CFF Sells its Crown Jewel

It wasn’t too bad of a concept: A bank that distributes a host of proprietary financial products through retail centres owned by its mortgage broker partners. Unfortunately for the company—Canadian First Financial Group (CFF)—it couldn’t get profitable fast enough to deliver on that vision.

CFF has bled millions and millions of dollars since inception, burning through most of a reported $40-45+ million in capital and having lost over $5.5 million in its last reported quarter. It got to a point where it was essentially forced to sell off the centrepiece of its business model, CFF Bank.

The buyer, Home Capital, gets a turnkey bank at a bargain ~$15 million +/- adjustments, or a mere 0.7 times book value (better known banks trade at about 1.7x book, as a median). Furthermore, Home Capital gets that bank quickly, without having to wait months or quarters for OSFI to approve its own 2014 bank application. That gets more deposits in the door faster, deposits that are essential to funding its lending businesses.

“The big bonus will be the bank name,” says Gerald Soloway, Home Capital CEO. “Under a bank name we’ve found that it’s easier to raise deposits from the public than it is with a trust company.” Mind you, Home has done well for itself as it is, with $15 billion in deposits compared to CFF Bank’s assets of $235 million.

While many CFF investors will be hugely disappointed with the bank sale, some remain upbeat. Broker and CFF Centre owner Brian Matthey notes: “Home Trust now has access to an exclusive group of high-end professional producing brokerage houses who see the light in the direction in which this industry is headed: more of a full-service operation, instead of a one-trick pony…CFF gets access to balance sheet funding and a broader funding source for competitive mortgage products in the “A” space, without relying on building a deposit base over time and relying on limited funders.”

We approached CFF Founder Karl Straky for comment as well. He didn’t speak to the loss of the bank, which was previously the “core” of CFF’s vision, but instead noted, “Our partnership with Home Capital strengthens our ability to deliver…to our Canadian First Financial Centre owners and provides a stable foundation for CFF Bank to continue to grow…We will continue to seek out (financial product) manufacturing ownership opportunities in financial services where it makes strategic sense and adds value to our shareholders.”

Here are a few other nuggets of note:

  • The deal will close this fall, pending approval by CFF shareholders, the Competition Bureau and the Minister of Finance. My guess is, unless the government wants to see a bank fail (which it doesn’t), it’ll approve this deal post haste. In fact, given CFF Bank’s seemingly dire cash flow situation, we wouldn’t be surprised if the federal banking regulator had some kind of role in pushing this deal along. The last thing OSFI wants is a bank collapse on its books, which Canada hasn’t witnessed since 1991.
  • There is no liquidity event for CFF shareholders. This is simply an asset sale. According to unconfirmed sources, some brokers invested upwards of $250,000 to 500,000+ in CFF.
  • The $15 million that Home is paying will go into the holding company and its hundreds of shareholders will presumably have a say in what to do with it—i.e., reinvest it in the company’s new white-label product strategy, pay it out as a dividend, etc.
  • For now, Home Capital will continue to operate the bank under the brand CFF Bank.
  • Home did not buy the 37 CFF Centres as they are independently owned, and Home had no intention of buying and managing the distribution channel.
  • CFF shareholders will not get stock in Home Capital. It’s an all-cash deal.
  • Upon approval, Home Capital is expected to withdraw its current bank licence application.
  • As for CFF Bank’s unique EasyOne savings account and line of credit (a slick account by the way), Soloway says, “We will continue that product,” noting that, “What we are looking to do is add products to the CFF bank.” (Incidentally, he says a HELOC is “not on the table” at this time.)
  • As for new products, Soloway says Home hopes to distribute more non-prime and commercial mortgages through CFF Centres, which Soloway says the company has “a limited relationship with at present time.”
  • Based on its limited product offerings and ho-hum interest rates, it seems that CFF Bank could not extract advantageous terms from mortgage aggregators (investors who buy mortgages). With home loans being such a crucial component of its revenue, this was a glaring shortcoming.

CFF-Bank-Horizontal-LogoThe above story illustrates how tough it is for small retail banks to flourish in Canada. It’s a brutally competitive business that relies on scale and access to low-cost capital. Many lenders have grand ideas of getting a bank licence to sell GICs/deposits and diversify their funding. But, as this case study proves, Canadians aren’t falling over themselves to park their savings with unfamiliar financial brands.

“Getting a bank licence was clearly a mistake for CFF,” said one top lender executive who didn’t want to be named. “Unregulated entities have more MBS leverage than banks and they don’t have to spend a million or two a year on regulatory compliance.”

One of the others who voiced skepticism was Dominion Lending Centres President Gary Mauris. Almost two years ago, Mauris made what was— at the time— a highly controversial public statement on Facebook, but one that seems prescient today: “We believe they (CFF) are very uncertain about their model, have huge shareholder and institution debt and anyone invested will have significant challenges with an exit strategy.”

Going forward, events like this may intensify regulator’s scrutiny. “Not a lot of bank licences are given out and those who apply for a new licence will have a higher hurdle to prove a profitable business model,” Soloway says.

Regulators will certainly keep CFF Bank’s Achilles heel, a shortage of working capital, top of mind. Banking is a capital-intensive, regulatory-intensive and investor-intensive business. Growing a bank requires ever-increasing amounts of funding, and it’s tough not to dilute shareholders along the way.

But all is not lost for CFF. The bank is no longer a drag on earnings and there is value to its distribution network, which is comprised of high-calibre brokers. It’s now a question of how much it can earn with white-labelled loans, credit cards, GICs, etc. This is where we find out what its management is made of—that is, if shareholders buy into this plan B.

  1. Rob, just great unbiased, truthful analysis.

    I think the time has come to make a clear statement to mortgage brokers in this country: when someone shows up offering to sell you non-publicly traded shares in a lender, a brokerage, a network, heck, even a carwash; do a Nancy Reagan: just say no!!

    A very old, wise man told me something 25 year ago: the only thing you ever end up doing with the shares you buy in a private company is starting the campfire at your cottage.

    This is not the first time that mortgage brokers across Canada were offered shares (or options or warrants) in private companies and the end results have almost always been identical to this one.

  2. What about recent CFF franchise buyers? Were they told the bank was being shopped around for sale? Did they pay full price for their shares on the promise of owning a bank?

    How did management make out in all of this?

    On February 24, 2015, the Bank granted 565,000 stock options of CFFG and a cash bonus of $214,000 to its senior management team. The options were fair valued at $0.44 each and are vested immediately.

    http://www.cffbank.ca/sites/default/files/compliance/regulatory_disclosure/cff_regulatory_disclosures_december_31_2014_final.pdf

    How many other options were given to management? Why immediate vesting? How many shares did management get for free or near free when brokers paid full price? How many options were exercised?

    Lawyers, on your mark. Get set….

  3. Nortel, Lehman Brothers or Anglo Irish Bank this is not. There are no adverse external forces such as a credit crises, liquidity crisis, housing crisis or general recession that drove these corporations under.

    This is in the league of [in my opinion] horrendously bad management. Shareholders left holding the paper stock on a company that owns no assets, just debt, and has no strategy.

    Every broker in Canada can sell a home trust mortgage, credit card, or GIC already. That won’t change.

    These 37 are good brokers. They should be pissed off.

    [Edited by CMT to comply with comment policy.]

  4. I think it’s time to make a clear statement to mortgage brokers in this country; when you have the opportunity to significantly enhance your client experience, expand your product offering and grow your forward thinking team, as a brokerage, a network, heck even a car wash (not sure on this one) just say YES!!

    I recall 2 diametrically opposed men speaking at a mortgage conference in Montreal last year. One of them had joined CFF; he was inspiring, he spoke about the value of value of client relationships, was interested in building a profitable future for all brokers in our industry, was prepared to take measured risks to move forward and also understood that all books have many chapters and rarely do the best stories unfold exactly as you expect so whether you’re a very old wise man or a young one, it’s important to understand that should always wait and see how the story concludes and not presume to have a crystal ball.

    The other fellow was looking to see our industry commoditized, our compensation indirectly gutted by ridiculously discounted rates sprayed across the web and from what I could tell didn’t see any value in providing a comprehensive offer to Clients, his vision was a mortgage factory of sorts.

    I decided to align myself with the first guy and the rewards (financial and personal) have already exceeded the investment I made to join the CFF Team. I remain very happy that I didn’t/don’t listen to that second guy, not to suggest that second way isn’t viable, I just like to run my business and live my life in a more “comprehensive” manner and it seems to be working out pretty well so far.

    I also don’t listen to anyone that believes in short term investing in common shares and thinks it’s reasonable to expect a big multiple on a private share investment in 6 or 8 months. Those individuals would do well to remember that all successful public companies start as private companies and they rarely follow a linear path – the greatest investment lift almost always comes with early adoption and with that there is an understood incremental risk. I also don’t listen to anyone that negates the value of the human assets existing in any company. I have confidence in the people behind the evolution of CFFG and equal confidence in the liked minded individuals that have opened Centres. The path may have changed but we’re all still moving forward and hey, maybe we end up at a better spot in the end, who really knows? If you’re one of those already know exactly how this will all end up you probably also know what the 5yr fixed will be in 1, 3 and 5 years so please post, you’re clearly a little smarter than the rest of us (me anyways) so why not lend a helping hand?!

    Since joining the CFF Team our brokerage has attracted new, forward thinking brokers, experienced growth in our mortgage business far exceeding what is correlated to the general market growth, created stronger relationships with our Clients through our ability to offer them a greater breadth of product (products that numerous non-CFF brokers call us to get access to btw) and on a personal note, joining CFF has enabled me to build strong connections and learn from the best brokerage owners/teams in the country which to me carries a great deal of additional value.

    Bigger/better brokerage team, more products, deeper client relationships, tightly networked with top brokerage owners in Canada.

    Pissed off, not really.

    1. Sorry I am late … I don’t subscribe the CMT yet I found Robs article a solid overview.

      Listen, the CFF adventure is not for everyone, while it is for those that want to “Do More” and “Keep More”

      Most know our founding principle is very simple and modest … “Give more to get more” … not very sophisticated eh?
      So selling retail banking products is for those that feel that their mortgage business has limitations and is primarily dictated by the forces of the mortgage market place like lenders compensation, interest rate discounts, relationships and policies … not to mention a very crowed broker space. My model was like that and of course I soon realized it was weak and lacked vision. We all know the future of our business is changing so the only question is how do you want your business to change with it? For me CFF provides us the ability to engage in full retail banking so we can compete with bank branches who are our biggest competition, and they seem to do “Everything!”. Having said that; we need CFF to deliver more competitive retail banking products and faster. The sooner we can get my hands on more attractive GIC’s, TFSA’s, LOC’s, savings accounts, mutual funds, insurance, etc the better because trust me … here we can sell it all! Therefore if making a painful decision to sell CFFBank now will help me realize my retail banking ambitions sooner then count me in because I am not going back to doing mortgages only.

      Finally; no doubt share value is a concern for anyone, so make no mistake that the future value of CFFG is dependent on the branches closing as much CFFBank product as possible and I for one feel collectively we can do it and ultimately “Have More”.

  5. That’s a strong endorsement of Peter. No one is surprised because he is that kind of guy and operator. First class.

    But don’t mistake Peter and his quality operation with CFF. He was operating an excellent brokerage long before CFF darkened his doorstep.

    Ask him candidly if he would invest all that money again today given the current outcome. Then you will know your answer.

  6. Over 5 years ago I made an investment in a vision that I thought was the right direction for our industry to pursue. It seemed like a pipe dream but it made sense.I was 59 at the time. That vision attracted a lot of seasoned people in the financial services industry. People many of which I had never met but who were the who’s who of visionarys who had been there and done that with developing something from nothing into something,all within the financial services sector.These people were excited with the vision and they had a lot more money on the table than I did.

    Now in retrospect,you may say at 59 why on earth would you be interested in becoming part of something from the ground up at your age.The answer was simple.I believed in the vision of our industry having to become more than just mortgage providers, if we were to survive.I believed there was a collective strength in our industry that could be harnessed and built into something different.

    It has not been easy.The vision has changed.The direction has morphed.Did I expect to make an instant kill from a liquidity event down the road?No.I knew it would take some time, but I had confidence in the players involved.Has it lost money-no doubt, but I didn’t expect it to roar out of the gate with the challenges facing it.

    I look where we are today and I am now more excited than ever.One of the most brilliant strategists in the industry who has been by the broker channel from day one and who has created more shareholder value for his shareholders than any Bank has stepped into a bargain in buying the CFF Bank. In doing so, he has the ability to take a hugely successful company from a Trust Company to a Bank and at the same time hopefully support and grow the distribution goals of the CFF network with a broader array of retail products and an array of products that will expand the mortgage products we can offer.It’s true we can do some of that now with Home Trust ,but I really like the idea of having Mr. Soloway adding his expertise and experience to a growing vision.I think he likes the idea of having access to 37 top brokerages houses involved in the vision.We are not true partners yet.I have no idea where it will take us and I have no idea if I will have an exit strategy down the road.I’m am not particularly concerned about that.Bad investment you may say. I am more concerned about our industry being able to compete head on with the Bank’s, who are not part of our channel and offer more to my clients. I have seen how that can be done.A liquidity event would be a nice bonus.The financial benefits are coming to me directly through the use of CFF products to lever a different relationship with my clients.

    I do know one thing. The vision is still alive, well and growing. 37 brokerage houses have recognized what I did and there will be more down the road.I have a host of new young visionary partners who are prepared to throw their time and effort into accomplishing a vision and they are working with some the best people in this industry to make that happen.When you attract the likes of Gord Dahlen,Peter Vukanovich, Karl Straky and a host of other veterans in the vision,you know you have people who are there with you.Andrew well said and welcome aboard.You have seen the early results of your involvement in the vision.

    There were a lot of skeptics around in the industry when I was invited to join 25 other people in 1993 in a hotel room to discuss how we could legitimize the mortgage brokerage industry in the public’s eyes and form a national association. Couldn’t be done.Too may hurdles etc etc.A lot of very good people invested their time and energy to make that a reality and it didn’t happen overnight.This is just as daunting. Moreso in today’s environment.

    “Skeptic’ one thing missing from the press release is how little the executives of this fledgling enterprise are really being paid and have been paid for all the effort,time and energy they have invested and that they continue to invest to make the vision a reality.It also doesn’t point out how much money they have on the table at equal or greater risk than those investing now.Stock options only reward somebody when there is a market publicly traded value.They deserve that if they help get us there.

    As to Bre Ex and even Nortel.Hey if you owned the stock,you had no say as to where it was going.You believed what you read.This case is a little different.I know the future of this vision sits with me and everybody else involved in making that vision a reality. We fail, it fails and there are a lot of people waiting on the sidelines to say “I told you so”. I always love a challenge.

    We all make a pretty good living and so I chose to invest some of that in a vision.It’s not for everybody and it isn’t easy.If I wanted easy I would be working for a Bank.

    I guess I am a bit of a gambler.I play Texas Hold em for fun.Enjoy the game ,enjoy the people at the table.Guess you could say “I’m all in” We have a pretty good hand.Might lose a few times but then you learn by experience.

  7. Great people. Good motives. Genuine ideals.

    This has nothing to do with that. CFF can fail due to mismanagement and poor strategy and all you have said in reference to your higher ideals and aspirations remains true. They are not tied or interdependent in any way.

    But let’s be honest – Mr Soloway has made a business purchase. He has nothing to do with CFF going forward. He’s no dummy. He is neither a shareholder, director, business partner, or franchisee of CFF. He is merely the shrewd buyer who purchased the distressed asset at a bargain. End of story. Home trust is not CFF.

  8. Rob gave us all the link, in the last quarter at CFF they paid salaries, bonuses, pension and benefits of $3.3 Million in a quarter they lost $5.5 Million and they have been in business for several years. Every lending boss I have spoken to for the last two years could never wrap their minds around the CFF expense levels.

    Maybe I have it all wrong but Ed Gettings and Paul Grewal started Street Capital from scratch virtually to the day the 2008 WFT hit and by watching expenses and moving heaven and earth to ramp up mortgage volume they survived and thrived. So launching a successful lender is doable although clearly very tough in the current regulatory environment.

    I am not beating up on people with a dream, I am a dreamer myself, at age 55 I tore apart my business and repurposed to a totally different form of mortgage brokerage, I also know there are brilliant people working at CFF and equally brilliant people who invested in CFF and they all did this for positive reasons that they all believed would only be helpful to the whole mortgage brokerage industry not just themselves.

    But facts are facts and I stand by my statement: when you buy shares or warrants or options or options for warrants (I was actually offered that once by a network) in a private company where you have zero control over the workings of that company you have taken a profound risk, you have also put a massive amount of trust in the people who run the company to do the right thing with your money.

    We shall see what the future will bring.

  9. I was presented with the “opportunity” a couple of years ago and didn’t ever get an answer to the question of ROI. As for me, and my loss-position Home Capital stock, I guess I now own a piece of CFF without the investment?

    For unsecured LOC’s, some bank lender should get on board with allowing us an easy way to refer and get them approved. As for providing other investment and life insurance products, it’s only a $500 investment to get your Life License in Ontario and have an instant stream of additional income.

    I wish all the CFF franchise owners well, there’s many great brokers that have contributed lots to the industry that bought into the CFF idea.

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