to innovate and grow the business in 2018 and beyond. Financial results in 2017 were disappointing, reflecting a decline in prime mortgage originations as the Company's addressable market in the prime insurable  market was materially reduced following the Department of Finance mortgage insurance eligibility rule changes in late 2016.

2018 will be both a pivotal and foundational year for the Company as it continues to adapt to the changing business and market landscape, grows its balance sheet, builds the foundational elements to enable realization of its strategy, and improves its financial performance. The Company recognizes that challenges remain in the market. The business model, by its nature, is affected by the strength and health of the mortgage and real estate markets, as well as the changing regulations and policies that govern these markets, and the Company's financial performance is directly affected by these elements. Part of the Company's strategic imperative over the medium to long term is to transform the business model from a mono-line prime mortgage originator into a full suite mortgage lender with access to multiple on- and off-balance sheet funding channels to both support growth objectives and diversify revenue sources.

Beginning in 2018 the Company has begun focusing on the following Strategic Priorities:

1.  Diversify its Funding Sources

• Increase access to Broker GIC channels
• Develop capabilities for direct savings and deposits
• Leverage capital market solutions for mortgage funding

2.  Expand its Addressable Markets

• Build its Street Solutions uninsured portfolio
• Launch a prime uninsurable mortgage product
• Evaluate and enter new product offerings adjacent to a mortgage

3.  Strengthen its Broker and Client Experiences

• Evaluate and improve end-to-end processes
• Reinforce a customer-centric culture

4.  Build a Lean and Scalable Operation

• Improve operating efficiency across the Company
• Strengthen controls and risk management

5.  Drive Customer Renewal and Retention

• Maximize the financial returns of the renewal portfolio
• Reduce mid-term liquidation rates

Regulatory Developments

Changes to Guideline B-20 Residential Mortgage Underwriting Practices and Procedures

On October 17, 2017, OSFI released amendments to Guideline B-20–Residential Mortgage Underwriting Practices and Procedures ("Guideline B-20") that became effective on January 1, 2018. The basic framework of Guideline B-20 has not changed:  the five fundamental principles for sound residential mortgage underwriting remain. However, OSFI tightened and clarified its expectations, and introduced new expectations, namely:

• Requiring a GDS/TDS stress test for all uninsured mortgages of the greater of i) 2.00% above the contractual interest rate, or ii) the five-year benchmark rate published by the Bank of Canada;
  
  
• Requiring that Loan-to-Value ("LTV") measurements remain dynamic and adjust for changes in local market conditions in order to accurately reflect the associated risks; and
  
  
• Expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent LTV limits, or other underwriting policy or legal limitations.

These changes in Guideline B-20 have the potential to reduce the size of mortgage a borrower may qualify for, as well as require more documentation for self-employed borrowers, and therefore reduce the level of uninsured mortgage lending activity originated by OSFI-regulated financial institutions. However, management is maintaining its previously outlined origination targets for Street Solutions, given the demand experienced for the product, and the fact that the targets are relatively modest compared to the overall size of the addressable market.

There remains a great deal of uncertainty in the housing 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.

Market Conditions 

The tighter mortgage lending rules from regulatory changes over the last two years, the likelihood of higher interest rates, and a forecasted decline in GDP growth are expected in combination to lead a general softening in housing activity in 2018. Management views a general softening as a positive course towards more normalized and sustainable housing markets. Current forecasts continue to predict relatively stable employment and high immigration targets. These factors, combined with a tight housing supply in key economic centers, continue to support the Company's targets in its lending regions. Management, along with its business partners, will continue to monitor the economic and housing market conditions along with the credit quality in local regions, and will adjust underwriting criteria and origination volumes as circumstances warrant.

Prime Mortgage Originations

The Department of Finance mortgage insurance eligibility changes made in late 2016 significantly reduced the Company's prime mortgage volumes and its financial performance in 2017. The mortgage insurance eligibility rule changes materially reduced the size of the prime insurable mortgage market and competition for these mortgages increased. While the Company was actively engaged in securing funding for prime mortgages that no longer qualified for insurance (i.e.:  prime uninsurable mortgages), it had only limited access to this funding in 2017.

In 2018, the Company expects that competition for prime insurable mortgages will remain high and that overall prime insurable mortgage activity will be flat to moderately declining compared to 2017. This view reflects the current economic forecasts, moderating housing prices, and expected interest rate increases. Rising bond yields and price competition for prime insurable mortgages have continued to put negative pressure on the gain on sale rates earned for these mortgages in late 2017 and into 2018, and it is too early to determine when this pressure might subside.

The Company has continued to pursue options for funding prime uninsurable mortgages and is cautiously optimistic some funding will become available in the first half of 2018, allowing it to selectively offer new prime uninsured products and expand its product suite. Financial returns for the product are still uncertain, but could add positively to revenue in 2018.  

Prime Mortgage Renewals

Softness in new originations of prime insurable mortgages will continue to be partly offset by the Bank's expected highly profitable renewal activity in 2018. Based on the maturity profile of the MUA, the Bank expects to experience increases in renewal activity in 2018 in the range of $2.20 - $2.40 billion.  To optimize this revenue stream, the Bank will continue to focus on its service and retention activities. Consistent with the gain on sale rate pressure for new prime mortgage sales, renewal gain on sale rates also face the same pressures. Additionally, the Company expects an increase of up to 10 bp in the renewal acquisition expense rates as mortgages originated under the broker Loyalty commission program, which was discontinued in 2015, start to renew in greater numbers. The Bank's almost $28 billion of prime 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. It should also be noted that the stress test associated with the recent changes to Guideline B-20, which applies to all refinances of mortgages or a change in mortgage lender, will potentially buoy renewal rates in 2018 and beyond. Management will monitor this carefully.

Street Solutions Uninsured Residential Mortgage Lending

The Bank launched its uninsured mortgage product, Street Solutions, in Q2 2017. The market response was very positive and demand was very strong, with many existing mortgage broker partners welcoming another provider in this segment. In mid-October 2017 the Bank put a hold on new commitments for closings in 2017 as it had met its funding targets for that year, but continued to accept commitments for 2018. The Bank is experiencing continued strong demand for the Street Solutions product, at high levels of credit worthiness, and expects to meet its target originations of $600 - $700 million for this product in 2018 with net interest margins within 2.0% - 2.35% for those funded on-balance sheet.

As discussed above, the changes to underwriting standards employed by federally regulated financial institutions in OSFI Guideline B-20, which came into effect in January 2018, have not changed management's target Street Solutions origination volumes given the relatively modest size of the Company's targets compared to the projected size of the addressable market.

Funding and Liquidity

As noted in the Company's Management's Discussion and Analysis for the Fourth Quarter and Year Ended December 31, 2017(the "MD&A"), under Prime Insurable Residential Lending, when investors purchase prime insurable mortgages at commitment, the Company transfers substantially all of the risks and rewards of the ownership of the mortgage. The Company's access to this funding is more than adequate, and the Bank remains competitive in this mortgage segment.

Also, as noted above, the Company continues to explore alternatives for funding prime uninsurable mortgages and is cautiously optimistic that some funding will available in the first half of 2018.

In order to fund its on-balance sheet loans and liquid assets (e.g.:  Street Solutions mortgages, prime uninsurable mortgages, stamped mortgages, and bridge loans), the Bank offers a full product suite of CDIC insurance-eligible retail GICs ranging in terms from 1 to 5 years, including a 90-day cashable option. Currently, the Bank's GIC distribution strategy is focused on the third-party deposit broker network, including IIROC, MFDA, RDBA and MGA members. Management believes the Bank is well-positioned to penetrate this channel, and has recently hired a business development manager who is charged with diversifying the Bank's deposit broker relationships. Success in building a well-diversified portfolio of stable retail term deposits will enable the Bank to meet its targets for uninsurable mortgage originations.

As also discussed in the MD&A, the Bank has a secondary source of funding for prime insurable mortgages, through their securitization. However, when the underlying mortgages remain on the Bank's balance sheet, they attract a commensurate increase in regulatory capital in the calculation of the Bank's leverage ratio, which management believes is an inefficient use of its capital.

Operating Expenses

The Company continues to target the achievement of positive operating leverage in 2018. This will involve careful management of expenses, as the Company balances improving efficiency against making the appropriate investments in the people and technology that will enable strategic priorities and the strengthening of the Company's risk and compliance management programs.

FINANCIAL TARGETS – 2018 to 2020

Note: The Bank may not realize the financial targets 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.

Financial Highlights

The following tables set out the financial highlights for the three months and year ended December 31, 2017:

Reconciliation of Shareholders' Net Income to Adjusted Shareholders' Net Income

2017 Review of Results

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 $317 million at December 31, 2017. This represents a real and sustainable tax advantage as the Company is not paying cash taxes.

Dividends
The Company and its management are committed to consistently creating shareholder value. At the present time, this is best achieved through the retention of earnings and the allocation of capital to the business opportunities within the growing potential of the bank platform. Over the longer term, 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. 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 NCIB expired on March 22, 2017 and was subsequently renewed. The renewed NCIB will expire on March 22, 2018. The Company does not intend to renew the NCIB in March.

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. During 2017, the Company did not purchase any additional common shares through the NCIB.

Further Information
Please also refer to the Company's 2017 Consolidated financial Statements and Fourth Quarter and Year Ended December 31, 2017 Management's Discussion and Analysis, which are available on the Company's website (www.streetcapital.ca) and on SEDAR (www.sedar.com).

Conference Call
Street will host a conference call today, Wednesday, February 28, 2018 at 8:00 a.m. ET to discuss its financial results. Duncan Hannay, Chief Executive Officer of Street, will chair the call with Marissa Lauder, Chief Financial Officer of Street.

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.

Forward-Looking Statements
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, its gain on sale rates and net interest margins earned, 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.

The following table sets out financial highlights of the Company's consolidated quarterly results of operations for the eight quarters ended December 31, 2017.

The following table sets out the Company's consolidated financial position as at December 31, 2017, September 30, 2017 and December 31, 2016. 

SOURCE Street Capital