Laurentian Bank reports first quarter results

MONTREAL, Feb. 26, 2015 /CNW Telbec/ -

Highlights of the first quarter of 2015

• Solid growth in the commercial loan portfolio including BAs, up 20% year-over-year
• B2B Bank segment mortgages up 8% year-over-year
• Strong credit performance, with continued low loan losses of $10.5 million
• Positive adjusted operating leverage year-over-year
• Bank of Canada rate change temporarily impacting earnings per share by $0.04

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Laurentian Bank of Canada reported adjusted net income of $40.5 million or $1.32 diluted per share for the first quarter of 2015, up 3% and 2% respectively, compared with $39.3 million or $1.29 diluted per share for the same period in 2014. Adjusted return on common shareholders' equity was 11.3% for the first quarter of 2015, compared with 11.7% for the first quarter of 2014. Adjusting items for the first quarter of 2015 include a charge of $3.6 million after tax or $0.12 per share, impacting reported net income, related to the recent announcement of the Bank's President and Chief Executive Officer's retirement. On a reported basis, net income totalled $35.8 million or $1.15 diluted per share for the first quarter of 2015, compared with $35.5 million or $1.16 diluted per share for the first quarter of 2014. Also on a reported basis, return on common shareholders' equity was 9.9% for the first quarter of 2015, compared with 10.5% for the first quarter of 2014.

Commenting on the Bank's financial results for the first quarter of 2015, Réjean Robitaille, President and Chief Executive Officer, mentioned: "We performed well during the first quarter, delivering a further 7% increase in our commercial loan portfolio, which has now increased 20% over the past twelve months. The 25 basis points decline in the Bank of Canada's overnight rate in January has temporarily weighed on our first quarter results; however, it should be relatively neutral on EPS for the full year. Furthermore, in this challenging interest rate environment, our rigorous control over expenses and the sustained credit quality of the loan portfolio contributed to our financial performance."

Mr. Robitaille added: "Looking ahead, we will continue to focus on further developing our higher-margin business activities within our Business Services and B2B Bank. We remain committed to unlocking value for our shareholders and we are working diligently to continuously achieve greater operational efficiency, maximize operating leverage and generate sustained earnings growth in each of our business segments."

Caution Regarding Forward-looking Statements

In this document and in other documents filed with Canadian regulatory authorities or in other communications, Laurentian Bank of Canada may from time to time make written or oral forward-looking statements within the meaning of applicable securities legislation. Forward-looking statements include, but are not limited to, statements regarding the Bank's business plan and financial objectives. The forward-looking statements contained in this document are used to assist the Bank's security holders and financial analysts in obtaining a better understanding of the Bank's financial position and the results of operations as at and for the periods ended on the dates presented and may not be appropriate for other purposes. Forward-looking statements typically use the conditional, as well as words such as prospects, believe, estimate, forecast, project, expect, anticipate, plan, may, should, could and would, or the negative of these terms, variations thereof or similar terminology.

By their very nature, forward-looking statements are based on assumptions and involve inherent risks and uncertainties, both general and specific in nature. It is therefore possible that the forecasts, projections and other forward-looking statements will not be achieved or will prove to be inaccurate. Although the Bank believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct.

The Bank cautions readers against placing undue reliance on forward-looking statements when making decisions, as the actual results could differ considerably from the opinions, plans, objectives, expectations, forecasts, estimates and intentions expressed in such forward-looking statements due to various material factors. Among other things, these factors include: changes in capital market conditions, changes in government monetary, fiscal and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, changes in competition, modifications to credit ratings, scarcity of human resources and developments in the technological environment. The Bank further cautions that the foregoing list of factors is not exhaustive. For more information on the risks, uncertainties and assumptions that would cause the Bank's actual results to differ from current expectations, please also refer to the Bank's Annual Report in the Management's Discussion and Analysis under the title "Risk Appetite and Risk Management Framework" and other public filings available at www.sedar.com.

The Bank does not undertake to update any forward-looking statements, whether oral or written, made by itself or on its behalf, except to the extent required by securities regulations.

Highlights

Review of Business Highlights

The Personal and Commercial segment, which is comprised of Retail Services and Business Services groups, performed well again this quarter, posting a 9% net income growth over the first quarter of 2014.

The development of the Business Services activities continued to be the main growth engine during the quarter. With a 20% increase in commercial loans and 11% in commercial mortgage loans year-over-year, the total value of the business portfolios is $6.2 billion today, representing 22% of the Bank's total loans. Over the past two years - since the first quarter of 2013 - these portfolios have grown by $1.4 billion, or 28%.

Business Services' activities are all the more productive for the Bank given the continued strong credit quality of its portfolios. The Bank's strategy of operating in specific market niches only - which were targeted notably on the basis of borrower quality - has proven to be a judicious one. Moreover, these targeted segments have strong growth potential for the Bank namely as a result of the high level of expertise required to serve these markets. Such specialized niches include energy, manufacturing, health care, daycares and equipment financing.

With the RRSP season in full swing, the Retail Services team is taking advantage of this time to review deposit and investment strategies with their clients. The solid base of clients who entrust their savings to the Bank constitutes an important asset for the Bank. Testifying to the effectiveness of its investment solutions, the Bank's mutual fund revenues continued to grow at the rate of 24% year-over-year.

For its part, B2B Bank pursued the development of its mortgage loan market. Thanks to its comprehensive range of products - one of the most complete lines available to mortgage brokers - B2B Bank's offerings are able to effectively meet the varied needs of these brokers' clients, including the demand for alternative mortgage solutions. Aside from the quality of its other offerings, such as investment loans, high-interest accounts and other investment vehicles, B2B Bank's success also rests on its unique business model, which concentrates exclusively on the financial advisor and broker market.

Finally, with close to $3 billion of assets under administration, the Laurentian Bank Securities and Capital Markets business segment is at a scale that enables it to effectively compete and serves as a solid complement to the Bank's operations.

Management's Discussion and Analysis

This Management's Discussion and Analysis (MD&A) is a narrative explanation, through the eyes of management, of the Bank's financial condition as at January 31, 2015, and of how it performed during the three-month period then ended. This MD&A, dated February 26, 2015, should be read in conjunction with the unaudited condensed interim consolidated financial statements for the period ended January 31, 2015, prepared in accordance with IAS 34 Interim financial reporting, as issued by the International Accounting Standards Board (IASB). Supplemental information on risk management, critical accounting policies and estimates, and off-balance sheet arrangements is also provided in the Bank's 2014 Annual Report.

Additional information about the Laurentian Bank of Canada, including the Annual Information Form, is available on the Bank's website at www.laurentianbank.ca and on SEDAR at www.sedar.com.

External Reporting Changes - Offsetting of Financial Instruments and Impact on Net Interest Margin

Effective November 1, 2014, the Bank adopted the amendments to IAS 32, Financial Instruments: Presentation, which clarified requirements for offsetting financial instruments. As a result, certain securities purchased under reverse repurchase agreements and related obligations that were previously offset on the balance sheet, are now presented on a gross basis. This restatement increased total assets and total liabilities and had no impact on the Bank's comprehensive income, shareholders' equity or cash flows. The following table presents the adjustments.

In light of this change, the Bank revised its use of the net interest margin financial measure to provide a more useful indicator and better align with industry practice. Net interest margin is now defined as the ratio of net interest income to average earning assets, excluding average earning assets of the Laurentian Bank Securities and Capital Markets' (LBS & CM) business segment. This new measure focuses on banking operations and eliminates net interest margin volatility related to variation in assets used in brokerage operations and trading activities. Net interest margin and average earning assets measures for the quarters and for the year ended in 2014 have been amended accordingly and are presented in the following table.

Economic Outlook

The decline in oil prices, driven mostly by abundant supply, is highly supportive for global growth in 2015, although at unequal speeds. In the United States, the pace of economic growth accelerated from moderate to solid, and improved labour market conditions support modest increases in the policy rate in the second half of 2015. In Canada, lower oil prices are projected to have a slightly negative impact on the economy, deteriorating terms of trade and dampening income growth. Short-term impacts tied to the oil shock have started to emerge in late 2014 and early 2015 in oil-producing provinces, notably Alberta, as companies in the oil sector have reduced capital spending and staff. Oil prices are expected to stay low in the near-term in light of rising inventories, but could rebound in the second half of 2015 if the stand-off between the Organization of the Petroleum Exporting Countries (OPEC) and North American oil producers comes to an end.

The substantial depreciation in the Canadian dollar during the last two years, lower energy costs and confident US consumers have already led to a rapid shift in regional economic performances. Economic growth in Ontario and Québec are showing concrete signs of acceleration, led by non-energy exports. Capital spending in the manufacturing sector has also started to improve and, with exports and unemployment improving, business investment is also expected to firm up in Central Canada. Altogether, the Canadian economy is expected to grow at a pace of approximately 2.0% in 2015 and 2.4% in 2016, following a 2.4% performance in 2014.

Prior to the oil shock, underlying inflationary pressures were muted due to excess slack in the economy and modest wage growth. Lower oil prices have amplified the downside risks to the inflation outlook. Accordingly, the Bank of Canada reduced its overnight rate target by 25 basis points to 0.75% in January while markets expect a further reduction in the short-term, failing a potential agreement among OPEC members to cut production or any other development that would prompt a sustainable increase in oil prices. As such, the policy rate could end the year 2015 at 0.50%. As interest rates are expected to remain at historically low levels throughout 2015, all signs point to a soft landing for the Canadian housing sector, which remains sensitive to macroeconomic factors related to the level of interest rates and unemployment.

Despite slightly softer interest rates expected in 2015, stronger economic growth in Central Canada, the Bank's targeted approach to grow in higher-yielding niche markets, renewed efforts on business development and its strong capital position should contribute positively to the performance of the Bank in 2015.

2015 Financial Performance

The following table presents management's financial objectives and the Bank's performance for 2015. These financial objectives were based on the assumptions noted on page 23 of the Bank's 2014 Annual Report under the title "Key assumptions supporting the Bank's objectives" and excluded adjusting items.

In an increasingly challenging interest rate environment, management believes that the Bank remains in line to meet its objectives. Disciplined management of expenses and focus on materializing revenue opportunities should improve efficiency. Good organic growth in higher-margin products, mainly through commercial activities, and strong credit quality should also contribute to the overall financial performance.

Analysis of Consolidated Results

Adjusting items

The Bank has designated certain amounts as adjusting items and presents adjusted results to facilitate understanding of its underlying business performance and related trends. The Bank assesses performance on a GAAP basis and non-GAAP basis and considers both measures to be useful to investors and analysts in obtaining a better understanding of the Bank's financial results and analyzing its growth and profit potential more effectively.

Adjusting items are related to business combinations which are included in the B2B Bank business segment's reported results, to restructuring charges which are included in the Personal & Commercial business segment and Other sector's reported results, as well as to a compensation charge which is reported in the Other sector's reported results, as detailed below.

Following Mr. Robitaille's decision to retire on November 1, 2015, the Bank and Mr. Robitaille entered into a new Employment, Retention and Transition Agreement on January 21, 2015. As a result, the cost related to certain enhancements to his pension plan valued at $2.1 million on January 21, 2015, and, upon retirement, 24 months of short-term compensation valued at $2.8 million were fully provisioned in the first quarter of 2015.  As shown below, these items were classified as adjusting items in the quarter.

Adjusted results and measures are non-GAAP measures. Comments on the uses and limitations of such measures are disclosed in the Non-GAAP Financial Measures section hereafter.

Three months ended January 31, 2015 compared with the three months ended January 31, 2014

Net income was $35.8 million or $1.15 diluted per share for the first quarter of 2015, compared with $35.5 million or $1.16 diluted per share for the first quarter of 2014. Adjusted net income was $40.5 million for the first quarter ended January 31, 2015, up from $39.3 million for the same quarter of 2014, while adjusted diluted earnings per share were $1.32, compared with $1.29 diluted per share in 2014.

Total revenue

Total revenue increased by $2.1 million or 1% to $218.2 million for the first quarter of 2015, compared with $216.1 million for the first quarter of 2014, as growth in other income was partly offset by lower net interest income year-over-year.

Net interest income decreased by $1.4 million or 1% to $139.5 million for the first quarter of 2015, from $140.9 million for the first quarter of 2014, mainly due to the compression stemming from the decrease in the higher-yielding personal loan portfolios over the past twelve months. Overall, net interest margin (as a percentage of average earning assets) decreased to 1.83% for the first quarter of 2015 from 1.86% for the first quarter of 2014, mainly as a result of a slightly less favourable mix in personal lending and lower yields on mortgages.

Other income increased by $3.4 million or 5% and amounted to $78.7 million for the first quarter of 2015, compared with $75.3 million for the first quarter of 2014. Higher income from treasury and financial market operations mainly due to higher realized net gains on securities, as well as continued solid mutual fund commissions mainly contributed to the year-over-year increase. At the end of the first quarter of 2015, the revaluation of certain derivatives used in hedging activities caused a $1.3 million loss in other income as a result of the sudden decline in short term rates. However this loss should be fully offset over the remainder of the year. Furthermore, fees and commissions on loans and deposits were up $0.2 million compared with the first quarter of 2014 which had benefitted from higher loan prepayment penalties in the commercial portfolios amounting to $1.8 million.

Amortization of net premium on purchased financial instruments

For the first quarter of 2015, the amortization of net premium on purchased financial instruments amounted to $1.5 million, compared with $1.1 million for the first quarter of 2014. Refer to Note 12 to the unaudited condensed interim consolidated financial statements.

Provision for loan losses

The provision for loan losses amounted to $10.5 million for the first quarter of 2015, unchanged from the first quarter of 2014. Loan losses remained at a low level reflecting the overall underlying quality of the loan portfolios and the continued favourable credit environment. Refer to the Risk Management section below for additional information.

Non-interest expenses

Non-interest expenses increased by $1.6 million to $160.7 million for the first quarter of 2015, compared with $159.1 million for the first quarter of 2014. This increase mostly reflects the net effect of adjusting items, as a retirement compensation charge of $4.9 million incurred in the first quarter of 2015 was partly offset by $3.9 million lower costs related to business combinations as integration work at B2B Bank was completed in the fourth quarter of 2014. The Bank continues to manage its costs through tight cost control and process reviews and, as a result, adjusted non-interest expenses remained essentially unchanged as detailed below.

Salaries and employee benefits increased by $2.8 million or 3% to $88.3 million for the first quarter of 2015, compared with the first quarter of 2014. As mentioned above, salaries for the first quarter of 2015 included a compensation charge of $4.9 million. Lower headcount from the optimization of certain retail and corporate activities in the fourth quarter of 2014, combined with final B2B Bank cost synergies achieved in 2014, generated a $2.1 million decline in the cost of salaries and employee benefits year-over-year.

Premises and technology costs increased by $2.5 million to $48.4 million compared with the first quarter of 2014. The increase mostly stems from ongoing business growth and enhanced on-line services.

Other non-interest expenses were relatively unchanged at $24.0 million for the first quarter of 2015, compared with the first quarter of 2014, reflecting continued stringent cost control.

The adjusted efficiency ratio was 71.4% for the first quarter of 2015, compared with 71.8% for the first quarter of 2014. Management remains committed to exercising disciplined control over expenses in light of historically low interest rates and slower growth environments.

Income taxes

For the quarter ended January 31, 2015, the income tax expense was $9.7 million and the effective tax rate was 21.2%. The lower tax rate, compared to 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 January 31, 2014, the income tax expense was $9.8 million and the effective tax rate was 21.6%.

Three months ended January 31, 2015 compared with the three months ended October 31, 2014

Net income was $35.8 million or $1.15 diluted per share for the first quarter of 2015 compared with $33.8 million or $1.09 diluted per share for the fourth quarter of 2014. As noted above, net income for the first quarter of 2015 was impacted by a retirement compensation charge of $4.9 million ($3.6 million after income taxes), or $0.12 diluted per share. Net income for the fourth quarter of 2014 included restructuring charges of $7.6 million ($5.6 million after income taxes), or $0.19 diluted per share. Adjusted net income was $40.5 million or $1.32 diluted per share, compared with $42.6 million or $1.39 diluted per share for the fourth quarter of 2014.

Total revenue decreased to $218.2 million for the first quarter of 2015, compared with $221.4 million for the previous quarter. Net interest income decreased by $0.7 million sequentially to $139.5 million for the first quarter of 2015, mainly due to seasonally lower residential mortgage prepayment penalties. The Bank's net interest margin (as a percentage of average earning assets) decreased sequentially by 1 basis point to 1.83% for the first quarter of 2015, compared with 1.84% for the fourth quarter of 2014, essentially for the same reason.

Other income decreased by $2.6 million sequentially to $78.7 million for the first quarter of 2015, mainly due to lower lending fees stemming from lower loan prepayment penalties in the commercial mortgage portfolio, as well as to the $1.3 million loss related to the revaluation of certain derivatives used in hedging activities, as noted above. This was partly offset by higher income from treasury and financial market operations due to higher realized net gains on securities.

The line-item "Amortization of net premium on purchased financial instruments" amounted to $1.5 million for the first quarter of 2015, unchanged compared with the fourth quarter of 2014. Refer to Note 12 to the unaudited condensed interim consolidated financial statements for additional information.

The provision for loan losses remained low at $10.5 million for the first quarter of 2015, unchanged compared with the fourth quarter of 2014, reflecting the continued high quality of the portfolio and the favourable credit environment.

Non-interest expenses amounted to $160.7 million for the first quarter of 2015, compared with $166.3 million for the fourth quarter of 2014. Excluding a compensation charge incurred in the first quarter of 2015 and T&I Costs and restructuring charges incurred in the fourth quarter of 2014, non-interest expenses were unchanged sequentially, as the Bank continued to prudently control costs.

Financial condition

Balance sheet assets amounted to $37.4 billion as at January 31, 2015, up $1.0 billion or 3% from $36.5 billion as at October 31, 2014. This increase reflects the higher level of liquid assets and growth in the loan portfolio as explained below.

Liquid assets

Liquid assets, including cash, deposits with other banks, securities and securities purchased under reverse repurchase agreements, totalled $8.8 billion as at January 31, 2015, an increase of $0.5 billion compared with October 31, 2014. The higher level of liquid assets mainly reflects the increase in assets used in capital market operations. Overall, the Bank continues to prudently manage the level of liquidity 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 $27.6 billion as at January 31, 2015, up $334.3 million from October 31, 2014, as continued organic growth in the higher-margin business portfolios and growth in B2B Bank's residential mortgage loan portfolio were slightly offset by continued repayments in the investment loan portfolio. Commercial loans, including acceptances, increased by $208.3 million or 7% since October 31, 2014 while commercial mortgage loans increased by $169.3 million or 6% over the same period, as the Bank continues to focus on the development of its commercial activities. Personal loans decreased by $97.8 million or 1% since October 31, 2014, as attrition in the investment loan portfolio continued, albeit at a slower pace, and despite gross sales of $72.0 million. Residential mortgage loans were up by $50.8 million from October 31, 2014, mostly driven by B2B Bank's mortgage solutions.

Liabilities

Personal deposits stood at $18.5 billion as at January 31, 2015, decreasing by $0.2 billion or 1% from $18.7 billion as at  October 31, 2014, as the Bank optimized its current funding strategy by focusing on direct client deposits through its retail branch network, increasing its access to institutional funding sources, and reducing the overall contribution of broker-sourced funding at B2B Bank. Alternatively, business and other deposits increased by $0.4 billion or 6% since October 31, 2014 to $6.2 billion as at January 31, 2015, mainly explained by new institutional deposits raised during the first quarter of 2015 as funding costs from this source continued to decline. Personal deposits represented 75% of total deposits as at January 31, 2015 relatively unchanged compared with 76% as at October 31, 2014. This ratio remains nonetheless well above the Canadian average and contributes to the Bank's solid liquidity position.

Debt related to securitization activities stood at $5.1 billion, remains a preferred source of fixed rate funding and increased by $198.5 million or 4% compared with October 31, 2014. Subordinated debt remained relatively unchanged compared with October 31, 2014 and stood at $0.4 billion as at January 31, 2015.

Shareholders' equity

Shareholders' equity stood at $1,597.9 million as at January 31, 2015, compared with $1,544.6 million as at October 31, 2014. This increase is mainly explained by the variation of the cash flow hedge reserve within accumulated other comprehensive income, and the net income contribution for the year, net of declared dividends. The Bank's book value per common share appreciated to $46.34 as at January 31, 2015 from $45.89 as at October 31, 2014. There were 28 944 619 common shares and 20 000 share purchase options outstanding as at February 20, 2015.

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. 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 4.5%, 6.0% and 8.0% respectively for 2015, which, for the Bank, will be fully phased-in to 7.0%, 8.5% and 10.5% 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 capital conservation buffer levels (the "all-in" basis). 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. Refer to the Bank's 2014 Annual Report under the title "Capital Management" for additional information on the Bank's regulatory capital.

As detailed in the table below, on an "all-in" basis, the Common Equity Tier 1, Tier 1 and Total capital ratios stood at 7.8%, 9.3% and 12.0%, respectively, as at January 31, 2015. These ratios meet all current requirements.

The Common Equity Tier 1 capital ratio decreased to 7.8% as at January 31, 2015 compared with 7.9% as at October 31, 2014, as the impact of higher risk-weighted commercial business was only partly offset by internal capital generation.

Basel III Leverage ratio

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. Under OSFI's Leverage Requirements Guideline issued in October 2014, the Asset to Capital Multiple (ACM) was replaced with a new leverage ratio as of January 1, 2015. Federally regulated deposit-taking institutions are expected to maintain a Basel III leverage ratio that meets or exceeds 3% at all times. 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 previous ACM requirement in that it includes more off-balance-sheet exposures and a narrower definition of capital (Tier 1 Capital instead of Total Capital).

As detailed in the table below, the leverage ratio stood at 3.7% as at January 31, 2015 and met current requirements.

Dividends

On February 11, 2015, the Board of Directors declared the regular dividend on the Preferred Shares Series 11 and Preferred Shares Series 13 to shareholders of record on March 6, 2015. At its meeting on February 26, 2015, the Board of Directors declared a dividend of $0.54 per common share, payable on May 1, 2015, to shareholders of record on April 1, 2015. Consistent with the previous quarter, the Board of Directors determined that shares attributed under the Bank's Shareholder Dividend Reinvestment and Share Purchase Plan will be purchased in the open market. As such, no discount will be applied to the purchase price of these common shares.

Risk Management

The Bank is exposed to various types of risks owing to the nature of its activities. These risks are mainly related to the use of financial instruments. In order to manage these risks, controls such as risk management policies and various risk limits have been implemented. These measures aim to optimize the risk/return ratio in all operating segments. Refer to the section "Risk Appetite and Risk Management Framework" on page 42 of the Bank's 2014 Annual Report for additional information.

Credit risk

The following sections provide further details on the credit quality of the Bank's loan portfolios.

The provision for loan losses amounted to $10.5 million in the first quarter of 2015, unchanged from the fourth quarter of 2014 and the same quarter a year ago. The continued low level of provision for loan losses 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 increased by $1.1 million compared with the very low loan losses in the first quarter of 2014, mainly due to normalized provisions in the B2B Bank's portfolios. On a sequential basis, loan losses on personal loans decreased by $2.1 million, mostly explained by lower losses at B2B Bank in the first quarter of 2015.

Loan losses on residential mortgage loans were up $0.9 million from the very low first quarter of 2014 level. On a sequential basis, loan losses on residential mortgage loans decreased by $0.6 million.

Loan losses on commercial mortgages and commercial loans totalled $3.4 million in the first quarter of 2015, a year-over-year decrease of $2.0 million, resulting from favourable settlements and improvements during the first quarter of 2015. On a sequential basis, loan losses in these portfolios increased by a combined $2.7 million as loan losses in the fourth quarter of 2014 had notably benefitted from a favourable settlement on a commercial loan exposure.

Gross impaired loans amounted to $125.8 million as at January 31, 2015, up from $102.1 million as at October 31, 2014. Overall, higher impaired commercial mortgage loans, essentially resulting from a well secured net exposure, offset the continued improvement in the commercial loan portfolio since the beginning of the year. A $4.6 million increase in impaired loans in the residential mortgage loan portfolio, in line with B2B Bank's growing portfolio, also contributed to the overall increase in gross impaired loans since the beginning of the year. Despite these increases, gross impaired loans remain at historically low levels 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 $6.6 million to $15.3 million mainly explained by settlements of impaired commercial loans. Collective allowances against impaired loans increased by $8.3 million over the same period, in-line with the higher impaired loans level. At 0.45% of loans and acceptances as at January 31, 2015, 0.37% as at October 31, 2014 and 0.42% a year ago, gross impaired loans continue to compare favourably to the Canadian banking industry.

Liquidity and funding risk

Liquidity and funding 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 funding risk management framework from year-end 2014. The Bank continues to maintain liquidity and funding that is appropriate for the execution of its strategy, with liquidity and funding risk remaining well within its approved limits.

Regulatory developments concerning liquidity

In December 2010, the BCBS issued the Basel III: International framework for liquidity risk measurement, standards and monitoring (the Basel III liquidity framework), which outlines two new liquidity requirements in addition to other supplemental reporting metrics. This document prescribes the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as minimum regulatory standards. Further updates regarding the LCR, the NSFR and liquidity risk monitoring tools were published in 2013 and 2014.

In May 2014, OSFI issued a comprehensive domestic Liquidity Adequacy Requirements (LAR) Guideline that reflects the aforementioned BCBS liquidity standards (LCR and NSFR). These requirements are supplemented by additional monitoring metrics including the liquidity and intraday liquidity monitoring tools as considered in the Basel III liquidity framework and the OSFI-designated Net Cumulative Cash Flow (NCCF) supervisory tool. The LAR Guideline was subsequently updated in November 2014 to clarify interpretation and applicability of certain guidance. The implementation date of the LCR standard was January 1, 2015. Subsequent to the quarter end, the Bank filed the LCR report with OSFI as at January 31, 2015, comfortably meeting the minimum requirement. The Bank also reported the NCCF supervisory tool.

On July 16, 2014, OSFI issued its LCR disclosure requirements for Domestic Systemically Important Banks (D-SIBs) in Guideline D-11 - Public Disclosure Requirements for Domestic Systemically Important Banks on Liquidity Coverage Ratio, which must be applied as of the second quarter of 2015. As the Bank is not a D-SIB, it is not subject to these disclosure requirements. The Bank is currently assessing how it will disclose the underlying information on liquidity.

On December 9, 2014, the BCBS issued for consultation the NSFR disclosure standards, following the publication of the NSFR standard in October 2014. This consultative document is open for comments until March 6, 2015.

Market risk

Market risk represents the financial losses that the Bank could incur following unfavourable fluctuations in the value of financial instruments subsequent to changes in the underlying factors used to measure them, such as interest rates, exchange rates or equity prices. This risk is inherent to the Bank's financing, investment, trading and asset and liability management (ALM) activities.

The purpose of ALM activities is to manage structural interest rate risk, which corresponds to the potential negative impact of interest rate movements on the Bank's revenues and economic value. Dynamic management of structural risk is intended to maximize the Bank's profitability while protecting the economic value of common shareholders' equity from sharp interest rate movements. As at January 31, 2015, the effect on the economic value of common shareholders' equity and on net interest income before taxes of a sudden and sustained 1% increase in interest rates across the yield curve was as follows.

The table above provides a measure of the sensitivity to changes in interest rates of the Bank as at January 31, 2015. The Bank remains generally insulated from rapid shifts in interest rates over the long term. However, the timing of Bank of Canada overnight rate changes and ensuing variations in the prime rate and short-term bankers' acceptances (BA) rates can temporarily impact margins. Barring any further movements by the Bank of Canada, the recent interest rate decline should slightly impact net interest income in the second quarter, however, such negative impact would be offset in the subsequent quarters of 2015. Management continues to expect that long term rates will remain at current low levels, within a narrow range for now, prolonging pressure on interest rate margins.

Segmented Information

This section outlines the Bank's operations according to its organizational structure. Services to individuals, businesses, financial intermediaries and institutional clients are offered through the following three business segments: Personal & Commercial, which is comprised of Retail Services and Business Services groups, as well as B2B Bank, and Laurentian Bank Securities & Capital Markets. The Bank's other activities are grouped into the Other sector.

Personal & Commercial

Three months ended January 31, 2015

Reported net income for the Personal & Commercial business segment was $30.7 million for the first quarter of 2015 compared with reported net income of $28.3 million for the first quarter of 2014. Adjusted net income was the same as reported net income for the first quarter of 2015 and for the first quarter of 2014, as only the fourth quarter of 2014 included adjusting items.

Total revenue increased by $4.9 million from $146.7 million for the first quarter of 2014 to $151.6 million for the first quarter of 2015. Net interest income increased by $2.9 million to $101.0 million, reflecting good volume growth in the higher-margin commercial portfolios, partly offset by margin compression. Other income increased by $2.0 million to $50.6 million in the first quarter of 2015, mainly due to higher mutual fund commissions.

Loan losses decreased by $1.1 million from $10.3 million for the first quarter of 2014 to $9.2 million for the first quarter of 2015, as the credit quality of both retail and commercial portfolios remains excellent.

Non-interest expenses increased by $3.0 million or 3%, from $99.8 million for the first quarter of 2014 to $102.8 million for the first quarter of 2015, as higher premises and technology costs and staffing levels in business services were partly offset by lower salaries from the optimization of certain retail activities in the fourth quarter of 2014.

Compared with the fourth quarter of 2014, adjusted net income decreased by 8% mainly due to lower lending fees stemming from lower loan prepayment penalties in the commercial mortgage portfolio, as well as higher loan losses in the commercial portfolios. Reported net income for the fourth quarter of 2014 was adversely impacted by restructuring charges of $6.5 million ($4.8 million after income taxes).

B2B Bank

Three months ended January 31, 2015

The B2B Bank business segment's contribution to adjusted net income was $13.5 million for the first quarter of 2015, down $3.7 million from $17.2 million for the first quarter of 2014. Reported net income for the first quarter of 2015 was $12.4 million compared with $13.4 million for the same quarter a year ago.

Total revenue decreased to $50.8 million for the first quarter of 2015 from $55.3 million for the first quarter of 2014. Net interest income decreased by $4.1 million to $42.1 million for the first quarter of 2015 compared with the corresponding period in 2014. This decrease mainly stems from the attrition in the high-margin investment loans incurred over the last 18 months. Furthermore, the Bank's decision to further take advantage of lower institutional funding costs led to a reduction in brokered deposit volumes, which also impacted net interest income in this segment. Other income amounted to $8.7 million in the first quarter of 2015, only slightly lower by $0.4 million from the first quarter of 2014.

As shown above, the line item "Amortization of net premium on purchased financial instruments" amounted to $1.5 million in the first quarter of 2015 compared with $1.1 million for the first quarter of 2014, reflecting higher amortization of net premium. For additional information, refer to Note 12 to the unaudited condensed interim consolidated financial statements.

Loan losses increased by $1.1 million compared with the unusually low level registered in the first quarter of 2014 and amounted to $1.3 million in the first quarter of 2015, still reflecting however the strong credit quality of the portfolio, as well as the good prevailing economic conditions.

Excluding costs related to business combinations, non-interest expenses decreased by $0.6 million or 2% to $31.0 million for the first quarter of 2015, compared with $31.6 million for the first quarter of 2014, essentially due to lower salary costs as expense synergies were partly offset by seasonally-higher sales and support staffing levels for the RRSP campaign. Costs related to business combinations for the first quarter of 2015 are nil, as integration activities were completed during the fourth quarter of 2014.

Compared with the fourth quarter of 2014, adjusted net income increased by $1.8 million, mainly as a result of the sequential decrease in other expenses and lower provisions for loan losses. The decrease in net interest income is mainly due to the slightly lower volume of investment loans, as repayments exceeded the relatively stronger disbursement level, as well as the sequential reduction in brokered deposit volumes. With the completion of integration activities in the fourth quarter of 2014 as mentioned above, costs related to business combinations decreased by $2.9 million and also contributed to the increase in the reported net income over the same period.

Laurentian Bank Securities & Capital Markets

Three months ended January 31, 2015

Laurentian Bank Securities & Capital Markets business segment's contribution to net income increased to $2.4 million for the first quarter of 2015, compared with $2.3 million for the first quarter of 2014. Total revenue increased by $1.0 million to $17.2 million for the first quarter of 2015 compared with $16.2 million for the first quarter of 2014, mainly due to higher underwriting fees in the fixed income market and higher trading revenues. Non-interest expenses increased by $0.8 million to $13.9 million for the first quarter of 2015, mainly due to higher performance-based compensation, commissions and transaction fees, in-line with slightly higher market-driven income.

Other sector

Three months ended January 31, 2015

For the three months ended January 31, 2015, the Other sector generated a net loss of $9.7 million and an adjusted net loss of $6.1 million, compared with a net loss and equivalent adjusted net loss of $8.4 million for the first quarter of 2014.

Net interest income was negative $4.3 million for the first quarter of 2015, relatively unchanged compared with the first quarter of 2014. Other income increased to $2.9 million for the first quarter of 2015, compared with $2.0 million for the first quarter of 2014, mainly due to higher net security gains and despite a $1.3 million temporary decline in the valuation of hedging derivatives. Non-interest expenses increased by $2.2 million to $13.0 million for the first quarter of 2015 compared with $10.7 million for the first quarter of 2014, mainly as a result of the compensation charge of $4.9 million related to the adjustment to the employment contract of the Bank's CEO, Mr. Robitaille, recorded during the first quarter of 2015. Excluding this charge, non-interest expenses decreased by $2.6 million, essentially as a result of higher technology cost allocation to the business segments compared with the first quarter of 2014.

On a sequential basis, the sector's adjusted net loss increased by $1.3 million, essentially due to lower other income and higher non-interest expenses, mainly related to stock-based compensation. Reported results for the first quarter of 2015 include the $4.9 million compensation charge, as noted above, while the fourth quarter of 2014 was impacted by restructuring charges of $1.1 million.

Additional Financial Information - Quarterly Results

Accounting Policies

A summary of the Bank's significant accounting policies is presented in Notes 2 and 3 of the 2014 audited annual consolidated financial statements. Pages 58 to 60 of the 2014 Annual Report also contain a discussion of critical accounting policies and estimates which refer to material amounts reported in the consolidated financial statements or require management's judgment. The unaudited condensed interim consolidated financial statements for the first quarter of 2015 have been prepared in accordance with these accounting policies, except for accounting changes detailed below.

Accounting changes

Effective November 1, 2014, the Bank adopted amendments to the existing standard on offsetting of financial instruments as described in the External Reporting Changes section, as well as new standards and amendments on levies and hedge accounting upon novation of derivatives. Additional information on the new standards, amendments to existing standards and new accounting policy can be found in Note 2 to the unaudited condensed interim consolidated financial statements.

Future accounting changes

The IASB has issued new standards and amendments to existing standards on financial instruments, revenue from contracts with customers and presentation of financial statements. These future accounting changes will be applicable for the Bank in various annual periods beginning on November 1, 2016 at the earliest. The Bank is currently assessing the impact of the adoption of these standards on its financial statements. Additional information on the new standards and amendments to existing standards can be found in Note 3 to the unaudited condensed interim consolidated financial statements.

Corporate Governance and Changes in Internal Control over Financial Reporting

During the first quarter ended January 31, 2015, there have been no changes in the Bank's policies or procedures and other processes that comprise its internal control over financial reporting which have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.

The Board of Directors and the Audit Committee of Laurentian Bank reviewed this document prior to its release.

Non-GAAP Financial Measures

The Bank uses both generally accepted accounting principles (GAAP) and certain non-GAAP measures to assess performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are unlikely to be comparable to any similar measures presented by other companies. These non-GAAP financial measures are considered useful to investors and analysts in obtaining a better understanding of the Bank's financial results and analyzing its growth and profit potential more effectively. The Bank's non-GAAP financial measures are defined as follows:

Common shareholders' equity

The Bank's common shareholders' equity is defined as the sum of the value of common shares, retained earnings and accumulated other comprehensive income, excluding cash flow hedge reserves.

Return on common shareholders' equity

Return on common shareholders' equity is a profitability measure calculated as the net income available to common shareholders as a percentage of average common shareholders' equity.

Book value per common share

The Bank's book value per common share is defined as common shareholders' equity divided by the number of common shares outstanding at the end of the period.

Average earning assets

Effective November 1, 2014, the Bank has modified its definition of average earning assets, as further detailed in the External Reporting Changes section. All financial measures for the quarters and for the year ended in 2014 have been amended accordingly.

Average earning assets include the Bank's interest-bearing deposits with other banks, securities, securities purchased under reverse repurchase agreements and loans net of allowances, excluding average earning assets of the Laurentian Bank Securities and Capital Markets' business segment. The averages are based on the daily balances for the period.

Net interest margin

Effective November 1, 2014, the Bank has modified its definition of net interest margin, as further detailed in the External Reporting Changes section. All financial measures for the quarters and for the year ended in 2014 have been amended accordingly.

Net interest margin is the ratio of net interest income to average earning assets, expressed as a percentage or basis points.

Efficiency ratio and operating leverage

The Bank uses the efficiency ratio as a measure of its productivity and cost control. This ratio is defined as non-interest expenses as a percentage of total revenue. The Bank also uses operating leverage as a measure of efficiency. Operating leverage is the difference between total revenue and non-interest expenses growth rates.

Dividend payout ratio

The dividend payout ratio is defined as dividends declared on common shares as a percentage of net income available to common shareholders.

Dividend yield

The dividend yield is defined as dividends declared per common share divided by the closing common share price.

Adjusted financial measures

Certain analyses presented throughout this document are based on the Bank's core activities and therefore exclude the effect of certain amounts designated as adjusting items, as detailed below and presented in the table in the Adjusting Items section.

Adjusting items
Adjusting items are related to business combinations, as well as to restructuring plans and to a special compensation charge.

Items related to business combinations relate to gains and expenses that arose as a result of acquisitions. The gain on acquisition and ensuing amortization of net premium on purchased financial instruments are considered adjusting items since they represent, according to management, significant non-cash and non-recurring adjustments. The revaluation of the contingent consideration and costs related to business combinations (T&I Costs) have been designated as adjusting items due to the significance of the amounts and their non-recurrence. Items related to business combinations are included in the B2B Bank business segment's reported results.

Restructuring charges result from a realignment of strategic priorities and are comprised of severance charges and impairment charges related to IT projects. These charges have been designated as adjusting items due to their nature and the significance of the amounts. Restructuring charges are included in the Personal & Commercial business segment and Other sector's reported results.

The compensation charge is related to the adjustment to the employment contract of the Bank's CEO, Mr. Robitaille, following his recent retirement announcement. This charge has been designated as an adjusting item due to its nature and the significance of the amount. The compensation charge is included in the Other sector's reported results.

About Laurentian Bank

Laurentian Bank of Canada is a banking institution whose activities extend across Canada. The Bank serves one and a half million clients throughout the country and employs more than 3,700 people whose talent and dedication has made it a major player in numerous market segments. The Bank has more than $37 billion in balance sheet assets and more than $42 billion in assets under administration.

Laurentian Bank distinguishes itself through the excellence and simplicity in its services. As such, the Bank caters to the needs of retail clients via its branch network and virtual offerings. The Bank has also earned a solid reputation among small and medium-sized enterprises and real estate developers thanks to its specialized teams across Canada, namely in Ontario, Québec, Alberta, British Columbia and Nova Scotia. For their part, B2B Bank is a Canadian leader in providing banking and investment products and services to financial advisors and brokers, while the expertise and effectiveness of Laurentian Bank Securities' integrated brokerage services are known nationwide.

Access to Quarterly Results Materials

Interested investors, the media and others may review this press release, unaudited condensed interim consolidated financial statements, supplementary financial information and our report to shareholders which are posted on our web site at www.laurentianbank.ca.

Conference Call

Laurentian Bank invites media representatives and the public to listen to the conference call with financial analysts to be held at 2:00 p.m. Eastern Time on Thursday, February 26, 2015. The live, listen-only, toll-free, call-in number is 416 204-9702 or 1 800 524-8850.

You can listen to the call on a delayed basis at any time from 5:00 p.m. on Thursday, February 26, 2015 until 5:00 p.m. on March 27, 2015, by dialing the following playback number: 647 436-0148 or 1 888 203-1112 Code 2782083. The conference call can also be heard through the Investor Relations section of the Bank's Web site at www.laurentianbank.ca. The Bank's Web site also offers additional financial information.

Unaudited Condensed Interim Consolidated Financial Statements

The unaudited condensed interim consolidated financial statements for the period ended January 31, 2015, including the notes to consolidated financial statements, are also available on the Bank's Web site at www.laurentianbank.ca.

Consolidated Balance Sheet ^[1]

Consolidated Statement of Income

Consolidated Statement of Comprehensive Income

Income Taxes — Other Comprehensive Income

The following table presents the income taxes for each component of other comprehensive income.

Consolidated Statement of Changes in Shareholders' Equity

¹ Refer to Adjusting and notable items and Non-GAAP financial measures sections for further details.

SOURCE Laurentian Bank of Canada