Laurentian Bank Financial Group reports first quarter 2019 results

François Desjardins, President and Chief Executive Officer, commented on the first quarter of 2019 highlights: “I am pleased to report that we successfully completed Phase 1 of the Core Banking implementation and now all B2B Bank and most of Business Services products are on our new system. We are now building on solid ground.”

M. Desjardins added: “This quarter’s performance was impacted by lower capital market revenue, nonetheless Management remains committed to achieve mid-term targets and ultimately, create long-term value for its shareholders.”

M. Desjardins concluded: “Laurentian Bank Financial Group has never been in a better financial position, in terms of its solid capital and liquidity levels; it continues to have an industry low loan loss provision - a testament to the quality of our underwriting and credit risk management; and even if there is more work to do, it has never been stronger in terms of its processes and technology.”

Highlights of first quarter 2019

• Adjusted net income⁽¹⁾ of $44.7 million, and reported net income of $40.3 million.
• Adjusted return on common shareholders' equity⁽¹⁾ of 7.3%, and reported return on common shareholders' equity of 6.5%.
• Adjusted efficiency ratio⁽¹⁾ of 74.0%, and reported efficiency ratio of 76.2%.
• Strong capital position.
• Prudent liquidity management translating into an estimated $7.0 million annual reduction in net interest income.
• Continued improvement in net interest margin at 1.80%.
• Solid credit quality, with provisions for credit losses at 0.12%.
• Phase 1 of the implementation of our core banking system completed.
• Measures to improve efficiency leading to a reduction of headcount by approximately 10% or 350 employees over the next 12 months. 

MONTREAL, Feb. 27, 2019 (GLOBE NEWSWIRE) -- Laurentian Bank Financial Group reported net income of $40.3 million or $0.88 diluted per share for the first quarter of 2019, compared with net income of $59.7 million or $1.41 diluted per share for the first quarter of 2018. Return on common shareholders' equity was 6.5% for the first quarter of 2019, compared with 10.8% for the first quarter of 2018. On an adjusted basis, net income totalled $44.7 million or $0.98 diluted per share for the first quarter of 2019, down 29% and 34% respectively, compared with $63.2 million or $1.49 diluted per share for the first quarter of 2018. Adjusted return on common shareholders' equity was 7.3% for the first quarter of 2019, compared with 11.5% a year ago. Reported results included adjusting items for the first quarter of 2019 and for the first quarter of 2018, as detailed in the Non-GAAP measures section.

Financial Reporting Changes

The Bank adopted IFRS 9, Financial Instruments (IFRS 9) and IFRS 15, Revenue from Contracts with Customers (IFRS 15) as at November 1, 2018. The adoption of IFRS 9 resulted in a decrease of $7.7 million of shareholders' equity as at November 1, 2018, or a decrease of 4 bps of the CET1 capital ratio. As permitted by IFRS 9, the Bank did not restate comparative amounts for prior periods. The adoption of IFRS 15 had no significant impact on the Bank's Consolidated Financial Statements as at November 1, 2018. For details on these accounting policy changes and on the impact of adoption as at November 1, 2018, refer to Notes 2 and 5 to the Condensed Interim Consolidated Financial Statements.

Non-GAAP measures

Management uses both generally accepted accounting principles (GAAP) and non-GAAP measures to assess the Bank’s performance. Results prepared in accordance with GAAP are referred to as “reported” results. Non-GAAP measures presented throughout this document are referred to as “adjusted” measures and exclude the effect of certain amounts designated as adjusting items. Adjusting items are related to restructuring plans and to business combinations and have been designated as such as management does not believe they are indicative of underlying business performance. Non-GAAP measures are considered useful to readers in obtaining a better understanding of how management analyzes the Bank’s results and in assessing underlying business performance and related trends. 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 issuers.

The following table shows adjusting items and their impact on reported results.

Strategic Plan

As previously mentioned, we are continuing our investments in people, processes and technology. We remain committed to executing our strategic plan and working toward our ultimate goal – to improve the Bank’s performance and achieve a profitability level similar to that of the other Canadian banks in 2022, as we reap benefits from our transformation initiatives. The goal remains to improve performance and to respond to customers' needs in the current economic and technological environment. We are striving to become a different and more relevant organization. As detailed below, changes to how we do banking will also lead to improved efficiency.

Development of growth platforms, including in the inventory and equipment financing area, is already yielding positive results. As we completed Phase 1 of the implementation of our core banking system in January, we are now focusing on the latest development stage of our new digital banking offering. This new offering, expected to be launched in the upcoming months, should improve funding and positively contribute to results. Investments in the AIRB approach continue and will provide significant benefits once completed. We are reinforcing our information technology security capabilities, our business continuity programs and global governance practices to better position the Bank for growth.

As we are fully devoted to these initiatives, we are being prudent in managing the Bank's assets and maintaining depositors' confidence. Our credit quality remains strong. In addition, we are maintaining significantly higher levels of capital and liquid assets, as we are progressing towards our transformation. Gradually redeploying capital should contribute to the resumption of profitable loan growth. Being mindful of the significant investments required to achieve our transformation, we remain committed to improving efficiency.

Core-banking system

During the first quarter of 2019, we migrated the remaining products for B2B Bank and most Business Services loans onto the new platform, marking the conclusion of Phase 1 of the program. As previously mentioned, Phase 2 of the program will encompass all Retail Services accounts and products, as well as the few remaining Business Services products. The target completion date of this phase will be determined once the uncertainty associated with the renewal of the collective bargaining agreement, which expired on December 31, 2017, is clarified. During the transition period, we are running concurrent platforms for our core-banking systems.

Advanced Internal Rating-Based approach to credit risk

We are also progressing on our project to adopt in late 2020, subject to regulatory approval, the AIRB Approach to credit risk used to determine the Bank's regulatory capital requirements. In addition, we continue to improve compliance and regulatory frameworks to better manage risks.

Optimization of Retail Services activities

In the first quarter of 2019, we merged four more branches and continued to monitor the impact of branch mergers on our core client base. The conversion of our retail branches to advice-only branches is expected to progressively be completed by the end of 2019. As we continue to simplify the Bank's retail branch operations, we are progressing toward our goal of becoming a renewed financial institution by 2022. However, the uncertainty associated with the renewal of the collective bargaining agreement may impact the pace at which we will execute this plan. Based on our previous experience, we are confident that these changes will optimize our retail branch network and better position the Bank to provide value-added services to clients.

Efficiency Measures

As part of our strategic initiative to optimize and simplify Retail Services operations, at the end of February, we are reiterating our intention to transform all remaining branches to the advice-only model by the end of the year. In addition, we are streamlining certain back-office functions, mostly related to supporting Retail Services. Overall, these actions are expected to reduce headcount by approximately 10% or 350 employees through attrition, early retirement and targeted job reductions over the next 12 months. On an ongoing basis, we expect this will generate cost savings to improve our efficiency.

Consolidated Results

Three months ended January 31, 2019 financial performance

Net income was $40.3 million or $0.88 diluted per share for the first quarter of 2019, compared with $59.7 million or $1.41 diluted per share for the first quarter of 2018. Adjusted net income was $44.7 million for the first quarter of 2019, down 29% from $63.2 million for the first quarter of 2018, while adjusted diluted earnings per share were $0.98, down 34% compared with $1.49 for the first quarter of 2018. The decrease in earnings per share, compared with the first quarter of 2018, is further detailed below and also reflects the full-quarter effect of the common share issuance completed at the beginning of fiscal 2018 to strengthen capital.

Total revenue

Total revenue decreased by $24.7 million or 9% to $242.3 million for the first quarter of 2019 from $267.0 million for the first quarter of 2018.

Net interest income decreased by $6.0 million or 3% to $172.6 million for the first quarter of 2019, from $178.6 million for the first quarter of 2018. The decrease was due to lower year-over-year loan volumes and to higher funding costs, partly offset by higher margins on loans to business customers as a result of changes in the portfolio mix. As mentioned above, we are maintaining a higher level of liquid assets to support our transformation plan. We estimate that this currently translates into additional interest costs of approximately $1.5 million quarterly.This prudent liquidity management is translating into an estimated $7.0 million annual reduction in net interest income. Furthermore, we have gradually increased the duration of our deposit portfolio to further strengthen the Bank. Net interest margin stood at 1.80% for the first quarter of 2019, an increase of 3 basis points compared with the first quarter of 2018, essentially as a result of the higher proportion of higher-yielding loans to business customers.

Other income decreased by $18.6 million or 21% to $69.7 million for the first quarter of 2019, compared with $88.4 million for the first quarter of 2018. Fees and commissions on brokerage operations decreased by $3.6 million compared with the first quarter of 2018, mostly as a result of a lower activity level given poor market conditions at the outset of the year. Looking forward, the pipeline remains strong and we expect revenues to increase when market conditions become more favorable. Other market related revenues, including securities gains and income from treasury and financial market operations, were also affected and decreased by a combined $7.3 million compared with the first quarter of 2018. This decline was mostly driven by lower gains on inventory held for brokerage activities, as well as by lower gains on treasury portfolios. Fees and commissions on loans and deposits decreased by $4.4 million compared with the first quarter of 2018, mainly driven by lower deposit and payment service charges as clients gradually modify their banking behavior.

Amortization of net premium on purchased financial instruments

For the first quarter of 2019, amortization of net premium on purchased financial instruments amounted to $0.4 million, compared with $0.7 million for the first quarter of 2018. Refer to Note 3.3 to the 2018 annual consolidated financial statements for additional information.

Provision for credit losses

The provision for credit losses amounted to $10.5 million for the first quarter of 2019 compared with $12.0 million for the first quarter of 2018. During the quarter, the Bank continued to benefit from the ongoing favorable economic conditions, as well as from the overall underlying good credit quality of the loan portfolios.

Non-interest expenses

Non-interest expenses amounted to $184.7 million for the first quarter of 2019, an increase of $7.1 million compared with the first quarter of 2018. Adjusted non-interest expenses increased by 4% to $179.2 million for the first quarter of 2019, compared with $173.0 million for the first quarter of 2018.

Salaries and employee benefits decreased by $1.6 million or 2% to $92.1 million for the first quarter of 2019, compared with the first quarter of 2018, mainly due to lower pension costs and lower performance-based compensation.

Premises and technology costs increased by $1.7 million or 4% to $49.0 million for the first quarter of 2019 compared with the first quarter of 2018, mainly as a result of higher technology costs incurred to run concurrent core-banking platforms, as well as to enhance IT service levels and security on an ongoing basis. Higher amortization expense for the completed Phase 1 of the core-banking system program also contributed to the increase. This was partly offset by lower rent expenses following the move to the new corporate office in Montreal in the fourth quarter of 2018.

Other non-interest expenses amounted to $41.5 million for the first quarter of 2019, an increase of $6.5 million or 18% compared with the first quarter of 2018. This increase was mainly due to higher regulatory expenses, including year-over-year increases in deposit insurance costs and other costs related to various compliance and regulatory risk-related projects. Higher professional fees and labour relation costs related to the renegotiation of the expired collective bargaining agreement also contributed to the increase year-over-year.

Restructuring charges amounted to $2.0 million for the first quarter of 2019 and mainly included expenses for the optimization of the Retail Services operations and for the reorganization of retail brokerage activities completed during the first quarter of 2019.

Costs related to business combinations were nil for the first quarter of 2019 as the integration of the equipment financing operations acquired in 2016 was substantially completed in the second quarter of 2018.

Efficiency ratio
The adjusted efficiency ratio was 74.0% for the first quarter of 2019, compared with 64.8% for the first quarter of 2018. This results in part from lower revenues, including lower market-driven income, and from higher non-interest expenses. As the Bank invests in its transformation, this ratio is currently impacted by the higher level of expenses. Therefore, as previously mentioned, this ratio is expected to remain high over the next few quarters. Operating dual core-banking platforms, managing matters related to the expired collective bargaining agreement and implementing new regulatory requirements such as the IFRS guidelines, anti-money laundering and regulatory risk-related projects are necessitating additional expenditures. The adjusted operating leverage was also negative year-over-year. We are still targeting an efficiency ratio of below 63% in 2021, and are continuing to aim for positive operating leverage.

The efficiency ratio, on a reported basis, was 76.2% for the first quarter of 2019, compared with 66.5% for the first quarter of 2018, essentially for the same reasons as noted above. 

Income taxes

For the quarter ended January 31, 2019, the income tax expense was $6.5 million and the effective tax rate was 13.8%. The lower tax rate, compared to the statutory rate, mainly resulted from lower taxation level on revenues from foreign operations, as well as from the favourable effect of holding investments in Canadian securities that generate non-taxable dividend income. For the quarter ended January 31, 2018, the income tax expense was $17.1 million and the effective tax rate was 22.2%. The lower tax rate, compared to the statutory rate, resulted from the same items as mentioned above. On December 22, 2017, the U.S. government enacted new comprehensive tax legislation, which made significant changes to the U.S. tax code. The enacted reduction of the U.S. corporate tax rate had resulted in a decrease of $0.5 million of the Bank's U.S. net deferred tax assets and an equivalent one-time charge to the income statement during the first quarter of 2018. We continue to evaluate the impact of these new tax measures on our U.S. operations. The lower tax rate for the first quarter of 2019, when compared to the first quarter of 2018, mainly resulted from the proportionally lower domestic revenue, and from the aforementioned one-time charge in 2018.

Financial Condition

As at January 31, 2019, total assets amounted to $45.1 billion, a decrease of $0.8 billion compared with $45.9 billion as at October 31, 2018. This mainly reflects a decrease in liquid assets of $0.4 billion, a decrease in loans of $0.3 billion, as well as a decrease in other assets of $0.1 billion, as explained below.

Liquid assets

Liquid assets consist of cash, deposits with other banks, securities and securities purchased under reverse repurchase agreements. As at January 31, 2019, these assets totalled $9.8 billion, a decrease of $0.4 billion compared with October 31, 2018. Overall, we continue to prudently manage the level of liquid assets as we are progressing on our various initiatives. The Bank benefits from well diversified funding sources and the current level of cash resources is sufficient to meet obligations, under both normal and stressed conditions.

Loans

Loans and bankers' acceptances, net of allowances, stood at $34.0 billion as at January 31, 2019, a decrease of $0.3 billion since October 31, 2018. The decrease reflects the continued optimization of our portfolio mix in order to better position the Bank, and is further explained by the items outlined below.

Personal loans amounted to $5.2 billion and decreased by $0.2 billion since October 31, 2018, mainly as a result of the continued reduction in the investment loan portfolio, reflecting the ongoing consumer behaviour to reduce leverage.

Residential mortgage loans stood at $16.6 billion as at January 31, 2019, a decrease of $0.4 billion since October 31, 2018. This mostly reflects a gradual decrease in origination as we focus on higher yielding commercial loans in order to optimize product mix. The decrease was partly offset by the acquisition of mortgage loans originated by third-parties as part of our program to optimize the usage of National Housing Act mortgage-backed securities (NHA MBS) allocations. 

Commercial loans and acceptances amounted to $12.3 billion as at January 31, 2019. In the first quarter of 2019, we generated growth of approximately $381 million or 3 % excluding loan sales, mainly due to inventory financing volumes through NCF and in real estate financing loans. As previously mentioned, we sold lower-yielding commercial loans amounting to $105 million at the beginning of the year, which concluded the realignment of our commercial loan portfolio. As a result, the commercial loan portfolio increased by 2% net of loan sales since October 31, 2018.

Other assets

Other assets decreased by $0.1 billion as at January 31, 2019, compared with October 31, 2018, primarily reflecting a decrease in cheques and other items in transit.

Liabilities

Deposits increased by $0.2 billion to $28.2 billion as at January 31, 2019, compared with October 31, 2018. Personal deposits stood at $21.4 billion as at January 31, 2019, up $0.4 billion compared with October 31, 2018, driven by higher term deposits sourced through both independent brokers and advisors and through the branch network. Business and other deposits decreased by $0.2 billion to $6.8 billion since the beginning of the year, mainly as we optimized our funding and in light of the reduction in total assets. Personal deposits represented 76% of total deposits as at January 31, 2019, compared with 75% as at October 31, 2018, and contribute to our solid liquidity position.

Debt related to securitization activities decreased by $0.4 billion compared with October 31, 2018 and stood at $7.3 billion as at January 31, 2019. The decrease mostly stems from maturities of liabilities related to the Canada Mortgage Bond program, as well as normal repayments, and as new insured loan originations have decreased following regulatory changes implemented since 2017.

Shareholders’ equity and regulatory capital

Shareholders' equity stood at $2,510.4 million as at January 31, 2019, compared with $2,496.2 million as at October 31, 2018. As mentioned in the Financial Reporting Changes section, the adoption of IFRS 9 resulted in a decrease of $7.7 million of shareholders' equity as at November 1, 2018. This was offset by an increase in shareholder's equity as a result of the net income contribution, net of declared dividends, an increase in AOCI, as well as by the issuance of common shares under the Shareholder Dividend Reinvestment and Share Purchase plan. For additional information, please refer to the Consolidated Statement of Changes in Shareholders' Equity.

Our book value per common share was $53.41 as at January 31, 2019 compared with $53.72 as at October 31, 2018. There were 42,190,040 common shares outstanding as at February 20, 2019.

The CET1 capital ratio stood at 8.9% as at January 31, 2019, compared with 9.0% as at October 31, 2018. As mentioned above, the adoption of IFRS 9 resulted in a decrease of 4 bps of the CET1 capital ratio as at November 1, 2018. During the quarter, we also continued to manage asset growth tightly to balance the product mix profitability maximization and the related risk-weighted exposures to maintain strong capital ratios.

Risk Management

Risk related to labour relations

Approximately 32% of our employees are represented by a union and are covered by a collective bargaining agreement which expired on December 31, 2017. The majority of these employees work in Laurentian Bank branches in the Province of Quebec, and certain of them are employed in Corporate Offices in Montreal. Renegotiating the expired collective bargaining agreement could result in higher costs which could have a material effect on our business, results of operations and financial condition. In addition, should we be unable to reach an acceptable negotiated collective bargaining agreement on a timely basis, a strike by affected employees, lock-out or other work disruption may occur which could adversely affect services to our Retail Services clients and operations and, in turn, financial performance.

Caution Regarding Forward-Looking Statements

In this document and in other documents filed with Canadian regulatory authorities or in other communications, we 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 our business plan and financial objectives including statements contained in our 2018 Annual Report under the heading “Outlook”. The forward-looking statements contained in this document are used to assist readers in obtaining a better understanding of our 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 prospect, 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 we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurances that these expectations will prove to be correct. Certain important assumptions by us in making forward-looking statements include, but are not limited to, our estimates and statements regarding our business plan and financial objectives including statements contained in our 2018 Annual Report under the heading “Outlook”. 

We caution 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, developments with respect to labour relations, as well as developments in the technological environment. Furthermore, these factors include the ability to execute our plan and in particular the successful reorganization of retail branches, the modernization of the core banking system and the adoption of the Advanced Internal Ratings-Based approach to credit risk (the AIRB approach).

We further caution that the foregoing list of factors is not exhaustive. For more information on the risks, uncertainties and assumptions that would cause our actual results to differ from current expectations, please also refer to the “Risk Appetite and Risk Management Framework” section of our 2018 Annual Report, as well as to other public filings available at www.sedar.com. 

We do not undertake to update any forward-looking statements, whether oral or written, made by us or on our behalf, except to the extent required by securities regulations.

Access to Quarterly Results Materials

Interested investors, the media and others may review this press release on our website at www.lbcfg.ca, under the Press Room tab, and our report to shareholders, presentation to investors and supplementary financial information under the Investor Centre tab, Financial Results.

Conference Call

Laurentian Bank Financial Group invites media representatives and the public to listen to the conference call to be held at 9:00 a.m. Eastern Time on February 27, 2019. The live, listen-only, toll-free, call-in number is 1-800-263-0877, code 5685882. A live webcast will also be available on the Group’s website under the Investor Centre tab, Financial Results.

The conference call playback will be available on a delayed basis at any time from 12:00 p.m. on February 27, 2019 until 12:00 p.m. on March 29, 2019, on our website under the Investor Centre tab, Financial Results.

The presentation material referenced during the call will be available on our website under the Investor Centre tab, Financial Results.

Contact Information

Investor Relations                                                               

Susan Cohen
Director, Investor Relations
Office: 514 284-4500, ext. 40452
Mobile: 514 970-0564
susan.cohen@lbcfg.ca 

Media

Hélène Soulard
Assistant Vice-President, Communications
Office: 514 284-4500, ext. 40015
Mobile: 514 926-3295
helene.soulard@lbcfg.ca 

About Laurentian Bank Financial Group

Founded in 1846, Laurentian Bank Financial Group is a diversified financial services provider whose mission is to help its customers improve their financial health. The Laurentian Bank of Canada and its entities are collectively referred as Laurentian Bank Financial Group (the “Group” or the “Bank”).

With more than 3,500 employees guided by the values of proximity, simplicity and honesty, the Group provides a broad range of advice-based solutions and services to its retail, business and institutional customers. With pan-Canadian activities and a presence in the U.S., the Group is an important player in numerous market segments.

The Group has $45 billion in balance sheet assets and $29 billion in assets under administration.