Canada Research Street Capital Group - Raymond … its current position among leaders in its...

Canada Research Published by Raymond James Ltd.

Please read domestic and foreign disclosure/risk information beginning on page 47 and Analyst Certification on page 45. Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

Street Capital Group July 11, 2016 SCB-TSX Company Report - Initiation of Coverage Michael Overvelde CFA, CPA, CA | 416.777.4943 | [email protected]

Brenna Phelan CFA, CPA, CA (Associate) | 416.777.7042 | [email protected]

Diversified Financials

The (Not So) New Kid on the Block; Initiating with an Outperform

Recommendation Street Capital Group (Street) is a Canadian-based financial services company that currently operates purely as an originator of prime mortgages through the independent mortgage broker channel. From its current position among leaders in its existing market, in terms of both the volume and quality of its mortgage originations, Street is about to expand its market scope by entering the relatively high-growth, high-margin and less concentrated near-prime mortgage market once it receives its banking license, which it expects to be awarded in 2H16. As a bank issuing deposit-funded near-prime mortgages, we expect Street will enjoy several years of above-average growth of both assets and earnings while adding relatively steady net interest income to a currently gains-heavy revenue mix. We initiate coverage with an Outperform and a target price of C$1.65.

Analysis Street Ranks Among Leaders in its Existing Core Market – Street consistently ranks

among the leading originators of prime residential mortgages through the mortgage broker channel in Canada (e.g., #3 in 2015 with 8.8% share) owing to the strength and size of its network of broker relationships and the competitiveness of its product and service offering. It is led by an accomplished management team and has a history of impressive underwriting success, consistently achieving lower arrears rates than those of the large Canadian banks.

Entry Into the Near-Prime Mortgage Market Offers Significant Growth Potential – Street is in the final phase of qualifying for its license to operate as a Schedule I bank, which will enable it to raise deposit funding and to originate and hold near-prime mortgages and other consumer loan products. Entry into these new markets offers potential for material earnings expansion over the medium term – Street expects an incremental revenue contribution of 10%-20% from new products as early as 2018E. Growth-related risks are moderate, in our opinion, considering its existing presence in the mortgage broker market, its underwriting experience, its conservative roll-out strategy and its recently-enhanced control structure.

Street is a 2017 Growth Story; 2016 is a Year of Transition – We expect EPS to decline in 2016 due to both a temporary reduction in mortgage renewal volumes and an inflated cost base that has been built out ahead of its transition to bank status. We expect an earnings rebound in 2017 as the pace of renewals normalizes and new near-prime mortgage issuance begins to contribute to earnings, and for growth of near-prime volumes to drive above-average earnings growth in 2018 (and beyond).

Valuation Our C$1.65 target price is based on a 2017E P/E of 7.5x, slightly below the sector’s current average multiple of 8.1x considering its superior medium-term growth outlook and valuable tax shield, offset by its relatively small size and growth-related risks.

Adjusted 1Q 2Q 3Q 4Q Full Revenues BVPS EPS Mar Jun Sep Dec Year (000s)

2015A C$0.03 C$0.09 C$0.06 C$0.04 C$0.21 C$75,016 C$0.98

2016E 0.02A 0.07 0.06 0.04 0.19 75,452 1.16

2017E 0.02 0.07 0.07 0.06 0.22 86,147 1.38

2018E 0.04 0.09 0.08 0.07 0.29 101,657 1.65

Source: Raymond James Ltd., Thomson One

Outperform 2 C$1.65 target price

Current Price ( Jul-06-16 ) C$1.24 Total Return to Target 33% 52-Week Range C$2.37 - C$1.09 Suitability High Risk/Growth

Market Data Market Capitalization (mln) C$151 Current Net Debt (mln) C$11 Enterprise Value (mln) C$162 Shares Outstanding (mln, f.d.) 121.8 10 Day Avg Daily Volume (000s) 17 Dividend/Yield C$0.00/n/a

Key Financial Metrics 2015A 2016E 2017E 2018E

P/E 5.8x 6.6x 5.5x 4.3x

Price-to-Book Ratio 1.3x 1.1x 0.9x 0.8x

Adjusted ROE 20.5% 17.6% 17.8% 19.0%

Mortgage Originations (mln) C$9,037 C$9,084 C$10,003 C$10,779

Mortgages Under Admin (mln) C$24,750 C$28,618 C$32,652 C$36,690

Company Description Street Capital Group is one of the largest non-bank mortgage lenders in Canada. It currently offers prime residential mortgages through the independent broker channel and has plans to begin issuing term deposits to fund its entry into the near-prime mortgage segment.

Canada Research | of 50 Street Capital Group

Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2

Table of Contents

Investment Overview........................................................................................................................................... 3

Business Overview ............................................................................................................................................... 5

Snapshot of Street’s Current Business Model ......................................................................................... 5

Bank Status Will Open New Growth Opportunities ................................................................................ 6

The Evolution of Street Capital ............................................................................................................................ 7

A Look in the Rear-View Mirror: The Counsel Years (1979-2013) ........................................................... 7

Shifting Gears to Become a Pure-Play Mortgage Lender (2013-2016) .................................................... 8

Approaching Cruising Speed as Street Capital Bank (Beyond 2016) ....................................................... 10

The Growth Opportunity as Street Bank ............................................................................................................. 11

Ready for the Rubber to hit the Road ..................................................................................................... 11

The Alt-A Growth Opportunity ................................................................................................................ 11

Alt-A Growth Will Initially be Self-Imposed ............................................................................................. 13

Our Alt-A Growth Forecasts Are Modest and Consistent With Guidance ............................................... 15

Beyond Alt-A: Evolution towards a Multi-Product Bank ......................................................................... 15

Prime Mortgage Origination Outlook .................................................................................................................. 16

Canadian Mortgage Market – Trends and Outlook ................................................................................. 17

Mortgage Broker Share of Originations .................................................................................................. 21

Street’s Share of Broker Channel Originations ........................................................................................ 21

Renewal Volumes – Driver of 2017 Growth ............................................................................................ 22

Financial Forecasts ............................................................................................................................................... 24

Pristine Credit Quality as a Differentiator ............................................................................................................ 29

Funding Considerations ....................................................................................................................................... 31

Capital Considerations ......................................................................................................................................... 31

Valuation & Recommendation ............................................................................................................................ 32

Appendix A: Financial Statements ....................................................................................................................... 37

Appendix B: Management & Board of Directors ................................................................................................. 40

Appendix C: Share Ownership ............................................................................................................................. 41

Appendix D: Risks ................................................................................................................................................ 42

Street Capital Group Canada Research | of 50


Investment Overview

Street Capital is a pure-play originator of high-quality prime mortgages through the independent broker channel that is about to expand the scope of its offerings and enter a new growth phase. Following receipt of its license to operate as a Canadian Schedule I Bank, which it expects to be awarded in 2H16, Street will be able to begin issuing deposits to fund its entry into the relatively high-growth, high-margin and less concentrated near-prime mortgage market. Beginning in 2017E, we expect Street will enjoy several years of above-average earnings growth while generating a cash return on equity in the ~25% range.

We initiate coverage of Street with an Outperform rating and a target price of C$1.65. Key considerations supporting our favourable investment outlook include the following:

Street is a Leader in its Core Market – Street consistently ranks among the leading originators of prime residential mortgages through the mortgage broker channel in Canada. In 2015, it ranked as the third-largest originator in this channel with 8.8% market share. Over the past four years its market share has averaged 9.4%, a testament to the strength and size of its network of broker relationships and the competitiveness of its product and service offering.

Exceptionally Strong Credit Quality Attracts Funding Liquidity – Critical to Street’s business model is its mortgage underwriting capability, which to-date has been exceptional. The serious arrears rate on mortgages originated by Street (e.g., 14 bps in 2015) is consistently lower than that of the large Canadian banks (2015 average of 27 bps), which helps sustain investor demand for Street-originated mortgages (i.e., providing it with liquidity to support growth of its insured mortgage business).

It is led by an Experienced and Accomplished Management Team – The CEO and COO of Street were co-founders of the business nine years ago, and had previously worked together at the helm of a leading competitor in the same market niche. Led by this team, Street has experienced rapid and consistent growth combined with relatively low arrears rates on originated mortgages since its inception. The company’s CFO joined more recently, adding complementary experience from her time with both the leading issuer of near-prime mortgages in Canada and, prior to that, the regulatory agency that will oversee Street’s operations as a bank.

Entry Into the Near-Prime Mortgage Market Represents Significant Growth Potential – Street is in the final phase of qualifying for its license to operate as a Schedule I bank, which we expect it will receive in 2H16. As a Schedule I bank, Street will be able to raise deposit funding, in turn allowing it to originate and hold near-prime mortgages and other consumer loan products on its balance sheet, representing new markets and a potentially material source of incremental growth. We expect that successful execution of its growth plans in the near-prime market should lead to outsized earnings growth for several years beginning in 2017. Given the risks associated with the timing and profitability of its entry into the near-prime market, we believe it remains too early to give full credit for this aspect of Street’s growth potential in its current valuation. We believe that announcement of approvals later this year could be a catalyst for the stock to receive partial recognition of this incremental growth potential, however.

Ready to Roll as a Bank – Through the process of applying for Schedule I bank status, Street has already developed detailed operational and financial plans as well as internal processes and controls designed to meet the standards of the industry regulator, the Office of the Superintendent of Financial Institutions (OSFI), such that it will be in position to begin writing near-prime business as soon as it is permitted, as a bank, to issue deposits as a source of funding. Its existing network of mortgage broker relationships provides immediate access to the near-prime market, and its core competency as a high-quality mortgage underwriter should, we expect, minimize risks associated with the introduction of the more complex underwriting required for near-prime loans.

Growth in its Prime Mortgage Origination Business is Maturing – Following several years of outsized growth as it expanded its market share in the broker channel from scratch in 2008 to 8.8% in 2013, the pace of Street’s mortgage originations has decelerated as its market share has stabilized in the ~9% range. Beyond 2017, we expect Street’s insured mortgage origination trend to mirror that of the overall Canadian mortgage market, assuming flattish



share in the broker market and that brokers’ share of total originations will also stabilize. In the near term, we expect that a temporary decline in renewal volumes will restrict prime mortgage origination growth to 0.5% in 2016E, and that a return to more normal renewal volumes will support a rebound to 7% growth in 2017E before settling in at a more normal 6% in 2018E.

2016E will be a Year of Transition; Street is a 2017E Growth Story – Our earnings forecasts call for a 13% Y/Y decline in EPS in 2016E, with the following factors contributing to negative near-term earnings momentum: (1) an inflated cost base that includes increased spending on enhanced processes and controls ahead of achieving bank status, without the offset of incremental revenues that bank status is expected to achieve; (2) a temporary ~15% Y/Y reduction in the level of mortgage renewals following a surge in 2015, both of which relate to an unusual break from the typical staggering of renewal timing; (3) a modest contraction of margins earned on the sale of mortgages vs. 2015 levels; and (4) the dilutive impact of a late-2Q15 restructuring and share exchange that involved the issuance of 20 million common shares. We forecast EPS growth of 20% in 2017E and 27% in 2018E, a reversal in relative earnings momentum that we expect will be supported by a resurgence of mortgage renewals to more normal levels and the introduction of net interest income from newly-originated near-prime mortgages.

Fairly Valued at a Modest Discount vs. Peers – At its current forward P/E of 6.3x, Street is valued at a 22% discount vs. the 8.1x average of its Canadian mortgage sector peers. We believe a modest valuation discount is currently warranted considering its relatively poor near-term earnings growth outlook, the risks associated with the timing and profitability of its expansion into the near-prime market, its lack of dividend yield, and its relatively small size and low trading liquidity. We believe the current valuation discount is too high, however, considering its superior medium-term growth potential and its valuable tax shield, which we expect should protect Street from paying cash taxes for the foreseeable future. A year from now, we expect that an improved near-term earnings growth profile and reduced risks regarding its business expansion will justify a higher forward P/E than the company is currently trading at, and we have accordingly established our target 2017E P/E at 7.5x. This target P/E is slightly below the current 8.1x average of Canadian mortgage sector peers.



Business Overview

Snapshot of Street’s Current Business Model

Street Capital in its current form as a pure-play originator of prime mortgages through the independent mortgage broker channel is a fairly simple business to understand. Essentially, it underwrites mortgages according to stringent credit standards and then sells the bulk of them to institutional investors at a gain. We consider Street to be a high-quality, well-established and conservatively-managed competitor in its core market of issuing low-risk prime mortgages.

Exhibit 1: Overview of Street Capital’s Current Business Model

Source: Raymond James Ltd.

Key aspects of its current business model are as follows:

A Historic Focus on Prime Mortgages – Street’s current product line-up is comprised solely of insurable residential mortgage loans. An insurable mortgage is one that conforms with CMHC underwriting guidelines (e.g., subject to maximum loan-to-value and minimum debt service ratios) and thereby qualifies for mortgage insurance coverage. In this report we use the terms “prime”, “insurable” and “A” mortgages interchangeably. Although Street is planning to expand its slate of product offerings to include near-prime mortgages, deposits and potentially other credit products (e.g., cards) following receipt of its bank license, at this point it remains a monoline provider of prime mortgages.

A Top-Tier Player in the Broker Channel – Street originates its mortgage loans through the independent mortgage broker channel, within which it has consistently ranked among the top-five originators from over the past four years (#3 in 2015 with a 8.8% share).

Industry-Leading Credit Quality – In order to maintain a high level of investment demand for its mortgages from its institutional liquidity providers, it is critical for Street to maintain a very high level of credit quality for its mortgages. Street has a conservative approach to underwriting that has consistently resulted in exceptionally low default rates well below the average level achieved by major Canadian banks.

Mortgages are Either Sold or Securitized – Almost all of Street’s mortgages are sold as whole loans to institutional investors following origination, with a small amount securitized to date. While a small level of mortgage loan investment remains on balance sheet at any point in time, these are generally newly-originated mortgages being warehoused ahead of planned sale or securitization (e.g., just $5 million at 1Q16). Accordingly, this is not a particularly capital-intensive business. Another implication of this business model is that Street’s revenues are comprised primarily of gains on the sale of mortgages rather than on investment-based yields, leading to somewhat volatile and seasonal quarterly revenues (and earnings) driven primarily by mortgage origination volumes.

Borrower / Homeowner

FundingInstitution

StreetCapital Financial

MortgageBroker

NHA MBS

Borrowers engage mortgage brokers to source and arrange competitively

priced and structured mortgages.

Street funds the issuance of mortgages primarily through the sale of whole loans

to financial institutions.

Street sells or securitizes virtually all of the mortgages it originates, generating

gains as its primary revenue source.

Mortgage brokers earn a fee from lenders, which compete on mortgage

pricing and structure, as well as on the

service level and fees paid to brokers.

As an alternative funding source, Street securitizes a portion of its mortgage

originations via NHA MBS.

Funding Funding

Prime mortgage loans

Prime mortgage loans



Virtually no Credit or Interest Rate Risk – Since Street transfers ownership of the mortgages it originates, it does not retain any of the associated credit or interest rate risk. Further, fluctuations in interest rate levels do not generally influence the level of gains achieved upon the sale of mortgages, as the value of newly-underwritten loans is effectively passed along to buyers. There are indirect risks related to each, however. If default rates on Street-underwritten mortgages were to increase materially, it could negatively impact investor demand for these loans and, in turn, Street’s ability to fund future originations. It is indirectly exposed to interest rates to the extent that rates influence the level of Canadian mortgage originations in general.

This very straightforward and easy-to-understand business model is set to become more complicated following the expected approval of Street’s bank application and the subsequent roll out of new loan and deposit products, as discussed below.

Bank Status Will Open New Growth Opportunities

Since entering the Canadian prime mortgage lending market in 2008, Street Capital Financial (i.e., Street’s primary operating subsidiary, acquired in 2011) has grown consistently and at a fairly high pace, growing its MUA from zero to $25 billion in less than nine years. Over the past four years (i.e., from 2011-2015) its MUA has grown at a 35% CAGR, although its pace of growth has decelerated to 23% then 15% over the past two years, due to both a growing base of MUA and a leveling off of the pace of new mortgage originations.

At this point, as its existing business begins to mature, management is no longer targeting further market share growth in the broker channel, and, in fact, is no longer focused on significant growth in insured mortgage volumes. Rather, its growth focus has shifted to the opportunity it sees in expanding its product slate to include higher-yielding assets such as uninsured mortgages and credit cards. To this end, Street is in the process of receiving approval to operate as a Schedule I bank, which will enable it to raise the deposit funding that will be required to economically grow an on-balance sheet portfolio of yielding assets. We discuss this bank conversion process and the opportunity it presents beginning at page 11.

Once Street receives approval to operate as a Schedule I bank, we expect its business will change in the following significant ways:

Expansion Into Near-Prime Mortgages – The primary purpose of seeking bank status is to allow Street to begin issuing near-prime (also known as “Alt-A” or “uninsured”) mortgages (and eventually other consumer credit products) funded by deposits. The Alt-A market is large and underserved, and as a result it generally enjoys superior growth and margins vs. the prime mortgage market. Street plans to initially grow its presence in this complementary market by leveraging its existing broker relationships.

Introduction of Deposit Funding – As a Schedule I bank, Street will be authorized to accept deposits eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation (CDIC). It plans to initially source deposits from wholesale funding sources, largely through a network of deposit brokers, although we expect that it might eventually develop direct-to-consumer deposit-taking capabilities to diversify and reduce its overall funding costs. These deposits will be used to fund the issuance of Alt-A mortgages, which, as uninsured loans, will be retained by Street on its balance sheet.

Potential Acceleration of Earnings Growth – Expansion into the near-prime mortgage market, and later into other consumer credit markets, will be additive to Street’s continuing presence in the prime residential mortgage market. We expect that this new line of business will be immediately profitable and that Street’s earnings growth will be augmented to the extent that it can successfully grow its on-balance sheet mortgage portfolio, especially if it can do so in the context of existing and internally-generated capital. Street is already carrying an inflated cost base supporting a bank-quality operating and control structure, and it expects incremental spread income from near-prime mortgages equal to 2%-5% of 2015 revenues in 2017E and of 10%-20% in 2018E.

Improved Revenue Stability – Street’s revenues are currently comprised primarily of gains realized on the sale of the mortgages that it originates, leading to modest earnings volatility driven by fluctuations in both the volume and margins of mortgage sales. Following the introduction of uninsured mortgages and deposits to its balance sheet, we would expect a



growing contribution from related spread income to result in an overall improvement in revenue (and earnings) stability.

Potential Dividend Introduction – While not an immediate consideration, we expect that the more stable and recurring nature of Street’s pro forma earnings stream will provide improved ongoing support for a regular dividend payout, and we foresee the establishment of a dividend policy once the new near-prime mortgage business hits its stride (although not likely until 2019).

Increased Credit and Interest Rate Risks – Once Street begins to retain a growing portfolio of mortgages on its balance sheet, it will become directly exposed to mortgage default risk as well as to the potential impact of shifting interest rates on net interest income. We expect that conservative credit underwriting and asset-liability management policies, respectively, should mitigate each of these risks as its Alt-A mortgage exposure grows. These are not risks to which its current originate-and-sell model is exposed.

Increased Regulatory Scrutiny and Capital Requirements – As a federally regulated deposit-taking institution, Street will become subject to strict capital adequacy requirements and ongoing oversight by OSFI. While there will be incremental operating costs and, potentially, compromised capital flexibility resulting from its new bank status, shareholders will also benefit from the related reduction to its operating and liquidity risk profile.

We discuss the company’s evolution and the expected impacts of bank conversion below.

The Evolution of Street Capital

Street Capital Group has not been in its current corporate form for very long, and it likely won’t remain as such for much longer. Accordingly, an analysis of Street today is the equivalent of a Polaroid picture that, if not shaken quickly to bring the image into focus, might prove to be a redundant representation of a shape-changing subject.

Having just completed a major corporate transformation to become a pure-play mortgage lender, Street is on the verge of morphing again into a more diversified and capital-intensive banking business. Below, we consider Street’s evolution through three stages of development.

Exhibit 2: The Three Stages of Street Capital Group's Evolution


A Look in the Rear-View Mirror: The Counsel Years (1979-2013)

Prior to Jun-2015, Street was known as Counsel Corporation and traded on the TSX under the symbol “CXS”. Counsel was founded in 1979 (and taken public in 1986) by Alan Silber, who served as President and CEO of the company until Jun-2015 and who remains as Chairman of Street today.

Counsel acted essentially as a publicly-traded private equity company, owning significant stakes in a variety of businesses across multiple industries at any point in time. The composition of its investment portfolio was not static, with frequent acquisition and/or disposition transactions reshaping its exposures from year to year (e.g., from a health care-dominated portfolio in 1998 to one refocused on technology companies just two years later).

Among its past investments was FirstLine Trust, a broker-channel mortgage lender comparable to Street Capital Financial that was sold in 1991 to CIBC. FirstLine grew to become the largest player in its market with an estimated ~30% share prior to being wound down by CIBC in 2012 (i.e., when it chose to exit the mortgage broker channel). Another of its former investments was the Counsel-managed Counsel REIT, which changed its name to RioCan REIT (REI-T) when it restructured to become internally managed in 1995.

The "Counsel" YearsTransformation to Pure-

Play Mortgage LenderGrowth of Street Capital

Bank

1979 to 2013 2013 to 2016 Beyond 2016



To illustrate the high level of portfolio turnover that was characteristic of Counsel as a diversified investment company, in Exhibit 3 we list Counsel’s major investments as at year-end on five-year intervals beginning in 1998.

Exhibit 3: Major Investments of Counsel Corporation at Various Points in Time

Source: Street Capital Group Inc., Raymond James Ltd.

The reason we highlight Counsel’s investment history is to point out just how different its business model and varied market exposures had been prior to evolving into the pure-play mortgage broker that it has since become. So although Street is the continuation of the publicly-traded entity formerly known as Counsel, we believe that the Counsel era of Street’s history is of limited, if any, relevance to the analysis and valuation of the company today.

Shifting Gears to Become a Pure-Play Mortgage Lender (2013-2016)

When Counsel acquired a 94% stake in Street Capital Financial in Mar-2011, this became just one of several active investments in its portfolio. Two years later, in Apr-2013, Counsel announced a planned restructuring involving the divestiture of all businesses other than Street Capital Financial in order to become a pure-play financial services company.

In Exhibit 4 we highlight, in the context of SCB’s share price, major milestones in the streamlining of Street into a pure-play mortgage lender, as well as significant operational developments for the business from the time it first invested in Street Capital Financial.

Year-End Investment Description

FARO Pharmaceuticals (90.4%) Pharmaceutical company focused on drugs too small to be promoted by larger drug companies

Sage BioPharma (61%) Provider of hormonal therapy products in the US

American HomePatient (26.6%) Provider of medical equipment and home health care services including infusion and respiratory therapy

Stadtlander Drug Company (100%) Specialty pharmacy business focused on patients with high-risk, high-cost chronic medical conditions

PharMerica (8.7%) Provider of pharmaceuticals and related services to long-term care and residential facil ities

2003 Acceris Communications (91%) Developer of VoIP technologies focused on licensing its patents

C2 Communications (91%) Developer of VoIP technologies focused on licensing its patents; formerly named Acceris Communications

Fleetwood Fine Furniture (94.8%) Provider of high quality customized case goods for upscale hotels

Knight's Bridge Capital Partners (100%) Manager of a private equity fund in which Counsel initially held a ~16% stake

Heritage Global LLC (73.3%) Liquidator of distressed assets

Fleetwood Fine Furniture (71.2%) Provider of high quality customized case goods for upscale hotels

Street Capital Financial (94%) Prime mortgage lender focused on the broker channel

Knight's Bridge Capital Partners (100%) Manager of a private equity fund in which Counsel initially held a ~16% stake

Note: Includes only select, large investments from Counsel's portfolio at specified points in time.

1998

2008

2013



Exhibit 4: Major Milestones in the Process of Becoming a Pure-Play Mortgage Lender

Source: Street Capital Group Inc., Bloomberg, Raymond James Ltd.

Event (#) Date Event Details

1 Mar-11 Counsel announced the acquisition of Street Capital Financial.

2 May-11

Counsel closed the acquisition of Street Capital Financial at a price of ~$33 mill ion, satisfied through the issuance

of 6,616,667 common shares at $0.75/share and ~$28 mill ion in cash. The cash portion was partially financed

through a $17.5 mill ion acquisition debt facil ity provided by a Canadian chartered bank as well as through the

issuance of $12.0 mill ion of convertible unsecured debentures, which matured in May-2014.

3 Apr-12Street Capital Financial announced its entry to the near-prime segment of the Canadian residential mortgage

market with the introduction of the Street Options Program.

4 Sep-12

Street Capital Financial announced its intention to apply for approval to operate as a federally regulated Schedule

I bank, with banking business to be primarily focused on residential mortgage lending as well as other consumer

lending and related services. The application was fi led in Dec-12.

5 Jan-13

Counsel paid a special dividend-in-kind under which shareholders received 0.0719 shares of Terra Firma Capital

Corporation (TSXV-TII), representing a distribution of most of the company's real estate assets and its exit from

real estate management.

6 Apr-13Counsel announced its intention to focus exclusively on the business of Street Capital Financial, with plans to

dispose of all other "non-core" operating business segments.

7 May-13

Obtained approval from the CMHC to become an approved issuer of National Housing Act mortgage-backed

securities (NHA MBS) and an approved seller under the Canada Mortgage Bond (CMB) program, providing an

additional source of l iquidity for Street Capital Financial.

8 Mar-14Counsel sold its controlling stake in Fleetwood Fine Furniture to an investor group led by Fleetwood's

management, representing a full exit from the case goods line of business.

9 Apr-14Counsel paid a special dividend-in-kind under which shareholders received 0.2084 shares of Heritage Global Inc.,

representing a full exit from the asset l iquidation line of business.

10 Feb-15Counsel announced that the monetization of Knight's Bridge Capital Partners Fund, which it manages and in which

it co-invests, was progressing ahead of schedule with only one significant investment remaining.

11 May-15

Counsel announced a corporate realignment involving (a) a change of the company's name to Street Capital Group

Inc., (b) the retirement of several of Counsel's senior executives and the appointment of Street Capital Financial's

senior management team to executive roles with its parent company, (c) an overhaul of its Board of Directors, and

(d) a share exchange through which Street would acquire all of the Class C non-voting shares of Street Capital

Financial held by its management in exchange for 20 mill ion common shares of Counsel and ~$3 mill ion cash. All

aspects of the proposed realignment were approved by the Board of Directors and enacted in Jun-15.

12 Jun-15Street appointed Marissa Lauder, with a background at both industry regulator OSFI and competitor Home Capital

Group, as CFO.

13 Jun-15 Counsel's name officially changed to Street Capital Group Inc., with its ticker changing from CXS-T to SCB-T.

0.00

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Jan-11 Jun-11 Dec-11 Jun-12 Nov-12 May-13 Nov-13 May-14 Oct-14 Apr-15 Oct-15 Apr-16

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A few important points on this transformation:

Operators Are Now in Charge – In May-2015, the CEO (Ed Gettings) and President (Lazaro DaRocha) of Street Capital Financial (the operating subsidiary) were appointed as CEO and President, respectively, of Street (the public company). This team had led Street Capital Financial since co-founding it in 2007, and had previously worked together in senior roles at CIBC Mortgage and Lending. In Jun-2015 Marissa Lauder was recruited from a senior finance position at competitor Home Capital Group (HCG-T) and was appointed as CFO of Street. We regard this “new” senior management team as a group of accomplished operators with substantial mortgage industry experience relevant to Street’s new, focused growth strategy.

The Board Was Refreshed and Strengthened – In Jun-2015, Street’s Board of Directors was reconstituted in conjunction with the corporate realignment, resulting in a group that is very well suited to governing a growing consumer finance business, in our opinion. In addition to Chairman Alan Silber and CEO Ed Gettings, there are six independent board members of which four were newly-appointed in 2015. This group includes a former Senior Executive VP of Technology & Operations from CIBC (CM-T), a former Executive VP of US Product Management, Personal & Commercial Banking from TD Bank (TD-T), a former Treasurer and VP Finance from BMO (BMO-T), and a former President of AMEX Bank of Canada. For complete bios on Street’s management and board of directors, please refer to Appendix B.

The Streamlining Process is Almost Complete – Exiting 1Q16, the only non-core investments Street still owned were: (a) a nominal amount of real estate assets classified as “discontinued”, and (b) shares of Differential Brands Group (DFBG-NASDAQ) held by its managed private equity fund, the remainder of which are expected to be sold in 2016 or 2017. In total, the value of its remaining portfolio investments (net of non-controlling interest) was $1.7 million at 1Q16. Not only is the distraction related to streamlining actions winding down, so are the distractions in its financial reporting, as the impacts of discontinued operations and its fully-consolidated private equity fund have become much easier to isolate and look through.

The Result is an Effectively New Public Company – Over the past two years, Street has changed its name, its business strategy, its asset base, its board and its management team to effectively reinvent itself as a new public company consisting of a single high-quality and accomplished business. As such, we believe the company bears a reintroduction to investors that might not yet be familiar with its recent transformation.

Approaching Cruising Speed as Street Capital Bank (Beyond 2016)

Becoming a pure-play mortgage lender was only the first stage of Street’s planned transformation. The next will be its transition into a multi-product consumer finance company, which will be dependent upon receiving its banking license.

In Sep-2012, Street announced its intention to apply to Canada’s Minister of Finance to operate as a federally regulated Schedule I bank, with banking operations to be primarily focused on residential mortgage and consumer lending. The application was filed in Dec-2012 and remains outstanding, an unusually long review period that we believe was caused mainly by external factors, namely a heightened level of regulatory scrutiny in Street’s market segment following the revelation in early 2015 of mortgage fraud at one of its broker channel competitors. Street’s application is currently in the “pre-commencement review” phase, one of the final stages of the approval process.

As part of its “pre-commencement review”, OSFI completed an on-site review in late-2015 aimed at assessing the operational readiness, control processes and management systems of Street, as well as its capability of producing the required statutory and supervisory information in an accurate and timely manner. This review resulted in certain prescribed operational changes, which Street has fully implemented and documented. It now awaits OSFI’s final review, which it expects to occur within the next two months or so. Following this final review, the next step will be for OSFI to make recommendations 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. The company expects to receive this approval by the end of 2016.

Our expectation is that no additional issues or delays will be encountered in this process, and that Street is likely to receive its bank license in the Fall of 2016. Once it has its license in hand, we



expect that there will be a 1-2 month delay before Street will actually begin issuing any meaningful amount of deposits or Alt-A mortgages, as it will likely take some time to implement the systems that it has designed to administer its new products. Accordingly, in our forecasts we have assumed that new banking-related activities will begin contributing to revenues in 1Q17.

The Growth Opportunity as Street Bank

Ready for the Rubber to hit the Road

Once Street receives approval of its bank application and subsequently ensures that the new systems related to the administration of new products are operating effectively, it will be ready to begin operating as a bank immediately. The heavy lifting associated with establishing an operating framework to accommodate the rollout of new products has already been undertaken, with no further up-front investment required.

Mortgage Broker Relationships Already Exist – While there are brokers that specialize in near-prime mortgages, most originations in this segment are produced by brokers that also offer prime mortgages. Initially, we expect Street will source near-prime originations from its own turndowns of prime mortgage applications. Beyond its second year as a bank, we expect that Street will be able to leverage off its existing and substantial network of broker relationships to provide immediate and extensive penetration of its new target market.

Operating Policies, Procedures and Controls Have Been Refined – In consultation with OSFI as part of the bank application process, Street has prepared beefed-up policies and procedures covering all aspects of operations including lending, funding, capital management and risk management. By the time its application receives approval, it should already be operating at a bank-like level, and will therefore be set to handle the execution, monitoring and reporting of its new lines of business.

A Flexible and Detailed Five-Year Plan Has Been Prepared and Scrutinized – As part of the bank application process, Street was required to prepare detailed five-year financial forecasts including discussion and sensitivities around key assumptions, a breakdown of all elements used to calculate risk-based capital ratios, planned sources of funding and capital, and contingency plans in the event key assumptions don’t pan out. With this level of planning already in place, there should be no strategic indecision to impede the rollout of new products as soon as permitted.

Operating Costs Already Reflect the Costs of Bank Conversion – Because Street was required to implement an enhanced operating and control structure prior to OSFI’s pre-conversion review as part of the bank application process, its operating cost run rate is already representative of its pro forma bank status, incorporating incremental staffing related to functions such as underwriting, compliance, audit etc.

Groundwork has Been Laid for Accessing Wholesale Deposits – Based on discussions that management has already held with the deposit broker community, it is confident that Street will be able to source enough deposits to comfortably fund its planned level of Alt-A mortgage originations at interest rates / spreads comparable to those currently achieved by industry peers such as Home Capital and Equitable Group (EQB-T).

The Alt-A Growth Opportunity

As a bank, Street aims to eventually become a diversified financial services provider offering multiple products over multiple distribution channels. Its initial goal is far simpler, however: to begin issuing near-prime mortgages funded by deposits in the form of Guaranteed Investment Certificates (GICs).

Near-prime, or “Alt-A”, mortgages are those issued to borrowers that do not meet the credit and/or documentation standards that would qualify them for prime mortgages. This group includes people that lack a sufficient credit history such as recent immigrants, those with difficult-to-verify incomes including people that are self-employed or whose income is commission-based, and those with imperfect credit histories, although this latter group often falls into the “subprime” rather than the “near-prime” category. Street will generally be targeting borrowers



with incomplete rather than imperfect credit histories with the goal of achieving superior yields at comparable credit costs vs. prime mortgages.

An important feature of this market is that there are very few large mortgage issuers competing for Alt-A business in Canada. The most prominent competitors in the Alt-A field are Home Capital and Equitable Group, with several other lenders having a relatively small presence, including credit unions, certain prime-oriented lenders such as MCAP, and a handful of smaller providers such as Equity Financial (EQI-T).

Another relevant aspect to the competitive environment is that Alt-A mortgages are less commoditized than insured mortgages, requiring a higher degree of underwriting, including more detailed collateral analysis, and resulting in a lesser degree of price competition. These factors, combined with the somewhat higher level of credit risk associated with this class of borrower, result in superior yields for Alt-A loans vs. those earned on insured mortgages. Exhibit 6 shows that Home Capital’s “Traditional” Alt-A mortgages have consistently earned higher yields than its “Accelerator” prime mortgages over the past five years, with the yield differential averaging 220 bps over this period.

Exhibit 5: Peers’ Gross Yield on Alt-A Mortgages Exhibit 6: Home Capital Gross Yields, Alt-A vs. Prime

Source: Home Capital Group, Equitable Group, Equity Financial Source: Home Capital Group

Another important consideration is that the Alt-A market has generally grown faster than the overall Canadian mortgage market for several years. While we’re not aware that any aggregate Alt-A market growth statistics are available, we look to the recent Alt-A portfolio growth of the two leading issuers, HCG and EQB, to illustrate this point (Exhibits 7-8). In recent years, growth has been incrementally supported by tightened mortgage industry regulation that has resulted in marginally reduced availability of insurable mortgages and a downward migration of the lower end of the “prime” market into the Alt-A category, resulting in an expanded target market for Alt-A issuers.

Exhibit 7: Near-prime Mortgage Principal Outstanding (C$ mln) Exhibit 8: Near-prime Mortgage Originations (C$ mln)

Source: Home Capital Group, Equitable Group Source: Home Capital Group, Equitable Group

Note: Al t-A mortgages have accounted for the fol lowing percentages of EQB's Core Lending Portfol io:2011: 49%, 2012: 59%, 2013: 61%, 2014: 68%, 2015: 74%

4.5%

5.0%

5.5%

6.0%

2011 2012 2013 2014 2015

HCG - Traditional Alt-A EQB - Core Lending EQI - Alternative Mortgages

0.0%

2.0%

4.0%

6.0%

2011 2012 2013 2014 2015Traditional - Alt-A Accelerator - Prime

-

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015

Home Capital Equitable

-

1,000

2,000

3,000

4,000

5,000

6,000

2010 2011 2012 2013 2014 2015


5-year CAGR:HCG: 20%EQB: 33%

5-year CAGR:HCG: 12%EQB: 21%



Alt-A Growth Will Initially be Self-Imposed

We consider below a number of potential constraints that Street might face in expanding into the Alt-A market, and conclude that the company’s growth targets for new Alt-A-generated net interest income over the next two years appear to be achievable:

Potential Constraint #1: Origination Capability – An obvious question ahead of the launch of new Alt-A loans is whether or not Street will be capable of sourcing its planned level of originations, especially since this new target market doesn’t really overlap in scope with its traditional insured mortgage market. If it required new distribution partners in order to reach its new target market, we would take more of a wait-and-see approach to forecasting its Alt-A originations. This is not the case, however, as Street has long-established relationships with an extensive network of mortgage brokers that sell both types of mortgages. Given the relative scarcity of Alt-A mortgage lenders, we expect that brokers should generally welcome the introduction of a competitive product from an issuer with which they already do business and are already comfortable.

Even within this group of existing broker relationships, we don’t expect Street will have to market its new product aggressively, at least not initially based on its modest origination targets for 2017. According to management, roughly 35% of mortgage applications submitted to Street are currently declined, primarily because they don’t meet its strict underwriting standards. This pool of “turndowns” alone represents a sizeable target market for Street’s new Alt-A product. In cases where applicants fail to qualify for a prime mortgage loan from Street, they will likely find similar resistance from other prime lenders and might find themselves open to alternative offers. In these cases, Street will have the opportunity to offer an Alt-A mortgage featuring risk-adjusted pricing when it communicates its decision to decline the original application. As shown in Exhibit 9, Street would only need to convert an estimated 6% of its own prime mortgage turndowns in 2017E (and 11% in 2018E) in order to achieve our Alt-A origination forecasts, which are in line with the company’s own targets.

Exhibit 9: Forecast Alt-A Originations vs. Prime Mortgage Application Declines


Potential Constraint #2: Market Share / Competition – To further assess the reasonability of our Alt-A originations for Street (as well as the company’s implied origination targets), we compare them to actual run-rate Alt-A volumes of the two largest competitors in the space, HCG and EQB. For 2017E and 2018E, we are forecasting Alt-A originations from Street of $270 million and $460 million, respectively, which amounts to just 3%-6% of the ~$7.8 billion of Alt-A mortgages originated by HCG and EQB in 2015 (i.e., and even less as a percentage of the entire Alt-A market). These are not aggressive market share aspirations, in our opinion, and are not likely large enough to prompt any sort of competitive response capable of constraining Street’s initial growth in this segment. If Street is able to initially source Alt-A originations primarily from its own pool of prime mortgage turndowns, it should have plenty of time to build and improve its presence in this market before it needs to compete more directly vs. more established lenders in pursuit of growth.

2017E 2018E

Prime mortgage originations excl. renewals ($ mln) 7,720 8,001

Declined prime mortgage applications at 35% of total 4,157 4,308

Alt-A mortgage originations ($ mln) 270 460

Alt-A originations as % of declined prime mortgage applications 6% 11%



Exhibit 10: Near-prime Mortgage Principal vs. Peers (C$ mln) Exhibit 11: Near-prime Mortgage Originations vs. Peers (C$ mln)

Source: Home Capital Group, Equitable Group, Raymond James Ltd. Source: Home Capital Group, Equitable Group, Raymond James Ltd.

Potential Constraint #3: Regulatory Capital Requirements – Once Street becomes a bank and begins growing a portfolio of deposit-funded uninsured mortgages, new capital-related issues will come into play. As a Schedule I bank, Street will be required to maintain both its Leverage Ratio (essentially representing Tier 1 regulatory capital divided by total asset exposure, on- and off-balance sheet) and its Risk-Based Capital Ratios (e.g., its Common Equity Tier 1, or CET1, ratio) above specified minimum levels, posing a potential constraint on growth in the event that these regulatory capital ratios approach minimum thresholds.

As part of its bank application process, Street submitted a five-year business plan to OSFI for review and approval. Based on this plan, Street expects that it will comfortably be able to internally fund projected balance sheet growth over at least the next three years (while initiating a dividend and potentially repurchasing shares) based on a combination of existing capital and anticipated cash flow retention. We note that Street’s plan calls for deposits to fund the actual investment in asset growth, such that its growth capital requirement will be limited to the amount of regulatory capital that it will have to set aside in relation to asset growth.

As at 1Q16, Street’s various regulatory capital ratios stood at excessive levels vs. specified minimum levels, as shown in Exhibit 12. Even after its first two years of operating as a bank, we estimate that it will exit 2018E with a CET1 ratio of over 30% (vs. the minimum requirement of 7.0%) and a Leverage Ratio of over 15% (vs. the minimum requirement of 3%). In other words, we believe that Street is sufficiently capitalized to internally fund its planned asset growth well beyond the period contemplated by our forecasts.

Exhibit 12: SCB Capital Ratios vs. Regulatory Minimum Levels

Source: Street Capital Group, Raymond James Ltd.

Potential Constraint #4: Deposit Funding Availability – Street plans to fund its Alt-A mortgage investment with wholesale deposits secured primarily through a network of deposit brokers. The downside to relying on wholesale deposits is that the cost of funding tends to be higher than certain other types of direct-to-consumer funding alternatives such as those now being used by HCG (e.g., through Oaken Financial) and EQB (e.g., through EQ Bank). The benefit is the high level of liquidity available in this market, as incremental price-sensitive deposit funding can generally be achieved by paying a marginally higher interest rate than competing borrowers. We therefore do not see deposit funding as a near-term growth constraint for Street, particularly given its relatively small funding requirements through 2018E. We also expect that depositors will welcome the opportunity to further diversify their CDIC-insured holdings with the addition of a new issuer.

11,715

6,450

713

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

HCG 2015 EQB 2015 SCB 2018E

5,075

2,673

460

-

1,000

2,000

3,000

4,000

5,000

6,000

HCG 2015 EQB 2015 SCB 2018E

CET 1 ratio 7.0% 31.9% 30.9%

Leverage ratio 3.0% 26.0% 15.4%

National

Regulatory

Minimum

1Q16A 4Q18E



Our Alt-A Growth Forecasts Are Modest and Consistent With Guidance

Based on its internal plans, Street is aiming for net interest income (NII) earned from Alt-A mortgages (i.e., net of the cost of related deposit funding) to grow to the range of 2%-5% of 2015 revenues in 2016E and to 10%-20% of 2015 revenues in 2017E. Based on actual 2015 revenues of $75.0 million, this suggests targeted NII of $1.5-$3.8 million in 2016E and of $7.5-$15.0 million in 2017E.

Based on our net interest margin (NIM) forecasts, these NII forecasts imply average Alt-A portfolio sizes of ~$60-$160 million in 2017E and of ~$300-$600 million in 2018E. In Exhibits 13-14 we present our own forecasts for Street’s Alt-A originations and resulting portfolio size through 2018E.

Exhibit 13: SCB Alt-A Origination Forecasts (C$’000s) Exhibit 14: SCB Alt-A Mortgages Outstanding Forecasts (C$’000s)

Source: Raymond James Ltd. Source: Raymond James Ltd.

Based on our forecasts, NII earned from Alt-A mortgages will amount to 3.4% of 2015 revenues in 2017 and 15.8% in 2018, towards the high end of the company’s target ranges.

Exhibit 15: Alt-A Net Interest Income Forecasts vs. Total 2015 Revenue


Over its initial three years operating as a bank, Street will be obliged to adhere strictly to its OSFI-approved growth plans. We believe that its Alt-A asset growth will be restricted to a variance of ~10% vs. plan, representing its primary constraint on growth and restricting upside to our revenue forecasts. Beyond 2019, we expect this constraint will loosen, enabling Street to grow its Alt-A portfolio as fast as other constraints (e.g., capital ratios, funding availability, loan demand, underwriting thresholds, etc.) will allow. By the time its training wheels come off, Street will have amassed underwriting experience in this niche and will have had the opportunity to establish its Alt-A credentials within the broker community, setting the stage for continued market share expansion in this segment.

Beyond Alt-A: Evolution towards a Multi-Product Bank

Once it becomes a bank, Street will initially limit its new product introductions to Alt-A mortgages and broker-sourced GICs to fund them. Its longer-term plans, however, are to evolve into a multi-product, multi-channel financial services company, ideally leveraging its sizeable existing customer base to gain initial traction in rolling out new product.

The initial three-year business plan Street submitted to OSFI anticipates the introduction of credit cards as its next product, which we expect could come as early as 2018 (although our forecasts assume a post-2018 introduction). Although this would represent a new product for Street, we

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1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E

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1Q17E 2Q17E 3Q17E 4Q17E 2017E 1Q18E 2Q18E 3Q18E 4Q18E 2018E

Near-Prime Mortgages Outstanding 30,000 84,925 164,713 269,301 269,301 347,954 465,345 600,691 713,183 713,183

Average Near-Prime Mortgages Outstanding 15,000 57,463 124,819 217,007 103,572 308,628 406,650 533,018 656,937 476,308

Net Interest Margin 2.43% 2.43% 2.43% 2.43% 2.43% 2.47% 2.50% 2.50% 2.50% 2.50%

Net Interest Income 91 350 760 1,320 2,521 1,907 2,542 3,331 4,106 11,885

> % of total revenue 0.6% 1.4% 3.1% 5.9% 2.9% 9.9% 8.9% 12.1% 15.7% 11.7%

> % of total 2015 revenue 3.4% 15.8%



believe that any risks related to this expansion would be contained considering the high level of card-related experience that already exists at the company’s senior management and board levels.

Notably, Street’s CEO and President had previously served together at CIBC where they collectively gained experience in the marketing and risk management of credit cards. Their ultimate positions at CIBC were as EVP Mortgages, Lending & Insurance and VP Mortgages & Lending, Product Management, respectively. President Lazaro DaRocha had also previously been part of MBNA Canada Bank’s management team where he gained risk management experience in this segment. Street’s board also includes two directors that have significant card industry experience: Morris Perlis spent 13 years with American Express Inc. including five years as President of American Express Canada, and Paul Vessey had previously been EVP, US Product Management, Personal and Commercial Banking at TD Bank, with prior positions including SVP Card Products and Personal Lending at Canada Trust, COO of Visa USA Inc., and Vice Chairman of Visa International.

Eventually, we’d expect Street to consider the introduction of direct-to-consumer deposits as a means of diversifying and lowering the cost of its funding base, similar to recent moves by larger peers HCG and EQB, although we don’t anticipate this within its first three years of bank operations.

The company’s medium-term operating expense guidance through 2018 (as well as our own forecasts) assumes a flattish operating efficiency ratio, signaling no expectation of operating leverage gains associated with anticipated top-line growth. Accordingly, our forecasts incorporate some degree of ongoing investment in preparation of future new product introduction (ex-mortgages) without including any associated revenues.

Prime Mortgage Origination Outlook

While net interest income from a growing Alt-A portfolio will provide Street with incremental earnings growth over the period of our forecasts, its primary source of revenues will remain gains on the sale of prime mortgages. The value of Street’s prime mortgage originations will therefore remain the primary driver of its medium-term earnings.

Street has historically grown its mortgages under administration (MUA) at an impressive pace. Over the past almost five years (data is only available to 2Q11), its MUA has grown at a CAGR of 34% after having grown from zero in early 2008 to almost $5 billion exiting 2010. This pace has decelerated over the past two years, but has remained above industry-average levels at 23% growth in 2014 and 15% in 2015.

Exhibit 16: Mortgages Under Administration, Quarterly (C$’000s)

Source: Street Capital Group

Similarly, and more directly relevant to its revenues, origination volumes have also grown sharply at a 26% CAGR over the past five years, decelerating to a CAGR of 8% over the past two years.

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2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15



Exhibit 17: Quarterly Mortgage Originations (C$’000s) Exhibit 18: Annual Mortgage Originations (C$’000s)

Source: Street Capital Group Source: Street Capital Group

Street’s portfolio of mortgages under administration (MUA) is skewed heavily towards Ontario (61% as at 1Q16), a product of both its high urban population and relatively high housing prices. Alberta has the second-highest concentration at 18% of MUA, although its share of originations fell from 22% of total in 2014 to 14% in 2015 as a result of both weaker regional market conditions and a tightening of underwriting standards in reaction to those conditions.

Exhibit 19: Geographic Distribution of MUA, 1Q16 Exhibit 20: Geographic Distribution of Originations, 2015

Source: Street Capital Group Source: Street Capital Group

Below, we consider the outlook for Street’s prime mortgage originations by looking at trends in the following four drivers of its origination volumes:

1) Growth of the overall Canadian residential mortgage market. 2) Mortgage brokers’ share of total residential mortgage originations. 3) Street’s share of broker channel originations. 4) The influence of renewal volumes.

Canadian Mortgage Market – Trends and Outlook

The size of the Canadian mortgage market, as measured by the total value of residential mortgages outstanding, has grown consistently over the long term, at a CAGR of 6.9% between 1990 and 2015 and, more recently, by a CAGR of 6.0% over the past five years. Growth of 6.2% in 2015 was consistent with long-term trend, with the market showing no signs of deceleration.

0

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1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

New originations Renewals

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2010 2011 2012 2013 2014 2015

Ontario, 61%

Alberta , 18%

BC, 16%

Atlantic, 2% Prairies, 3%

Ontario, 67%

Alberta, 14%

BC, 15%

Atlantic, 2% Prairies, 2%



Exhibit 21: Residential Mortgage Credit Outstanding, Canada Exhibit 22: Canadian Residential Mortgages, Y/Y Growth

Source: Statistics Canada CANSIM Tables Source: Statistics Canada CANSIM Tables

As shown in Exhibit 23, growth of the aggregate value of Canadian mortgages outstanding has historically been the product of both steady price improvement and generally rising unit sales.

Exhibit 23: Canadian Residential Unit Sales and Average Prices

Source: Canadian Real Estate Association (CREA)

Several factors have supported this historical growth in both unit sales and housing prices, including fairly steady levels of net migration into Canada and of new housing starts (correlated factors), a long-term trend of rising home ownership and, more recently, historic low interest rates that have supported housing affordability, as measured by average debt-to-service levels. The Mortgage Professionals Canada (MPC) also believes a long-term trend of urbanization (i.e., resulting in net migration to higher-value homes) accounts for roughly a quarter of historical mortgage credit growth in Canada.

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

C$

bln

25-year CAGR: 6.9%10-year CAGR: 7.6%5-year CAGR: 6.0%

0%

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016F

Unit Sales (LHS) Average Price (RHS)

CAGR, Unit Sa les: 2.9%CAGR, Average Price: 4.7%



Exhibit 24: Net Migration to Canada (# of persons) Exhibit 25: Canadian Mortgage Credit Growth vs. Housing Starts

Source: Statistics Canada CANSIM, CMHC forecasts Source: CMHC Canadian Housing Observer, Statistics Canada CANSIM

Exhibit 26: Home Ownership Rate, Canada Exhibit 27: Bond Yield vs. Conventional Mortgage Rate

Source: Statistics Canada Source: Bloomberg

The Canadian Mortgage and Housing Corporation (CMHC) estimates that net migration into Canada will be over 236,000 in 2016E and over 244,000 in 2017E, consistent with historical actual levels. It also estimates that new housing starts, which at ~195,500 in 2015 were in line with the 2010-2015 average of ~195,000/year, will decline modestly to still-healthy levels of 181,300-192,300 in 2016E and 172,600-183,000 in 2017E.

As for housing affordability, in its Dec-2015 Annual State of the Residential Mortgage Market report, the MPC point out that the average mortgage payment as a percentage of monthly wages stood at 39.5% in 2015, only slightly higher than the 38.6% long-term average of this ratio and well below peak levels reached in 1990 (~55%) and 2007 (~42%). Based on Statscan’s more comprehensive Debt Service Ratio, the 1Q16 level of 14.05% is consistent with the fairly flattish range of the past six years and remains modestly below the previous 15-year peak of 14.94% reached in 4Q07. This ratio would presumably be somewhat higher today based on subsequent mortgage credit growth. On an “interest-only” basis, however, this ratio was at its lowest historical point and trending lower as at its latest update.

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017F

Housing Starts (RT Axis) Y/Y Growth, Residential Mortgage Credit (LFT Axis)

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017F

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1971 1976 1981 1986 1991 1996 2001 2006 20110%

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Feb-90 Feb-94 Feb-98 Feb-02 Feb-06 Feb-10 Feb-14

Gov't of Canada 5-Yr Bond Yield Bank of Canada 5-Yr Conventional Mortgage Rate



Exhibit 28: Mortgage Payment as % of Monthly Wages Exhibit 29: Average Canadian Debt Service Ratio

Source: Mortgage Professionals Canada: Source: Statistics Canada CANSIM Annual State of the Residential Mortgage Market in Canada

Outlook: Continued Canadian Mortgage Market Growth Averaging ~5%/Year

The net sum of the above considerations is that key trends remain generally supportive of continued expansion in the size of the Canadian residential mortgage market over the next two years. Recent forecasts from each of CREA and the MPC support an outlook of at least 5%/year mortgage market expansion (i.e., consistent with historical trend), on average, between 2015 and 2017E:

- In its Dec-2015 Annual State of the Residential Mortgage Market report, the MPC forecasted Canadian mortgage credit growth of 5.5% in 2016E and 5.0% in 2017E. The pace of both housing price expansion and sales activity have accelerated since this forecast was issued, such that we believe the MPC’s two-year growth forecast will now be front-end loaded, consistent with CREA’s more recent forecasts (below).

- In a more recent Jun-2016 market forecast report, CREA called for a 6.1% Y/Y increase in Canadian home sales (to 536,400) in 2016E and a national average price increase of 10.8% (to $491,100) in 2016. Much of this anticipated price increase has already occurred, with CREA’s nation-wide MLS Home Price Index appreciating by 5.2% between Jan-2016 and Apr-2016 alone and with prices tracking 12.5% higher Y/Y in Apr-2016. It expects British Columbia to lead the way in 2016E with 20% growth in sales volume and an average home price increase of 13.5%. CREA forecasts a flattish market in 2017E featuring a nominal 0.2% increase in home sales and a national average price increase of just 0.1%. Declining levels of already-low housing inventory are expected to curtail the growth of sales activity, with a period of consolidating housing prices expected to follow an extended period of above-normal price increases. Overall, these forecasts imply an expected two-year CAGR in housing prices alone of over 5%.

A current concern that industry followers might have is the risk of a potential housing price correction that might, in turn, pressure both the pace of new mortgage origination as well as industry charge-off levels. In the absence of an interest rate shock, we believe there is low risk of such a correction in the near-term considering that housing affordability in Canada is not overly stretched and that, if anything, there is an escalating supply/demand imbalance currently putting more upward pressure than usual on housing prices. We also note that with an average loan size of ~$375,000, Street is not overly exposed to the higher-value segment of the housing market that may be more vulnerable in the event of a market-wide price correction.

As shown in Exhibit 30, at May-2016 the level of Canadian residential housing stock in inventory was at its lowest level in over six years, with the ratio of sales to new listings at its highest level since Oct-2009. As a result, the pace of Canadian housing price growth, as measured by the CREA’s MLS Housing Price Index, had accelerated for four consecutive months to 12.5% Y/Y in Apr-2016. The other impact of an already low and shrinking supply base is decelerating sales activity – although sales activity was up 9.6% Y/Y in May-2016, it was down 2.8% from record Apr-2016 levels and is expected by CREA to be flat in 2017.

20%

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50%

60%

1990 1995 2000 2005 2010 2015

10%

11%

12%

13%

14%

15%

16%

Q1 1990 Q1 1994 Q1 1998 Q1 2002 Q1 2006 Q1 2010 Q1 2014



Exhibit 30: Canadian Residential Housing Market Balance

Source: CREA

Mortgage Broker Share of Originations

Street originates its mortgages exclusively through the mortgage broker channel, which competes primarily with major banks. As shown in Exhibit 31, the broker channel’s share of total Canadian residential mortgage originations has been on a generally increasing trend over the past decade, accounting for an estimated 55% of originations from first-time buyers in 2015 (vs. 28% in 2005), 42% from repeat buyers (vs. 24% in 2005) and 21% of renewals (vs. 8% in 2005). Although this is a generally supportive trend, we have limited visibility on its outlook, and our base case assumption is that brokers’ aggregate share will hold steady going forward, such that we expect broker-originated volumes to track the overall mortgage market.

Exhibit 31: Mortgage Brokers’ Share of Canadian Mortgage Originations, by Borrower Type

Source: CMHC Consumer Lending Surveys

Street’s Share of Broker Channel Originations

Following a period of meaningful market share expansion, Street’s share of broker-sourced originations has remained fairly steady over the past four years at roughly 9% on a rolling four- quarter basis, consistently placing it towards the top end of tier-2 lenders in this channel (i.e., well behind market leaders Scotiabank and First National). Market share in this channel can fluctuate widely from quarter-to-quarter as various competitors become more or less aggressive in

4

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Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

45%

50%

55%

60%

65%

Months inventory (LFT Axis) Sales to New Listings Ratio (RT Axis)

0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015

First-time buyers Repeat buyers Refinancing Renewals



pursuing volumes at any point in time, but in Street’s case its share has remained somewhat range bound despite this volatility.

The growth in Street’s market share since inception has been the result of both an expanding network of broker relationships (currently at >1,300) and increased penetration with existing relationships. At this point, Street believes the biggest growth potential in its core business is its opportunity to increase the amount of business it does with the brokers that already sell its product.

In 2015, Street ranked #3 in the broker channel with 8.8% market share, or #4 if peer MCAP’s various brands are considered collectively as a single issuer. In 3Q15, its share was negatively impacted by the Jul-2015 discontinuation of a trailer fee program that had been initiated in 2011 but which wasn’t showing evidence of improving renewal volumes, a strategic choice made for the sake of profitability. By 4Q15, its pipeline had already returned to normal seasonally-adjusted levels and its share improved slightly to 8.1%.

Exhibit 32: Street Capital Share of Mortgage Broker Originations Exhibit 33: Lender Share of Mortgage Broker Originations, 2015

Source: D+H Lender Insights Report, via Canadian Mortgage Trends Source: D+H Lender Insights Report, via Canadian Mortgage Trends

Street is currently working through a period of unusually, and likely temporarily, weak market share. In 1Q16, its share fell to 7.6%, or 6

th place in the industry due to processing-related hiccups

that followed the implementation of certain OSFI-requested procedural changes to its underwriting process. A temporary drop in service level related mainly to increased turnaround times on application reviews has resulted in the diversion of some business to competitors. Management believes that its service level has been gradually improving and is confident that it will soon be back to a normal level, although we suspect it might take another quarter or two for Street to achieve and demonstrate this recovery to its broker partners and to regain lost market share.

Looking forward, Street’s target is simply to maintain its typical market share of ~9% and to remain as the third or fourth largest originator in the broker channel. If anything, we’d expect its attraction to brokers should increase once it becomes a one-stop shop following its introduction of Alt-A mortgages, and we think it reasonable to expect that it should be able to at least maintain share in this channel over time.

Renewal Volumes – Driver of 2017 Growth

The vast majority of loans issued by Street carry five-year terms, meaning that it will have the opportunity to renew existing loans roughly every five years. Street targets a renewal success rate of 75%-80% and achieved a rate of “over 75%” in 1Q16. Renewals provide a sizeable, growing and visible pipeline of future originations that are more profitable than originations from new customers due to the minimal acquisition costs involved.

Considering that Street only began issuing prime mortgages in 2008, it only began to renew five-year loans in 2013, since which time the level of renewals has generally been growing as a percentage of total origination volumes.

2%

4%

6%

8%

10%

12%

14%

1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Scotiabank, 16.6%

First National, 14.3%

Street Capital, 8.8%

MCAP, 7.3%

Home Trust, 7.9%

RMG Mortgages,

5.6%

TD Canada Trust, 7.6%

Merix Financial, 7.1%

National Bank, 4.0%

Equitable Bank, 4.1%



Exhibit 34: Street Capital Renewals as a % of Total Mortgage Originations

Source: Street Capital Group

Fluctuations in the level of renewal volumes are causing some temporary but material volatility in Street’s mortgage origination trend. In 2011 and 2012, due to borrower demand, there was a temporary spike in the issuance of three- and four-year mortgages. The result was a “cohort bump” resulting in a surge of renewals in 2015, when volumes included a higher-than-normal level of three-to-four year renewals of 2011-2012 vintage loans in addition to a normal level of five-year renewals of 2010-vintage loans.

The hangover effect of this cohort bump will be a below-normal level of renewals in 2016E as a portion of mortgages issued in 2011 that would normally be coming up for renewal this year had been pulled forward to 2015. Similarly, 2017E renewal volumes will not reflect a full year’s worth of activity due to the above-average level of shorter-term loans issued in 2012. The cohort bump impact will be far lower in 2017E, in our estimation, and should be overwhelmed in impact by a significant increase in the number of five-year loans coming up for renewal that year.

Based on its existing book of business and its targeted renewal success rate, Street expects that renewal volumes in 2016 will be 15% lower than in 2015, and that 2017 renewals will be 10%-15% higher than 2015 levels (i.e., 29%-35% higher Y/Y). A 2017E rebound of this size seems reasonable considering that originations grew Y/Y by 62% in 2012, providing significant growth in the pool of mortgages that will become eligible for renewal in 2017.

We forecast 15% Y/Y growth of renewal volumes in 2018E which could be a conservative assumption considering that originations grew by 29% in 2013 and that this will be the next year in which a full year’s worth of five-year mortgages will be coming up for renewal.

Prime Mortgage Origination Forecasts: 4.5% CAGR from 2015-2018E

Street’s most recent guidance calls for 2016 mortgage sales to be “at least” equal to 2015 volumes despite the anticipated decline in renewal volumes. This suggests an expectation of modest growth in the level of originations from new customers, which is directionally consistent with the market forecasts of CREA and the MPC discussed above. We estimate that if renewal volumes were to decline by 15% in 2016E as projected by management, origination volumes from new customers would have to increase by just 3.7% in 2016E in order for total mortgage sales to hold steady Y/Y, an easy hurdle to surpass, in our opinion, considering CREA’s 2016E market forecasts of 10.8% Y/Y pricing growth and 6.1% volume growth.

Our forecasts for Street call for total prime mortgage sales (including renewals) to increase by 0.5% in 2016E, 7.1% in 2017E and 6.0% in 2018E. These forecasts assume that brokers’ share of mortgage originations and Street’s share among brokers (after recovering in 2H16E) will both remain static going forward, that the level of renewals will decline in 2016E before playing catch-up in 2017E (as discussed above), and that the pace of market-wide origination growth will accelerate in 2016E before stalling in 2017E. By 2018E, we expect that both the pace of market-wide mortgage credit growth and the level of Street’s renewals (vs. underlying MUA) will revert towards “normal” levels. Our forecasts are shown in Exhibit 35:

0%

5%

10%

15%

20%

25%

30%

3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16



Exhibit 35: Prime Mortgage Origination Forecasts (C$’000s)


Financial Forecasts

Exhibit 36: Summary Earnings Forecasts


2016E will be a Year of Transition – Our earnings forecasts call for a 13% Y/Y decline in adjusted EPS in 2016E, with the following factors contributing to temporarily negative near-term earnings momentum:

7,753

9,037 9,0849,732

10,319

-

2,000

4,000

6,000

8,000

10,000

12,000

2014 2015 2016E 2017E 2018ENew originations Renewals

($ thousands, unless otherwise noted) 2014 2015 1Q16 2Q16E 3Q16E 4Q16E 2016E 2017E 2018E

Revenue

Net gain on sale of mortgages 56,483 76,068 12,597 21,861 21,266 17,909 73,633 82,288 88,716

Net interest income - Alt-A mortgages - - - - - - - 2,521 11,885

Net interest income - other - - - - - - - 24 (41)

Provisions for credit losses - - - - - - - (47) (214)

Net interest income after PCL - - - - - - - 2,498 11,630

Other income 5,789 (1,052) 628 371 409 411 1,819 1,361 1,311

Total revenue 62,272 75,016 13,225 22,232 21,675 18,320 75,452 86,147 101,657

Expenses `

Salaries and benefits 24,056 28,148 6,738 7,200 7,392 7,460 28,790 31,381 34,205

Selling, general and administrative 13,736 14,641 3,147 3,984 3,981 4,373 15,484 17,032 18,736

Total expenses 37,792 42,789 9,885 11,184 11,373 11,833 44,274 48,414 52,941

Income before restructuring, fair value adjs. and taxes 24,480 32,227 3,340 11,049 10,302 6,487 31,178 37,734 48,716

Restructuring expenses and fair value adjs. 26,983 (62,132) 461 - - - 461 - -

Income taxes (7,045) (6,835) (1,111) (2,928) (2,730) (1,719) (8,488) (9,999) (12,910)

Income from continuing operations 44,418 (36,740) 2,690 8,121 7,572 4,768 23,151 27,734 35,806

Discontinued operations (11,594) 17 9 8 8 8 33 32 16

Non-controlling interest 19,895 (6,688) (304) - - - (304) - -

Net income attributable to shareholders 12,929 (30,035) 3,003 8,129 7,580 4,776 23,488 27,766 35,822

Adjusted net income 17,435 23,773 2,444 8,121 7,572 4,768 22,905 27,734 35,806

Key metrics:

EPS - diluted $0.13 -$0.27 $0.02 $0.07 $0.06 $0.04 $0.19 $0.22 $0.29

Y/Y growth nmf nmf -29% -118% 5% -268% nmf 17% 27%

EPS - adjusted $0.18 $0.21 $0.02 $0.07 $0.06 $0.04 $0.19 $0.22 $0.29

Y/Y growth nmf 22% -39% -23% 8% -2% -13% 20% 27%

Return on equity 12.4% -25.9% 10.0% 25.8% 22.6% 13.6% 18.0% 17.8% 19.0%

Return on equity - adjusted 16.7% 20.5% 8.1% 25.8% 22.6% 13.6% 17.6% 17.8% 19.0%

Net gain as % of mortgages sold 0.73% 0.84% 0.83% 0.80% 0.80% 0.82% 0.81% 0.85% 0.86%

Net interest margin - Alt-A mortgages - - - - - - - 2.43% 2.50%

Opex as % of mortgages sold 0.49% 0.47% 0.65% 0.41% 0.43% 0.54% 0.49% 0.48% 0.49%

Opex as % of revenue 60.7% 57.0% 74.7% 50.3% 52.5% 64.6% 58.7% 56.2% 52.1%

Effective tax rate 28.4% 33.6% 29.2% 26.5% 26.5% 26.5% 26.8% 26.5% 26.5%

Note: "Net interest income - other" is included in "Other Income" prior to 2017E.



- an inflated cost base that includes increased spending on enhanced processes and controls ahead of achieving bank status, without the offset of incremental revenues that bank status is expected to achieve;

- a temporary ~15% Y/Y reduction in the level of mortgage renewals following a surge in 2015, both of which relate to an unusual break from the typical staggering of renewal timing;

- an expected contraction of margins earned on the sale of mortgages vs. 2015 levels; and - equity dilution related to a late-2Q15 restructuring and share exchange that resulted in

the issuance of 20 million common shares (i.e., our 2016E adjusted earnings forecast is 4% lower vs. 2015 before converting to per share metrics).

Street is a 2017E Growth Story – We forecast adjusted EPS growth of 20% in 2017E, a reversal in relative earnings momentum that we expect will be supported by a return to more normal mortgage renewal levels and the introduction of net interest income from newly-originated near-prime mortgages.

Near-Prime Mortgage Growth Should Begin to Drive Superior Earnings Growth Beginning in 2018E – We expect a growing NII contribution from Alt-A loans to support total revenue and earnings growth of 18% and 27%, respectively, in 2018E. The acceleration of near-prime related revenues in 2018E will dovetail nicely with the deceleration we expect in gains on mortgage sales (i.e., as renewal volumes settle back towards “normal” levels following a year of catch-up growth in 2017E) to maintain a double-digit EPS growth profile, based on our forecasts.

We Forecast a Cash ROE of 24%-26% - Based on our forecasts, we expect Street to generate an adjusted ROE of 17.6% in 2016E, 17.8% in 2017E and 19.0% in 2018E. Considering that Street does not expect to pay any cash taxes for several years, however, our cash return on equity forecasts are much higher at 24%-26% over the next three years, representing a high level of internal cash generation available to support growth and, eventually, a possible dividend payout.

We discuss the major components of our earnings forecasts below:

Gains on Mortgage Sales; Growth to Mature Following an Expected Surge in 2017E – Street’s primary source of revenue is gains from the sale of prime mortgages that it originates, representing both the cash premium at sale and the NPV of servicing fees expected over the life of underlying mortgages (net of related costs). The level of gains earned by Street is a product of three factors: the dollar volume of mortgages sold, the gross gain on sale (i.e., expressed as a yield) and acquisition costs (also measured as a % of mortgages sold).

The gross level of gains (as a % of mortgages sold) can be somewhat volatile from quarter to quarter, driven mainly by fluctuating levels of market-based competition (i.e., Street is a price taker), but over time tends to revert towards the ~180bps level. Over the past three years, the gross gains ratio has ranged between 1.75% - 1.82% on a full-year basis, and between 1.67% - 1.92% on a quarterly basis. Street earned a yield of 1.77% on gains in 1Q16 and its guidance is for 2016E is 1.78% - 1.82%. Consistent with this relatively steady trend, we assume a consistent gross yield of 1.80% in our forecasts.

Acquisition costs are netted from gross gains to arrive at the net gain on sale. In our forecasts, we assume that the level of acquisition costs on new loan originations should remain fairly steady. The overall acquisition cost ratio (including renewals) will vary, however, based on the amount of renewals in the originations mix considering that the cost of renewals is quite low at ~80 bps lower than for new originations (i.e., at ~30 bps). Accordingly, based on our forecast of resurgent renewal volumes, we forecast slight improvement in the average acquisition cost in each of 2017E and 2018E, supportive of an expanding net gains yield.

Overall, we forecast a 3% Y/Y decline in net gains on sale in 2016E on a combination of ~1% growth in mortgage originations and an expected 4% (3 bps) contraction in the net gain ratio resulting from both a slight contraction in the level of gross gains (i.e., 1H15 gains were abnormally high) and a decrease of renewals in the mix.



We forecast 12% Y/Y growth in net gains on sale in 2017E due to a combination of 7% forecast growth in prime mortgage originations and an expected 5% (4 bps) expansion in the net gains ratio. For 2018E, we forecast 8% Y/Y growth in net gains.

Exhibit 37: Gains as a % of Prime Mortgages Sold, Quarterly Exhibit 38: Gains as a % of Prime Mortgages Sold, Annually

Source: Street Capital Group Source: Street Capital Group, Raymond James Ltd.

NII From Near-Prime Mortgages; The Primary Driver of Street’s Medium-Term Growth Outlook – Street’s internal plan, as submitted to OSFI in conjunction with its bank application process, calls for NII from near-prime mortgages (net of related deposit funding costs) to grow in size to the equivalent of 2%-5% of 2015 revenues in 2017E (i.e., $1.5-$3.8 million) and to 10%-20% of 2015 revenues in 2018E (i.e., $7.5-$15.0 million).

Assuming that the company receives its bank license in 2H16E, we believe there is a very high probability that it should be able to achieve its near-prime NII targets over the next two years. As discussed earlier, the level of near-prime originations implicit in the company’s revenue guidance is modest in relation to the volume of prime mortgage applications that it currently reviews and turns down. In its initial three years operating as a bank, Street will be required by OSFI to adhere very closely to its submitted business plan, meaning that it will not be able to grow much more aggressively than planned even if able to. We expect that Street will initially have the luxury of being particularly selective in approving loans as it will likely need to restrict supply relative to demand. We expect it will achieve this by limiting the number of brokers permitted to sell its new near-prime product, and also by using loan pricing as a means of establishing equilibrium.

As a result, we expect that Street will be able to enjoy relatively healthy yields (i.e., vs. competitive product) on near-prime mortgage originations through at least 2018E, which makes us comfortable using the yields earned by HCG and EQB on similar Alt-A product as benchmarks in setting our margin forecasts for Street. In 2015, HCG earned an average yield of 4.99% on its Alt-A portfolio, while EQB earned 4.79% on a portfolio that included some commercial loans (i.e., restricting its comparability). Smaller Alt-A competitor Equity Financial (EQI-T) earned a 4.86% yield in 2015. We have assumed a slightly lower 4.70% average yield for Street for both 2017E and 2018E as we expect it will initially focus on the higher-quality end of the near-prime credit spectrum.

We assume that its Alt-A portfolio will be slightly over-funded by deposits in 2017E and fully matched by deposit funding in 2018E. We forecast that the applicable deposit rate will be 2.20% through both 2017E and 2018E, resulting in a forecast net interest margin on Alt-A loans of 2.43% in 2017E, and 2.50% in 2018E. As at 1Q16, the average deposit rates of peers HCG and EQB were in the 2.00%-2.10% range, suggesting the potential for Street to achieve lower deposit rates than our 2.20% forecast once it becomes a more seasoned issuer of GICs.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15Gross gain on sale Net gain on sale

0.00%

0.50%

1.00%

1.50%

2.00%

2011 2012 2013 2014 2015 2016E 2017E 2018EGross gain on sale Net gain on sale



Our near-prime NII forecasts for Street are as follows:

Exhibit 39: SCB Alt-A Net Interest Income Forecasts (C$’000s)


“Other Income” is Immaterial – Outside of gains on mortgage sales, Street currently has no other material source of revenues. To date, “Net Interest and Other Income” has been a catch-all for a number of generally immaterial revenue and cost types that collectively amounted to a net pre-tax loss of ~$1.0 million in 2015, or net revenues of ~$600,000 excluding a one-time provision related to a discontinued asset. Our forecasts call for aggregate Net Interest and Other Income from the legacy business (excluding one-time items) of $1.2-$1.4 million/year from 2016E-2018E. Larger components of this revenue line include the following:

- Net Interest Income from Prime Mortgage Lending – This includes the nominal amount of NII earned on both warehoused loans (i.e., originated but not yet sold or securitized) and on its small portfolio of securitized mortgages. Street incurred a net cost of $(0.2) million from this NII type in 2015, and we are forecasting prime mortgage-related NII of ~$0.6 million/year through 2016E-2018E.

- Servicing and Fee Income – This line represents the variance between the actual cash receipts related to servicing mortgages and the amortization of deferred placement fees established at the time of mortgage origination. When it turns out that Street has conservatively accrued for these fees relative to actual experience, the result is positive servicing fee revenue as in both 2014 (revenue of $1.8 million) and 2015 (revenue of $1.3 million). We are forecasting flattish servicing fees through 2018 (i.e., of ~$1.3 million per year) on the assumption that a consistent level of conservatism has been applied in establishing deferred placement fees over time.

- Interest Expense – Interest expense incurred on the company’s operating bank line is recognized here, amounting to $(0.9) million in 2015 and forecast to remain in the range of $(0.6) million to $(0.8) million per year through 2018E.

Beginning at 1Q17E, we break out the NII-related components (i.e., on prime mortgage lending and on the operating credit facility) separately in our forecasts, as we expect the company will also begin disclosing NII as a separate revenue component once it begins building a yield-generating Alt-A portfolio. From that point forward, our “Other Income” forecast includes only servicing and fee income.

A Cost Structure Befitting the Bank that Street is About to Become – Although total operating expenses increased by 13% in 2015 to $42.8 million, they remained consistent relative to corporate activity levels at 0.47% of mortgages sold vs. 0.49% in 2014. Given that mortgage sales grew by 17% in 2015 and the fact that a decent portion of costs are effectively fixed in nature, we might normally have expected Street’s operating expense ratio to improve nicely on this sort of top-line growth due to improving operating leverage. These are not normal times, however, in the lead up to receiving a bank license.

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500




Exhibit 40: Components of 2015 Operating Expenses Exhibit 41: Operating Expenses as % of Mortgages Sold

Source: Street Capital Group, Raymond James Ltd. Source: Street Capital Group, Raymond James Ltd.

In preparation of becoming a bank, Street built out in advance its infrastructure in areas such as internal audit, governance (i.e., an expanded board), finance and underwriting while incurring above-normal expenditures in areas such as professional services (e.g., IT consulting) and legal & regulatory costs directly related to the bank application process. The result is that Street has been carrying incremental bank-related costs, now at a run rate of ~$5 million per year (management’s estimate), that are as-yet unproductive.

For 2016, management expects a modest increase in run rate spending levels as incremental staff is added and occupancy costs rise in conjunction with the rollout of new product categories. For the following two years, management is aiming to maintain a flat operating efficiency ratio as it grows its new lines of business. We therefore do not assume any operating leverage relative to origination levels due to uncertainty regarding the level of incremental costs that might be required to support this upcoming growth phase. In our forecasts, we assume that the ratio of operating expenses to mortgage originations will rise slightly from 0.47% in 2015 to 0.49% in 2016E and that this ratio will be roughly maintained through 2018E.

Although we do not assume any efficiency improvement relative to mortgage origination levels, we do expect its efficiency ratio (i.e., expenses as a percentage of revenues) to improve in each of 2017E (by 250 bps to 56.2%) and 2018E (by 410 bps to 52.1%) as the recurring stream of net interest income arising from Alt-A originations contributes incrementally to revenues.

Earnings Should Be Shielded from Cash Taxes for the Foreseeable Future – As at 1Q16, SCB had a sizeable $307 million balance of non-capital loss carry-forwards with expiration periods of up to 20 years available to shield it from paying cash taxes. Assuming an effective tax rate of 26.5% and EPS growth of 3%/year beyond 2018, we estimate that its existing tax loss pool would protect it from cash taxes for approximately 20 years, which is the expiration window on its longest-dated loss carryforwards. We believe this is a relevant valuation consideration, as straight-up P/E multiples do not give fair credit for the incremental cash flow that this tax shield should yield for the foreseeable future, representing incremental internally-generated funding available to support the planned growth of its on-balance sheet mortgage portfolio. We estimate the NPV of this tax shield at page 36.

The Noise has Almost Ended – Street’s financial reports in recent periods have been complicated by two factors that should both have negligible, if any, impact on its results going forward:

- Now that all planned non-core business dispositions have been completed other than a nominal amount of real estate investment that remains on the books, we do not expect any further earnings impact related to discontinued operations.

- As general partner of the Knight’s Bridge Capital Partners Fund in which it is a minority co-investor, Street fully consolidates the fund, which has resulted in material levels of earnings attributable to non-controlling interests in previous periods. This fund has been almost fully wound down and its only remaining investment of significance is a residual equity position in Differential Brands Group, which we expect it to sell in 2016

Salaries and

benefits66%

Professional services

10%

Legal and

regulatory2%

Premises4%

Bus iness development

7% Other

11%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1Q14 3Q14 1Q15 3Q15 1Q16 2014 2016E 2018E

Quarterly Annually



or 2017. Future fair value adjustments (and the related earnings attributable to non-controlling interests) should therefore be limited to fluctuations in the value of this holding, and should cease to occur once this position has been sold. The total value of portfolio investments at 1Q16 was $5.2 million, of which only $1.7 million was attributable to Street.

Pristine Credit Quality as a Differentiator

Even though Street bears no residual credit risk associated with the prime mortgages that it originates and subsequently sells or securitizes, maintaining pristine credit quality has remained a cornerstone of its corporate culture. The reason for this is that low default rates make its mortgage product attractive to institutional investors that provide funding for its originations, such that demand for Street’s mortgages might decline if its credit quality metrics were to deteriorate.

The company’s focus on credit quality assurance is evident in the historical performance of the mortgages that it has originated. Its Serious Arrears Rate (i.e., mortgages in arrears for over 90 days plus those in legal action due to non-payment as a % of mortgages under administration) consistently outperforms that of the Canadian banks and exited 2015 at just 14 bps vs. the banks’ average of 27bps, consistent with the ~11 bps advantage Street has enjoyed, on average, over the past three years (Exhibit 42). It also outperforms the industry in terms of Early Default Rate (i.e., defaults within nine months of origination), which, at 5 bps, is currently well below the CMHC average of 12 bps.

Exhibit 42: Arrears Rate - Street Capital vs. Canadian Bank Average (bps)

Source: Street Capital Group, Canadian Bankers Association

We note that Street achieves this superior credit quality despite the fact that it originates mortgages through brokers, without any direct incoming customer relationship. The banks, on the other hand, often have longer-term, multi-product relationships with their customers that presumably provide incremental financial insights useful to the underwriting process. We credit Street’s relative success to both its underwriting conservatism and to its relatively intense process, which features the following attributes:

- Heavy Investment at the Underwriting Level – Street aims to compensate its underwriters towards the high end of the competitive range in order to maintain a high quality team. It also staffs this team at a relatively high level such that underwriters are given more time to review each file, enabling improved decision making. Street’s underwriters review fewer than six deals per day, on average, a fraction of the industry average, according to management.

- Heavy Investment in Quality Assurance – Over 40% of files are subject to either pre-funding or post-funding quality assurance (QA) testing, a much higher level of review than the industry average, according to management. When a new broker relationship is established, 100% of mortgage applications originating from that broker will be subject to pre-funding QA for a period of time until Street is satisfied with the quality of its submissions. Each underwriter will periodically have a batch of their files subjected to

10

15

20

25

30

35

3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Street Capital CBA Bank Composite

Street Capital a verage outperformance: 11 bps



post-funding QA as a check on their performance. Certain higher-risk applications (e.g., deals with “rush” closing dates) are automatically flagged for pre-funding QA. Street also conducts a significant amount of random post-funding QA to provide continuous feedback on the quality of mortgage applications being submitted by the brokers that it works with.

- Separation of Functions – Risk management, sales and underwriting functions are separated and are each compensated differently in order to preserve the integrity of the process. Within the underwriting function, Junior Underwriters perform independent review of key information, with employment verification calls made for 100% of files.

- A Regional Approach to Underwriting – Street has underwriting offices in each of Toronto, Vancouver and Calgary, a regional approach that it believes results in better insights in assessing applications on a community-by-community basis.

- External Audits Provide Additional Assurance – The institutions that provide funding to Street regularly conduct on-site audits in order to gain firsthand comfort in the continued quality of the mortgages it is originating. Likewise, mortgage insurers regularly conduct their own audits. These external reviews provide Street with additional feedback on how its underwriting process is functioning.

- Regular Reassessment of Underwriting Criteria – Changing market and macro conditions are regularly factored into Street’s credit review process, and it has demonstrated a willingness to proactively restrict originations for the sake of preserving credit quality. For example, Street became more restrictive in underwriting mortgages from Alberta beginning in early 2014, a major reason for the province falling from 23% of total originations in 1H14 to 14% in 2015.

In early 2015, the issue of fraudulent mortgage applications in the mortgage broker channel impacted one of Street’s competitors and became an industry-wide point of concern and area of focus for regulators. We find it notable that throughout this period, fraudulent mortgages have not been identified as an issue for Street despite heavy scrutiny by OSFI in its on-site review and ongoing audits by both funding institutions and mortgage insurers.

Street has assembled a team of ~10 underwriters with Alt-A experience that is ready to begin reviewing near-prime mortgage applications once they begin coming through. Due to the higher- risk aspects of the debt servicing capabilities of near-prime borrowers, greater emphasis will be placed on assessing the value and liquidity of properties serving as collateral. Property appraisals will be performed for all loans by appraisers from a pre-approved list, and loan-to-value ratios will be constrained to levels designed to provide plenty of collateralization buffer in the event of default. The company expects an average loan-to-value ratio for Alt-A loans in the 65% range.

We assume a very low level of provisions for credit losses (PCL) in our 2017E-2018E forecasts as its near-prime portfolio will remain relatively small through this initial ramp-up period, and also because it will take time for these new loans to season to the point that arrears begin approaching “normal” levels. To provide some context on typical credit loss rates for the type of near-prime mortgage loans Street intends to offer, we show the recent provisioning history of peers HCG and EQB in Exhibit 43.



Exhibit 43: PCL Ratios (% of Loans), Alt-A Mortgage Providers

Source: Equitable Group, Home Capital Group

Funding Considerations

Street currently uses two types of funding for the prime mortgages that it originates:

Institutional Buyers of Mortgages – Street’s customary and primary means of funding the mortgages that it underwrites is to sell them on a whole loan basis to regulated financial institutions. Prior to 2014, this was its only available funding source for originated mortgages (other than a small and fluctuating balance of temporarily warehoused mortgages funded by a dedicated bank line), and going forward we expect it will continue to rely almost exclusively on this source of funding (i.e., vs. MBS issuance). Street currently has three large institutional funding partners (two large Canadian banks and one U.S. bank), of which two accounted for 85% of Street’s newly-originated mortgage volumes in 2015. Although this represents a fair degree of concentration risk to its funding sources, we note that Street now also has access to the MBS market, has never been unable to secure demand for its originations, and is actively working towards expanding its list of institutional funding partners, with at least one addition expected in 2016.

Securitization via Mortgage-Backed Securities – In order to diversify its funding sources and provide an alternative source of liquidity, Street gained approval in May-2013 to securitize prime insured mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program and became an approved seller under the Canada Mortgage Bond (CMB) program. Street has made modest use of its MBS issuance capability to-date, issuing none in 2013, $50 million in 2014 and $125 million in 2015 (i.e., vs. $9.0 billion of mortgages sold in 2015). Although these levels of securitization were modest, they demonstrated the company’s ability to process these transactions and to access this source of funding.

No mortgages were securitized in 1Q16, and the company has indicated that future securitization levels are likely to be nominal, if any. Its reluctance to use this funding source relates to the regulatory capital constraints that it will become subject to as a Schedule I bank, as securitized mortgages, unlike mortgages that have been sold on a whole loan basis, are included in the numerator of the Leverage Ratio’s formula. In our forecasts, we assume no further securitization activity.

Capital Considerations

Street has a clean capital structure, consisting solely of common equity and a syndicated credit facility that is used primarily to fund warehoused mortgage loans (i.e., newly-originated loans that have not yet been sold) on a short-term basis. Its current business model is not very capital intensive, as it does not retain originated mortgages on its own balance sheet beyond a brief warehousing period, and its core debt level is quite low with total bank debt representing just 10% of equity at 1Q16.

PCL Ratios (% of Loans), Alt-A Mortgage Providers

Note: For Home Capital, ratio is individual provisions on single-family residential mortgages except 2010 and2011, where disclosure by product was for total provisions. For Equitable, ratio is Individual Provisions for mortgage principal on balance sheet.

0.00%

0.04%

0.08%

0.12%

0.16%

0.20%

0.24%

2009 2010 2011 2012 2013 2014 2015




Capital-related considerations at this point (i.e., excluding regulatory capital issues, discussed earlier) include:

A Sizeable Bank Facility With Plenty of Headroom – Street has a $165 million revolving credit facility with a syndicate of Canadian banks, of which $12 million was drawn at 1Q16. This facility is comprised of three separate tranches, each with a different purpose, as follows:

- Insured Loans Facility ($125 million; BA +1.25%) – This tranche can be used to fund up to 98% of the value of insured mortgage loans on Canadian properties, and is essentially used as a warehouse line to finance insured loans that have yet to be sold or securitized. Just $0.5 million was drawn at 1Q16.

- Conventional Loans Facility ($25 million; BA +2.50%) – This tranche has a similar purpose as the insured loans facility, and can be used to fund up to 80% of the value of conventional insurable mortgage loans. These are loans awaiting mortgage insurance coverage, typically expected within weeks, not to be confused with the type of non-prime mortgages that Street intends to originate in future. No balance was drawn from this facility as at 1Q16.

- Operating Line ($15 million; BA +2.50%) – $11.5 million was drawn at 1Q16, up from $5.0 million at 4Q15.

We expect that Street should be able to establish an additional warehouse line capable of funding Alt-A mortgages when the need arises, although at a higher borrowing rate than its existing warehouse lines. This would likely serve only as a liquidity backstop, however, as the company’s plan is to fully fund these loans via lower-cost deposits.

Dividend Initiation Likely to (Eventually) Follow Approval of its Bank Application – In its previous life as Counsel Corporation, the company occasionally paid out special dividends following the monetization of significant investments, or dividends-in-kind to distribute certain investments as a means of disposition. Although it does not currently pay a regular dividend, we believe that Street intends to initiate one at some point following its conversion to a Schedule I bank once it has established a growing stream of recurring revenues from retained mortgages, in line with the practice of its industry peers. If it does, we would not expect it to target a payout ratio as high as more mature peers for some time considering that: (a) it will want to retain capital to support growth and (b) it should want to retain a comfortable cushion in its payout ratio as long as potentially volatile gains on mortgage sales remain the dominant driver of its revenues (and distributable cash flow). We expect the company to initiate a dividend in its third year operating as a bank (i.e., in 2019).

2% Buyback In Place – The company initiated a share repurchase program effective March 23, 2016 allowing it to buy back up to 2.44 million shares (2% of outstanding) over the following year, with maximum daily purchases of 8,043 shares. We expect this facility will be used sparingly, with the company preserving capital to support the balance sheet growth it expects will follow its transition to a Schedule I bank. Having said that, management made it clear that it expects to have ample capital to execute buybacks without impairing its ability to achieve its growth forecasts, emphasizing its confidence that it is already sufficiently capitalized for the foreseeable future. Our forecasts do not assume any buyback activity.

Valuation & Recommendation

We are initiating coverage of Street with an Outperform rating and a $1.65 target price, which is based on a target 2017E P/E of 7.5x. Our target valuation is based on the following considerations:

Street’s Historical Valuation Range is of Limited Relevance – Although the company has a long history as a publicly-traded entity, it has only been in its current pure-play form for roughly two years, too brief a period to provide adequate valuation context, in our opinion, particularly as it doesn’t encompass an entire business cycle. Prior to Jun-2015, Street was named Counsel Corporation and traded under the ticker CXS. It was only in Apr-2013 that CXS announced its intention to dispose of its non-mortgage businesses, a process that was materially complete by Apr-2014. Since announcing plans to become a pure-play mortgage lender in Apr-2013, Street’s forward P/E has averaged 7.4x. At its current forward P/E of 6.3x, Street is trading at a 15% discount to its recent ~3-year average P/E.



Exhibit 44: Street Capital Group Historical Forward P/E Multiple

Source: Bloomberg

Due to Street’s limited history trading as a pure-play mortgage lender, we turn instead to the valuation histories of its key market peers to provide some historical context. Below, we consider both: (a) the current valuation of peers vs. their historical trading ranges; and, (b) the relative valuation of Street vs. the same peers on a current basis.

Peers Are Currently Trading Fairly Close to Historical Average P/E Levels – Exhibit 45 shows the 10-year histories (where available) of the forward P/E ratios of the four-largest Canadian mortgage sector stocks – HCG, MIC, EQB and FN – which we consider to be SCB’s primary publicly-traded Canadian peers.

Exhibit 45: Canadian Mortgage Peers – Historical Forward P/E Multiples

Source: Bloomberg

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16

Forward P/E Average +/- 1 Std. Dev.

Announced plans to become a pure-play mortgage lender

Exited its asset liquidation business via a dividend--in-kind

Announced the sale of its case goods business

Corporate realignment announced,including changes to the company's

executive management, board and name.

2.0x

6.0x

10.0x

14.0x

18.0x

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Home Capital Equitable First National Genworth



Exhibit 46: Canadian Mortgage Peers – Current Forward P/E Ratios vs. Historical Averages

Source: Bloomberg

The stocks in this group are, on average, currently trading 4% higher than their one-year average valuation levels and 1% below their 5-year averages, fairly close to historical average P/E ratios in both cases. Stocks primarily exposed to SCB’s current core market of prime mortgages (i.e., FN and MIC) are both trading above historical average P/E levels, while those with exposure to the Alt-A market (i.e., HCG and EQB) are both trading low within their historical valuation ranges.

Each of these stocks are comfortably below peak valuations achieved in 2014, however, with HCG and EQB trading at discounts of 28% and 11%, respectively, relative to their 10-year P/E averages.

In the context of historical valuation ranges, we assess the group’s current average forward P/E of 8.1x as fair considering our stable outlook for the Canadian housing (and mortgage) market, as well as consensus EPS growth forecasts for this group, which average 5% for 2016E and 7% for 2017E. We therefore believe that the current valuations of this peer group provides fair context for the relative valuation of Street.

Street Currently Trades at a Sizeable Discount vs. Peers – We compare the current valuation of Street vs. select Canadian peers below:

Exhibit 47: Canadian Mortgage Sector Peers – Valuation Comparison

Source: Bloomberg, Raymond James Ltd.

Compared with the peer average, SCB is currently trading at discounts of 22% on 2016E P/E and of 30% on 2017E P/E. On P/BVPS, SCB’s 1.2x multiple is comparable to the 1.1x average of the group ex-FN.

In our opinion, based on its existing pre-bank business model and near-term earnings outlook, Street deserves to trade at some level of P/E-based valuation discount vs. its Canadian mortgage peer group considering the following:

- There are incremental risks associated with the timing and execution of Street’s transition to bank status.

- Street’s revenues are currently comprised primarily of gains on the sale of mortgages and are therefore reliant primarily upon transaction volumes, potentially representing increased revenue volatility vs. peers that are more exposed to relatively steady spread-based income.

- Street’s current product offering, target market, distribution and funding sources are generally less diversified than these peers, although we expect it will gradually become more aligned in these respects following receipt of its banking license.

- Unlike each of these peers, Street does not currently pay a dividend. - Street has a relatively small market capitalization and has less-liquid trading volumes

compared with these peers.

Current 1-year avg. 5-year avg. 10-year avg. 1-year avg. 5-year avg. 10-year avg.

EQB 6.6x 6.8x 7.0x 7.4x (3%) (6%) (11%)

FN 10.6x 9.1x 9.4x na 16% 12% na

HCG 6.7x 7.2x 8.4x 9.4x (6%) (20%) (28%)

MIC 8.6x 8.0x 8.0x na 8% 8% na

Average: 8.1x 7.8x 8.2x 8.4x 4% (1%) (19%)

Current vs:

Price Mkt Cap. Dividend

06-Jul-16 ($ mln) Yield 2015A 2016E 2017E 2015A 2016E 2017E 2015A 2016E 2017E P/BV

Mortgage Lending Peer Group

Equitable Group Inc. $54.92 $855 1.5% $7.69 $7.81 $8.75 15.7% 1.6% 12.0% 7.1x 7.0x 6.3x 1.1x

First National Financial Corp. $29.99 $1,798 5.7% $2.32 $2.74 $2.93 8.9% 18.2% 6.8% 12.9x 10.9x 10.2x 5.3x

Genworth MI Canada Inc. $32.65 $2,997 5.1% $3.88 $3.76 $3.80 (0.7%) (3.0%) 0.9% 8.4x 8.7x 8.6x 0.9x

Home Capital Group $30.32 $1,995 3.2% $4.14 $4.31 $4.69 1.2% 4.1% 8.9% 7.3x 7.0x 6.5x 1.3x

Group Average 3.9% 6.3% 5.2% 7.1% 9.0x 8.4x 7.9x 2.1x

Street Capital Group 1 $1.24 $151 NA $0.21 $0.19 $0.22 21.8% (12.6%) 19.8% 5.8x 6.6x 5.5x 1.2x1 - Raymond James Ltd. Adjusted EPS estimates

P/E MultiplesAdjusted EPS Earnings Growth



- Street’s near-term earnings growth outlook is soft vs. these peers, with our forecasts calling for a Y/Y EPS decline of (13)% in 2016E before resuming growth in 2017E. As discussed earlier, 2016 is a transition year for Street in which it is carrying an inflated cost base ahead of its bank transition, and which is expected to feature a temporary decline in renewal-based mortgage originations.

Offsetting considerations in support of Street’s relative valuation, in our opinion, are as follows:

1) We Believe that Street is About to Enter a Multi-year Period of Outsized Growth – A relevant valuation consideration, in our opinion, is the potential for Street to enjoy a multi-year period of above-average earnings growth following receipt of its banking license should it be able to successfully and profitably originate and fund a growing book of near-prime mortgages. Street will be starting from scratch in its new product markets, and even modest market penetration will have the potential to drive material incremental earnings growth that could, in turn, support a higher valuation multiple. Following an expected EPS decline in 2016E, we forecast above-average (vs. peers) EPS growth of 20% in 2017E driven by both a temporary rebound of prime mortgage renewal activity and the initial rollout of new near-prime product. We expect that Street will maintain above-average earnings growth through 2018 and beyond as it continues to evolve as a bank.

2) As a Bank, The Rationale for its Current Valuation Discount Should Diminish – As Street goes through the process of receiving its bank license and introducing its planned deposit and near-prime mortgage products, the risk level associated with its transition to bank status will naturally diminish. As it grows its stream of recurring net interest income and eventually introduces a dividend, relative valuation issues regarding its revenue diversification and stability and its current lack of yield should also decline.

3) Unlike Peers, Street Has a Sizeable and Valuable Tax Shield – Street maintains a sizeable tax shield that we estimate could protect it from paying cash taxes for the full 20-year term covered by its current pool of non-capital tax loss carryforwards. The incremental cash flows made possible by this tax shield will enable it to internally fund a higher degree of balance sheet growth, and should be given some degree of credit in valuing the company, in our opinion. Although we don’t expect investors will assign full value to this tax shield, we believe it has value that deserves at least partial recognition in the stock’s valuation. Our approach to partially recognizing the value of this tax shield is to implicitly consider it in establishing our target P/E at a higher level than we would use in its absence.

To illustrate the value of this tax shield, in Exhibit 48 we present a simplified NPV of Street’s tax loss carryforwards assuming 3%/year pre-tax earnings growth beyond 2018, an effective tax rate of 26.5% and a discount rate of 15% that arrives at an NPV of $0.79/share. We note the estimated value of this tax shield is sizeable vs. Street’s current share price of $1.24 and excludes potential additions to the pool of loss carryforwards that we expect would accompany continued growth of the insured mortgage portfolio.



Exhibit 48: NPV Estimation of Street’s Existing Pool of Non-Capital Tax Loss Carryforwards


At this point, we believe that it remains too early to fully factor Street’s bank-related growth potential into either its earnings or valuation given that that it has not yet achieved bank status and there remains a moderate degree of risk related to the timing and execution of the rollout and profitability of new products. We do, however, believe that Street will warrant a higher valuation a year from now vs. today as we expect it will have moved beyond the temporary earnings weakness of 2016 with the risk surrounding near-prime originations growth lower than it is today. Accordingly, we have established our target 2017E P/E of 7.5x at a modest premium to the company’s current forward P/E of 6.3x, in line with its historical average valuation and slightly below the sector’s current 8.1x average. Relative to our 2017E cash EPS forecast, our $1.65 target price equates to a target cash P/E of 5.5x.

Our $1.65 target price also equites to a multiple of 1.3x our 2Q17E BVPS forecast of $1.25, which we think is reasonable given our 2Q17E adjusted ROE forecast of 17.8% (and our cash ROE forecast of 24%).

2Q16E

to 4Q16E 2017E 2018E 2019P 2020P 2021P 2022P 2023P 2024P 2025P

Pre-tax earnings projections 27,838 37,734 48,716 50,177 51,682 53,233 54,830 56,475 58,169 59,914

Y/Y earnings growth assumed 29.1% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Effective tax rate 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5%

Income taxes shielded from cash payment 7,377 9,999 12,910 13,297 13,696 14,107 14,530 14,966 15,415 15,877

NPV (@15%) 7,377 8,695 9,762 8,743 7,831 7,014 6,282 5,626 5,039 4,513

Remaining tax loss carryforwards 299,541 289,542 276,632 263,335 249,639 235,532 221,003 206,037 190,622 174,745

2026P 2027P 2028P 2029P 2030P 2031P 2032P 2033P 2034P 2035P

Pre-tax earnings projections 61,711 63,563 65,470 67,434 69,457 71,540 73,687 75,897 78,174 80,519

Y/Y earnings growth assumed 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Effective tax rate 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5%

Income taxes shielded from cash payment 16,354 16,844 17,349 17,870 18,406 18,958 19,527 20,113 20,716 8,608

NPV (@15%) 4,042 3,621 3,243 2,904 2,601 2,330 2,087 1,869 1,674 605

Remaining tax loss carryforwards 158,391 141,547 124,198 106,328 87,922 68,963 49,437 29,324 8,608 -

Estimated NPV/Share:

Aggregate NPV 2016E-2035P 95,857

# Shares Outstanding 121,824

NPV/Share 0.79



Appendix A: Financial Statements

Exhibit 49: Income Statement


($ thousands, unless otherwise noted 2014 2015 2016E 2017E 2018E

Revenue

Gain on sale of mortgages 138,964 164,796 163,058 175,191 185,745

Acquisition costs (82,481) (88,728) (89,426) (92,903) (97,029)

Net gain on sale of mortgages 56,483 76,068 73,633 82,288 88,716

Interest income - Alt-A mortgages - - - 4,868 22,386

Interest on deposits and other - - - (2,347) (10,501)

Net interest income - Alt-A mortgages - - - 2,521 11,885

Net interest income - other - - - 24 (41)

Provision for credit losses - - - (47) (214)

Net interest income after provision for credit losses - - - 2,498 11,630

Other income 5,789 (1,052) 1,819 1,361 1,311

Total revenue 62,272 75,016 75,452 86,147 101,657

Expenses

Salaries and benefits 24,056 28,148 28,790 31,381 34,205

Selling, general and administrative 13,736 14,641 15,484 17,032 18,736

37,792 42,789 44,274 48,414 52,941

Income before restructuring, FVA and taxes 24,480 32,227 31,178 37,734 48,716

Restructuring expenses and fair value adjustments 26,983 (62,132) 461 - -

Income taxes (7,045) (6,835) (8,488) (9,999) (12,910)

Net income from continuing operations 44,418 (36,740) 23,151 27,734 35,806

Discontinued operations (11,594) 17 33 32 16

Non-controlling interest 19,895 (6,688) (304) - -

Net income attributable to shareholders 12,929 (30,035) 23,488 27,766 35,822

Adjusted net income 17,435 23,773 22,905 27,734 35,806

Key metrics:

EPS - diluted $0.13 -$0.27 $0.19 $0.22 $0.29

Y/Y growth nmf nmf nmf 17% 27%

EPS - adjusted $0.18 $0.21 $0.19 $0.22 $0.29

Y/Y growth nmf 22% -13% 20% 27%

Return on equity 12.4% -25.9% 18.0% 17.8% 19.0%

Return on equity - adjusted 16.7% 20.5% 17.6% 17.8% 19.0%

Shares outstanding, weighted average, basic and diluted 99,142 111,005 122,353 123,704 125,304

Note: "Net interest income - other" is included in "Other Income" prior to 2017E.



Exhibit 50: Balance Sheet


($ thousands, unless otherwise noted) 2014 2015 2016E 2017E 2018E

ASSETS

Cash and cash equivalents 23,022 8,846 27,815 56,633 79,812

Restricted cash 13,130 13,078 14,309 16,191 17,988

Loans

Prime residential mortgages 4,285 16,741 13,095 14,247 14,873

Non-prime residential mortgages - - - 269,301 713,183

Securitized mortgage loans 50,318 167,762 148,894 134,553 121,594

Allowance for credit losses - - - (47) (213)

Net Loans 54,603 184,503 161,989 418,054 849,437

Deferred placement fees receivable 38,749 46,442 51,512 58,289 64,758

Prepaid portfolio insurance 50,888 66,672 77,269 87,433 97,138

Deferred tax asset 9,939 14,135 13,975 6,483 6,483

Other assets 59,345 28,177 20,715 17,437 17,988

Goodwill and intangibles 29,588 28,864 28,678 28,678 28,678

Total assets 279,264 390,717 396,262 689,198 1,162,282

LIABILITIES

Deposits - - - 277,380 713,183

Bank facil ities 9,773 15,817 16,121 17,794 19,023

Loans payable 9,134 8,972 6,795 6,795 6,795

Securitization liabilities 50,546 167,380 148,894 134,553 121,594

Accounts payable and accrued liabilities 45,964 37,763 37,203 38,859 39,575

Deferred income tax liabilities 26,219 37,250 45,578 48,085 60,995

Liabilities of discontinued operations 1,167 1,166 1,166 1,166 -

Total l iabilities 147,711 268,348 255,757 524,633 961,164

EQUITY

Share capital 204,263 242,178 244,870 247,470 250,070

Contributed surplus 62,311 61,800 60,264 58,395 56,527

Retained earnings (deficit) (155,698) (185,733) (162,245) (134,479) (98,657)

Shareholders' equity 110,876 118,245 142,888 171,386 207,939

Non-controlling interest 20,677 4,124 (2,383) (6,821) (6,821)

Total equity 131,553 122,369 140,505 164,565 201,119

Total l iabilities and equity 279,264 390,717 396,262 689,198 1,162,282

Key metrics:

Book value per share $1.12 $0.98 $1.16 $1.38 $1.65



Exhibit 51: Cash Flow Statement


($ thousands, unless otherwise noted) 2014 2015 2016E 2017E 2018E

Cash provided by (used in)

Operating activities

Income from continuing operations 44,418 (36,740) 23,151 27,734 35,806

Non-cash items:

Provision for credit losses - - - 47 214

Deferred income taxes 7,045 6,835 8,488 9,999 12,910

FX on loans payable 231 538 (205) - -

Share issuance - restructuring - 35,345 - - -

Depreciation and amortization 1,297 1,593 1,639 1,600 1,600

Fair value adjustments (26,979) 12,130 352 - -

Share based compensation 418 349 295 300 300

Amortization of deferred financing and other costs 199 - - - -

(Gain) loss on sale of business unit (4,125) - - - -

Changes in non-cash assets and liabilities related to operations (8,900) (33,303) (14,914) (12,048) (28,178)

Cash provided by (used in) continuing operations 13,604 (13,253) 18,806 27,632 22,652

Cash provided by (used in) discontinued operations 1,686 19 125 32 16

Cash flows (used in) provided by operating activities 15,290 (13,234) 18,931 27,664 22,668

Cash flows provided by investing activities 6,112 3,030 1,150 722 80

Financing activities

Proceeds from (repayments of) loans payable 801 (700) (1,972) - -

Share issue costs - (399) - - -

Exercise of stock options 25 1,154 365 431 431

Payment of contingent l iability (4,027) (4,027) - - -

Common shares purchased for cancellation - - (10) - -

Settlement of share purchase loan - - 505 - -

Cash flows (used in) financing activities (3,201) (3,972) (1,112) 431 431

Increase (decrease) in cash and cash equivalents 18,201 (14,176) 18,969 28,818 23,179

Cash and cash equivalents, beginning of period 4,866 23,022 8,846 27,815 56,633

Cash and cash equivalents, end of period 23,067 8,846 27,815 56,633 79,812

Less: Cash - discontinued operations 45 - - - -

Cash and cash equivalents - continuing operations 23,022 8,846 27,815 56,633 79,812



Appendix B: Management & Board of Directors

Management

Ed Gettings, AMP, was appointed Chief Executive Officer of Street in June, 2015, adding to his existing responsibility as Chief Executive Officer of its primary operating subsidiary, Street Capital Financial Corporation, a position he has held since 2007. Mr. Gettings previously held the position of CIBC Executive Vice President, Mortgages, Lending & Insurance, where he served as overall executive leader for multiple business lines and implemented a unique multi brand/channel residential mortgage lending strategy for FirstLine, President’s Choice Financial and CIBC brands. Mr. Gettings holds a Bachelor of Business Administration from Wilfrid Laurier University.

Lazaro M. DaRocha, CPA, CA, AMP, was appointed President of Street in June 2015, prior to which he had been Chief Finance and Risk Officer of Street Capital Financial with responsibility for all finance and risk management functions. Prior to founding Street Capital Financial, Mr. DaRocha held the position of Vice President, CIBC Mortgage and Lending, Product Management, where he had overall strategic accountability for CIBC Brand Mortgages and Lending portfolios. Mr. DaRocha holds a CA designation and a Bachelor of Commerce degree from The University of Toronto.

Marissa Lauder, CPA, CA, was appointed Chief Financial Officer in June, 2015, joining the company from Home Capital Group where she had held executive positions in both Finance and Risk Management over a six-year period, contributing to strategic planning and with responsibility for financial and regulatory reporting, financial and capital planning, accounting and regulatory standard implementations, enterprise stress testing, credit analytics and market risk. She had previously spent over 5 years at the Office of the Superintendent of Financial Institutions of Canada in the regulation sector, prior to which she had earned her CPA, CA designation while working in Ernst and Young’s Toronto Financial Services office. She holds a Bachelor of Commerce degree from the University of Toronto.

Board of Directors

Ronald Appleby, Q.C. – Mr. Appleby has been a partner in Robins Appleby LLP since 1973 and was appointed Queen’s Counsel in 1982. His practice includes consulting on income tax and business matters in major commercial transactions and corporate reorganizations, as well as estate planning for high-net-worth individuals. He served as a special lecturer on the faculty of Osgoode Hall Law School for 15 years and is a member of the Law Society of Upper Canada, the York County Law Association, the Canadian Bar Association, the Canadian Tax Foundation, the International Fiscal Association, and the Foundation for Legal Research in Canada. He has been a Director of the Corporation since June 2007.

Tom Bermingham – Mr. Bermingham provides consulting services to financial institutions in the areas of governance, risk, compliance, treasury, finance and accounting. He has served as the Chief Risk Officer at Continental Bank of Canada, Director at Bank of Montreal Mortgage Corporation, Treasurer and Vice President of Finance at Bank of Montreal and President at the Canadian and North American Asset & Liability Associations. He is a Chartered Professional Accountant and was appointed Director of Street in June 2015.

Ed Gettings, Chief Executive Officer – Refer to Management section.

Ron Lalonde – Mr. Lalonde served in a number of financial, operational, technological, risk management and human resources roles at CIBC prior to his retirement from his position as Senior Executive Vice-President, Technology and Operations in 2010. Mr. Lalonde is currently a director of both D+H Corporation and of Morneau Shepell, and is also a Commissioner of the Toronto Transit Commission. He was appointed Director of Street in June 2015.

Morris Perlis – Mr. Perlis served as President of the Corporation from 1992 until 2001 and as Executive Vice Chairman from July 2009 to June 2015, at which point he was appointed Director. He spent 13 years with American Express Inc., including five years as President of American Express Canada. During that time he obtained approval for, and directed the launch of, the AMEX Bank of Canada, for which he also served as CEO. He also spent four years as President & CEO of Mad Catz Interactive, a leading manufacturer of gaming accessories. Mr. Perlis has served on a number of boards including those of Sears Bank of Canada, Sears Canada, Assante Corporation and the Baycrest Centre for the Aged Foundation. He is currently Chairman of the Board of UJA



Federation of Toronto and a member of York University’s Schulich Business School Advisory Board and Toronto’s Mt. Sinai Hospital Board of Governors.

Lea Ray –Ms. Ray is a Chartered Professional Accountant and holds the ICD.D certification from the Institute of Corporate Directors. She was appointed Director of Street in June 2015. She has chaired several Audit, Finance and Governance Board Committees and currently serves as Vice Chair of the Tarion Warranty Corporation and as a Director of the Workplace Safety and Insurance Board (Ontario). Her financial career began with PricewaterhouseCoopers and she is a former executive (Vice-President Corporate Finance) of Warner Bros. Entertainment Canada Inc., where she was employed for 19 years. Ms. Ray has served on the Professional Conduct Committee of the Chartered Professional Accountants (Ontario) and has served as a board member and volunteer of several non-profit health, conservation and community institutions.

Allan Silber, Chairman – Mr. Silber founded the Corporation in 1979 and served as its Chief Executive Officer until June 2015. Mr. Silber attended McMaster University and received a BSc from the University of Toronto.

Paul Vessey – Mr. Vessey retired as TD Bank Group’s Executive Vice President, US Product Management, Personal and Commercial Banking in 2011 and has been Director of Street since June 2011. He previously served as TD Canada Trust’s Senior Vice President of Card Products and Personal Lending. Prior to joining TD, Mr. Vessey was the Chief Operating Officer of Visa USA Inc. He also served in senior executive positions at CIBC as well as at American Express Canada. In total, Mr. Vessey spent almost four decades in the banking industry. Mr. Vessey has served on numerous boards of directors and is the former Chairman of CIBC Mortgage Corp. and Vice Chairman of Visa International. He was also a Director of both Women’s College Hospital and the Toronto International Film Festival.

Appendix C: Share Ownership

Exhibit 52: Share Ownership, Jul-5-16

Source: S&P Capital IQ, Raymond James Ltd.

Shareholder Summary # Shares % O/S

Institutions and Corporations

FCMI Financial Corp. 12,165,051 10.0%

Sprott Asset Management, LP 4,219,700 3.5%

CXS Holdings Inc 3,099,192 2.5%

Friedberg Mercantile Group Ltd., Asset Management Arm 1,267,590 1.0%

2378903 Ontario Ltd. 384,189 0.3%

Dimensional Fund Advisors LP 216,427 0.2%

BlackRock, Inc. 64,925 0.1%

Anglian Warmspace Limited 34,700 0.0%

Total Institutions and Corporations 21,451,774 17.6%

Insiders

Gettings, W. Edward (Chief Executive Officer) 9,970,709 8.2%

Silber, Allan Charles (Founder and Executive Chairman) 6,006,584 4.9%

Grewal, Shaminder Paul (Former President of Street 5,802,740 4.8%

DaRocha, Lazaro Manuel (President ) 4,728,833 3.9%

Casciato AMP, Alfonso (Senior Vice President of Sales) 1,230,845 1.0%

Perlis, Morris A. (Director) 815,000 0.7%

Levy, R. Adam (Chief Compliance Officer) 812,494 0.7%

Taylor, Gary (Chief Risk Officer) 618,601 0.5%

Weintraub, Stephen A. (Former Corporate Secretary) 556,501 0.5%

Appleby, Ronald (Director) 452,400 0.4%

Top 10 Insiders 30,994,707 25.4%

Other Insiders 879,172 0.7%

Total Insiders 31,873,879 26.1%

Public and other 68,738,659 56.3%

Total Shares Outstanding 122,064,312 100%

Public and other, 56.3%

Institutions and Corporations,

17.6%

Insiders, 26.1%



Appendix D: Risks

Competition Risk – The Canadian mortgage and consumer credit industry is highly competitive, and intense competition in the markets for Street’s products could pose a threat to its profitability and/or growth. Competitors in the issuance of mortgages (all channels) include major banks, smaller financial institutions and specialty lenders, many of which are better capitalized and may have bigger market share and/or brand recognition than Street. Increased price competition can lead to lower originations and/or reduced gains on the sale of mortgages. In the event that Street broadens its credit product offerings beyond traditional prime mortgages, it could increase the scope of the competition that it faces. New entrants to the market or a shift in mortgage origination preference away from the broker channel also represent potential competitive threats.

Credit Risk – Street sells the vast majority of the mortgages it originates to institutional investors, transferring mortgage default risk in the process and leaving it with an immaterial amount of residual credit risk. In the event that the default rate on Street-originated mortgages was to increase materially, however, it could negatively impact Street’s ability to sell and securitize mortgages in future, representing an indirect credit risk exposure. If Street begins holding near-prime mortgages on its balance sheet, as it intends to do following receipt of its bank license, its direct credit exposure would increase commensurately.

Dependency on Key Employees Risk – Street’s performance is dependent on the performance of its highly experienced executive management team and other senior employees. The loss of service of any of these senior managers or the inability to hire qualified personnel in future could harm Street’s future performance.

Distribution Risk – Street originates mortgages exclusively through a network of independent mortgage brokers which have no contractual obligation to conduct business with it. The ability to grow this network and/or sell higher volumes of mortgages through existing broker relationships could be negatively impacted by competitive market conditions, the company’s level of service and support, reputation factors and/or other considerations.

Economic and Business Cycle Risks – An extended period of limited economic growth or recession in Canada could negatively impact the levels of property sales, property values and default rates, in turn impacting the demand for mortgage lending and/or the appetite of institutional investors to purchase mortgages originated by third parties.

Funding Concentration Risk – Approximately 85% of newly originated mortgages are sold to two institutional investors, one Canadian and one in the U.S. In the event that these institutions were to either reduce the level of mortgages purchased from Street or cease making such purchases altogether without being replaced by alternative funding sources, it could have a material adverse impact on the company’s operations.

Interest Rate Risk – Street is not currently exposed to a material level of interest rate risk as (a) it sells the vast majority of originated mortgages and retains only modest balance sheet exposure to interest rate-bearing investments, and (b) it is generally able to pass along interest rates to investors without impacting resulting gains on sale. If Street begins holding near-prime mortgages on its balance sheet, as it intends to do following receipt of its bank license, its interest rate exposure could increase if not adequately immunized by the interest rate sensitivity of its liabilities.

Mortgage Repurchase Obligation Risk – When Street funds mortgages, it relies heavily upon information provided by third parties which, if misrepresented and not detected as such prior to mortgage funding, can result in mortgage value impairment. Even though mortgages are typically sold after being originated, Street generally indemnifies purchasers against losses related to mortgages that were not originated or underwritten in accordance with applicable requirements. In the case of misrepresentation, Street might not be able to collect loss reimbursement from the responsible parties. Significant breaches of mortgage sale agreements could impair Street’s ability to sell mortgages in the future, with potentially negative impact on its growth and/or profitability.

Operational Risk – In the event of inadequate or failed processes or systems, including to information technology systems, the company could incur costs related to such failure as well as to taking necessary corrective actions. Issues could arise due to either internal (i.e., control



inadequacies) or external (e.g., business interruption) factors, and might not be promptly addressable.

Regulatory Risk – Street’s mortgage lending business is regulated under lending and other legislation, and in the event that the company secures a bank license, it will become subject to increased regulation and supervision by regulatory authorities including OSFI. The banking industry is heavily regulated and changes in regulation have the potential to reduce Street’s profitability and/or growth. Among issues monitored by regulatory authorities would be the company’s capital adequacy ratio which, if it were to fall below specified thresholds, could prompt regulatory actions restrictive of strategic and capital management decisions. As an approved lender under the National Housing Act, its mortgage lending subsidiary is able to originate insured mortgages, and loss of this status (or of the availability of mortgage insurance in general) could have a material adverse impact on its ability to originate and sell mortgages.



Company Citations

Company Name Ticker Exchange Currency Closing Price RJ Rating RJ Entity

DH Corporation DH TSX C$ 31.96 1 RJ & Associates RioCan REIT REI.UN TSX C$ 30.02 3 RJ & Associates Visa, Inc. V NYSE US$ 74.06 3 RJ & Associates

Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.



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Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.



Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Raymond James Argentina S.A. rating definitions: Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

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Suitability Ratings (SR)

Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital.

Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program.

High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital.

High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal.

High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal.

RATING DISTRIBUTIONS

Coverage Universe Rating Distribution* Investment Banking Distribution

RJL RJA RJ Arg RJEE/RJFI RJL RJA RJ Arg RJEE/RJFI

Strong Buy and Outperform (Buy) 69% 56% 53% 50% 39% 18% 0% 0%

Market Perform (Hold) 29% 39% 47% 36% 16% 6% 0% 0%

Underperform (Sell) 2% 5% 0% 14% 0% 2% 0% 0%

* Columns may not add to 100% due to rounding.



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Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months.

Company Name Disclosure

Street Capital Group Raymond James Ltd - the analyst and/or associate has viewed the material operations of SCB.

Raymond James Ltd. makes a market in the securities of SCB.

STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences.

Target Prices: The information below indicates our target price and rating changes for SCB stock over the past three years.

Valuation Methodology: For Street Capital Group, our valuation methodology utilizes a Price/Earnings multiple on our adjusted earnings per share forecast and takes into account the company’s historical market valuation, the current and historical market valuations of select peer Canadian mortgage companies, and the company’s risk profile, intended strategic initiatives, earnings growth outlook, size and liquidity and shield from cash taxes.

RISK FACTORS

General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation.

Risks - Street Capital Group Competition Risk – The Canadian mortgage and consumer credit industry is highly competitive, and intense competition in the markets for Street’s products could pose a threat to its profitability and/or growth. Competitors in the issuance of mortgages (all channels) include major banks, smaller financial institutions and specialty lenders, many of which are better capitalized and may have bigger market share and/or brand recognition than Street. Increased price competition can lead to lower originations and/or reduced gains on the sale of mortgages. In the event that Street broadens its credit product offerings beyond traditional prime mortgages, it could increase the scope



of the competition that it faces. New entrants to the market or a shift in mortgage origination preference away from the broker channel also represent potential competitive threats. Credit Risk – Street sells the vast majority of the mortgages it originates to institutional investors, transferring mortgage default risk in the process and leaving it with an immaterial amount of residual credit risk. In the event that the default rate on Street-originated mortgages was to increase materially, however, it could negatively impact Street’s ability to sell and securitize mortgages in future, representing an indirect credit risk exposure. If Street begins holding near-prime mortgages on its balance sheet, as it intends to do following receipt of its bank license, its direct credit exposure would increase commensurately. Dependency on Key Employees Risk – Street’s performance is dependent on the performance of its highly experienced executive management team and other senior employees. The loss of service of any of these senior managers or the inability to hire qualified personnel in future could harm Street’s future performance. Distribution Risk – Street originates mortgages exclusively through a network of independent mortgage brokers which have no contractual obligation to conduct business with it. The ability to grow this network and/or sell higher volumes of mortgages through existing broker relationships could be negatively impacted by competitive market conditions, the company’s level of service and support, reputation factors and/or other considerations. Economic and Business Cycle Risks – An extended period of limited economic growth or recession in Canada could negatively impact the levels of property sales, property values and default rates, in turn impacting the demand for mortgage lending and/or the appetite of institutional investors to purchase mortgages originated by third parties.

Funding Concentration Risk – Approximately 85% of newly originated mortgages are sold to two institutional investors, one Canadian and one in the U.S. In the event that these institutions were to either reduce the level of mortgages purchased from Street or cease making such purchases altogether without being replaced by alternative funding sources, it could have a material adverse impact on the company’s operations.

Interest Rate Risk – Street is not currently exposed to a material level of interest rate risk as (a) it sells the vast majority of originated mortgages and retains only modest balance sheet exposure to interest rate-bearing investments, and (b) it is generally able to pass along interest rates to investors without impacting resulting gains on sale. If Street begins holding near-prime mortgages on its balance sheet, as it intends to do following receipt of its bank license, its interest rate exposure could increase if not adequately immunized by the interest rate sensitivity of its liabilities.

Mortgage Repurchase Obligation Risk – When Street funds mortgages, it relies heavily upon information provided by third parties which, if misrepresented and not detected as such prior to mortgage funding, can result in mortgage value impairment. Even though mortgages are typically sold after being originated, Street generally indemnifies purchasers against losses related to mortgages that were not originated or underwritten in accordance with applicable requirements. In the case of misrepresentation, Street might not be able to collect loss reimbursement from the responsible parties. Significant breaches of mortgage sale agreements could impair Street’s ability to sell mortgages in the future, with potentially negative impact on its growth and/or profitability.

Operational Risk – In the event of inadequate or failed processes or systems, including to information technology systems, the company could incur costs related to such failure as well as to taking necessary corrective actions. Issues could arise due to either internal (i.e., control inadequacies) or external (e.g., business interruption) factors, and might not be promptly addressable.

Regulatory Risk – Street’s mortgage lending business is regulated under lending and other legislation, and in the event that the company secures a bank license, it will become subject to increased regulation and supervision by regulatory authorities including OSFI. The banking industry is heavily regulated and changes in regulation have the potential to reduce Street’s profitability and/or growth. Among issues monitored by regulatory authorities would be the company’s capital adequacy ratio which, if it were to fall below specified thresholds, could prompt regulatory actions restrictive of strategic and capital management decisions. As an approved lender under the National Housing Act, its mortgage lending subsidiary is able to originate insured mortgages, and loss of this status (or of the availability of mortgage insurance in general) could have a material adverse impact on its ability to originate and sell mortgages.

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ENERGY

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HEATHER HERRON 403.509.0509 HEAD OF PUBLISHING | SUPERVISORY ANALYST

CYNTHIA LUI 604.659.8210

TYLER BOS (SUPERVISORY ANALYST | EDITOR) 416.777.4948 INDER GILL (RESEARCH EDITOR) 604.659.8202 KATE MAJOR (RESEARCH PRINCIPAL | EDITOR) 416.777.7173 ASHLEY RAMSAY (SUPERVISORY ANALYST |EDITOR) 604.659.8226

INSTITUTIONAL EQUITY SALES HEAD OF SALES

MIKE WESTCOTT 416.777.4935 GREG JACKSON (ECM, BUSINESS MANAGER) 416.777.7172 MICHELLE MARGUET ( ECM, INSTITUTIONAL MARKETING) 416.777.4951

TORONTO (CAN 1.888.601.6105 | USA 1.800.290.4847)

SEAN BOYLE 416.777.4927 JEFF CARRUTHERS, CFA 416.777.4929 RICHARD EAKINS 416.777.4926 JONATHAN GREER 416.777.4930 DAVE MACLENNAN 416.777.4934 ROBERT MILLS, CFA 416.777.4945 BRADY PIMLOTT 416.777.4993 NICOLE SVEC-GRIFFIS, CFA (U.S. EQUITIES) 416.777.4942 NEIL WEBER 416.777.4931 ORNELLA BURNS (ASSISTANT) 416.777.4928 SATBIR CHATRATH (ASSISTANT) 416.777.4915 MARIA STEPANOVA (ASSISTANT) 416.777.4949

VANCOUVER (1.800.667.2899)

SCOT ATKINSON, CFA 604.659.8225 NICK POCRNIC 604.659.8230 TERRI MCEWAN (ASSISTANT) 604.659.8228

MONTREAL (514.350.4450 | 1.866.350.4455)

JOHN HART 514.350.4462 DAVID MAISLIN, CFA 514.350.4460 TANYA HATCHER (ASSISTANT) 514.350.4458

LONDON

ADAM WOOD 0.207.426.5612

INSTITUTIONAL EQUITY TRADING

CO-HEAD OF TRADING BOB MCDONALD, CFA 604.659.8222 ANDREW FOOTE, CFA 416.777.4924

TORONTO (CANADA 1.888.601.6105 | USA 1.800.290.4847) MARK ARMSTRONG 416.777.4981 PAM BANKS 416.777.4923 OLIVER HERBST 416.777.4947 ANDY HERRMANN 416.777.4937 MATT MALOWNEY 416.777.4941 ERIC MUNRO, CFA 416.777.4983 BOB STANDING 416.777.4921 PETER MASON (ASSISTANT) 416.777.7195

VANCOUVER (1.800.667.2899) NAV CHEEMA 604.659.8224 FRASER JEFFERSON 604.659.8218 DEREK ORAM 604.659.8223

MONTREAL (514.350.4450 | 1.866.350.4455) JOE CLEMENT 514.350.4470 PATRICK SANCHE 514.350.4465

INSTITUTIONAL EQUITY OFFICES

Calgary Suite 4250 525 8th Avenue SW Calgary, AB T2P 1G1 403.509.0500

Montreal Suite 3000 1800 McGill College Montreal, PQ H3A 3J6 514.350.4450 Toll Free: 1.866.350.4455

Vancouver Suite 2100 925 West Georgia Street Vancouver, BC V6C 3L2 604.659.8000 Toll Free: 1.800.667.2899

Toronto Suite 5400, Scotia Plaza 40 King Street West Toronto, ON M5H 3Y2 416.777.4900 Toll Free Canada: .888.601.6105 Toll Free USA: 1.800.290.4847

International Headquarters The Raymond James Financial Center 880 Carillon Parkway St.Petersburg, FL USA 33716 727.567.1000

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