Mr. Rejean Robitaille reports
LAURENTIAN BANK REPORTS THIRD QUARTER RESULTS
Laurentian Bank of Canada has released its financial results for the third quarter of fiscal 2014.
Highlights of the third quarter of 2014
- Financial highlights on a reported and adjusted basis for the third
quarter of 2014:
- Net income of $40.1-million;
-
Return on common shareholders' equity of 11.2 per cent;
-
Diluted earnings per share of $1.27;
- Adjusted net income increased 10 per cent to $42.4-million;
-
Adjusted return on common shareholders' equity of 11.9 per cent;
-
Adjusted diluted earnings per share up 6 per cent to $1.35;
-
Positive adjusted operating leverage of 2.0 per cent sequentially;
-
Commercial loan portfolio including BAs up 16 per cent year over year;
-
Strong credit performance, with continued low loan losses of $10.5-million.
Laurentian Bank of Canada
reported adjusted net income of $42.4-million, or $1.35 diluted per
share, for the third quarter of 2014, up 10 per cent and 6 per cent, respectively,
compared with $38.5-million, or $1.27 diluted per share, for the same
period in 2013. Adjusted return on common shareholders' equity
was 11.9 per cent for the third quarter of 2014, compared with 12.0 per cent for the
same period in 2013. When including adjusting items, net income totalled $40.1-million, or $1.27 diluted per share, for the
third quarter of 2014, compared with $27.0-million, or 86 cents diluted per
share, for the third quarter of 2013. Return on common shareholders'
equity was 11.2 per cent for the third quarter of 2014, compared with 8.1 per cent for
the same period in 2013.
For the nine months ended July 31, 2014, adjusted net income totalled
$121.0-million, or $3.92 diluted per share, compared with $116.9-million,
or $3.81 diluted per share, in 2013. Adjusted return on common
shareholders' equity was 11.8 per cent for the nine months ended July 31, 2014,
compared with 12.2 per cent for the same period in 2013. When including
adjusting items, net income was $106.6-million, or $3.42 diluted per
share, for the nine months ended July 31, 2014, compared with $93.6-million, or $2.99 diluted per share, for the same period in 2013. Return
on common shareholders' equity was 10.3 per cent for the nine months ended July
31, 2014, compared with 9.6 per cent for the same period in 2013.
Commenting on the bank's financial results for the third quarter of
2014, Rejean Robitaille, president and chief executive officer,
mentioned: "We continued to deliver solid core earnings in the quarter
and maintained our targeted efforts to improve efficiency and maximize
operating leverage. In an environment of slowing consumer loan demand
and compressed margins, our rigorous control over expenses and the
sustained credit quality of the loan portfolio contributed to the good
performance for the quarter.
"We maintained our focus on further developing our
higher-margin commercial activities as evidenced by a 16-per-cent increase in
our commercial loan portfolio. Looking ahead, we will continue to grow
income from non-interest sensitive sources in order to foster
profitable revenue growth. Within our B2B Bank business segment, with
most cost synergies related to our acquired businesses delivered, our
efforts shift from integration to business development. We remain
committed to unlocking value for our shareholders and we are working
diligently to continuously improve our operations and generate
sustained earnings growth in each of our business segments."
Review of business highlights
Personal and commercial
Business services continue to generate strong growth. The commercial loan portfolio
increased by 16 per cent year over year and commercial mortgages grew by 9 per cent,
excluding the sale of $102-million of commercial mortgage loans in the
second quarter of 2014. The leasing and equipment financing division,
launched only two quarters ago, is seeing an increase in the number of
credit applications and is starting to build a solid pipeline. Business
services continue to be well positioned as a growth engine for the
bank.
Retail services is becoming increasingly focused on the wealth management offer, with
an emphasis on investment products such as deposits and mutual funds.
To accommodate clients' need for more convenient and higher-quality
service and to enhance this offer, advisory branch hours were recently
extended. Furthermore, the momentum in wealth management continued as
income from mutual fund sales increased by 29 per cent in the third quarter of
2014 compared with a year earlier.
B2B Bank is turning its attention toward business development, now that the
integrations are almost completed. With a contribution from the new
alternative and expanded mortgage solution successfully rolled out at
the end of last quarter, mortgage loans increased by 2 per cent sequentially or
8 per cent on an annualized basis. B2B Bank is well positioned in the mortgage
market, having among the most comprehensive offerings in Canada.
Laurentian Bank securities' (LBS) focus on the small cap market is reaping benefits. During the quarter,
underwriting fees related to small cap securities increased
significantly. LBS's broad research coverage, including sectors such as
technology, base metals, industrials and health care, should help drive
investment banking opportunities.
Supporting all of the bank's activities is a solid capital base. After
issuing $125-million of preferred shares in the second quarter, the
$110-million Series 10 preferred share issue was redeemed on June 15,
2014. The bank's pro-active capital management aims to optimize capital
for all stakeholders.
Economic outlook
North American economic growth accelerated this summer, led by the
United States and despite the escalating geopolitical tensions.
Accordingly, the Federal Reserve should end its accommodative asset
purchase program this fall, gradually sowing the seeds for a modest
increase in its policy rate in the second half of 2015.
While the discrepancy in economic performances between Western Canada
and the rest of the country persists, improving U.S. demand and a lower
currency are gradually benefiting a broader number of sectors. In turn,
Canadian economic activity and hiring are expected to advance at a
slightly faster pace for the remainder of the year and during
2015, which should benefit both personal and commercial lending. As
these conditions materialize, the Bank of Canada may start to increase
its policy rate some time before the end of 2015. In the housing sector,
home-building activity stabilized at a demographic-driven level this
summer, while the resale market appears more balanced, with prices
generally increasing at a slow-to-moderate pace. As interest rates are
expected to remain at historically low levels, all signs point to a
soft landing for the Canadian housing sector.
Financial performance
for 2014
The table presents management's financial objectives for 2014
and the bank's performance to date. These financial objectives are
based on the assumptions noted in the bank's 2013 annual
report.
2014 FINANCIAL OBJECTIVES
For the nine months ended
2014 objectives July 31, 2014
Adjusted return on common shareholders' equity 10.5% to 12.5% 11.8%
Adjusted net income -- annual ($M) $145.0 to $165.0 $121.0
Adjusted efficiency ratio 72.5% to 69.5% 71.3%
Adjusted operating leverage Positive 2.1%
Common equity Tier I capital ratio -- all-in basis >7.0% 7.7%
Based on the results for the nine months ended July 31, 2014, and current
forecasts, management believes that the bank is in line to meet its
objectives, within the range set out at the beginning of the year. In a
slow-revenue-growth environment, disciplined management of expenses,
strong credit quality, strategies to increase other income and good
organic growth in the higher-margin commercial businesses were the key
drivers of the bank's good financial performance since the beginning of
the year.
Analysis of consolidated results
CONDENSED CONSOLIDATED RESULTS
(In thousands, except per share)
Three months ended July 31, Nine months ended July 31,
2014 2013 2014 2013
Net interest income $ 141,249 $ 144,549 $ 420,831 $ 427,323
Other income 78,396 76,493 231,813 222,483
Total revenue 219,645 221,042 652,644 649,806
Amortization of net premium on purchased financial
instruments and revaluation of contingent consideration 1,511 1,140 8,145 3,420
Provision for loan losses 10,500 9,000 31,500 26,000
Non-interest expenses 155,973 176,705 475,010 501,428
Income before income taxes 51,661 34,197 137,989 118,958
Income taxes 11,564 7,213 31,378 25,347
Net income $ 40,097 $ 26,984 $ 106,611 $ 93,611
Preferred share dividends, including applicable taxes 3,588 2,520 8,590 9,112
Net income available to common shareholders $ 36,509 $ 24,464 $ 98,021 $ 84,499
Diluted earnings per share $ 1.27 $ 0.86 $ 3.42 $ 2.99Three months ended July 31, 2014, compared with the three months ended
July 31, 2013
Net income was $40.1-million, or $1.27 diluted per share, for the third
quarter of 2014, compared with $27.0-million, or 86 cents diluted per share,
for the third quarter of 2013. Adjusted net income was $42.4-million
for the third quarter ended July 31, 2014, up from $38.5-million for
the same quarter of 2013, while adjusted diluted earnings per share was
$1.35, compared with $1.27 diluted per share in 2013. Income available
to common shareholders in the third quarter of 2014 included a final
dividend on the preferred shares, Series 10, redeemed in June, 2014, a
regular dividend on the preferred shares, Series 11, and an initial
partial dividend on the preferred shares, Series 13, issued in April,
2014. As a result, the calculation of diluted earnings per share
included an additional one-time net $1.2-million (or four cents per share)
charge for the third quarter of 2014.
Total revenue
Total revenue decreased by $1.4-million, or 1 per cent, to $219.6-million in the
third quarter of 2014, compared with $221.0-million in the third
quarter of 2013, as lower net interest income year over year was partly
offset by growth in other income.
Net interest income decreased by $3.3-million, or 2 per cent, to $141.2-million for the third quarter
of 2014, from $144.5-million in the third quarter of 2013, mainly due
to the revenue impact of a lower level of high-margin personal loans
and lower prepayment penalties on residential mortgage loans. Over all,
margins decreased to 1.65 per cent in the third quarter of 2014 from 1.68 per cent in
the third quarter of 2013, essentially for the same reasons.
Other income increased by $1.9-million, or 2 per cent, and amounted to $78.4-million in the
third quarter of 2014, compared with $76.5-million in the third quarter
of 2013. Higher income from brokerage operations driven by improved
activity in the small cap equity underwriting market, as well as
continued solid mutual fund commissions and lending fees contributed to
the year-over-year increase. These good results were partly offset by
lower income from treasury and financial market operations compared with
the particularly strong performance of treasury activities in the third
quarter of 2013, as well as lower deposit service charges as clients
optimized their use of the bank's offerings.
Amortization of net premium on purchased financial instruments and
revaluation of contingent consideration
For the third quarter of 2014, the amortization of net premium on
purchased financial instruments amounted to $1.5-million, compared with
$1.1-million in the third quarter of 2013.
Provision for loan losses
The provision for loan losses increased by $1.5-million to $10.5-million
in the third quarter of 2014 from $9.0-million in the third quarter of
2013. Nonetheless, loan losses remained at a low level reflecting the
overall underlying quality of the loan portfolios and the continued
favourable credit environment.
Non-interest expenses
Non-interest expenses decreased by $20.7-million to $156.0-million for
the third quarter of 2014, compared with $176.7-million for the third
quarter of 2013. This mostly reflects $13.0-million lower T&I costs as
integration work at B2B Bank winds down and a 5-per-cent decrease in the bank's
adjusted non-interest expenses through tight cost control, acquisition
synergies and process reviews.
Salaries and employee benefits decreased by $6.5-million, or 7 per cent, to $82.9-million for the third quarter
of 2014, compared with the third quarter of 2013, mainly due to lower
headcount from acquisition synergies realized over the last 12 months, the optimization of certain retail and corporate activities in
the fourth quarter of 2013, and lower employee benefit expenses. Regular
salary increases partly offset the decrease year over year.
Premises and technology costs increased by $1.0-million to $45.5-million compared with the
third quarter of 2013. The increase mostly stems from higher technology
costs related to continuing business growth and enhanced on-line services.
Other non-interest expenses decreased by $2.2-million, or 8 per cent, to $26.0-million for the third quarter
of 2014, compared with the third quarter of 2013. The decrease mainly
reflects the full impact of cost synergies in B2B Bank as well as the
continued disciplined control over discretionary expenses throughout
the bank in light of a slower-retail-loan-growth environment.
T&I costs for the third quarter of 2014 totalled $1.6-million compared with $14.6-million a year ago. During the third quarter of 2014, T&I costs mainly
related to completing processes and harmonizing products. Integration
of the AGF Trust operations and related T&I costs are in their final
stage and should be completed in the fourth quarter of 2014.
The adjusted efficiency ratio was 70.3 per cent in the third quarter of 2014,
compared with 73.3 per cent in the third quarter of 2013, as integration
synergies, continued rigorous cost control and efforts to improve
operating costs are bearing fruit. As a result, adjusted operating
leverage was 4.1 per cent in the third quarter of 2014, with quarterly growth
rates calculated versus the third quarter of 2013.
Income taxes
For the quarter ended July 31, 2014, the income tax expense was $11.6-million and the effective tax rate was 22.4 per cent. The lower tax rate,
compared with the statutory rate, mainly resulted from the favourable
effect of holding investments in Canadian securities that generate
non-taxable dividend income and the lower taxation level on revenues
from foreign insurance operations. For the quarter ended July 31, 2013,
the income tax expense was $7.2-million and the effective tax rate
was 21.1 per cent. Year over year, the higher effective tax rate for the
quarter ended July 31, 2014, resulted from the relatively higher level
of domestic taxable income.
Nine months ended July 31, 2014, compared with the nine months ended July
31, 2013
Net income was $106.6-million, or $3.42 diluted per share, for the nine
months ended July 31, 2014, compared with $93.6-million, or
$2.99 diluted per share, for the nine months ended July 31, 2013.
Adjusted net income was $121.0-million for the nine months ended July
31, 2014, compared with $116.9-million in 2013, while adjusted diluted
earnings per share was $3.92, compared with $3.81 diluted per share in
2013.
Total revenue
Total revenue increased by $2.8-million to $652.6-million in the nine
months ended July 31, 2014, compared with $649.8-million in the nine
months ended July 31, 2013. The year-over-year growth in other income
more than offset a modest decline in net interest income.
Net interest income decreased by $6.5-million to $420.8-million for the nine months ended
July 31, 2014, from $427.3-million in the nine months ended July 31,
2013, mainly reflecting a reduced level of investment loans and lower
prepayment penalties on residential mortgage loans. When compared with
the nine months ended July 31, 2013, margins were unchanged at 1.66 per cent
for the nine months ended July 31, 2014, as a better loan mix offset
slightly compressed margins.
Other income increased by $9.3-million, or 4 per cent, and amounted to $231.8-million in the
nine months ended July 31, 2014, compared with $222.5-million in the
nine months ended July 31, 2013. Higher lending fees stemming from
increased business activity and loan prepayment penalties in the
commercial portfolio partly contributed to the year-over-year increase.
Solid mutual fund commissions as well as higher income from brokerage
operations and insurance income also contributed to the year-over-year
increase. These strong improvements were partly offset by lower income
from treasury and financial market operations mainly due to lower
income from trading activities in the nine months ended July 31, 2014.
Amortization of net premium on purchased financial instruments and
revaluation of contingent consideration
For the nine months ended July 31, 2014, amortization of
net premium on purchased financial instruments and revaluation of
contingent consideration amounted to $8.1-million, compared with $3.4-million in the nine months ended July 31, 2013. The higher charge in
2014 essentially results from a $4.1-million non-tax-deductible charge
recorded in the second quarter to settle the contingent consideration
related to the AGF Trust acquisition. The amortization of net premium
on purchased financial instruments amounted to $4.0-million in the nine
months ended July 31, 2014, compared with $3.4-million in the nine
months ended July 31, 2013.
Provision for loan losses
The provision for loan losses increased by $5.5-million to $31.5-million
in the nine months ended July 31, 2014, from $26.0-million in the nine
months ended July 31, 2013. While still low, this reflects a partial
return to more normalized overall loan losses from the very low 2013
levels.
Non-interest expenses
Non-interest expenses decreased by $26.4-million to $475.0-million for
the nine months ended July 31, 2014, compared with $501.4-million for
the nine months ended July 31, 2013. This mainly reflects $18.3-million
lower T&I costs and a decrease in the bank's adjusted non-interest
expenses through tight cost control and process reviews as mentioned
above.
Salaries and employee benefits decreased by $14.7-million, or 5 per cent, to $252.9-million for the nine months
ended July 31, 2014, compared with the nine months ended July 31, 2013,
mainly due to lower headcount from acquisition synergies realized over
the last 12 months, and the optimization of certain retail and
corporate activities in the fourth quarter of 2013, partly offset by
regular salary increases. Lower pension costs and expenses related to
group insurance programs also contributed to the decrease
year over year.
Premises and technology costs increased by $11.0-million to $137.0-million for the nine months
ended July 31, 2014. As noted above, the increase mostly stems from
higher technology costs related to continuing business growth and enhanced
on-line services. Higher amortization expenses related to completed
regulatory IT projects and rental costs also contributed to the
increase.
Other non-interest expenses decreased by $4.4-million to $75.1-million for the nine months ended
July 31, 2014, from $79.5-million for the nine months ended July 31,
2013. As mentioned above, as the bulk of cost synergies related to
acquisitions have materialized, the bank continued to exercise
disciplined control over discretionary expenses in light of a slower
growth environment.
T&I costs for the nine months ended July 31, 2014, totalled $10.0-million compared
with $28.3-million a year ago. They mainly related to IT systems
conversion costs, salaries, professional fees, employee relocation
costs and other expenses mostly for the integration of the AGF Trust
operations.
The adjusted efficiency ratio was 71.3 per cent in the nine months ended July
31, 2014, compared with 72.8 per cent in the nine months ended July 31, 2013.
On the same basis, the bank generated positive operating leverage of
2.1 per cent year over year, mainly due to cost synergies related to
acquisitions, continued rigorous cost control and efforts to improve
its operations, as well as higher other income.
Income taxes
For the nine months ended July 31, 2014, the income tax expense was
$31.4-million and the effective tax rate was 22.7 per cent. The lower tax rate,
compared with the statutory rate, resulted mainly from the favourable
effect of holding investments in Canadian securities that generate
non-taxable dividend income and the lower taxation level on revenues
from foreign insurance operations. For the nine months ended July 31,
2013, the income tax expense was $25.3-million and the effective tax
rate was 21.3 per cent. Year over year, the higher effective tax rate for the
nine months ended July 31, 2014, resulted from the relatively higher
level of domestic taxable income considering a $4.1-million non-tax-deductible charge recorded in the second quarter of 2014 as a
result of the final settlement of the contingent consideration related
to the AGF Trust acquisition.
Three months ended July 31, 2014, compared with the three months ended
April 30, 2014
Net income was $40.1-million, or $1.27 diluted per share, for the third
quarter of 2014 compared with $31.0-million, or 99 cents diluted per share,
for the second quarter of 2014. Adjusted net income was $42.4-million, or $1.35 diluted per share, compared with $39.4-million, or $1.29
diluted per share, for the second quarter of 2014. As noted above, the
calculation of diluted earnings per share in the third quarter of 2014
included a final dividend on the preferred shares, Series 10, redeemed in
June, 2014, a regular dividend on the preferred shares, Series 11, and an
initial partial dividend on the preferred shares, Series 13, issued in
April, 2014, which resulted in an additional one-time net $1.2-million
(four cents diluted per share) charge for the third quarter of 2014.
Total revenue increased to $219.6-million in the third quarter of 2014,
compared with $216.9-million in the previous quarter. Net interest
income increased by $2.5-million sequentially to $141.2-million in the
third quarter of 2014, mainly due to three more days in the third
quarter. This increase was partly offset by lower interest recoveries
resulting from favourable settlements in the commercial loan portfolio
in the second quarter of 2014. Net interest margin decreased
sequentially by three basis points to 1.65 per cent in the third quarter of 2014,
compared with 1.68 per cent in the second quarter of 2014, mainly due to the
lower interest recoveries.
Other income increased by $200,000 sequentially despite a $3.7-million gain on the sale of a $102.4-million commercial mortgage loan
portfolio during the second quarter of 2014. Higher fees and
commissions on loans and card service revenues stemming from increased
business activity, as well as higher income from treasury and financial
market operations, mainly contributed to the increase.
Amortization of net premium on purchased financial
instruments and revaluation of contingent consideration amounted to
$1.5-million in the third quarter of 2014, compared with $5.5-million
for the last quarter which included the final $4.1-million contingent
consideration charge noted above.
The provision for loan losses remained low at $10.5-million for the
third quarter of 2014, unchanged from the second quarter of 2014,
reflecting the continued high quality of the portfolio and the
favourable credit environment.
Non-interest expenses amounted to $156.0-million for the third quarter
of 2014, compared with $159.9-million for the second quarter of 2014.
T&I costs decreased to $1.6-million in the third quarter of 2014,
compared with $4.4-million in the second quarter of 2014 and adjusted
non-interest expenses decreased by 1 per cent despite three more days in the
third quarter. On the same basis, the bank generated positive operating
leverage of 2.0 per cent sequentially, as the bank's continued prudent cost
control efforts are bearing fruit.
Financial condition
Balance sheet assets amounted to $34.3-billion at July 31, 2014, up $400-million, or 1 per cent, from year-end 2013. Over the last 12 months, balance
sheet assets increased by $600-million.
Liquid assets
Liquid assets, including cash, deposits with other banks, securities and
securities purchased under reverse repurchase agreements, totalled $6.4-billion as at July 31, 2014, an increase of $476.3-million, or 8 per cent,
compared with Oct. 31, 2013. This higher level of liquidity reflects
the successful raising of institutional deposits since the beginning of
the year in a slower-loan-growth environment as the bank maintained
diversified financing sources in anticipation of higher growth going
forward. Liquid assets as a percentage of total assets were up
marginally at 19 per cent compared with Oct. 31, 2013. The bank continues to
prudently manage the level of liquid assets and to hold sufficient cash
resources from various sources in order to meet its current and future
financial obligations, under both normal and stressed conditions.
Loans
Loans and bankers' acceptances, net of allowances, stood at $27.2-billion as at July 31, 2014, up marginally from Oct. 31, 2013. On a
gross basis, continued organic growth in the higher-margin commercial
loan portfolios outpaced the decrease in the investment loan portfolio,
while the residential mortgage loan portfolio remained unchanged since
the beginning of the year. Commercial loans, including bankers'
acceptances, increased by $302.3-million, or 11 per cent, since Oct. 31, 2013,
and 16 per cent over the last 12 months, as the bank continued to grow this
portfolio and began to reap results from the launch of the new lease
financing offer. Commercial mortgage loans increased by $82.5-million,
or 3 per cent, since Oct. 31, 2013, despite a $102.4-million loan sale in the
second quarter of 2014, as the bank maintained its efforts to develop
this portfolio. Personal loans decreased by $329.5-million, or 5 per cent, since
Oct. 31, 2013, mainly reflecting attrition in the investment loan
portfolio. Residential mortgage loans decreased marginally by $8.7-million from Oct. 31, 2013, mainly due to the effect of a slower-retail-loan-growth environment in 2014 in Eastern Canada.
Liabilities
Personal deposits stood at $18.8-billion as at July 31, 2014, decreasing
slightly from $19.3-billion as at Oct. 31, 2013. Business and other
deposits increased by $800-million, or 17 per cent, since Oct. 31, 2013, to
$5.4-billion as at July 31, 2014, mainly explained by new deposits
raised during the third quarter of 2014 as the bank further diversified
its financing sources. Personal deposits represented 78 per cent of total
deposits as at July 31, 2014, a slight decrease from year-end 2013, as
the bank saw a reduced level of brokered deposits to the benefit of
more favourably priced institutional deposits. This ratio remains
nonetheless well above the Canadian average and will help to meet
upcoming Basel III liquidity requirements.
Debt related to securitization activities and subordinated debt remained
relatively unchanged compared with Oct. 31, 2013, and stood at $4.8-billion and $400-million, respectively, as at July 31, 2014.
Shareholders' equity
Shareholders' equity stood at $1,516.1-million as at July 31, 2014,
compared with $1,433.6-million as at Oct. 31, 2013. This increase
resulted mainly from the net income contribution for the nine-month
period, net of declared dividends and the net effect of preferred share
transactions detailed below. In addition, the issuance of 304,865 new
common shares under the shareholder dividend reinvestment and share
purchase plan further contributed to the increase in shareholders'
equity. The bank's book value per common share appreciated to $45.10 as at July 31, 2014, from $43.19 as at Oct. 31,
2013. There were 28,837,452 common shares and 20,000 share purchase
options outstanding as at Aug. 20, 2014.
On April 3, 2014, the bank issued five million Basel III-compliant
non-cumulative Class A preferred shares, Series 13, at a price of $25.00 per share for gross proceeds
of $125.0-million, $120.9-million net of issuance costs of $4.1-million
($2.9-million after income taxes), and yielding 4.3 per cent annually. The
preferred shares, Series 13, which were initially recorded as
liabilities as at April 30, 2014, were reclassified during the third
quarter within shareholders' equity to align with the presentation
retained by the Canadian banking industry and to better meet interested
parties' expectations.
On June 15, 2014, the bank repurchased 4.4 million non-cumulative Class A
preferred shares, Series 10, yielding 5.3 per cent annually, at a price of $25
per share, for an aggregate amount of $110.0-million.
Capital management
Regulatory capital
The regulatory capital calculation is determined based on the guidelines
issued by the Office of the Superintendent of Financial Institutions
Canada (OSFI) originating from the Basel committee on banking
supervision (BCBS) regulatory risk-based capital framework "Basel III: A global regulatory framework for more resilient banks and
banking systems." Under OSFI's capital adequacy requirements guideline (the CAR
guideline), transitional requirements for minimum common equity Tier 1,
Tier 1 and total capital ratios were set at 4.0 per cent, 5.5 per cent and 8.0 per cent,
respectively, for 2014, which, for the bank, will be fully phased in to
7.0 per cent, 8.5 per cent and 10.5 per cent by 2019, including the effect of capital
conservation buffers.
In its CAR guideline, OSFI indicated that it expects deposit-taking
institutions to attain target capital ratios without transition
arrangements equal to or greater than the 2019 minimum capital ratios
plus conservation buffer levels. The all-in
basis includes all of the regulatory adjustments that will be required
by 2019, while retaining the phase-out rules of non-qualifying capital
instruments.
In August, 2013, OSFI issued a guideline clarifying the application of
the credit valuation adjustment (CVA). The CVA capital charge took
effect as of Jan. 1, 2014, and will be phased in over a five-year
period beginning in 2014. This has not nor is it expected to have a
significant impact on the regulatory capital ratios for the bank.
In April, 2014, OSFI issued a revised CAR guideline, effective
immediately, incorporating a number of clarifications to facilitate the
interpretation of the guidance. The new guideline had no significant
impact on the regulatory capital ratios for the bank.
On an all-in basis, the common equity
Tier 1, Tier 1 and total capital ratios stood at 7.7 per cent, 9.3 per cent and 12.4 per cent,
respectively, as at July 31, 2014. These ratios meet all current
requirements.
The common equity Tier 1 capital ratio increased to 7.7 per cent as at July 31,
2014, compared with 7.6 per cent as at Oct. 31, 2013. As mentioned
previously, effective Nov. 1, 2013, the bank adopted an amended
version of IAS 19, employee benefits, which reduced the common equity Tier 1 capital ratio by approximately
0.2 per cent. This impact was more than offset by internal capital generation
during the nine months ended July 31, 2014, which increased total
equity over all, while risk-weighted assets slightly increased.
On April 3, 2014, the bank issued five million preferred shares, Series 13,
for net proceeds of $120.9-million. These preferred shares fully
qualify as additional Tier 1 capital under the Basel III capital
adequacy framework and the CAR guideline as they include mandatory
non-viability contingency capital provisions. These preferred shares
are now classified as equity on the balance sheet.
On June 15, 2014, the bank redeemed all of its 4.4 million outstanding
non-cumulative Class A preferred shares, Series 10, at a redemption
price of $25.00 per share, for an aggregate amount of $110.0-million.
Basel leverage ratio requirement
The Basel III capital reforms introduced a non-risk based leverage ratio
requirement to act as a supplementary measure to the risk-based capital
requirements. The leverage ratio is currently defined as the Tier 1
capital divided by unweighted on-balance sheet assets and off-balance
sheet commitments, derivatives and securities financing transactions,
as defined within the requirements. It differs from OSFI's current
asset to capital multiple (ACM) requirement in that it includes more
off-balance-sheet exposures and a narrower definition of capital (Tier
1 capital instead of total capital).
In January, 2014, the BCBS issued the full text of Basel III leverage
ratio framework and disclosure requirements following endorsement by
its governing body. In its leverage ratio requirements draft guideline
issued in July, 2014, OSFI indicated that it will replace the ACM with
the new Basel III leverage ratio as of Jan. 1, 2015. OSFI is
expected to issue a final leverage ratio requirements guideline later
this year. Federally regulated deposit-taking institutions will be
expected to have Basel III leverage ratios that exceed 3 per cent.
Dividends
On Aug. 20, 2014, the board of directors declared the regular dividend
on the preferred shares, Series 11, and preferred shares, Series 13, to
shareholders of record on Sept. 8, 2014. At its meeting on
Aug. 28, 2014, the board of directors declared a dividend of 52 cents per common share, payable on Nov. 1, 2014, to shareholders of
record on Oct. 1, 2014. These dividends will be recorded in the
fourth quarter of 2014.
Provision for loan losses
The provision for loan losses amounted to $10.5-million in the third
quarter of 2014, unchanged from the second quarter of 2014 and up $1.5-million compared with the same quarter a year ago. For the nine months
ended July 31, 2014, provisions for loan losses increased by $5.5-million and amounted to $31.5-million compared with $26.0-million for
the same period in 2013. Despite the gradual increase from the 2013
very low levels, the provision for loan losses remains low and reflects
the underlying strong credit quality of the bank's loan portfolios and
prolonged low interest rates in the Canadian market.
Loan losses on personal loans decreased by $1.2-million compared with
the third quarter of 2013, mainly reflecting lower provisions in the
point-of-sale financing and investment loan portfolios compared with last
year due to the reduced exposure. For the nine months ended July 31,
2014, loan losses on personal loans decreased by $4.2-million,
essentially due to lower losses from the reduced exposure in the
investment and point-of-sale financing loan portfolios. On a sequential
basis, loan losses on personal loans decreased by $3.0-million, mostly
explained by lower losses at B2B Bank in the third quarter of 2014.
Loan losses on residential mortgage loans were down $3.0-million from
the third quarter of 2013, as loan losses in 2013 were impacted by
higher provisions on medium-sized residential real estate properties
and projects. On a sequential basis, loan losses on residential
mortgage loans increased slightly by $700,000, in line with growth
in B2B Bank's prime and Alt-A residential mortgage loan portfolio. For
the nine months ended July 31, 2014, loan losses on residential
mortgage loans decreased by $3.7-million year over year, essentially
for the same reasons mentioned above.
Loan losses on commercial mortgages and commercial loans cumulatively
amounted to $3.9-million in the third quarter of 2014, a year-over-year
increase of $5.7-million. Notably, loan losses in 2013 were impacted by
a $3.5-million favourable settlement on a single commercial mortgage
loan exposure. On a sequential basis, loan losses in these portfolios
increased by a combined $2.3-million from low second quarter losses
which benefited from recoveries. For the nine months ended July 31,
2014, loan losses on commercial mortgages and commercial loans totalled
$10.9-million compared with a negative amount of $2.6-million for the
same period in 2013. The year-over-year increase in loan losses mainly
results from growth in the underlying portfolios, as well as from lower
favourable settlements and improvements in 2014 compared with 2013.
Impaired loans
Gross impaired loans amounted to $106.0-million as at July 31, 2014, up
from $99.4-million as at Oct. 31, 2013, but slightly down from
$107.3-million as at April 30, 2014. Over all, continued improvement in
the commercial loan portfolios since the beginning of the year was more
than offset by increases in impaired loans in the personal loan
portfolio. Despite the increase, gross impaired loans remain
historically low and borrowers continue to benefit from the favourable
low-interest-rate environment and business conditions in Canada.
Since the beginning of the year, individual allowances decreased by $6.7-million to $27.6-million mainly explained by favourable settlements on
a limited number of impaired commercial loans. Collective allowances
against impaired loans increased by $4.4-million over the same period,
in line with the higher impaired loans level. Net impaired loans,
calculated as gross impaired loans less individual allowances and
collective allowances against impaired loans, amounted to $62.0-million
as at July 31, 2014, compared with $53.1-million as at Oct. 31,
2013. At 0.39 per cent of loans and acceptances as at July 31, 2014, and 0.37 per cent
as at Oct. 31, 2013, gross impaired loans continue to be at a low
level.
Liquidity and financing risk
Liquidity and financing risk represents the possibility that the bank may
not be able to gather sufficient cash resources, when required and on
reasonable conditions, to meet its financial obligations. There have
been no material changes to the bank's liquidity and financing risk
management framework from year-end 2013. The bank continues to maintain
liquidity and financing that is appropriate for the execution of its
strategy, with liquidity and financing risk remaining well within its
approved limits.
Regulatory developments concerning liquidity
In December, 2010, the BCBS issued the regulatory liquidity framework "Basel III: International framework for liquidity risk measurement,
standards and monitoring," which mainly outlines two new liquidity requirements. This document
prescribes the liquidity coverage ratio (LCR) and net stable funding
ratio (NSFR) as minimum regulatory standards effective January, 2015, and
January, 2018, respectively. Further updates regarding these new
requirements were also published in 2013 and 2014.
In addition, in January, 2014, the BCBS issued its final paper on liquidity coverage ratio disclosure standards. Banks are expected to comply with the BCBS LCR disclosure standards
beginning in the first full fiscal quarter of calendar 2015 (expected
to be the second quarter of 2015 for Canadian banks).
In May, 2014, OSFI issued a comprehensive domestic liquidity adequacy
requirements guideline that reflects the aforementioned BCBS liquidity
standards and monitoring tools, and formalized the use of the net
cumulative cash flow (NCCF) supervisory tool. At this stage, it is
still too early to determine their definitive impact on liquidity
management. The bank is presently developing its liquidity data and
reporting systems to meet the upcoming liquidity requirements. Based on
its preliminary review of the regulatory requirements and prior
analyses, management expects that the bank will meet the upcoming
standards.
Segmented information
Personal and commercial
The personal and commercial business segment's contribution to net income
was $30.0-million in the third quarter of 2014 compared with $26.1-million in the third quarter of 2013.
Total revenue increased by $1.8-million from $148.7-million in the third
quarter of 2013 to $150.4-million in the third quarter of 2014. Net
interest income increased by $700,000 to $99.6-million, reflecting
good volume growth in the higher-margin commercial portfolios, partly
offset by the lower level of prepayment penalties on residential
mortgages. Other income increased by $1.0-million to $50.9-million in
the third quarter of 2014, as higher mutual fund commissions and
lending fees from underwriting activity more than compensated for lower
deposit service charges.
Loan losses increased by $2.3-million from $6.5-million in the third
quarter of 2013 to $8.8-million in the third quarter of 2014. The
higher level of losses compared with a year ago is mainly due to a $3.5-million favourable settlement on a single exposure recorded in the
corresponding period in 2013, as the overall level of loan losses
remains low.
Non-interest expenses decreased by $5.9-million, or 5 per cent, from
$108.2-million in the third quarter of 2013 to $102.4-million in the
third quarter of 2014, mainly due to lower salaries and other expenses
from the optimization of certain retail activities in the fourth
quarter of 2013 and disciplined control over discretionary expenses.
Compared with the second quarter of 2014, net income decreased by
$300,000 as the impact of three more days in the third quarter was
offset by higher loan losses on commercial mortgage loans and slightly
higher income taxes.
For the nine months ended July 31, 2014, net income increased 14 per cent to
$88.5-million compared with $77.5-million for the same period a year
ago. This performance was mainly driven by organic growth in the
commercial loan portfolio, up 16 per cent year over year, a good increase in
other income and lower non-interest expenses in retail services, partly
offset by higher loan losses. The efficiency ratio was 68.1 per cent for the
nine months ended July 31, 2014, compared with 72.8 per cent for the nine
months ended July 31, 2013. The segment generated positive operating
leverage of 6.7 per cent year over year, reflecting the bank's focus on
rigorous cost control, and growth in other income and commercial
businesses.
B2B Bank
The B2B Bank business segment's contribution to adjusted net income was
$15.3-million in the third quarter of 2014, down $1.5-million from
$16.8-million in the third quarter of 2013. Reported net income in the
third quarter of 2014 was $13.0-million compared with $5.2-million a
year ago.
Total revenue decreased to $53.2-million in the third quarter of 2014
from $57.6-million in the third quarter of 2013. Net interest income
decreased by $3.8-million to $44.4-million in the third quarter of 2014
compared with the corresponding period in 2013. This decrease resulted
from the reduced level of high-margin investment loans as investors
continue to deleverage, as well as margin compression on certain
deposits. Other income amounted to $8.8-million in the third quarter of
2014, down $600,000 from the third quarter of 2013, mainly impacted
by lower income from self-directed accounts.
Amortization of net premium on purchased
financial instruments and revaluation of contingent consideration
increased by $400,000 and amounted to $1.5-million in the third
quarter of 2014 compared with $1.1-million for the third quarter of
2013.
Loan losses decreased by $800,000 compared with the third quarter of
2013 and amounted to $1.7-million in the third quarter of 2014. Lower
provisions in the investment loan portfolios due to the reduced
exposure compared with last year were partly offset by higher provisions
on other personal loans.
Excluding T&I costs, non-interest expenses decreased by $1.6-million, or
5 per cent, to $30.6-million in the third quarter of 2014, compared with $32.1-million in the third quarter of 2013 mainly reflecting acquisition
synergies. T&I costs for the third quarter of 2014 decreased by
$13.0-million to $1.6-million and mainly related to completing
processes and harmonizing products. Integration activities are in their
final stage and should be completed in the fourth quarter of 2014.
Compared with the second quarter of 2014, adjusted net income increased
by $1.8-million, mainly resulting from lower loan losses in the third
quarter of 2014 and three additional days of net income. These items,
combined with the favourable impact of lower headcount, the decrease in
T&I costs and the $4.1-million non-tax-deductible charge recorded in
the second quarter to settle the contingent consideration related to
the AGF Trust acquisition, contributed to the $8.0-million increase in
reported net income over the same period.
For the nine months ended July 31, 2014, adjusted net income was $45.9-million, $900,000 lower than the same period of 2013, as the items
impacting revenues, as detailed above, were partly compensated by lower
non-interest expenses and loan losses. Reported net income for the nine
months ended July 31, 2014, increased by $8.0-million to $31.6-million,
mainly due to the same factors mentioned above and as a result of lower
T&I costs year over year.
Laurentian Bank securities and capital markets
Laurentian Bank Securities and capital markets business segment's
contribution to net income increased to $3.0-million in the third
quarter of 2014, compared with $2.3-million in the third quarter of
2013. Total revenue increased by $2.5-million to $18.5-million in the
third quarter of 2014 compared with $16.0-million in the third quarter
of 2013, mainly driven by improved activity in the small-cap equity
underwriting market. Non-interest expenses increased by $1.3-million to
$14.3-million in the third quarter of 2014, mainly due to higher
performance-based compensation, commissions and transaction fees,
in line with higher market-driven income.
For the nine months ended July 31, 2014, net income amounted to
$7.9-million, essentially unchanged compared with the same period last
year. Total revenue increased by $2.2-million to $52.2-million in the
nine months ended July 31, 2014, mainly as the business segment
capitalized on growth opportunities in the small-cap equity
underwriting market. Non-interest expenses increased by $2.0-million to
$41.5-million for the nine months ended July 31, 2014, mainly for the
same reasons explained above.
Other sector
The other sector posted a negative contribution to net income of $5.9-million in the third quarter of 2014 compared with a negative
contribution of $6.7-million in the third quarter of 2013.
Net interest income remained essentially unchanged at negative $3.3-million in the third quarter of 2014. Other income decreased to
$800,000 in the third quarter of 2014, compared with $2.0-million
in the third quarter of 2013, which was a stronger quarter in treasury
activities and included higher net security gains. Non-interest
expenses decreased to $7.2-million in the third quarter of 2014
compared with $8.7-million in the third quarter of 2013, mainly as a
result of lower unallocated costs.
On a sequential basis, net loss improved by $1.0-million as lower
non-interest expenses more than offset the impact of the $2.5-million
gain on sale of commercial mortgage loans recorded in the second
quarter of 2014.
For the nine months ended July 31, 2014, the negative contribution to
net income was $21.3-million, compared with negative $15.4-million for
the nine months ended July 31, 2013, mainly explained by non-interest
expenses which increased by $8.3-million compared with 2013. The increase
in non-interest expenses mainly results from unallocated technology
expenses related to new initiatives aimed at improving IT
infrastructure and on-line services.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share)
Three months ended Nine months ended
July 31, July 31,
2014 2013 2014 2013
Interest income
Loans $ 266,872 $ 274,778 $ 796,282 $ 816,352
Securities 9,922 13,053 30,379 46,359
Deposits with other banks 201 314 576 1,727
Other, including derivatives 10,403 10,217 30,758 34,863
287,398 298,362 857,995 899,301
Interest expense
Deposits 112,232 115,561 335,063 349,509
Debt related to securitization activities 29,758 33,950 89,427 109,338
Subordinated debt 4,038 4,033 12,002 11,984
Other 121 269 672 1,147
146,149 153,813 437,164 471,978
Net interest income 141,249 144,549 420,831 427,323
Other income
Fees and commissions on loans and deposits 35,983 35,033 103,702 98,087
Income from brokerage operations 16,667 14,449 48,866 45,494
Income from investment accounts 7,772 8,249 24,142 24,001
Income from sales of mutual funds 7,546 5,848 21,277 16,403
Income from treasury and financial
market operations 3,909 5,840 11,014 15,782
Insurance income, net 4,670 4,793 14,047 12,603
Other income 1,849 2,281 8,765 10,113
78,396 76,493 231,813 222,483
Total revenue 219,645 221,042 652,644 649,806
Amortization of net premium on purchased
financial instruments and
revaluation of contingent consideration 1,511 1,140 8,145 3,420
Provision for loan losses 10,500 9,000 31,500 26,000
Non-interest expenses
Salaries and employee benefits 82,938 89,457 252,885 267,593
Premises and technology 45,465 44,491 137,047 125,998
Other 26,006 28,157 75,128 79,544
Costs related to business combinations 1,564 14,600 9,950 28,293
155,973 176,705 475,010 501,428
Income before income taxes 51,661 34,197 137,989 118,958
Income taxes 11,564 7,213 31,378 25,347
Net income 40,097 26,984 106,611 93,611
Preferred share dividends, including
applicable taxes 3,588 2,520 8,590 9,112
Net income available to
common shareholders 36,509 24,464 98,021 84,499
Earnings per share
Basic 1.27 0.86 3.42 2.99
Diluted 1.27 0.86 3.42 2.99
Dividends declared per share
Common share 0.52 0.50 1.54 1.48
Preferred share -- Series 9 - - - 0.75
Preferred share -- Series 10 0.33 0.33 0.98 0.98
Preferred share -- Series 11 0.25 0.25 0.75 0.66
Preferred share -- Series 13 0.22 - 0.22 -We seek Safe Harbor.
© 2024 Canjex Publishing Ltd. All rights reserved.