Why a U.S. commercial financing company is a key to the sale of Laurentian Bank

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As Laurentian Bank of Canada LB-T searches for potential takeover suitors, its Canadian retail business is not the main attraction. Instead, the emerging jewel is its U.S. commercial financing business, Northpoint Commercial Finance NPNTQ, which has been its fastest-growing division.

Since Laurentian purchased Northpoint in 2017, its U.S. segment has ballooned to contribute just under a quarter of the bank’s revenue.

The Montreal-based bank received interest in Northpoint from potential acquirers even before it recently started exploring the possibility of a sale, according to five sources. They said Northpoint could be the cornerstone of a possible deal, but if suitors are interested only in this division, Laurentian will have to weigh whether what remains of its operations will be compelling enough for public shareholders to own.

The Globe and Mail is not naming the sources because they are not permitted to discuss the confidential sale process.

Laurentian Bank confirmed in a press release on July 11 that the country’s ninth-largest lender is “conducting a review of strategic options” after The Globe reported that the bank is exploring a sale.

Northpoint’s business has been a boon to Laurentian’s earnings, especially after COVID-19 pandemic lockdowns spurred spending on recreational activities. The company lends to manufacturers and dealers of recreational vehicles, trailers, power sports products and other equipment. Northpoint’s largest markets at the time of the 2017 acquisition were Texas, Florida and California, as well as a small unit in Ontario.

Revenue in Laurentian’s U.S. segment – which is made up of Northpoint, as well as a separate equipment financing business that Laurentian owned prior to the acquisition – has surged to $55.2-million in the recent second quarter from $4.7-million at the end of 2017 after the deal closed. In less than six years, the U.S. arm went from contributing just 6 per cent of Laurentian’s total revenue to 22 per cent, according to financial statements.

The division’s assets have also ballooned, climbing to $4.8-billion in the most recent quarter from $1.3-billion in 2017.

Over that same period, Laurentian’s Canadian business has remained relatively stagnant. While its revenue has fluctuated over the years, it booked $201.9-million in the second quarter, a 20-per-cent drop from the end of 2017. And its total assets grew 1 per cent.

“This was a great success, tremendous success for the bank,” chief financial officer Yvan Deschamps said in French in response to a shareholder question during the bank’s annual meeting in April. He said that since the bank bought Northpoint, the business has grown five times its initial size to nearly $5-billion in assets.

But for all the success the business has seen in recent years, it could face a tougher market as the threat of a recession looms and rising interest rates dampen demand for loans, especially for discretionary items such as recreational equipment.

Laurentian also faces challenges in its home market. It is at the midway point of a three-year strategic overhaul led by chief executive officer Rania Llewellyn, who took on the role in 2020 after its share price underperformed rivals for years.

A key tenet of the plan is to focus on niche specialties, especially in commercial markets – which account for about half of Laurentian’s total loan book – and equipment and inventory financing. The bank is also under pressure to strengthen its weak core deposit base – a cheaper source of funding – while grappling with slower loan growth and rising expenses, two trends that are weighing on profits across the sector.

Laurentian has made some headway in growing its deposit base. In the second quarter, the bank’s deposits grew 5 per cent from the same period a year prior, largely driven by customers stashing cash away into accounts that pay higher interest rates.

Among Canada’s Big Six banks, there appear to be few candidates that are likely to chase a deal to buy Laurentian. Royal Bank of Canada’s RY-T excess capital is earmarked for its pending acquisition of HSBC Canada. Canadian Imperial Bank of Commerce CM-T has said it is focused on building its existing business and in building its capital reserves under a tighter regulatory environment. National Bank of Canada NA-T is focused on expanding outside of its stronghold in Quebec.

Bank of Nova Scotia has signalled its interest in building its personal and commercial businesses in Quebec, but has also been tasked with improving funding issues that are similar to those of Laurentian. While Bank of Montreal BMO-T has been expanding its commercial unit, it may be tied up with integrating its purchase of California-based Bank of the West.

Toronto-Dominion Bank TD-T, however, has the means to buy Laurentian. The bank is sitting on $18-billion in excess capital and it recently terminated its $13.5-billion deal for Tennessee-based First Horizon Corp.

Canada’s second-largest lender boasts a peer-leading core deposit base, which provides it with cheap funding, and it has shown recent interest in specialty commercial financing, having acquired Wells Fargo’s Canadian equipment finance business in 2021. Adding Northpoint could help TD expand in the U.S.

But TD has a reputation as a prudent, risk-averse bank when it comes to acquisitions, and the cost of integrating a bank that is still turning around its businesses could deter a deal.