CIBC Acknowledges Potential FirstLine Sale

firstlineThe former #1 broker lender is now officially on the block.

In its earnings announcement today, CIBC (FirstLine’s parent) stated:

“…We are announcing this morning our decision to explore options, including a potential sale, of our broker mortgage brand, called FirstLine…”

 

It continued by saying:

“We do not expect this process will be a lengthy one. Once this process is complete, we plan to increase renewals into our CIBC brand from the FirstLine platform over time. Benefits of this will include higher net interest margins and deeper relationships as these clients enter into CIBC branded channels.

We believe the time is right for us to make this move. Over the past number of years, we have invested in our branch-based mortgage business, including a substantial
build of our mortgage advisers. The results of these investments are paying off as evidenced by our growth rates over the past year. CIBC branded mortgages have grown at a rate of 10% over the past year compared to the industry average of 7%.”

Rumour has it that there are at least three capable buyers evaluating an acquisition of FirstLine.

CIBC is reportedly keeping FirstLine’s mortgage book for itself. So the main “assets” are FirstLine’s:

  1. Brand
  2. Origination, underwriting and funding platform
  3. Future potential to fund via the Canada Mortgage Bond (CMB) program
  4. Broker incentive program

CIBC-Bank

Our take on the value of each is this:

#1) FirstLine’s brand has taken a buttkicking since April 2011 when CIBC chose to price FirstLine out of the variable-rate mortgage (VRM) market. Back then, VRMs were a huge portion of its volume, so this impacted a lot of brokers.

#2) Apart from the broker relationships, the rest of its platform can be replicated. There could potentially be job cuts if an acquirer wants to run a lean operation.

#3) It would have been valuable if FirstLine’s CMB allocation of (up to) $2 billion was included. CMB funding is limited (hence why there’s an “allocation”) and is virtually the lowest-cost source of mortgage funds. Unfortunately, any buyer would probably have to apply to get CMB “approved lender status.” Hence, the “new” FirstLine might have a limited ability to fund through the CMB market, at least out of the gate. (One overriding question is: How would a buyer fund FirstLine’s $14-$15 billion in originations? It would take tremendous capital.)

#4)  Many consider this a liability more than an asset. Some brokers have over one million basisPOINTS (a type of broker incentive). For those brokers, these points are theoretically worth tens of thousands of dollars. The value of those points going forward is now in question. Presumably, any new buyer would honour them (if it wants to avoid irate brokers). In the unexpected event that FirstLine is dissolved, however, there is seemingly nothing to assure that CIBC would pay brokers a fair value for these points. This uncertainly may, as one lender exec told us, spark various “spring (rate) promotions” by brokers using their point balances to buy down rates.

****************

CIBC’s sale announcement results from its desire to “enhance the client experience and to accelerate profitable revenue growth,” among other reasons.

CIBC says FirstLine “clients are sold single products” with relatively little cross-selling. In turn, it says “broker mortgage margins continue to be compressed relative to our other channels.”

On CIBC’s conference call today, David Williamson, Head of CIBC’s retail banking, reiterated that it’s largely about “client relationships.” He says:

“Deeper client relationships result in less velocity in our client base due to lower rates of attrition, are positively correlated to higher client satisfaction, have higher NIMs, result in the ability to derive more revenue from an existing base of clients and more fully engage both sides of the balance sheet.”

He adds:

“We anticipate that our efforts to streamline our processes will also provide increased revenue or lower cost structures as a by-product over time.”

CIBC says its other major priority is to:

“…acquire and retain clients that are aligned to our strategic objectives.”

“Our existing client base is relatively large but has not shown appropriate levels of growth. In addition, the degree of depth of some of our client relationships is comparatively low due to our prior product orientation, and our historic involvement in channels that typically result in single product client relationships.  We want to shift to deeper relationships as they have lower rates of client attrition leading to better client retention and satisfaction.”

“Once this process is complete, we plan to increase renewals into our CIBC brand from the FirstLine platform over time. Benefits of this will include higher NIMs and deeper relationships as these clients enter into CIBC-branded channels.”

CIBC’s total mortgage funding in 2011 was a reported $45 billion. That includes an estimated $140 million of volume from Mortgage Centre brokers (the only brokers with access to CIBC brand products).

To keep its momentum going after unloading FirstLine, CIBC is on a mortgage adviser hiring spree. It’s reportedly offering above-normal compensation in an effort to add 500-1,000 mortgage salespeople by year-end. A few of our mortgage specialist friends at the major banks tell us they’ve already received calls from CIBC recruiters.

It also appears clear that CIBC’s retention department will be working overtime. It will try to steer renewing FirstLine clients away from the originating mortgage broker and into the arms of its CIBC brand. You can rest assured that brokers will move heaven and earth to offer those clients better terms, in spite of CIBC.

As of December 31, 2011, FirstLine was the 3rd-ranked lender in the broker channel by volume, according to D+H data. “Until a strategic decision is made, we will continue to originate new mortgages in the FirstLine channel,” CIBC said.

CIBC did have a few positive things to say about FirstLine. Williamson called FirstLine “a well run channel, with rigorous and effective credit adjudication and substantial origination capability supported by highly capable mortgage brokers.”

Most of the broker industry is pulling for FirstLine and its dedicated employees. They know it is CIBC calling these shots and not FirstLine. Given the right buyer (likely a buyer with a strong balance sheet), there’s no reason why FirstLine can’t successfully re-assert itself in the market.


Sidebar: As our valued readers know, FirstLine’s potential sale was reported here a month ago. Here is that story: Breaking News: CIBC to Reportedly Sell FirstLine (February 10, 2012).


Rob McLister, CMT

  1. It’s just like in hockey; one player’s injury is another player’s opportunity to play!
    Wayne Campbell, Invis – Prince George

  2. Rob,
    Great article and sources again!
    It would be a shame for the broker channel to lose the great array of products that Firstline has, however more importantly they have some amazing employees that are great to work with, my thoughts about what an amazing BDM we have in Cathy may be a bit biased, but she does do a great job trying to make us differentiate ourselves from the pack.
    Here is to hoping that a great suitor steps up quickly and re-invigorates the brand.
    Joe

  3. So, CIBC has finally decided to do it by itself.
    I am sure that we shall miss those deals. But you never know, someone else may step in.
    I agree with Joe, there are some great guys there. I wish them all the best.

  4. It will be a shame to lose them, but given the mismanagement of the brand it’s really no surprise that CIBC is unloading them. Like everything CIBC has done over the last many years, there has been great opportunity squandered. The idea of keeping Firstline separate from the CIBC family was never really understood and when other lenders are experiencing deeper relationships higher satisfaction with branch sign-ups, CIBC completely missed years of opportunity.
    I feel bad for the employees and hope things work out for them.

  5. It is a sad day; although we all knew it was coming. So many great people have devoted themselves to Firstline for so many years.
    We as brokers all think of our hardworking BDMs but there are so many great underwriters and managers that have worked so hard and put in so much overtime in those May / June closing crunches. So many folks at Firsline worked so tirelessly over the years to build a great company and don’t fool yourselves it was a GREAT company in its day.
    The lesson I think is to try to understand who we are as brokers in the true scheme of things. We are very tiny factors in the thinking of truely huge corporations. I guarantee you the CEO of CIBC has no idea what we even do every day and he does not care. Also in the end; whether it is bank direct or indirectly through monolines most of our funding comes from big banks.
    As always Rob has given great reporting and insightful comentary. I will add one final take-away; based on the comments from the analyst’s meeting if Firstline is not sold, bet the farm it will simply be closed by Oct 31st.

  6. As a Firstline employee…. i appreciate the positive comments made about Firstline and our dedicated staff. We appreciate the positive comments made by you Rob, and Ron, as this is a very difficult time for us.
    I have been a FLM employee for almost 10 years, and I bleed red and white (not red, GOLD and white)…
    I can’t say that i am not afraid of loosing my job, i’d be silly and naive to be doing that… but at the same time, i do believe there is a LOT of value that FLM can provide brokers, when we are backed by a company that has a drive to let us succeed.
    Everyone at FLM knows that we’ve had handcuffs on for quite some time…. a racehorse locked in the stable…. and to be honest, we are SO READY to come out of the gate– all of us.
    Who ever wins this “buying war” is going to get a turnkey operation that can create, underwrite and service BILLIONS of volume simply by giving us the go ahead…. and the employees that are dying to show our true colors once again.
    Funny, our motto has been “Giving you the tools to succeed…” For a long time… and now isn’t it ironic that WE are the ones waiting for OUR “tools” now.
    Rest assured… Firstline can and will be great again… with the the proper leadership, direction and support, we can bring our new found owners (whoever that may be)… instant credibility, respect and footprint in the industry…
    We also have some of the most dynamic, informed, creative AND dedicated brokers in the industry that we are proud to call our partners… so when this is all over, we will crack the champagne, and have a few rounds on us.
    Until then… I… WE…. thank you for being there for us… and for supporting us now more than ever. When its time for FLM to rise up out of the ashes… we hope that you will be there to help let this Thoroughbred out of its stable once again.
    Until then…..
    Bleeding Red and White. Its our Culture.

  7. My impressions as a Firstline mortgage holder and a once-loyal broker:
    1) CIBC seems to be longing for the days of the uninformed and fiercely loyal customer…Pssst – Its called the internet, and its changing things.
    2) Firstline’s “failure” was not taking into account how to better monetize their huge client base. CIBC branch signings, creating other Firstline-branded products to cross-sell, or paring costs were all options. Given that Firstline was an industry leader in the re-advancable line of credit that many people used for Smith maneuver-type investment, how did they not try and divert these clients to Investor’s Edge or Imperial Service? For example, did they ever tell their mortgage holders that they are all entitled to $6.95 trades with Investor’s Edge? Nope…I had to read about this promotion while I was on Investor’s Edge to take advantage (its called preaching to the converted).
    3) There is a shocking lack of accountability in this divestiture. Alienating their top brokers and even their own staff by keeping them in the dark for well over a year. Even Firstline’s email to brokers yesterday attempting to clarify the rumours was noticeably unsigned and unattributed to any particular Director. Imagine being a Firstline BDM when circulars like this come out.

  8. Well Said Whistler.
    There are some very good people at Firstline that have truly been left to bang their heads against the wall with CIBC’s ludicrous mismanagement and failure to capitalize on such a once great company. I wish I could have sent more to our Awesome BDM Sara but was becoming impossible with rates and bizarre treatment from some at the Vancouver office and at head office in Toronto. Who in their right mind comes up with the business plan for Firstline anyway? Go away, come back, go away, come back, OK GO AWAY!

  9. Firstline was the first major advocate of the brokerage industry and over the years has helped our industry grow and mature. The loss of the many Head office management staff over the last few years has spawned other lenders who continue to spread the message of the benefits of partnering with good brokers. The actual “loss” of their products today may not seem so critical, and their partnership glow has dimmed over the last year, but loosing such a great historical supporter, with top personnel who not only liked working with brokers, but actually respected brokers, is a real loss to the industry. But change happens, and growth, they say, only comes from change!

  10. Given that brokers have been abandoning FL in the last few years, myself included, I’m impressed they were still funding 15B mortgages in 2011. CIBC seems to think they will just slaughter the goose that provided 1/3 of its total mortgage originations, and replace it with road reps who will need to literally start from scratch.
    That 15B per year in mortgages will go to other broker-friendly lenders, and CIBC will lose market share in the coming years – just like HSBC and BMO suffered when they left the broker channel…

  11. You were certainly ahead of the curve on this story rob…great early scoop….so what happens to firstline mortgage holders like me now that cibc is parting ways…

  12. I really don’t see why CIBC would sell when they have built up to a iconic brand in the broker world. As Rob mentioned the actual business up for sale is not really much in the way of hard assets. They should continue originating mortgage through brokers however follow the Scotia and TD model in branch sign up’s. The business is functioning efficient now and they have a steady stream of new clients coming to them. Now they will turn their backs on this and strictly originate through the branch and road reps. Looks like they have RBC envy. Everyone is trying to own the client however client’s are much more savvy these days and most don’t want to be owned as they have egg’s at many different institutions. Good luck CIBC and bring on a new player or an existing player that wants to get much stronger but operate much smarter then CIBC.

  13. Thanks A.J.
    Long before maturity, CIBC and your broker will both likely contact you to discuss renewal options. CIBC will probably quote an unusually aggressive rate to compete with your broker. Your broker will likely also present one or more good alternatives…and then the ball will be in your court.

  14. thanx rob…much appreciated…great site u have here…and thanx for the heads up on what to expect down the road…

  15. It’s exactly what I said would happen. They’ll keep the good business for themselves and aim to renew these clients at CIBC while the less attractive Alt/A stuff will be either included in the sale or they’ll just refuse to renew upon maturity at their discretion.
    The party who’s most ideal to buy FLM is a foreign bank with a large balance sheet who wants to establish themselves in Canada and want to capitalize on currently on a resilient housing market and very low default rates. But given that international banks are facing pressure to meet the new Basel III reserve requirements, I just can’t think of anyone who would foray into this segment at this particular time.

  16. Well, The big Announcement coming on Monday. Firstline has been sold to a new partnership that consist of MCAP, SunLife and RBC ( DS ). SOme of the senior management were notified today.
    MCAP and SunLife is a big winner on this. Brokers should be happy as well.

  17. That Suprises me. MCAP is having a difficult time closing the Resmor deal! They dont have the CMB and MBS capacity. It would make no sense for MCAP to do this deal and it would be stupid of CIBC to sell it to them!
    Why would CIBC sell MCAP the Firstline business knowing that MCAp hasnt and cant even close the Resmor deal yet!
    Why as a broker send my deals to Firstline or Resmor well knowing that its MCAP who is doing my deal. Too many Shell games being played by guys like MCAP and Paradigm. To me this is a insult to every broker.

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