Highlights of the second quarter of 2015
- Adjusted diluted earnings per share up 7% year-over-year
- Solid growth in the commercial loan portfolio including BAs, up 19% year-over-year
- B2B Bank segment mortgages up 13% year-over-year
- Strong credit performance with loan losses of $8.0 million
- Quarterly common share dividend raised by $0.02 to $0.56
NET INCOME (IN MILLIONS OF $) | DILUTED EARNINGS PER SHARE | RETURN ON COMMON SHAREHOLDERS' EQUITY | |||
Reported basis | $41.2 | $1.34 | 11.8% | ||
Adjusted basis1 | $42.3 | $1.38 | 12.1% |
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1 | Certain analyses presented throughout this document are based on the Bank's core activities and therefore exclude certain charges designated as adjusting items. Refer to the Adjusting Items and Non-GAAP Financial Measures sections for further details. |
MONTRÉAL, June 3, 2015 /CNW Telbec/ - Laurentian Bank of Canada reported adjusted net income of $42.3 million or $1.38 diluted per share for the second quarter of 2015, both up 7%, compared with $39.4 million or $1.29 diluted per share for the same period in 2014. Adjusted return on common shareholders' equity was 12.1% for the second quarter of 2015, compared with 11.9% for the second quarter of 2014. On a reported basis, net income totalled $41.2 million or $1.34 diluted per share for the second quarter of 2015, compared with $31.0 million or $0.99 diluted per share for the second quarter of 2014. Also on a reported basis, return on common shareholders' equity was 11.8% for the second quarter of 2015, compared with 9.2% for the second quarter of 2014.
For the six months ended April 30, 2015, adjusted net income totalled $82.8 million or $2.69 diluted per share, both up 5%, compared with adjusted net income of $78.6 million or $2.57 diluted per share for the same period in 2014. Adjusted return on common shareholders' equity was 11.7% for the six months ended April 30, 2015, compared with 11.8% for the same period in 2014. On a reported basis, net income was $77.0 million or $2.49 diluted per share for the six months ended April 30, 2015, compared with $66.5 million or $2.15 diluted per share for the same period in 2014. Also on a reported basis, return on common shareholders' equity was 10.9% for the six months ended April 30, 2015, compared with 9.8% for the same period in 2014.
Commenting on the Bank's financial results for the second quarter of 2015, Réjean Robitaille, President and Chief Executive Officer, mentioned: "The emphasis that we put during the last quarters on the development of our business activities continued to bear fruit. The year-over-year growth that we generated from these activities was 19% in our commercial loan portfolio and 13% on our B2B Bank mortgages. Furthermore, solid other income growth, the sustained credit quality of the loan portfolio, witnessed by low loan losses, and continued control over expenses contributed to our solid financial performance."
Mr. Robitaille added: "In this challenging interest rate environment, we are working to achieve better operational efficiency and maximize operating leverage. Looking ahead, we will continue to focus on further developing our higher-margin business activities and on growing income from non-interest sensitive sources. I am therefore pleased to announce that the Board of Directors has approved an increase in our quarterly common share dividend of $0.02 to $0.56 per share."
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 | |||||||||||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | ||||||||||||||||||||||
In thousands of Canadian dollars, except per share and percentage amounts (Unaudited) | APRIL 30 | JANUARY 31 | VARIANCE | APRIL 30 | VARIANCE | APRIL 30 | APRIL 30 | VARIANCE | |||||||||||||||
Profitability | |||||||||||||||||||||||
Total revenue | $ | 220,679 | $ | 218,160 | 1 | % | $ | 216,890 | 2 | % | $ | 438,839 | $ | 432,999 | 1 | % | |||||||
Net income | $ | 41,188 | $ | 35,835 | 15 | % | $ | 30,989 | 33 | % | $ | 77,023 | $ | 66,514 | 16 | % | |||||||
Diluted earnings per share | $ | 1.34 | $ | 1.15 | 17 | % | $ | 0.99 | 35 | % | $ | 2.49 | $ | 2.15 | 16 | % | |||||||
Return on common shareholders' equity [1] | 11.8 | % | 9.9 | % | 9.2 | % | 10.9 | % | 9.8 | % | |||||||||||||
Net interest margin (on average earning assets) - updated measure [1] [2] | 1.84 | % | 1.83 | % | 1.93 | % | 1.84 | % | 1.89 | % | |||||||||||||
Efficiency ratio [1] | 71.9 | % | 73.7 | % | 73.7 | % | 72.8 | % | 73.7 | % | |||||||||||||
Operating leverage [1] | 2.4 | % | 1.9 | % | (0.1) | % | 1.2 | % | 2.8 | % | |||||||||||||
Per common share | |||||||||||||||||||||||
Share price - Close | $ | 48.29 | $ | 46.81 | 3 | % | $ | 47.08 | 3 | % | $ | 48.29 | $ | 47.08 | 3 | % | |||||||
Price / earnings ratio (trailing four quarters) | 9.9 | x | 10.4 | x | 12.3 | x | 9.9 | x | 12.3 | x | |||||||||||||
Book value [1] | $ | 47.10 | $ | 46.34 | 2 | % | $ | 44.61 | 6 | % | $ | 47.10 | $ | 44.61 | 6 | % | |||||||
Market to book value [1] | 103 | % | 101 | % | 106 | % | 103 | % | 106 | % | |||||||||||||
Dividends declared | $ | 0.54 | $ | 0.54 | — | % | $ | 0.51 | 6 | % | $ | 1.08 | $ | 1.02 | 6 | % | |||||||
Dividend yield [1] | 4.5 | % | 4.6 | % | 4.3 | % | 4.5 | % | 4.3 | % | |||||||||||||
Dividend payout ratio [1] | 40.3 | % | 46.7 | % | 51.3 | % | 43.3 | % | 47.4 | % | |||||||||||||
Adjusted financial measures | |||||||||||||||||||||||
Adjusted net income [1] | $ | 42,313 | $ | 40,468 | 5 | % | $ | 39,375 | 7 | % | $ | 82,781 | $ | 78,636 | 5 | % | |||||||
Adjusted diluted earnings per share [1] | $ | 1.38 | $ | 1.32 | 5 | % | $ | 1.29 | 7 | % | $ | 2.69 | $ | 2.57 | 5 | % | |||||||
Adjusted return on common shareholders' equity [1] | 12.1 | % | 11.3 | % | 11.9 | % | 11.7 | % | 11.8 | % | |||||||||||||
Adjusted efficiency ratio [1] | 71.9 | % | 71.4 | % | 71.7 | % | 71.7 | % | 71.7 | % | |||||||||||||
Adjusted operating leverage [1] | (0.7) | % | (1.5) | % | 0.2 | % | 0.1 | % | 1.1 | % | |||||||||||||
Adjusted dividend payout ratio [1] | 39.2 | % | 41.1 | % | 39.6 | % | 40.1 | % | 39.6 | % | |||||||||||||
Financial position | |||||||||||||||||||||||
Balance sheet assets [3] | $ | 37,656 | $ | 37,435 | 1 | % | $ | 35,932 | 5 | % | |||||||||||||
Loans and acceptances | $ | 28,111 | $ | 27,760 | 1 | % | $ | 27,233 | 3 | % | |||||||||||||
Deposits | $ | 24,960 | $ | 24,647 | 1 | % | $ | 23,759 | 5 | % | |||||||||||||
Average earning assets | $ | 30,631 | $ | 30,220 | 1 | % | $ | 29,534 | 4 | % | $ | 30,422 | $ | 29,761 | 2 | % | |||||||
Basel III regulatory capital ratios | |||||||||||||||||||||||
Common Equity Tier I | 7.8 | % | 7.8 | % | 7.6 | % | |||||||||||||||||
Total | 11.9 | % | 12.0 | % | 13.3 | % | |||||||||||||||||
Leverage ratio | 3.7 | % | 3.7 | % | n.a | ||||||||||||||||||
Other information | |||||||||||||||||||||||
Number of full-time equivalent employees | 3,746 | 3,718 | 3,764 | ||||||||||||||||||||
Number of branches | 151 | 151 | 153 | ||||||||||||||||||||
Number of automated banking machines | 415 | 417 | 423 | ||||||||||||||||||||
[1] | Refer to the Non-GAAP Financial Measures section. |
[2] | As previously disclosed, now calculated as net interest income divided by average earning assets. Refer to the External Reporting Changes - Offsetting of Financial Instruments and Impact on Net Interest Margin section below and the Non-GAAP Financial Measures section for further details. |
[3] | Comparative figures for 2014 reflect the adoption of amendments to IAS 32, Financial Instruments: Presentation. Refer to Note 2 in the unaudited condensed interim consolidated financial statements. |
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 6% net income growth over the second quarter of 2014.
The strategy to develop our Business Services activities continued to bear fruit during the quarter just ended. Commercial loans increased by 19% and commercial mortgages rose by 13% compared to a year earlier. With $6.4 billion in loans, this portfolio has doubled over the past five years and is in line to again double by 2018 from 2013 levels. Our decision to develop a specialized sales force within specific niches is paying off. For example, the financing solutions offered by our equipment finance specialists serving the manufacturing sector in Quebec and Ontario support the investments required by these companies to improve their competitiveness. As well, ties are being developed with other third party lenders to further diversify the loan portfolio and geographic footprint. Business Services continues to be well positioned as one of the Bank's engines of growth.
Retail Services had a successful RRSP season. Buoyed by strong sales of mutual funds, income from this source increased by 43% from the second quarter of 2014. Our clients are particularly pleased with the co-branded LBC-Mackenzie mutual fund offering, given its solid performance and breadth of product.
B2B Bank's sustained emphasis on operational excellence is well placed as advisors and brokers are experiencing increased efficiency owing to B2B Bank's enhanced service and systems. Furthermore, B2B Bank's comprehensive range of mortgage products, consisting of expanded mortgage solutions in addition to its traditional offering, continues to be well received. This is evidenced by mortgage loans having increased by 13% compared to the second quarter of 2014.
Laurentian Bank Securities hosted its second Annual Equity Small Cap Conference in April. Drawing over 270 people from across Canada to this event testifies to its success. By bringing small cap companies together with investors, LBS is building mutually beneficial and profitable partnerships, as well as confirming its enviable position within the small cap market. LBS currently covers more than 100 companies in nine industry sectors. Its expanding coverage universe resulted in a multitude of advisory mandates being completed during the first six months of the fiscal year.
The Bank released its latest Social Responsibility Report in March 2015. The Report draws upon Global Reporting Initiative indicators which attests to the importance the Bank assigns to the good governance of its activities. As a responsible corporate citizen, the Bank ensures that its practices are effective and equitable for shareholders, clients, employees and communities alike.
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 April 30, 2015, and of how it performed during the three-month and six-month periods then ended. This MD&A, dated June 3, 2015, should be read in conjunction with the unaudited condensed interim consolidated financial statements for the period ended April 30, 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.
Economic Outlook
Although worldwide economic growth did not sharply accelerate during the first three months of the calendar year, the net effect of the lower crude oil prices is still expected to provide strong global support to Gross Domestic Product for the remainder of 2015. In Canada, short-term impacts relating to the price decline of crude oil have so far been relatively modest compared to previous oil shocks. However, further negative effects are expected to gradually materialize in upcoming months.
The substantial depreciation of the Canadian dollar, lower energy costs and confident US consumers have already led to a rapid shift in regional economic performance. Economic growth in oil-producing provinces is decelerating, while Ontario and Quebec's economies are showing signs of acceleration. With exports improving and the capacity utilization rate increasing, business investment still has to firm up in Central Canada. Altogether, the Canadian economy is expected to grow 1.5%-2.0% in 2015 and slightly above 2.0% in 2016, following a 2.5% performance in 2014.
The rally in crude oil prices observed since April has led to a rise in inflation expectations in financial markets. Combined with the foreseeable removal of monetary policy easing in the United States later this year and improved economic conditions in Europe, global long term interest rates, including Canadian interest rates, have firmed up over the last three months. However, the Bank of Canada may still reduce its overnight target rate again before year-end.
For the Bank, this persisting low-interest rate environment combined with stable unemployment and stronger economic growth in Central Canada, should help sustain the Canadian housing market as well as growth of the Bank's business loan portfolio. While prudent monitoring of the resource rich areas of the Canadian economy is warranted, the overall environment remains very supportive of the growth and credit quality of the Bank's loan portfolios.
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.
2015 FINANCIAL OBJECTIVES [1] | FOR THE SIX MONTHS ENDED APRIL 30, 2015 | ||
2015 OBJECTIVES | |||
Adjusted diluted earnings per share | 5% to 8% growth | 5 % | |
Adjusted efficiency ratio | < 71.0% | 71.7 % | |
Adjusted operational leverage [2] | Positive | 0.1 % | |
Adjusted return on common shareholders' equity | ≥ 12.0% | 11.7 % | |
Common Equity Tier I capital ratio — All-in basis | > 7.0% | 7.8 % | |
[1] | Refer to the Non-GAAP Financial Measures section. |
[2] | For the purpose of calculating 2015 financial objectives, year-to-date growth rates are calculated year-over-year (i.e. current period versus the corresponding prior year period). |
Management believes that the financial objectives set at the beginning of the fiscal year remain achievable. In a challenging interest rate environment, the Bank maintains its focus on realizing revenue opportunities and containing expense growth. Good growth in higher-margin products and continued strong credit quality are also expected to contribute to the achievement of the Bank's short term financial objectives.
Analysis of Consolidated Results
CONDENSED CONSOLIDATED RESULTS | ||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||
In thousands of Canadian dollars, except per share amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||
Net interest income | $ | 137,691 | $ | 139,496 | $ | 138,726 | $ | 277,187 | $ | 279,582 | ||||
Other income | 82,988 | 78,664 | 78,164 | 161,652 | 153,417 | |||||||||
Total revenue | 220,679 | 218,160 | 216,890 | 438,839 | 432,999 | |||||||||
Amortization of net premium on purchased financial instruments | 1,531 | 1,472 | 5,498 | 3,003 | 6,634 | |||||||||
Provision for loan losses | 8,000 | 10,500 | 10,500 | 18,500 | 21,000 | |||||||||
Non-interest expenses | 158,750 | 160,697 | 159,904 | 319,447 | 319,037 | |||||||||
Income before income taxes | 52,398 | 45,491 | 40,988 | 97,889 | 86,328 | |||||||||
Income taxes | 11,210 | 9,656 | 9,999 | 20,866 | 19,814 | |||||||||
Net income | $ | 41,188 | $ | 35,835 | $ | 30,989 | $ | 77,023 | $ | 66,514 | ||||
Preferred share dividends, including applicable taxes | 2,398 | 2,399 | 2,501 | 4,797 | 5,002 | |||||||||
Net income available to common shareholders | $ | 38,790 | $ | 33,436 | $ | 28,488 | $ | 72,226 | $ | 61,512 | ||||
Diluted earnings per share | $ | 1.34 | $ | 1.15 | $ | 0.99 | $ | 2.49 | $ | 2.15 | ||||
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. In addition, a compensation charge related to the Bank's President and Chief Executive Officer's announced retirement, which is reported in the Other sector's reported results, was classified as an adjusting item in the first quarter of 2015.
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.
IMPACT OF ADJUSTING ITEMS [1] | |||||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | ||||||||||||||||
In thousands of Canadian dollars, except per share amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | ||||||||||||
Impact on net income | |||||||||||||||||
Reported net income | $ | 41,188 | $ | 35,835 | $ | 30,989 | $ | 77,023 | $ | 66,514 | |||||||
Adjusting items | |||||||||||||||||
Items related to business combinations, net of income taxes | |||||||||||||||||
Amortization of net premium on purchased financial instruments | |||||||||||||||||
Amortization of net premium on purchased financial instruments | 1,125 | 1,083 | 1,026 | 2,208 | 1,862 | ||||||||||||
Revaluation of contingent consideration | — | — | 4,100 | — | 4,100 | ||||||||||||
Costs related to business combinations (T&I Costs) | — | — | 3,260 | — | 6,160 | ||||||||||||
1,125 | 1,083 | 8,386 | 2,208 | 12,122 | |||||||||||||
Retirement compensation charge, net of income taxes [2] | — | 3,550 | — | 3,550 | — | ||||||||||||
1,125 | 4,633 | 8,386 | 5,758 | 12,122 | |||||||||||||
Adjusted net income | $ | 42,313 | $ | 40,468 | $ | 39,375 | $ | 82,781 | $ | 78,636 | |||||||
Impact on diluted earnings per share | |||||||||||||||||
Reported diluted earnings per share | $ | 1.34 | $ | 1.15 | $ | 0.99 | $ | 2.49 | $ | 2.15 | |||||||
Adjusting items | |||||||||||||||||
Items related to business combinations | 0.04 | 0.04 | 0.29 | 0.08 | 0.42 | ||||||||||||
Retirement compensation charge | — | 0.12 | — | 0.12 | — | ||||||||||||
0.04 | 0.16 | 0.29 | 0.20 | 0.42 | |||||||||||||
Adjusted diluted earnings per share [3] | $ | 1.38 | $ | 1.32 | $ | 1.29 | $ | 2.69 | $ | 2.57 | |||||||
[1] | Refer to the Non-GAAP Financial Measures section. |
[2] | The retirement compensation charge is included in the line item Salaries and benefits in the consolidated statement of income. |
[3] | The impact of adjusting items on a per share basis does not add due to rounding for the quarters ended January 31, 2015 and April 30, 2014. |
Three months ended April 30, 2015 compared with the three months ended April 30, 2014
Net income was $41.2 million or $1.34 diluted per share for the second quarter of 2015, compared with $31.0 million or $0.99 diluted per share for the second quarter of 2014. Adjusted net income was $42.3 million for the second quarter ended April 30, 2015, up from $39.4 million for the same quarter of 2014, while adjusted diluted earnings per share were $1.38, compared with $1.29 diluted per share in 2014.
Total revenue
Total revenue increased by $3.8 million or 2% to $220.7 million for the second quarter of 2015, compared with $216.9 million for the second quarter of 2014, as solid growth in other income was partly offset by lower net interest income year-over-year.
Net interest income decreased by $1.0 million or 1% to $137.7 million for the second quarter of 2015, from $138.7 million for the second quarter of 2014, which had benefitted from $2.5 million of interest recoveries resulting from favourable settlements in the commercial loan portfolio. Excluding these prior year recoveries, the resulting $1.5 million increase was mainly generated by strong volume growth in higher-margin commercial portfolios year-over-year, partly offset by tighter margins on deposits.
Overall, net interest margin (as a percentage of average earning assets) decreased to 1.84% for the second quarter of 2015 from 1.93% for the second quarter of 2014, mainly as a result of lower interest recoveries as mentioned above (-3 basis points), the negative impact of the flattening in the interest rate curve (-3 basis points), the relatively higher level of liquid assets compared to a year ago (-2 basis points) and finally, margin compression on loans and deposits (-1 basis point, of which: +5 basis points on loans and -6 basis points on deposits).
Other income increased by $4.8 million or 6% and amounted to $83.0 million for the second quarter of 2015, compared with $78.2 million for the second quarter of 2014. Income from treasury and financial market operations increased by $4.1 million compared with the second quarter of 2014, mainly due to higher income from trading activities. The revaluation of certain derivatives used in hedging activities also generated a $1.3 million gain in other income in the aftermath of the sudden decline in short term rates at the end of the first quarter. This gain fully offsets the $1.3 million loss that had been recorded in the first quarter of 2015. Mutual fund commissions increased by $3.1 million compared with the second quarter of 2014, partly driven by new sales, as well as additional fee-based revenues earned on the co-branded LBC-Mackenzie mutual fund assets under administration. Furthermore, fees and commissions on loans and deposits were up $2.0 million compared with the second quarter of 2014 mainly driven by higher lending fees due to increased underwriting activity in the commercial portfolios. Other income in the second quarter of 2014 also included a $3.7 million gain on the sale of a $102.4 million commercial mortgage loan portfolio.
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration
For the second quarter of 2015, the line item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" amounted to $1.5 million, compared with $5.5 million for the second quarter of 2014. The higher charge in the second quarter of 2014 essentially resulted from a $4.1 million non-tax deductible charge to settle the contingent consideration related to the AGF Trust acquisition. The amortization of net premium on purchased financial instruments amounted to $1.5 million for the second quarter of 2015, compared with $1.4 million for the second quarter of 2014. Refer to Note 12 to the unaudited condensed interim consolidated financial statements.
Provision for loan losses
The provision for loan losses decreased to $8.0 million for the second quarter of 2015 from $10.5 million for the second quarter of 2014. This low level of loan losses is consistent with the improved overall underlying quality of the loan portfolios. During the quarter, various improvements and repayments, mainly in the commercial portfolios, triggered net favourable adjustments to provisions. Management believes that loan losses could remain slightly lower than historical levels for the rest of the year. Refer to the Risk Management section below for additional information.
Non-interest expenses
Non-interest expenses decreased by $1.2 million to $158.8 million for the second quarter of 2015, compared with $159.9 million for the second quarter of 2014. This decrease mostly reflects $4.4 million of lower costs related to business combinations as integration work at B2B Bank was completed in the fourth quarter of 2014 and as there were no adjusting items in the second quarter of 2015. The overall decrease was partly offset by higher premises and technology costs, as detailed below.
Salaries and employee benefits decreased by $0.9 million or 1% to $83.5 million for the second quarter of 2015, compared with the second quarter of 2014, mainly due to lower headcount from the optimization of certain retail and corporate activities in the fourth quarter of 2014 and good performance in group insurance programs where the Bank co-insures risk. Higher staffing levels in business services, regular annual salary increases and higher payroll taxes introduced in December 2014 partly offset this decrease year-over-year.
Premises and technologycosts increased by $3.1 million to $48.8 million compared with the second quarter of 2014. The increase mostly stems from higher project expenses.
Other non-interest expenses increased by $1.0 million to $26.4 million for the second quarter of 2015, compared with the second quarter of 2014, mostly reflecting higher unrecoverable sales taxes. The Bank continues to manage its costs through tight cost control and process reviews.
The adjusted efficiency ratio was 71.9% for the second quarter of 2015, compared with 71.7% for the second quarter of 2014. Management remains committed to exercising disciplined control over expenses in light of historically low interest rates and the resulting slower revenue growth environment.
Income taxes
For the quarter ended April 30, 2015, the income tax expense was $11.2 million and the effective tax rate was 21.4%. 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 April 30, 2014, the income tax expense was $10.0 million and the effective tax rate was 24.4%. Year-over-year, the lower effective tax rate for the quarter ended April 30, 2015 resulted from 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.
Six months ended April 30, 2015 compared with the six months ended April 30, 2014
Net income was $77.0 million or $2.49 diluted per share for the six months ended April 30, 2015, compared with $66.5 million or $2.15 diluted per share for the six months ended April 30, 2014. Adjusted net income was $82.8 million for the six months ended April 30, 2015, up 5% compared with $78.6 million in 2014, while adjusted diluted earnings per share was $2.69, compared with $2.57 diluted per share in 2014.
Total revenue
Total revenue increased by $5.8 million to $438.8 million for the six months ended April 30, 2015, compared with $433.0 million for the six months ended April 30, 2014. The year-over-year growth in other income more than offset a modest decline in net interest income.
Net interest income decreased by $2.4 million or 1% to $277.2 million for the six months ended April 30, 2015, from $279.6 million for the six months ended April 30, 2014, in part as $2.5 million in interest recoveries were recorded in the second quarter of 2014, as mentioned above. Furthermore, good growth in the higher-margin businesses was offset by the decrease in the investment loan portfolio and narrower overall margins. When compared with the six months ended April 30, 2014, net interest margin (as a percentage of average earning assets) decreased by 5 basis points to 1.84% for the six months ended April 30, 2015, essentially due to the lower interest recoveries and lower interest rates affecting deposit margins.
Other income increased by $8.2 million or 5% and amounted to $161.7 million for the six months ended April 30, 2015, compared with $153.4 million for the six months ended April 30, 2014. Higher income from treasury and financial market operations due to higher income from trading activities and higher realized net gains on securities, as well as continued solid mutual fund commissions mainly contributed to the year-over-year increase. Furthermore, fees and commissions on loans and deposits were up $2.1 million compared with the six months ended April 30, 2014 mainly as a result of a higher level of underwriting activities. Of note, other income in the six months ended April 30, 2014 included a one-time $3.7 million gain on the sale of a $102.4 million commercial mortgage loan portfolio.
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration
For the six months ended April 30, 2015, the line item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" amounted to $3.0 million, compared with $6.6 million for the six months ended April 30, 2014. As noted above, the higher charge in 2014 essentially resulted 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 $3.0 million for the six months ended April 30, 2015, compared with $2.5 million for the six months ended April 30, 2014. Refer to Note 12 to the unaudited condensed interim consolidated financial statements.
Provision for loan losses
The provision for loan losses decreased by $2.5 million to $18.5 million for the six months ended April 30, 2015 from $21.0 million for the six months ended April 30, 2014. The overall level of losses, expressed as a percentage of average loans, stood at a very low 12 basis points reflecting the excellent condition of the loan portfolio noted above. Refer to the Risk Management section below for additional information.
Non-interest expenses
Non-interest expenses were essentially unchanged and totalled $319.4 million for the six months ended April 30, 2015, compared with $319.0 million for the six months ended April 30, 2014. Adjusting items had a favourable net effect of $3.5 million compared with the six months ended April 30, 2014, as $8.4 million lower costs related to business combinations were only partly offset by a retirement compensation charge of $4.9 million incurred in the first quarter of 2015. Adjusted non-interest expenses increased by $3.9 million, mainly as a result of higher ongoing technology costs, as detailed below.
Salaries and employee benefits increased by $1.9 million or 1% to $171.8 million for the six months ended April 30, 2015, compared with the six months ended April 30, 2014. As mentioned above, salaries for the first quarter of 2015 included a retirement compensation charge of $4.9 million. Good performance in group insurance programs where the Bank co-insures risk and lower headcount from restructuring initiatives in 2014 mainly contributed to a decline of $3.0 million in the cost of salaries and employee benefits year-over-year.
Premises and technology costs increased by $5.6 million to $97.2 million compared with the six months ended April 30, 2014. The increase mostly stems from expensed project management costs.
Other non-interest expenses slightly increased by $1.3 million to $50.4 million for the six months ended April 30, 2015, from $49.1 million for the six months ended April 30, 2014.
The adjusted efficiency ratio was 71.7% for the six months ended April 30, 2015, unchanged compared with the six months ended April 30, 2014. The adjusted operating leverage remained slightly positive year-over-year.
Income taxes
For the six months ended April 30, 2015, the income tax expense was $20.9 million and the effective tax rate was 21.3%. The lower tax rate, compared to 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 six months ended April 30, 2014, the income tax expense was $19.8 million and the effective tax rate was 23.0%. Year-over-year, the lower effective tax rate for the six months ended April 30, 2015 resulted from 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 April 30, 2015 compared with the three months ended January 31, 2015
Net income was $41.2 million or $1.34 diluted per share for the second quarter of 2015 compared with $35.8 million or $1.15 diluted per share for the first quarter of 2015. 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). Adjusted net income was $42.3 million or $1.38 diluted per share, compared with $40.5 million or $1.32 diluted per share for the first quarter of 2015.
Total revenue increased to $220.7 million for the second quarter of 2015, compared with $218.2 million for the previous quarter. Net interest income decreased by $1.8 million sequentially to $137.7 million for the second quarter of 2015, as growth in loans and deposits generated $2.8 million in net interest income, but was muted by the $4.6 million negative impact of three fewer days in the second quarter. The Bank's net interest margin (as a percentage of average earning assets) increased sequentially by 1 basis point to 1.84% for the second quarter of 2015, compared with 1.83% for the first quarter of 2015, mainly reflecting a more favourable mix.
Other income increased by $4.3 million sequentially to $83.0 million for the second quarter of 2015, mainly due to higher income from brokerage operations and treasury operations as well as continued solid mutual fund commissions as explained above.
The line-item "Amortization of net premium on purchased financial instruments" amounted to $1.5 million for the second quarter of 2015, unchanged compared with the first quarter of 2015. Refer to Note 12 to the unaudited condensed interim consolidated financial statements for additional information.
Provision for loan losses declined to $8.0 million for the second quarter of 2015, a decrease of $2.5 million compared with the first quarter of 2015, reflecting an improvement in quality of the portfolio and the favourable credit underwriting environment as noted above.
Non-interest expenses amounted to $158.8 million for the second quarter of 2015, compared with $160.7 million for the first quarter of 2015. Excluding a retirement compensation charge incurred in the first quarter of 2015, non-interest expenses increased by 2% sequentially due to higher project and other expenses. Adjusted operating leverage was slightly negative at 0.7%.
Financial condition
CONDENSED BALANCE SHEET [1] | |||||||||
In thousands of Canadian dollars (Unaudited) | AS AT APRIL 30 | AS AT OCTOBER 31 | AS AT APRIL 30 | ||||||
ASSETS | |||||||||
Cash and deposits with other banks | $ | 200,882 | $ | 248,855 | $ | 215,508 | |||
Securities | 5,180,605 | 4,880,460 | 4,532,598 | ||||||
Securities purchased under reverse repurchase agreements | 3,320,127 | 3,196,781 | 3,253,021 | ||||||
Loans and acceptances, net | 27,996,925 | 27,310,208 | 27,110,647 | ||||||
Other assets | 957,408 | 846,481 | 820,062 | ||||||
$ | 37,655,947 | $ | 36,482,785 | $ | 35,931,836 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
Deposits | $ | 24,960,321 | $ | 24,523,026 | $ | 23,758,753 | |||
Other liabilities | 5,205,222 | 5,103,778 | 5,227,457 | ||||||
Debt related to securitization activities | 5,445,989 | 4,863,848 | 4,896,007 | ||||||
Subordinated debt | 448,568 | 447,523 | 446,485 | ||||||
Shareholders' equity | 1,595,847 | 1,544,610 | 1,603,134 | ||||||
$ | 37,655,947 | $ | 36,482,785 | $ | 35,931,836 | ||||
[1] | Comparative figures for 2014 reflect the adoption of amendments to IAS 32, Financial Instruments: Presentation. Refer to Note 2 in the unaudited condensed interim consolidated financial statements. |
Balance sheet assets amounted to $37.7 billion as at April 30, 2015, up $1.2 billion or 3% from $36.5 billion as at October 31, 2014. This increase mainly reflects the 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 $8.7 billion as at April 30, 2015, an increase of $0.4 billion compared with October 31, 2014 and an increase of $0.7 billion compared with April 30, 2014. This higher level of liquid assets supports the Bank's expected loan growth, particularly in the commercial loan portfolio and is also in line with increased deposit gathering from multiple sources. 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 $28.0 billion as at April 30, 2015, up $686.7 million from October 31, 2014, as continued strong growth in the Bank's higher-margin business portfolios and B2B Bank's residential mortgage loan portfolio was slightly offset by continued repayments in the investment loan portfolio. Commercial loans, including acceptances, increased by $347.5 million or 11% since October 31, 2014, while commercial mortgage loans increased by $213.6 million or 8% over the same period, as the Bank maintains its focus on achieving long-term targeted growth rates of its commercial activities. Personal loans decreased by $156.6 million or 2% since October 31, 2014, as attrition in the investment loan portfolio continued, albeit at a relatively slower pace than in previous periods. Residential mortgage loans were up by $277.3 million from October 31, 2014, mostly driven by B2B Bank's enhanced mortgage solutions.
Liabilities
Personal deposits stood at $18.6 billion as at April 30, 2015, down $0.1 billion compared with October 31, 2014, while business and other deposits increased by $0.5 billion since October 31, 2014 to $6.3 billion as at April 30, 2015. The Bank continues to optimize its current funding strategy by focusing on client deposits either through its retail branch network or B2B Bank's advisor relationships, while also increasing usage of institutional funding sources. Personal deposits represented 75% of total deposits as at April 30, 2015 relatively unchanged compared with 76% as at October 31, 2014. This ratio remains well above the Canadian average and contributes to the Bank's solid liquidity position.
Debt related to securitization activities totalling $5.4 billion, remains a preferred source of fixed-rate funding and increased by $582.1 million or 12% compared with October 31, 2014, as a result of the Bank's participation in both the Canada Mortgage Bond program and multi-seller mortgage securitization facilities. Subordinated debt remained relatively unchanged compared with October 31, 2014 and stood at $0.4 billion as at April 30, 2015.
Shareholders' equity
Shareholders' equity stood at $1,595.8 million as at April 30, 2015, compared with $1,544.6 million as at October 31, 2014. This increase is mainly explained by the net income contribution for the year, net of declared dividends, as well as the variation of the cash flow hedge reserve within accumulated other comprehensive income. The Bank's book value per common share appreciated to $47.10 as at April 30, 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 May 28, 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 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 11.9%, respectively, as at April 30, 2015. These ratios meet all current requirements.
REGULATORY CAPITAL [1] | ||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | AS AT APRIL 30 | AS AT OCTOBER 31 | AS AT APRIL 30 | |||||||
Regulatory capital | ||||||||||
Common Equity Tier 1 capital | $ | 1,135,624 | $ | 1,087,224 | $ | 1,030,263 | ||||
Tier 1 capital | $ | 1,355,257 | $ | 1,306,857 | $ | 1,356,413 | ||||
Total capital | $ | 1,743,886 | $ | 1,747,526 | $ | 1,811,191 | ||||
Total risk-weighted assets [2] | $ | 14,586,681 | $ | 13,844,014 | $ | 13,576,578 | ||||
Regulatory capital ratios | ||||||||||
Common Equity Tier 1 capital ratio | 7.8 | % | 7.9 | % | 7.6 | % | ||||
Tier 1 capital ratio | 9.3 | % | 9.4 | % | 10.0 | % | ||||
Total capital ratio | 11.9 | % | 12.6 | % | 13.3 | % | ||||
[1] | The amounts are presented on an "all-in" basis. |
[2] | Using the Standardized Approach in determining credit risk and operational risk. |
The Common Equity Tier 1 capital ratio decreased to 7.8% as at April 30, 2015, compared with 7.9% as at October 31, 2014, as the impact of higher risk-weighted commercial business and investments were not fully offset by internal capital generation.
Regulatory developments concerning capital
In December 2014, the BCBS issued for consultation the Revisions to the standardised approach for credit risk document, which forms part of the BCBS' broader work on improving the consistency and comparability of bank capital ratios. This document proposes to reduce reliance on external credit ratings, increase risk sensitivity and enhance comparability across banks. This consultative document was open for comments until March 27, 2015. The Bank is closely monitoring these developments as they could potentially impact capital requirements in the future.
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 April 30, 2015 and exceeds current requirements.
BASEL III LEVERAGE RATIO | ||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | AS AT APRIL 30 | |||
Tier 1 capital | $ | 1,355,255 | ||
Total unweighted exposures | $ | 36,836,772 | ||
Basel III leverage ratio | 3.7 | % | ||
Dividends
On May 20, 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 June 8, 2015. At its meeting on June 3, 2015, given the Bank's solid results, solid balance sheet and capital position, the Board of Directors approved an increase of $0.02 per share, or 4%, to the quarterly dividend and declared a dividend of $0.56 per common share, payable on August 1, 2015, to shareholders of record on July 2, 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.
COMMON SHARE DIVIDENDS AND PAYOUT RATIO | |||||||||||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | FOR THE YEARS ENDED | |||||||||||||||||||||
In Canadian dollars, except payout ratios (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | OCTOBER 31 | OCTOBER 31 | OCTOBER 31 | ||||||||||||||||
Dividends declared per common share | $ | 0.54 | $ | 0.54 | $ | 0.51 | $ | 1.08 | $ | 2.06 | $ | 1.98 | $ | 1.84 | |||||||||
Dividend payout ratio [1] | 40.3 | % | 46.7 | % | 51.3 | % | 43.3 | % | 45.7 | % | 52.0 | % | 37.0 | % | |||||||||
Adjusted dividend payout ratio [1] | 39.2 | % | 41.1 | % | 39.6 | % | 40.1 | % | 38.7 | % | 39.0 | % | 36.9 | % | |||||||||
[1] | Refer to the Non-GAAP Financial Measures section. |
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.
PROVISION FOR LOAN LOSSES | ||||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||||
Personal loans | $ | 7,715 | $ | 5,550 | $ | 8,003 | $ | 13,265 | $ | 12,476 | ||||||
Residential mortgage loans | 760 | 1,523 | 922 | 2,283 | 1,570 | |||||||||||
Commercial mortgage loans | (812) | 1,908 | (2,508) | 1,096 | 384 | |||||||||||
Commercial and other loans (including acceptances) | 337 | 1,519 | 4,083 | 1,856 | 6,570 | |||||||||||
$ | 8,000 | $ | 10,500 | $ | 10,500 | $ | 18,500 | $ | 21,000 | |||||||
As a % of average loans and acceptances | 0.12 | % | 0.15 | % | 0.16 | % | 0.14 | % | 0.16 | % | ||||||
The provision for loan losses amounted to $8.0 million in the second quarter of 2015, a decrease of $2.5 million from the first quarter of 2015 and the same quarter a year ago. For the six months ended April 30, 2015, the provisions for loan losses decreased by $2.5 million and amounted to $18.5 million compared with $21.0 million for the same period in 2014. The favourable impact during the quarter and six-month period is due to more favourable settlements and overall improvements in the credit quality of the Bank's loan portfolios as explained below. The current level of provisions continues to reflect 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 slightly by $0.3 million compared with the second quarter of 2014. For the six months ended April 30, 2015, loan losses on personal loans increased by $0.8 million, mainly due to a return to normalized provision level in the B2B Bank's portfolios compared with last year. On a sequential basis, loan losses on personal loans increased by $2.2 million, essentially for the same reason.
Loan losses on residential mortgage loans were low, down $0.2 million and by $0.8 million compared with the second quarter of 2014 and the first quarter of 2015 respectively. For the six months ended April 30, 2015, loan losses on residential mortgage loans increased slightly by $0.7 million year-over-year.
Loan losses on commercial mortgages and commercial loans remained very low and cumulatively amounted to negative $0.5 million in the second quarter of 2015, a decrease of $2.1 million compared with the same quarter last year, mainly resulting from favourable settlements and improvements during the second quarter of 2015. On a sequential basis, loan losses in these portfolios decreased by a combined $3.9 million, essentially for the same reason. For the six months ended April 30, 2015, loan losses on commercial mortgages and commercial loans totalled $3.0 million compared with $7.0 million for the same period in 2014. The year-over-year decrease of $4.0 million was mainly attributable to a higher amount of favourable settlements compared to last year, as well as continued improvements in the underlying portfolios as mentioned above.
IMPAIRED LOANS | ||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | AS AT APRIL 30 | AS AT OCTOBER 31 | AS AT APRIL 30 | |||||||
Gross impaired loans | ||||||||||
Personal | $ | 18,316 | $ | 22,359 | $ | 28,476 | ||||
Residential mortgages | 34,572 | 32,843 | 31,794 | |||||||
Commercial mortgages | 45,140 | 16,633 | 13,360 | |||||||
Commercial and other (including acceptances) | 33,825 | 30,245 | 33,653 | |||||||
131,853 | 102,080 | 107,283 | ||||||||
Allowances for loan losses against impaired loans | ||||||||||
Individual allowances | (14,526) | (21,951) | (27,440) | |||||||
Collective allowances | (27,103) | (17,238) | (16,896) | |||||||
(41,629) | (39,189) | (44,336) | ||||||||
Net impaired loans | $ | 90,224 | $ | 62,891 | $ | 62,947 | ||||
Collective allowances against other loans | $ | (72,895) | $ | (80,182) | $ | (77,767) | ||||
Impaired loans as a % of loans and acceptances | ||||||||||
Gross | 0.47 | % | 0.37 | % | 0.39 | % | ||||
Net | 0.32 | % | 0.23 | % | 0.23 | % | ||||
Gross impaired loans amounted to $131.9 million as at April 30, 2015, up $29.8 million from $102.1 million as at October 31, 2014. This increase was mainly due to higher impaired commercial mortgage loans, essentially as a result of a well-secured single exposure, as well as, to a lesser extent, from the impact of higher loan volumes. This increase was partially offset by the continued improvement in the personal loan portfolio since the beginning of the year. Despite the overall increase, gross impaired loans remain at 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 $7.4 million to $14.5 million mainly explained by settlements of impaired commercial loans and commercial mortgage loans. Collective allowances against impaired loans increased by $9.9 million over the same period. At 0.47% of loans and acceptances as at April 30, 2015, 0.37% as at October 31, 2014 and 0.39% 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. Other than changes related to enhanced regulatory requirements described below, 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. Throughout the quarter, the Bank filed with OSFI the monthly LCR reports, 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.
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 was 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 April 30, 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.
STRUCTURAL INTEREST RATE SENSITIVITY ANALYSIS | |||||||
In thousands of Canadian dollars (Unaudited) | AS AT APRIL 30 | AS AT OCTOBER 31 | |||||
Effect of a 1% increase in interest rates | |||||||
Increase in net interest income before taxes over the next 12 months | $ | 10,635 | $ | 10,297 | |||
Decrease in the economic value of common shareholders' equity (net of income taxes) | $ | (41,778) | $ | (21,990) | |||
The table above provides a measure of the sensitivity to changes in interest rates of the Bank as at April 30, 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. As such, quarterly fluctuations in net interest income may occur, but within controlled tolerance margins. Management continues to expect that long term rates will remain within a narrow range for now. These results reflect efforts to take advantage in the movement of short-term and long-term interest rates, while maintaining the sensitivity to these fluctuations within approved risk limits.
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, B2B Bank, as well as Laurentian Bank Securities & Capital Markets. The Bank's other activities are grouped into the Other sector.
Personal & Commercial
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||||
Net interest income | $ | 99,978 | $ | 100,970 | $ | 97,592 | $ | 200,948 | $ | 195,646 | ||||||
Other income | 51,773 | 50,583 | 49,110 | 102,356 | 97,740 | |||||||||||
Total revenue | 151,751 | 151,553 | 146,702 | 303,304 | 293,386 | |||||||||||
Provision for loan losses | 5,876 | 9,172 | 7,436 | 15,048 | 17,690 | |||||||||||
Non-interest expenses | 103,354 | 102,848 | 99,947 | 206,202 | 199,756 | |||||||||||
Income before income taxes | 42,521 | 39,533 | 39,319 | 82,054 | 75,940 | |||||||||||
Income taxes | 10,330 | 8,833 | 9,037 | 19,163 | 17,380 | |||||||||||
Net income | $ | 32,191 | $ | 30,700 | $ | 30,282 | $ | 62,891 | $ | 58,560 | ||||||
Efficiency ratio [1] | 68.1 | % | 67.9 | % | 68.1 | % | 68.0 | % | 68.1 | % | ||||||
[1] | Refer to the Non-GAAP Financial Measures section. |
Net income for the Personal & Commercial business segment was $32.2 million for the second quarter of 2015, up 6% compared with net income of $30.3 million for the second quarter of 2014.
Total revenue increased by $5.0 million from $146.7 million for the second quarter of 2014 to $151.8 million for the second quarter of 2015. Net interest income increased by $2.4 million to $100.0 million, reflecting strong volume growth in both commercial loan and commercial mortgage portfolios year-over-year, partly offset by lower interest recoveries compared with the second quarter of 2014, which had benefitted from $2.5 million of favourable settlements. Other income increased by $2.7 million to $51.8 million in the second quarter of 2015, mainly due to higher mutual fund commissions and higher lending fees due to increased underwriting activity in the commercial portfolios. Other income in the second quarter of 2014 also included a portion of a gain on the sale of a commercial mortgage loan portfolio, of which $1.2 million was allocated to the Personal & Commercial segment.
Loan losses decreased by $1.6 million from $7.4 million for the second quarter of 2014 to $5.9 million for the second quarter of 2015, mainly resulting from favourable settlements and improvements during the second quarter of 2015, as the credit quality of both retail and commercial portfolios remains excellent.
Non-interest expenses increased by $3.4 million or 3%, from $99.9 million for the second quarter of 2014 to $103.4 million for the second quarter of 2015. Higher premises and technology costs from project expenses and higher 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 first quarter of 2015, net income increased by 5% mainly due to continued solid mutual fund commissions, lower loan losses in the commercial portfolios as well as good growth in higher-margin loans, which more than offset the net income impact of the three fewer days in the second quarter.
For the six months ended April 30, 2015, net income increased 7% to $62.9 million compared with $58.6 million for the same period a year ago. This performance was mainly driven by good growth in the high-margin businesses, a strong increase in other income and lower loan losses, partly offset by higher ongoing technology costs. The efficiency ratio was 68.0% for the six months ended April 30, 2015, compared with 68.1% for the six months ended April 30, 2014. The segment generated slightly positive operating leverage year-over-year, reflecting the Bank's focus on realizing revenue opportunities in other income and higher-margin business activities, as well as on containing expense growth.
B2B Bank
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||||
Net interest income | $ | 41,612 | $ | 42,060 | $ | 43,377 | $ | 83,672 | $ | 89,574 | ||||||
Other income | 8,540 | 8,716 | 9,107 | 17,256 | 18,209 | |||||||||||
Total revenue | 50,152 | 50,776 | 52,484 | 100,928 | 107,783 | |||||||||||
Amortization of net premium on purchased financial instruments | 1,531 | 1,472 | 5,498 | 3,003 | 6,634 | |||||||||||
Provision for loan losses | 2,124 | 1,328 | 3,064 | 3,452 | 3,310 | |||||||||||
Non-interest expenses | 32,535 | 30,980 | 30,971 | 63,515 | 62,547 | |||||||||||
Costs related to business combinations [1] | — | — | 4,437 | — | 8,386 | |||||||||||
Income before income taxes | 13,962 | 16,996 | 8,514 | 30,958 | 26,906 | |||||||||||
Income taxes | 3,830 | 4,573 | 3,432 | 8,403 | 8,391 | |||||||||||
Net income | $ | 10,132 | $ | 12,423 | $ | 5,082 | $ | 22,555 | $ | 18,515 | ||||||
Efficiency ratio [2] | 64.9 | % | 61.0 | % | 67.5 | % | 62.9 | % | 65.8 | % | ||||||
Adjusted net income [2] | $ | 11,257 | $ | 13,506 | $ | 13,468 | $ | 24,763 | $ | 30,637 | ||||||
Adjusted efficiency ratio [2] | 64.9 | % | 61.0 | % | 59.0 | % | 62.9 | % | 58.0 | % | ||||||
[1] | Costs related to the integration of AGF Trust (T&I Costs). |
[2] | Refer to the Non-GAAP Financial Measures section. Adjusted financial measures exclude items related to business combinations designated as adjusting items. |
The B2B Bank business segment's contribution to reported net income for the second quarter of 2015 was $10.1 million compared with $5.1 million for the same quarter a year ago. Adjusted net income was $11.3 million for the second quarter of 2015, down $2.2 million from $13.5 million for the second quarter of 2014.
Total revenue decreased to $50.2 million for the second quarter of 2015 from $52.5 million for the second quarter of 2014. Net interest income decreased by $1.8 million to $41.6 million for the second quarter of 2015 compared with the corresponding period in 2014. This decrease mainly stems from lower levels of brokered deposits, as the Bank used alternative funding sources over recent quarters. Margin compression on certain deposits also contributed to the decrease in net interest income as rates paid to depositors remained elevated in a competitive environment following the drop in market interest rates initiated by the Bank of Canada at the end of the last quarter. Investment loans continued to decline because of investor deleveraging, albeit at a decelerating pace, as a result of stronger gross sales. However, alternative mortgages have helped propel residential mortgage loan growth into the double digit range, which should support net interest income going forward. Other income amounted to $8.5 million in the second quarter of 2015, only slightly lower than in the second quarter of 2014, resulting from lower account management fees.
As shown above, the line item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" amounted to $1.5 million in the second quarter of 2015 compared with $5.5 million for the second quarter of 2014. The higher charge in the second quarter of 2014 essentially resulted from a $4.1 million non-tax deductible charge to settle the contingent consideration related to the AGF Trust acquisition. For additional information, refer to Note 12 to the unaudited condensed interim consolidated financial statements.
Loan losses decreased by $0.9 million compared with the second quarter of 2014 and amounted to $2.1 million in the second quarter of 2015. This decrease mainly results from lower provisions in the investment loan portfolio due to reduced exposure and overall improvements, reflecting the credit quality of the portfolio, as well as the good prevailing economic conditions.
Excluding costs related to business combinations, non-interest expenses increased by $1.6 million to $32.5 million for the second quarter of 2015, compared with $31.0 million for the second quarter of 2014, mostly due to higher amortization expenses from completed IT projects and higher allocated costs. Costs related to business combinations for the second quarter of 2015 are nil, as integration activities were completed during the fourth quarter of 2014.
Compared with the first quarter of 2015, reported and adjusted net income decreased by $2.2 million, mainly resulting from lower net interest income, which was impacted by the fewer number of days in the quarter. Higher non-interest expenses resulting from seasonally higher staffing levels for the RSP campaign and slightly higher loan losses also contributed to the decrease in adjusted and reported net income.
For the six months ended April 30, 2015, B2B Bank business segment's contribution to adjusted net income was $24.8 million, down $5.9 million compared with the same period in 2014. This decrease mainly stemmed from lower revenues due to tighter overall margins and the attrition in higher-margin investment loans year-over-year as well as slightly higher non-interest expenses as described above. With the finalization of integration activities in the fourth quarter of 2014, reported net income for the six months ended April 30, 2015 increased by $4.0 million to $22.6 million compared with $18.5 million in 2014 which also included a $4.1 million non tax-deductible charge to settle the contingent consideration.
Laurentian Bank Securities & Capital Markets
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||||
Total revenue | $ | 19,126 | $ | 17,210 | $ | 17,590 | $ | 36,336 | $ | 33,755 | ||||||
Non-interest expenses | 14,511 | 13,918 | 14,059 | 28,429 | 27,146 | |||||||||||
Income before income taxes | 4,615 | 3,292 | 3,531 | 7,907 | 6,609 | |||||||||||
Income taxes | 502 | 883 | 947 | 1,385 | 1,773 | |||||||||||
Net income | $ | 4,113 | $ | 2,409 | $ | 2,584 | $ | 6,522 | $ | 4,836 | ||||||
Efficiency ratio [1] | 75.9 | % | 80.9 | % | 79.9 | % | 78.2 | % | 80.4 | % | ||||||
[1] | Refer to the Non-GAAP Financial Measures section. |
Laurentian Bank Securities & Capital Markets business segment's contribution to net income increased to $4.1 million for the second quarter of 2015, compared with $2.6 million for the second quarter of 2014. Total revenue increased by $1.5 million to $19.1 million for the second quarter of 2015 compared with $17.6 million for the second quarter of 2014, mainly due to higher underwriting fees in the fixed income market and higher trading revenues. Non-interest expenses increased by $0.5 million to $14.5 million for the second quarter of 2015, mainly due to higher performance-based compensation, commissions and transaction fees, in-line with higher market-driven income.
Laurentian Bank Securities & Capital Markets business segment's contribution to net income increased to $6.5 million for the six months ended April 30, 2015, compared with $4.8 million for the six months ended April 30, 2014. Total revenue increased by $2.6 million to $36.3 million for the six months ended April 30, 2015, as higher revenues from growth in underwriting activities in the fixed income market and higher trading revenues were partly offset by lower underwriting fees in the small-cap equity market. Non-interest expenses increased by $1.3 million to $28.4 million for the six months ended April 30, 2015, mainly for the same reasons noted above.
Other sector
FOR THE THREE MONTHS ENDED | FOR THE THREE MONTHS ENDED | |||||||||||||
In thousands of Canadian dollars (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||
Net interest income | $ | (4,614) | $ | (4,260) | $ | (2,749) | $ | (8,874) | $ | (6,827) | ||||
Other income | 4,264 | 2,881 | 2,863 | 7,145 | 4,902 | |||||||||
Total revenue | (350) | (1,379) | 114 | (1,729) | (1,925) | |||||||||
Non-interest expenses | 8,350 | 12,951 | 10,490 | 21,301 | 21,202 | |||||||||
Loss before income taxes | (8,700) | (14,330) | (10,376) | (23,030) | (23,127) | |||||||||
Income taxes recovery | (3,452) | (4,633) | (3,417) | (8,085) | (7,730) | |||||||||
Net loss | $ | (5,248) | $ | (9,697) | $ | (6,959) | $ | (14,945) | $ | (15,397) | ||||
Adjusted net loss [1] | $ | (5,248) | $ | (6,147) | $ | (6,959) | $ | (11,395) | $ | (15,397) | ||||
[1] | Refer to the Non-GAAP Financial Measures section. Adjusted financial measures exclude a retirement compensation charge designated as an adjusting item. |
For the three months ended April 30, 2015, the Other sector generated a reported and equivalent adjusted net loss of $5.2 million, compared with a net loss and equivalent adjusted net loss of $7.0 million for the second quarter of 2014.
Net interest income decreased by $1.9 million to negative $4.6 million for the second quarter of 2015 compared with negative $2.7 million for the second quarter of 2014, mainly as a result of the temporary negative impact in the quarter of the recent change in short-term interest rates. Other income increased to $4.3 million for the second quarter of 2015, compared with $2.9 million for the second quarter of 2014, mainly due to higher income from trading activities as well as a $1.3 million gain on the revaluation of certain derivatives used in hedging activities, offsetting an equivalent loss in the previous quarter. Other income in the second quarter of 2014 also included a portion of a gain on the sale of a commercial mortgage loan portfolio, representing $2.5 million. Non-interest expenses decreased by $2.1 million to $8.4 million for the second quarter of 2015 compared with $10.5 million for the second quarter of 2014, resulting from higher allocated costs to other business segments.
On a sequential basis, the sector's adjusted net loss improved by $0.9 million, essentially due to the gain on the revaluation of certain derivatives used in hedging activities in the second quarter of 2015. Reported results improved by $4.4 million, as results for the first quarter of 2015 included a $4.9 million retirement compensation charge.
For the six months ended April 30, 2015, the Other sector's contribution to adjusted net income was a negative $11.4 million, compared with a negative $15.4 million for the six months ended April 30, 2014, mainly resulting from a decrease of $4.8 million in adjusted non-interest expenses, reflecting higher technology cost allocations to the business segments. Including the $4.9 million compensation charge, reported net income for the six months ended April 30, 2015 was negative $14.9 million, compared with negative $15.4 million for the six months ended April 30, 2014.
Additional Financial Information - Quarterly Results
In thousands of Canadian dollars, except per share | APRIL 30 | JANUARY 31 | OCTOBER 31 | JULY 31 | APRIL 30 | JANUARY 31 | OCTOBER 31 | JULY 31 | |||||||||||||||||
Net interest income | $ | 137,691 | $ | 139,496 | $ | 140,149 | $ | 141,249 | $ | 138,726 | $ | 140,856 | $ | 141,437 | $ | 144,549 | |||||||||
Other income | 82,988 | 78,664 | 81,272 | 78,396 | 78,164 | 75,253 | 74,094 | 76,493 | |||||||||||||||||
Total revenue | 220,679 | 218,160 | 221,421 | 219,645 | 216,890 | 216,109 | 215,531 | 221,042 | |||||||||||||||||
Amortization of net premium on purchased financial instruments | 1,531 | 1,472 | 1,508 | 1,511 | 5,498 | 1,136 | 1,006 | 1,140 | |||||||||||||||||
Provision for loan losses | 8,000 | 10,500 | 10,500 | 10,500 | 10,500 | 10,500 | 10,000 | 9,000 | |||||||||||||||||
Non-interest expenses | 158,750 | 160,697 | 166,299 | 155,973 | 159,904 | 159,133 | 172,651 | 176,705 | |||||||||||||||||
Income before income taxes | 52,398 | 45,491 | 43,114 | 51,661 | 40,988 | 45,340 | 31,874 | 34,197 | |||||||||||||||||
Income taxes | 11,210 | 9,656 | 9,360 | 11,564 | 9,999 | 9,815 | 6,008 | 7,213 | |||||||||||||||||
Net income | $ | 41,188 | $ | 35,835 | $ | 33,754 | $ | 40,097 | $ | 30,989 | $ | 35,525 | $ | 25,866 | $ | 26,984 | |||||||||
Earnings per share | |||||||||||||||||||||||||
Basic | $ | 1.34 | $ | 1.16 | $ | 1.09 | $ | 1.27 | $ | 0.99 | $ | 1.16 | $ | 0.82 | $ | 0.86 | |||||||||
Diluted | $ | 1.34 | $ | 1.15 | $ | 1.09 | $ | 1.27 | $ | 0.99 | $ | 1.16 | $ | 0.82 | $ | 0.86 | |||||||||
Return on common shareholders' equity [1] | 11.8 | % | 9.9 | % | 9.5 | % | 11.2 | % | 9.2 | % | 10.5 | % | 7.6 | % | 8.1 | % | |||||||||
Balance sheet assets [2] | $ | 37,656 | $ | 37,435 | $ | 36,483 | $ | 36,289 | $ | 35,932 | $ | 34,273 | $ | 33,911 | $ | 33,758 | |||||||||
Adjusted financial measures | |||||||||||||||||||||||||
Adjusted net income [1] | $ | 42,313 | $ | 40,468 | $ | 42,591 | $ | 42,355 | $ | 39,375 | $ | 39,261 | $ | 38,526 | $ | 38,547 | |||||||||
Adjusted diluted earnings per share [1] | $ | 1.38 | $ | 1.32 | $ | 1.39 | $ | 1.35 | $ | 1.29 | $ | 1.29 | $ | 1.26 | $ | 1.27 | |||||||||
Adjusted return on common shareholders' equity [1] | 12.1 | % | 11.3 | % | 12.2 | % | 11.9 | % | 11.9 | % | 11.7 | % | 11.7 | % | 12.0 | % | |||||||||
[1] | Refer to the non-GAAP financial measures section. |
[2] | Comparative figures for 2014 reflect the adoption of amendments to IAS 32, Financial Instruments: Presentation. Comparative figures for 2013 have not been restated. Refer to Note 2 in the unaudited condensed interim consolidated financial statements. |
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 second 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 second quarter ended April 30, 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.
RETURN ON COMMON SHAREHOLDERS' EQUITY | ||||||||||||||||
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||||
Reported net income available to common shareholders | $ | 38,790 | $ | 33,436 | $ | 28,488 | $ | 72,226 | $ | 61,512 | ||||||
Adjusting items, net of income taxes | 1,125 | 4,633 | 8,386 | 5,758 | 12,122 | |||||||||||
Adjusted net income available to common shareholders | $ | 39,915 | $ | 38,069 | $ | 36,874 | $ | 77,984 | $ | 73,634 | ||||||
Average common shareholders' equity | $ | 1,348,139 | $ | 1,335,437 | $ | 1,276,035 | $ | 1,341,683 | $ | 1,259,798 | ||||||
Return on common shareholders' equity | 11.8 | % | 9.9 | % | 9.2 | % | 10.9 | % | 9.8 | % | ||||||
Adjusted return on common shareholders' equity | 12.1 | % | 11.3 | % | 11.9 | % | 11.7 | % | 11.8 | % | ||||||
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 hereafter. All financial measures for the quarters and for the year ended in 2014 have been amended accordingly.
Average earning assets include the Bank's loans net of allowances, as well as interest-bearing deposits with other banks, securities, securities purchased under reverse repurchase agreements used in the Bank's treasury operations, but 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 hereafter. 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 retirement compensation charge.
Items related to business combinations relate to special gains and expenses that arose as a result of acquisitions. The one-time 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 non-recurring 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.
External Reporting Changes - Offsetting of Financial Instruments and Impact on Net Interest Margin
As of 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 thousands of Canadian dollars (Unaudited) | AS AT APRIL 30 | AS AT OCTOBER 31 | ||||
Total assets - Previously reported | $ | 34,260,996 | $ | 34,848,681 | ||
Impact of IAS 32 on total assets | 1,670,840 | 1,634,104 | ||||
Total assets | $ | 35,931,836 | $ | 36,482,785 | ||
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.
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | FOR THE YEAR ENDED | ||||||||||||||||
In thousands of Canadian dollars, except percentage amounts (Unaudited) | APRIL 30 | APRIL 30 | APRIL 30 | APRIL 30 | OCTOBER 31 | |||||||||||||
Net interest income (A) | $ | 137,691 | $ | 138,726 | $ | 277,187 | $ | 279,582 | $ | 560,980 | ||||||||
Average assets - Previously reported (B) | n.a. | 33,774,419 | n.a. | 33,710,184 | 34,023,265 | |||||||||||||
Average earning assets - Previously reported | n.a. | 32,667,273 | n.a. | 32,742,801 | 32,974,163 | |||||||||||||
Impact of IAS 32 on average earning assets | n.a. | 1,431,353 | n.a. | 1,065,220 | 1,536,926 | |||||||||||||
Average earning assets of LBS & CM | n.a. | (4,564,592) | n.a. | (4,046,866) | (4,654,654) | |||||||||||||
Average earning assets - Updated measure (C) | $ | 30,631,169 | $ | 29,534,034 | $ | 30,421,945 | $ | 29,761,155 | $ | 29,856,435 | ||||||||
Net interest margin - Previously reported (A/B) | n.a. | 1.68 | % | n.a. | 1.67 | % | 1.65 | % | ||||||||||
Net interest margin - Updated measure (A/C) | 1.84 | % | 1.93 | % | 1.84 | % | 1.89 | % | 1.88 | % | ||||||||
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 have made it a major player in numerous market segments. The Bank has more than $37 billion in balance sheet assets and $43 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 Wednesday, June 3, 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 Wednesday, June 3, 2015 until 5:00 p.m. on July 2, 2015, by dialing the following playback number: 647 436-0148 or 1 888 203-1112 Code 6071920. 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 April 30, 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]
In thousands of Canadian dollars (Unaudited) | AS AT APRIL 30 | AS AT OCTOBER 31 | AS AT APRIL 30 | ||||
ASSETS | |||||||
Cash and non-interest-bearing deposits with other banks | $ | 106,540 | $ | 126,247 | $ | 92,282 | |
Interest-bearing deposits with other banks | 94,342 | 122,608 | 123,226 | ||||
Securities | |||||||
Available-for-sale | 2,573,806 | 2,577,017 | 2,027,794 | ||||
Held-to-maturity | 421,161 | 323,007 | 390,045 | ||||
Held-for-trading | 2,185,638 | 1,980,436 | 2,114,759 | ||||
5,180,605 | 4,880,460 | 4,532,598 | |||||
Securities purchased under reverse repurchase agreements | 3,320,127 | 3,196,781 | 3,253,021 | ||||
Loans | |||||||
Personal | 6,636,520 | 6,793,078 | 7,079,386 | ||||
Residential mortgage | 15,102,862 | 14,825,541 | 14,665,381 | ||||
Commercial mortgage | 2,864,861 | 2,651,271 | 2,535,881 | ||||
Commercial and other | 3,123,129 | 2,794,232 | 2,651,025 | ||||
Customers' liabilities under acceptances | 384,077 | 365,457 | 301,077 | ||||
28,111,449 | 27,429,579 | 27,232,750 | |||||
Allowances for loan losses | (114,524) | (119,371) | (122,103) | ||||
27,996,925 | 27,310,208 | 27,110,647 | |||||
Other | |||||||
Premises and equipment | 61,625 | 68,750 | 74,535 | ||||
Derivatives | 253,750 | 132,809 | 126,777 | ||||
Goodwill | 64,077 | 64,077 | 64,077 | ||||
Software and other intangible assets | 195,172 | 207,188 | 208,779 | ||||
Deferred tax assets | 4,003 | 7,936 | 12,882 | ||||
Other assets | 378,781 | 365,721 | 333,012 | ||||
957,408 | 846,481 | 820,062 | |||||
$ | 37,655,947 | $ | 36,482,785 | $ | 35,931,836 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits | |||||||
Personal | $ | 18,648,149 | $ | 18,741,981 | $ | 19,168,273 | |
Business, banks and other | 6,312,172 | 5,781,045 | 4,590,480 | ||||
24,960,321 | 24,523,026 | 23,758,753 | |||||
Other | |||||||
Obligations related to securities sold short | 1,689,862 | 1,562,477 | 1,436,150 | ||||
Obligations related to securities sold under repurchase agreements | 2,216,589 | 2,215,965 | 2,558,224 | ||||
Acceptances | 384,077 | 365,457 | 301,077 | ||||
Derivatives | 134,149 | 90,840 | 101,494 | ||||
Deferred tax liabilities | 441 | 10 | 984 | ||||
Other liabilities | 780,104 | 869,029 | 829,528 | ||||
5,205,222 | 5,103,778 | 5,227,457 | |||||
Debt related to securitization activities | 5,445,989 | 4,863,848 | 4,896,007 | ||||
Subordinated debt | 448,568 | 447,523 | 446,485 | ||||
Shareholders' equity | |||||||
Preferred shares | 219,633 | 219,633 | 327,275 | ||||
Common shares | 465,926 | 465,854 | 456,032 | ||||
Retained earnings | 888,718 | 848,905 | 812,229 | ||||
Accumulated other comprehensive income | 21,479 | 10,127 | 7,507 | ||||
Share-based payment reserve | 91 | 91 | 91 | ||||
1,595,847 | 1,544,610 | 1,603,134 | |||||
$ | 37,655,947 | $ | 36,482,785 | $ | 35,931,836 | ||
[1] | Comparative figures for 2014 reflect the adoption of amendments to IAS 32, Financial Instruments: Presentation. Refer to Note 2 in the unaudited condensed interim consolidated financial statements. |
Consolidated Statement of Income
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||||
In thousands of Canadian dollars, except per share amounts | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||||
Interest income | ||||||||||||||
Loans | $ | 251,074 | $ | 263,549 | $ | 260,326 | $ | 514,623 | $ | 529,410 | ||||
Securities | 9,749 | 11,137 | 10,136 | 20,886 | 20,457 | |||||||||
Deposits with other banks | 151 | 215 | 194 | 366 | 375 | |||||||||
Other, including derivatives | 14,441 | 10,640 | 10,167 | 25,081 | 20,355 | |||||||||
275,415 | 285,541 | 280,823 | 560,956 | 570,597 | ||||||||||
Interest expense | ||||||||||||||
Deposits | 105,568 | 113,026 | 108,811 | 218,594 | 222,831 | |||||||||
Debt related to securitization activities | 28,068 | 28,853 | 29,140 | 56,921 | 59,669 | |||||||||
Subordinated debt | 3,938 | 4,037 | 3,933 | 7,975 | 7,964 | |||||||||
Other | 150 | 129 | 213 | 279 | 551 | |||||||||
137,724 | 146,045 | 142,097 | 283,769 | 291,015 | ||||||||||
Net interest income | 137,691 | 139,496 | 138,726 | 277,187 | 279,582 | |||||||||
Other income | ||||||||||||||
Fees and commissions on loans and deposits | 34,935 | 34,915 | 32,964 | 69,850 | 67,719 | |||||||||
Income from brokerage operations | 17,373 | 15,000 | 16,992 | 32,373 | 32,199 | |||||||||
Income from investment accounts | 7,731 | 7,519 | 8,343 | 15,250 | 16,370 | |||||||||
Income from sales of mutual funds | 10,226 | 8,154 | 7,151 | 18,380 | 13,731 | |||||||||
Insurance income, net | 3,823 | 4,813 | 4,744 | 8,636 | 9,377 | |||||||||
Income from treasury and financial market operations | 6,837 | 6,429 | 2,766 | 13,266 | 7,105 | |||||||||
Other | 2,063 | 1,834 | 5,204 | 3,897 | 6,916 | |||||||||
82,988 | 78,664 | 78,164 | 161,652 | 153,417 | ||||||||||
Total revenue | 220,679 | 218,160 | 216,890 | 438,839 | 432,999 | |||||||||
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration | 1,531 | 1,472 | 5,498 | 3,003 | 6,634 | |||||||||
Provision for loan losses | 8,000 | 10,500 | 10,500 | 18,500 | 21,000 | |||||||||
Non-interest expenses | ||||||||||||||
Salaries and employee benefits | 83,543 | 88,294 | 84,407 | 171,837 | 169,947 | |||||||||
Premises and technology | 48,782 | 48,396 | 45,642 | 97,178 | 91,582 | |||||||||
Other | 26,425 | 24,007 | 25,418 | 50,432 | 49,122 | |||||||||
Costs related to business combinations | — | — | 4,437 | — | 8,386 | |||||||||
158,750 | 160,697 | 159,904 | 319,447 | 319,037 | ||||||||||
Income before income taxes | 52,398 | 45,491 | 40,988 | 97,889 | 86,328 | |||||||||
Income taxes | 11,210 | 9,656 | 9,999 | 20,866 | 19,814 | |||||||||
Net income | $ | 41,188 | $ | 35,835 | $ | 30,989 | $ | 77,023 | $ | 66,514 | ||||
Preferred share dividends, including applicable taxes | 2,398 | 2,399 | 2,501 | 4,797 | 5,002 | |||||||||
Net income available to common shareholders | $ | 38,790 | $ | 33,436 | $ | 28,488 | $ | 72,226 | $ | 61,512 | ||||
Average number of common shares outstanding (in thousands) | ||||||||||||||
Basic | 28,945 | 28,942 | 28,677 | 28,943 | 28,622 | |||||||||
Diluted | 28,952 | 28,950 | 28,684 | 28,951 | 28,630 | |||||||||
Earnings per share | ||||||||||||||
Basic | $ | 1.34 | $ | 1.16 | $ | 0.99 | $ | 2.50 | $ | 2.15 | ||||
Diluted | $ | 1.34 | $ | 1.15 | $ | 0.99 | $ | 2.49 | $ | 2.15 | ||||
Dividends declared per share | ||||||||||||||
Common share | $ | 0.54 | $ | 0.54 | $ | 0.51 | $ | 1.08 | $ | 1.02 | ||||
Preferred share - Series 10 | n.a. | n.a. | $ | 0.33 | n.a. | $ | 0.66 | |||||||
Preferred share - Series 11 | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.50 | $ | 0.50 | ||||
Preferred share - Series 13 | $ | 0.27 | $ | 0.27 | n.a. | $ | 0.54 | n.a. | ||||||
Consolidated Statement of Comprehensive Income
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | ||||||||||||
In thousands of Canadian dollars (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | ||||||||
Net income | $ | 41,188 | $ | 35,835 | $ | 30,989 | $ | 77,023 | $ | 66,514 | |||
Other comprehensive income, net of income taxes | |||||||||||||
Items that may subsequently be reclassified to the statement of income | |||||||||||||
Unrealized net gains (losses) on available-for-sale securities | (1,565) | 343 | 5,941 | (1,222) | 6,699 | ||||||||
Reclassification of net (gains) losses on available-for-sale securities to net income | (798) | (2,622) | (1,236) | (3,420) | (2,297) | ||||||||
Net change in value of derivatives designated as cash flow hedges | (24,071) | 40,065 | (4,965) | 15,994 | (2,419) | ||||||||
(26,434) | 37,786 | (260) | 11,352 | 1,983 | |||||||||
Items that may not be subsequently reclassified to the statement of income | |||||||||||||
Actuarial gains (losses) on employee benefit plans | 1,271 | (2,424) | (2,012) | (1,153) | 3,622 | ||||||||
Comprehensive income | $ | 16,025 | $ | 71,197 | $ | 28,717 | $ | 87,222 | $ | 72,119 | |||
Income Taxes — Other Comprehensive Income
The following table presents the income taxes for each component of other comprehensive income.
FOR THE THREE MONTHS ENDED | FOR THE SIX MONTHS ENDED | |||||||||||
In thousands of Canadian dollars (Unaudited) | APRIL 30 | JANUARY 31 | APRIL 30 | APRIL 30 | APRIL 30 | |||||||
Income tax expense (recovery) on: | ||||||||||||
Unrealized net gains (losses) on available-for-sale securities | $ | (665) | $ | 91 | $ | 2,103 | $ | (574) | $ | 2,346 | ||
Reclassification of net (gains) losses on available-for-sale securities to net income | (370) | (1,040) | (449) | (1,410) | (839) | |||||||
Net change in value of derivatives designated as cash flow hedges | (8,773) | 14,624 | (1,808) | 5,851 | (883) | |||||||
Actuarial gains (losses) on employee benefit plans | 466 | (889) | (738) | (423) | 1,328 | |||||||
$ | (9,342) | $ | 12,786 | $ | (892) | $ | 3,444 | $ | 1,952 | |||
Consolidated Statement of Changes in Shareholders' Equity
FOR THE SIX MONTHS ENDED APRIL 30, 2015 | |||||||||||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME | |||||||||||||||||
In thousands of Canadian dollars (Unaudited) | PREFERRED | COMMON | RETAINED | AVAILABLE- | CASH | TOTAL | SHARE- | TOTAL | |||||||||
Balance as at October 31, 2014 | $ | 219,633 | $ | 465,854 | $ | 848,905 | $ | 13,337 | $ | (3,210) | $ | 10,127 | $ | 91 | $ | 1,544,610 | |
Net income | 77,023 | 77,023 | |||||||||||||||
Other comprehensive income (net of income taxes) | |||||||||||||||||
Unrealized net losses on available-for-sale securities | (1,222) | (1,222) | (1,222) | ||||||||||||||
Reclassification of net gains on available-for-sale securities to net income | (3,420) | (3,420) | (3,420) | ||||||||||||||
Net change in value of derivatives designated as cash flow hedges | 15,994 | 15,994 | 15,994 | ||||||||||||||
Actuarial losses on employee benefit plans | (1,153) | (1,153) | |||||||||||||||
Comprehensive income | 75,870 | (4,642) | 15,994 | 11,352 | 87,222 | ||||||||||||
Issuance of share capital | 72 | 72 | |||||||||||||||
Dividends | |||||||||||||||||
Preferred shares, including | (4,797) | (4,797) | |||||||||||||||
Common shares | (31,260) | (31,260) | |||||||||||||||
Balance as at April 30, 2015 | $ | 219,633 | $ | 465,926 | $ | 888,718 | $ | 8,695 | $ | 12,784 | $ | 21,479 | $ | 91 | $ | 1,595,847 | |
FOR THE SIX MONTHS ENDED APRIL 30, 2014 | |||||||||||||||||
ACCUMULATED OTHER | |||||||||||||||||
In thousands of Canadian dollars | PREFERRED | COMMON | RETAINED | AVAILABLE- | CASH | TOTAL | SHARE- | TOTAL | |||||||||
Balance as at October 31, 2013 | $ | 205,204 | $ | 446,496 | $ | 776,256 | $ | 9,536 | $ | (4,012) | $ | 5,524 | $ | 91 | $ | 1,433,571 | |
Net income | 66,514 | 66,514 | |||||||||||||||
Other comprehensive income | |||||||||||||||||
Unrealized net gains on available-for-sale securities | 6,699 | 6,699 | 6,699 | ||||||||||||||
Reclassification of net gains on available-for-sale securities to net income | (2,297) | (2,297) | (2,297) | ||||||||||||||
Net change in value of derivatives designated as cash flow hedges | (2,419) | (2,419) | (2,419) | ||||||||||||||
Actuarial gains on employee benefit plans | 3,622 | 3,622 | |||||||||||||||
Comprehensive income | 70,136 | 4,402 | (2,419) | 1,983 | 72,119 | ||||||||||||
Issuance of share capital | 122,071 | 9,536 | 131,607 | ||||||||||||||
Dividends | |||||||||||||||||
Preferred shares, including | (5,002) | (5,002) | |||||||||||||||
Common shares | (29,161) | (29,161) | |||||||||||||||
Balance as at April 30, 2014 | $ | 327,275 | $ | 456,032 | $ | 812,229 | $ | 13,938 | $ | (6,431) | $ | 7,507 | $ | 91 | $ | 1,603,134 | |
SOURCE Laurentian Bank of Canada