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Edited Transcript of SCB.TO earnings conference call or presentation 8-May-19 11:00am GMT

Q1 2019 Street Capital Group Inc Earnings Call

TORONTO Jun 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Street Capital Group Inc earnings conference call or presentation Wednesday, May 8, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Duncan Hannay

Street Capital Group Inc. - President, CEO & Director

* Marissa Lauder

Street Capital Group Inc. - Executive VP & CFO

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Conference Call Participants

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* Victor Dri

National Bank Financial, Inc., Research Division - Associate

* Jonathan Ross

Loderock Advisors - Principal

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Presentation

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Operator [1]

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Hi, everyone. Welcome to the Street Capital Group first quarter results conference call. As a reminder, this call is being recorded on Wednesday, May 8, 2019. (Operator Instructions)

I would now like to turn the call over to Jonathan Ross, Head of Investor Relations for Street Capital Group. Please go ahead, Mr. Ross.

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Jonathan Ross, Loderock Advisors - Principal [2]

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Thanks, Joanna. Good morning, everyone, and thanks for joining us this morning. I'm joined on the call today by Duncan Hannay, Chief Executive Officer of Street Capital; and Marissa Lauder, Chief Financial Officer. Street Capital Group's first quarter 2019 financial results were released this morning. The press release, financial statements and MD&A are available on SEDAR as well as on our website at streetcapitalgroup.ca.

Before passing the call over to management, we would like to remind listeners that portions of today's discussion contain 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 conference call, the words may, plan, will, anticipate, believe, estimate, expect, intend and words of similar import are intended to identify any forward-looking statements. You should not put undue reliance on these forward-looking statements. They 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. Relevant risks and uncertainties include, without limitation, possible unanticipated changes in the company's capital requirements, regulatory requirements, mortgage insurance rules and the business and economic environment generally, including, but not limited to, Canadian housing market conditions and activity, interest rates, mortgage-backed securities markets, timing and execution of anticipated transactions, technology, employment conditions, taxation and competitive factors. Any of these factors, amongst others, could cause actual results to vary materially from current results or from the current -- 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, except as required by applicable securities laws. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

I will now pass the call over to Duncan Hannay, Chief Executive Officer of Street Capital Group.

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Duncan Hannay, Street Capital Group Inc. - President, CEO & Director [3]

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Thanks, Jon, and good morning, everyone. We appreciate you joining the call this morning. I am very pleased and proud of the progress our team made in the first quarter. Our renewed go-to-market strategy and focus on cost management drove meaningful improvement in the quarter, particularly in our prime mortgage business. This strategy, which we outlined in Q4 2018, calls out 3 important areas of focus: first, prime new mortgage originations; second, prime mortgage renewals; and third, loan origination systems and processes.

For prime new mortgage originations, we are placing renewed focus on new broker onboarding, deepening share of wallet and improving the end-to-end customer experience to drive new prime origination volume growth across both the insured and uninsured segments. These efforts have already begun to pay off. Prime new mortgage originations in Q1 were up 6% year-over-year in a sluggish real estate market. And our team drove meaningful market share improvement in the mortgage broker channel, improving Street Capital Bank's position by 2 places from #8 to #6, with overall share growing from 4.7% to 6.8% of funded volume compared to Q4 2018. This momentum has continued in Q2.

The second priority we outlined for shareholders was prime mortgage renewals. Our team entered 2019 with the benefit of better processes and an enhanced capability to target offers to renewing customers. Our focus here is retention and overall contribution versus the absolute renewal rate. While gain on sale rates remain pressured on renewals in a highly competitive environment, we are nonetheless satisfied with our performance in the first quarter. During the quarter, our team successfully renewed 71% of eligible mortgages, had gain on sale rates more than 1.5x higher than those generated on new prime originations.

On the subject of loan origination systems and processes, we have assembled teams focused on middle-office transformation and digital delivery to improve throughput, customer experience and the overall efficiency of the company's mortgage origination platform with the objective of solidifying our competitive advantage and growing overall market share. These teams have had a direct impact on our market share improvement in the quarter, and they are working on several key initiatives to build on this early success.

During Q1 and into Q2, we continue to experience solid high-quality demand for the Street Solutions mortgage product, and our portfolio continues to perform well from a credit and net interest margin perspective. We originated $120.3 million in Street Solutions mortgages, 22% higher than originations in Q1 2018. We continued to make good progress in gaining access to third-party broker deposit platforms in the quarter. However, in order for the bank to grow its portfolio of Street Solutions mortgages on balance sheet, it needs a commensurate increase in its level of regulatory capital given the bank's current internal capital targets. In 2019, the management team and Board of Street Capital continue to be keenly focused on deepening the bank's sources of funding and, importantly, strengthening its capital base so that we can grow our Street Solutions book and solidify our plans to deliver sustainable profitability.

I am very pleased with the bank's performance in Q1, and Q2 is off to a great start. However, I will reiterate my comments from last quarter to say that this is a long-term transformational journey. We have much more work to do. The management team and Board of Directors of Street Capital are both aligned and committed to seeing it through for the benefit of our stakeholders.

With that, I will pass it over to Marissa to walk you through our financial results.

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Marissa Lauder, Street Capital Group Inc. - Executive VP & CFO [4]

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Thanks, Duncan, and good morning, everyone. Reported EPS for Q1 was a loss of $1 -- $0.01 per share, flat with the loss of $0.01 in the same period last year. Adjusted EPS was flat in Q1, improved from a loss of $0.01 per share in Q1 2018. Adjusted EPS excludes the impact of $2.1 million restructuring charge taken in the quarter as we reduced our workforce by about 10%.

Total revenue was $13.3 million, up 15% from $11.6 million last year, reflecting higher prime originations and the net interest income earned from a larger Street Solutions portfolio. Prime insurable originations were $767.3 million for the quarter, up 6% from $723.9 million in the same quarter last year. Prime uninsurable originations were $61.6 million, up from $24.5 million in Q4 2018 and none last year. Increased funding and improvements in product pricing have led to higher originations in the prime uninsurable product and supports our broader mortgage shelf.

Gain on sale rates on prime originations improved sequentially compared to Q4 2018 as seasonally lower prime originations were more than offset by a 16 basis point improvement in gain on sale rates in the quarter. The net gain on sale rates from prime insurable mortgages were 69 basis points in Q1 compared to 51 basis points last quarter and 70 basis points 1 year ago. Increases in net gain on sale rates are primarily due to better market spreads and allocations. We do anticipate increasing competition and pricing pressure for prime insurable mortgages into Q2 2019. This could put some downward pressure on gain on sale rates compared to those realized in Q1 2019.

Prime renewals were $473.8 million in Q1, down from $519.7 million in Q1 2018 and were up from Q4 of 2018's $457.2 million. The decline over last year is due to both underlying -- the underlying maturity and prepayment profile of the portfolio available for new renewal and lower renewal rates this quarter compared to last year. Net gain on sale rates for renewal were 1.16% versus 1.29% last year. The decline in net gain on sale rates was expected due to higher acquisition costs, reflecting the increased proportion of renewals that were part of the discontinued loyalty program that ran from January 2011 to July 2015 as well as continued rate competition increasing -- is increasing rate discounting on renewals. As Duncan mentioned, we are squarely focused on balancing the renewal rate with maximizing profit contribution.

We originated $120.3 million in Street Solutions mortgages in Q1 compared to $98.3 million in Q1 of 2018 and $121.6 million in Q4 2018. This generated net interest income of $3.7 million on our nonsecuritized assets in Q1, up from $3.2 million last quarter and up significantly from $1.4 million in Q1 2018. This reflects the ongoing growth in the Street Solutions mortgage portfolio from $294 million at the end of Q1 2018 to $622 million at the end of this quarter.

The net interest margin also increased meaningfully to 2.11% in the quarter from 1.66% last year. Although the spread on Street Solutions over deposits was 2.5% in the quarter compared to 2.71% in Q1 2018, relative returns and the utilization of the bank's liquidity pool resources have improved. At the end of the quarter, deposits totaled $720.8 million, up from $638.7 million at the end of 2018. Deposits have terms ranging from 1 to 5 years at interest rates between 0.8% and 3.69%.

We continue to manage our funding and liquidity conservatively. And while liquidity balances have declined to $89 million at the end of the quarter from $112 million at the end of 2018, the decline is in the normal course of our operations and liquidity management practices. Our liquid assets are sized and managed with consideration of expected and planned cash inflows and outflows, including the funding of Street Solutions mortgages. Our liquidity metrics are well within our conservative internal targets and well above regulatory minimum. The bank's CET1 ratio at the end of the quarter was 18.2% and its leverage ratio was [9.10%], with both being above our internal targets.

In our quarterly MD&A, we have provided some updates to our 2019 targets as we outlined last quarter. Our targets for prime new originations, prime renewals and operating leverage remain consistent with those discussed in Q4. However, we are currently unable to provide new origination level targets for Street Solutions. While there is strong demand for the product than we could originate at higher levels, we need to manage the portfolio against the bank's current levels of available regulatory capital and funding and in particular off-balance-sheet funding. To do this, we need to manage the Street Solutions renewal volumes and new originations in tandem. This makes it difficult to provide new volume targets at this time. We will continue to maximize the profit contribution of the -- of Street Solutions within the bank's current constraint.

For new originations, we continue to expect an increase in originations in 2019 compared to 2018 and improvements in our broker market share. This is supported by a renewed go-to-market strategy, and we generated improved prime originations and market share in Q1, and the momentum has continued into Q2. For prime renewals, we continue to expect volumes to be in the range of $2.4 billion to $2.6 billion in 2019 and between $2.6 billion and $2.8 billion in 2020. We expect net gain on sale rates for renewals to continue at relatively lower rates for the reasons discussed. We also continue to target to achieve positive operating leverage in 2019. That concludes our prepared remarks this morning.

And I'll now pass the call back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Victor Dri from National Bank Financial.

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Victor Dri, National Bank Financial, Inc., Research Division - Associate [2]

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Yes, sorry. Just wanted to make sure I didn't miss anything on the prepared remarks. But on the Street Solutions origination guidance, I think it was $300 million to roughly $450 million as of February 19. Is that now -- like, how are we thinking of the -- is the guidance now removed and it's kind of on a go-see-forward basis? Or can you -- just a little bit of color there.

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Duncan Hannay, Street Capital Group Inc. - President, CEO & Director [3]

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Yes. That's $300 million to $450 million was the guidance in 2019, but for the reasons Marissa stated in her prepared remarks, we have decided to remove that guidance as we prudently manage the balance sheet through the course of 2019.

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Victor Dri, National Bank Financial, Inc., Research Division - Associate [4]

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Okay. I'm sorry. And do you mind just giving me a quick rundown of those again? I missed that earlier.

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Marissa Lauder, Street Capital Group Inc. - Executive VP & CFO [5]

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Well, we're managing 2 sides of the continuity of Street Solutions portfolio on our balance sheet. And I spoke of renewal volumes and new volumes. And it's a fairly new portfolio for us. And so getting the renewal volumes, estimating that, is it will take some time, so it's difficult for us to provide absolute guidance on new originations. And given that we do have some regulatory capital constraints as it relates to growing our balance sheet, there is only so much we can put on our balance sheet right now, which the second item would be our ability to fund these mortgages off balance sheet. It's very much determined by what the underlying economics are of doing that. Right now they haven't been favorable, so we haven't been able to sell Street Solutions off the -- off our balance sheet in the short term. We do hope to do that over the longer term or even the midterm, but we don't have certainty around that. So it's hard for us to provide the new origination guidance, for those reasons.

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Victor Dri, National Bank Financial, Inc., Research Division - Associate [6]

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Okay. That's perfect. That's helpful. Second question is on the prime uninsurable. I noticed the -- there was about -- origination sales of $62 million. Is that something -- is that kind of the level that we should be expecting for the rest of 2019? Or how are you guys thinking about that?

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Duncan Hannay, Street Capital Group Inc. - President, CEO & Director [7]

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We're not guiding on that specifically. We do expect that our prime origination volumes overall will continue to grow and we will see improved market share. We've seen that our prime uninsurable product has been much more competitive this year and thus the growth on the volume side. We do anticipate that, that funding will continue. And we've had good success in the second quarter, so I think, consistent with our comments, continued growth on the prime side and market share improvements, and that should carry across both the insured and uninsured segments.

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Operator [8]

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Thank you. We have no further questions. Ladies and gentlemen, this will conclude your conference call. We thank you for participating, and we ask that you please disconnect your lines.