Street Capital Bank of Canada to be sold to RFA Capital; majority of shareholders withhold votes for CEO, forcing resignation from board | General financial discussion | Discussion forum

It's been awhile since I've updated everyone on Street Capital Bank of Canada, a Schedule I (domestic) federally-chartered bank, and its publicly traded parent company, Street Capital Group, Inc., for which I'm (unfortunately) a shareholder. For those that don't know who Street Capital Bank of Canada is, it's essentially the third-largest mortgage lender in the brokerage channel - it operates exclusively in the brokerage space, though it's starting to originate mortgages direct to consumers through its website as well, I believe. It has about $33 billion in mortgages under administration, which essentially means they're not on its balance sheet as it sells them to securitization trusts (primarily the Canada Housing Trust, through the Canada Mortgage Bond program) and it collects an upfront fee and then serves as the administrator, payment collector, and general servicer of the mortgage for which it earns annual servicing income. A couple years ago, they finally won their federal bank charter and they immediately started offering GICs through the deposit broker channel, with plans to offer GICs direct-to-consumer.

The plan was accelerated somewhat following macro-prudential changes with respect to mortgage amortization and qualification standards, not to mention the elimination of the federal government, through CMHC, no longer allowing banks to insure their non-CMHC mortgages with CMHC to remove most of the default risk (called "portfolio insurance," the bank, as opposed to the borrower, pays the CMHC premium) when the federal government didn't increase CMHC's authorized insurance limit. So, they planned to originate more mortgages direct-to-consumer and also to hold them on balance sheet, thus the need for GICs. Suddenly, without warning, in December 2018, Street Capital announced that they'd taken a large writedown of the amount they'd invested to a third-party to build them an online banking platform to be able to offer GICs and eventually HISAs as well. They terminated their contract with the third-party I.T. solutions provider and said they'd retain the intellectual property assets for the partially-complete online banking platform for potential future use at some point down the road.

Since then, the stock's been on a downward trajectory, closing as low as $0.48 a couple weeks ago. I should pause and say how I acquired the shares. I bought into Street Capital Group, Inc., in 2017 around the time of the Home Capital Group mini-bank run and capital adequacy event when Street, Home, and Equitable all sold off heavily. I was attracted to the fact that Street was, at the time, trading slightly below book value, most of the mortgages weren't on their balance sheet and thus minimal credit risk, and they'd been growing their mortgage book of business and revenues. I figured it was the safer move versus buying Home Capital Group, since no one knew how that story would end up. As well, they subsequently hired a new CEO in Duncan Hannay, who previously headed up Real Estate Secured Lending at Scotiabank and, before that, Scotia iTRADE. So, my cost base is $1.20 per share, for 5,000 shares, which are in my TFSA.

With the growing mortgage book (they're still originating billions in new mortgages and renewing the majority of their mortgages every year), growing revenue, and growing GIC deposits and on-balance sheet mortgages (call it $800 million, or about the size of Alterna Bank), but profitability was elusive, probably in part due to the I.T. investments. Anyway, with the lending book growing and their stock price falling, it'd been rumoured that they were looking for a buyer. They've found that buyer, for $0.68 per share, in RFA Capital Group, which is better in the sense I'm only going to be down $2,500 instead of $3,500-3,700, that's a privately-held boutique asset management firm for institutional and high net worth investors. In this article, it was noted that they plan to use their own internal mortgage investment corporation and investors as a source of funding to grow their on- and off-balance sheet mortgage originations from ~$6 to ~$10 billion per year. They might consider doing direct-to-consumer GICs and HISAs, potentially, in the future, but it sounds like that's off the table for at least a couple years. This Globe article somes it up this way, including this hint of urgency in that OSFI, the bank's regulator, had reportedly made some confidential inquiries and subsequently required a capital raise:

"Late last year, Street Capital changed course, halting investments to replace its core banking system and announcing a “realignment” plan that included job cuts. Days later, on Christmas Eve, board chair Alan Silber announced he would step down after more than 30 years with the company, and was replaced by director Lea Ray in the new year.

Street Capital has been looking to raise money ever since. But the hunt for a lifeline took on greater urgency earlier this year when the Office of the Superintendent of Financial Institutions (OSFI) intervened with the lender, inquiring about its plans to recapitalize, according to sources who were not authorized to discuss the matter." [emphasis added]

Then, yesterday, Street Capital Group announced their annual director election results via press release (normally a routine affair, with directors re-elected with banana republic size majorities in the high 90 percent range, typically). Not surprisingly, given the stock's performance, the number of votes "withheld" for all the directors was quite high. Note the following:

Nominee | Votes For | % For | Votes Withheld | % Withheld
Ronald Appleby, Q.C. | 27,920,300 | 62.85 | 16,500,422 | 37.15
Tom Bermingham | 29,047,846 | 65.39 | 15,372,876 | 34.61
W. Edward Gettings | 33,436,732 | 75.27 | 10,983,990 | 24.73
Duncan Hannay | 15,873,232 | 35.73 | 28,547,490 | 64.27
Ron Lalonde | 27,895,350 | 62.80 | 16,525,372 | 37.20
Morris Perlis | 26,955,314 | 60.68 | 17,465,408 | 39.32
Lea Ray | 28,658,448 | 64.52 | 15,762,274 | 35.48
Carrie Russell | 22,984,948 | 51.74 | 21,435,774 | 48.26

Despite the high votes withheld, including one where the votes withheld exceeds the votes for (which rarely happens), the company said they were all elected except that, under their corporate rules and the Toronto Stock Exchange rules, President & CEO had to immediately offer up his resignation from the Street Capital Group board (though not necessarily the Street Capital Bank of Canada subsidiary board, because that is a subsidiary and the parent company board would appoint its directors), for which the parent company board's Governance, Conduct Review, and Compensation Committee is to review his resignation and determine whether to accept it, for which it'll report to the board and the board promises to make a decision with 90 days.

Cheers,
Doug