Laurentian Bank reports second quarter results

PR Newswire

Highlights of the second quarter of 2014

  • Financial highlights on a reported and adjusted basis for the second quarter of 2014:
    • Net income of $31.0 million
    • Return on common shareholders' equity of 9.2%
    • Diluted earnings per share of $0.99

    • Adjusted net income of $39.4 million
    • Adjusted return on common shareholders' equity of 11.9%
    • Adjusted diluted earnings per share of $1.29
  • Commercial loan portfolio up 18% year-over-year
  • Strong credit performance, with loan losses at $10.5 million
  • Positive adjusted operating leverage
  • Non tax-deductible charge of $4.1 million, impacting reported net income, as a result of the final settlement with AGF Management Limited of the contingent consideration related to the AGF Trust acquisition
  • Successful issuance of $125.0 million Basel III-compliant Preferred Shares Series 13
  • Quarterly common share dividend raised by $0.01 to $0.52 per share

MONTREAL, June 4, 2014 /CNW Telbec/ - Laurentian Bank of Canada reported adjusted net income of $39.4 million or $1.29 diluted per share for the second quarter of 2014, compared with $39.2 million or $1.24 diluted per share for the same period in 2013. Adjusted return on common shareholders' equity was 11.9% for the second quarter of 2014, compared with 12.2% for the same period in 2013. When including adjusting items 1 , net income totalled $31.0 million or $0.99 diluted per share for the second quarter of 2014, compared with $33.8 million or $1.05 diluted per share for the second quarter of 2013. Return on common shareholders' equity was 9.2% for the second quarter of 2014, compared with 10.4% for the same period in 2013.

For the six months ended April 30, 2014, adjusted net income totalled $78.6 million or $2.57 diluted per share, compared with $78.4 million or $2.54 diluted per share in 2013. Adjusted return on common shareholders' equity was 11.8% for the six months ended April 30, 2014, compared with 12.4% for the same period in 2013. When including adjusting items, net income was $66.5 million or $2.15 diluted per share for the six months ended April 30, 2014, compared with $66.6 million or $2.13 diluted per share for the same period in 2013. Return on common shareholders' equity was 9.8% for the six months ended April 30, 2014, compared with 10.4% for the same period in 2013.

Commenting on the Bank's financial results for the second quarter of 2014, Réjean Robitaille, President and Chief Executive Officer, mentioned: "We delivered solid core earnings in the quarter, as we continued our targeted efforts to improve efficiency, maximize operating leverage, and deliver the synergies related to our acquired businesses. The sustained credit quality of the loan portfolio and rigorous control over expenses contributed to the good performance for the quarter. In an environment of consumer deleveraging and compressed margins, we maintain our focus on further developing our higher-margin commercial activities and growing income from non-interest sensitive sources in order to foster profitable revenue growth."

Mr. Robitaille added: "I am pleased with the issuance of $125.0 million of Basel III compliant preferred shares which, combined with the expected redemption of $110.0 million of Series 10 preferred shares, strengthens our capital structure and helps to sustain our growth strategies."

Mr. Robitaille concluded: "As we move forward, we remain committed to enhancing value for our shareholders and we are working diligently to generate sustained earnings growth in each of our business segments. I am therefore pleased to announce that the Board of Directors has approved an increase in our quarterly common share dividend of $0.01 to $0.52 per share"

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


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 capital market activity, changes in government monetary, fiscal and economic policies, changes in interest rates, inflation levels and general economic conditions, legislative and regulatory developments, competition, credit ratings, scarcity of human resources and 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 under the title "Risk Appetite and Risk Management Framework" and other public filings available at www.sedar.com .

With respect to the anticipated benefits from the acquisition AGF Trust Company 1 (AGF Trust) and the Bank's statements with regards to this transaction being accretive to earnings, such factors also include, but are not limited to: the fact that synergies may not be realized in the time frame anticipated; the ability to promptly and effectively integrate the businesses; reputational risks and the reaction of B2B Bank's or AGF Trust's customers to the transaction; and diversion of management time on acquisition-related issues.

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.

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1 AGF Trust was amalgamated with B2B Bank as of September 1, 2013.


Highlights [1]

  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except per
share and percentage amounts (Unaudited)
APRIL 30
2014
  JANUARY 31
2014
  VARIANCE   APRIL 30
2013
  VARIANCE   APRIL 30
2014
  APRIL 30
2013
  VARIANCE
                                               
Profitability                                              
  Total revenue $ 216,890     $ 216,109     %   $ 214,850     1 %   $ 432,999     $ 428,764     1 %
  Net income $ 30,989     $ 35,525     (13) %   $ 33,839     (8) %   $ 66,514     $ 66,627     %
  Diluted earnings per share $ 0.99     $ 1.16     (15) %   $ 1.05     (6) %   $ 2.15     $ 2.13     1 %
  Return on common shareholders' equity [2] 9.2 %   10.5 %         10.4 %         9.8 %   10.4 %      
  Net interest margin [2] 1.68 %   1.66 %         1.68 %         1.67 %   1.66 %      
  Efficiency ratio [2] 73.7 %   73.6 %         75.2 %         73.7 %   75.7 %      
  Operating leverage [2] [3] (0.1) %   8.1 %         1.3 %         2.8 %   n. m.      
                                               
Per common share                                              
  Share price                                              
    High $ 47.54     $ 47.96           $ 45.41           $ 47.96     $ 45.97        
    Low $ 45.00     $ 44.34           $ 42.57           $ 44.34     $ 42.57        
    Close $ 47.08     $ 45.73     3 %   $ 44.21     6 %   $ 47.08     $ 44.21     6 %
  Price / earnings ratio (trailing four quarters) [4] 12.3 x   11.8 x         n. m.         12.3 x   n. m.      
  Book value [2] $ 44.61     $ 44.03     1 %   $ 41.75     7 %   $ 44.61     $ 41.75     7 %
  Market to book value 106 %   104 %         106 %         106 %   106 %      
  Dividends declared $ 0.51     $ 0.51     %   $ 0.49     4 %   $ 1.02     $ 0.98     4 %
  Dividend yield [2] 4.3 %   4.5 %         4.4 %         4.3 %   4.4 %      
  Dividend payout ratio [2] 51.3 %   44.1 %         46.5 %         47.4 %   46.0 %      
                                               
Adjusted financial measures                                              
  Adjusted net income [2] $ 39,375     $ 39,261     %   $ 39,247     %   $ 78,636     $ 78,363     %
  Adjusted diluted earnings per share [2] $ 1.29     $ 1.29     %   $ 1.24     4 %   $ 2.57     $ 2.54     1 %
  Adjusted return on common shareholders' equity [2] 11.9 %   11.7 %         12.2 %         11.8 %   12.4 %      
  Adjusted efficiency ratio [2] 71.7 %   71.8 %         72.4 %         71.7 %   72.5 %      
  Adjusted operating leverage [2] [3] 0.2 %   4.9 %         0.5 %         1.1 %   n. m.      
  Adjusted dividend payout ratio [2] 39.6 %   39.6 %         39.3 %         39.6 %   38.5 %      
                                               
Financial position (in millions of Canadian dollars)                                              
  Balance sheet assets $ 34,261     $ 33,631     2 %   $ 34,480     (1) %                  
  Loans and acceptances $ 27,233     $ 27,092     1 %   $ 27,035     1 %                  
  Deposits $ 23,759     $ 23,804     %   $ 23,809     %                  
                                               
Basel III regulatory capital ratios All-in basis [5]                                              
  Common Equity Tier I 7.6 %   7.6 %         7.6 %                        
  Tier 1 10.0 %   9.1 %         9.1 %                        
  Total 13.3 %   12.4 %         12.6 %                        
                                               
Other information                                              
  Number of full-time equivalent employees 3,764     3,850           4,254                          
  Number of branches 153     153           154                          
  Number of automated banking machines 423     422           423                          
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits . Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] Refer to the non-GAAP financial measures section. Effective November 1, 2013, the Bank has modified its definition of common shareholders' equity, which is now better aligned with regulatory requirements. Book value per common share and return on common shareholders' equity measures for the quarters ended in 2013 have been amended accordingly.
[3] Quarterly growth rates are calculated sequentially. Operating leverage for the six months ended April 30, 2013 is not meaningful as 2012 results were not restated to reflect the adoption of amendments to IAS 19, Employee Benefits .
[4] Price / earnings ratios for the three months and six months ended April 30, 2013 are not meaningful as 2012 results were not restated to reflect the adoption of amendments to IAS 19, Employee Benefits .
[5] Regulatory capital ratios for 2013 are presented as filed with OSFI and have not been adjusted to include the impact of the adoption of amendments to IAS 19, Employee Benefits .


Review of Business Highlights

Personal & Commercial Business services generated strong growth during the quarter. In particular, the commercial loan portfolio grew 18% year-over-year, approaching the $3.0 billion mark. The strategy of specialization is contributing to these excellent results. Recently hired account managers are becoming increasingly productive and delivering added value to clients. With respect to leasing and equipment financing, solid teams, systems and processes are now in place. The offer is being well received in the market and a strong pipeline is being built. The Business Services segment continues to be well positioned as one of the Bank's engines of growth. Retail activities are benefitting from ongoing investments to improve the Bank's website. Thanks to significant enhancements made to the platform, the number of LBC Direct users has increased by 30% over the past six months. The Bank is committed to enhancing its internet offering to ensure that client needs, expectations and preferences are met.

B2B Bank added two new mortgage programs to its offering for mortgage brokers and their clients towards the end of the quarter, presenting one of the most comprehensive product lines in the industry. Along with insured and conventional mortgages, B2B Bank offers alternative and expanded mortgage solutions designed for borrowers who, due to their employment status or credit history, may not qualify for insured or conventional mortgage loans. This is yet another step to strengthen B2B Bank's position as a leader in serving financial advisors and brokers in Canada. Furthermore, the Bank reached a final settlement with AGF Management of the contingent consideration related to the AGF Trust acquisition for $10.0 million.

Laurentian Bank Securities hosted its first Annual Equity Small Cap Conference in April. The event was very well received, with 35 corporate issuers presenting and almost 200 institutional investors from across Canada in attendance. This success underscores the expertise and reputation of the LBS Institutional Equity team and validates their strategic focus on the small cap market niche. This group is well positioned to further leverage their small cap capability.

Supporting all of the Bank's activities is a solid capital base. During the quarter, $125.0 million of preferred shares, Series 13, yielding 4.3% annually, was issued. Subsequent to quarter-end, it was announced that the $110.0 million preferred share issue, Series 10, yielding 5.3% annually, will be redeemed on June 15, 2014. The Bank's proactive approach to capital management ensures the optimization of capital and will contribute to lower overall funding costs.

The Bank released its Social Responsibility Report for fiscal 2013 in March 2014. As a responsible corporate citizen, the Bank carefully considers all of its stakeholders in the development of strategies and implementation of business decisions. Paying  particular attention to its governance, whether it be the composition and diversity of the Board of Directors, managing relationships with its shareholders and financial markets, its human resource programs for officers and employees or its community involvement, the Bank ensures that its practices are effective and equitable for shareholders, customers, employees and partners 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, 2014, and of how it performed during the three-month and six-month periods then ended. This MD&A, dated June 4, 2014, should be read in conjunction with the unaudited condensed interim consolidated financial statements for the period ended April 30, 2014, 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 2013 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 .

Adoption of the amended IFRS accounting standard on employee benefits

Effective November 1, 2013, the Bank adopted the amendments to the employee benefits standard under International Financial Reporting Standards (IFRS), which required restatement of the Bank's 2013 comparative information and financial measures. Additional information on the impact of the adoption is available in the notes to the unaudited condensed interim consolidated financial statements and in the Supplementary Information reported for the second quarter of 2014.

Economic Outlook

North American economic growth resumed this spring. Prospects, particularly in the United States, are bright as US companies, consumers, workers and governments are all showing more confidence. Accordingly, the Federal Reserve has continued to reduce its stimulus asset purchase program and has begun to shift its focus on the near zero policy rate. However, as inflation remains low, interest rates are expected to increase only in the second half of 2015.

In Canada, the goods sector is better positioned to benefit from improving US demand and a lower currency. The services sector growth, driven to a larger extent by domestic demand, should however remain more modest. All-in, economic activity should continue to advance at a modest pace, around 2 %, for the remainder of 2014. Furthermore, inflation is expected to rise only moderately from its early 2014 trough. This should provide the Bank of Canada with the needed flexibility to postpone any increase to its rate policy until the end of 2015 at the earliest  and, in any case, not before a Federal Reserve increase. The ensuing moderate increase in interest rates should not exert undue pressure on households and housing affordability and favour a soft landing in the Canadian housing sector.

2014 Financial Performance

The following table presents management's financial objectives for 2014 and the Bank's performance to date. These financial objectives are based on the assumptions noted on page 21 of the Bank's 2013 Annual Report under the title "Key assumptions supporting the Bank's objectives" and exclude adjusting items 1 .

2014 FINANCIAL OBJECTIVES [1]        
  2014 OBJECTIVES   FOR THE SIX MONTHS ENDED
APRIL 30, 2014
 
         
Adjusted return on common shareholders' equity 10.5% to 12.5%   11.8 %
Adjusted net income (in millions of dollars) $145.0 to $165.0   $78.6  
Adjusted efficiency ratio 72.5% to 69.5%   71.7 %
Adjusted operating leverage [2] Positive   1.1 %
Common Equity Tier I capital ratio All-in basis > 7.0%   7.6 %
[1] Refer to the non-GAAP financial measures section.
[2] For the purpose of calculating 2014 financial objectives, year-to-date growth rates are calculated year-over-year (i.e. current period versus the corresponding prior year period).


Based on the results for the six months ended April 30, 2014 and current forecasts, management believes that the Bank is in line to meet its objectives as set out at the beginning of the year. Good organic growth in the higher-margin commercial businesses, strategies to diversify other income, a disciplined management of expenses and strong credit quality are expected to remain the key drivers of the Bank's overall financial performance for the year.

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


Analysis of Consolidated Results

CONDENSED CONSOLIDATED RESULTS [1]                            
  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except per share amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Net interest income $ 138,726     $ 140,856     $ 140,430     $ 279,582     $ 282,774  
Other income 78,164     75,253     74,420     153,417     145,990  
Total revenue 216,890     216,109     214,850     432,999     428,764  
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration 5,498     1,136     1,224     6,634     2,280  
Provision for loan losses 10,500     10,500     9,000     21,000     17,000  
Non-interest expenses 159,904     159,133     161,630     319,037     324,723  
Income before income taxes 40,988     45,340     42,996     86,328     84,761  
Income taxes 9,999     9,815     9,157     19,814     18,134  
Net income $ 30,989     $ 35,525     $ 33,839     $ 66,514     $ 66,627  
Preferred share dividends, including applicable taxes 2,501     2,501     4,059     $ 5,002     $ 6,592  
Net income available to common shareholders $ 28,488     $ 33,024     $ 29,780     $ 61,512     $ 60,035  
                             
Diluted earnings per share $ 0.99     $ 1.16     $ 1.05     $ 2.15     $ 2.13  
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits . Refer to Note 2 in the unaudited condensed interim consolidated financial statements.


Adjusting items

The Bank has designated certain amounts as adjusting items and presents adjusted GAAP results to facilitate understanding of its underlying business performance and related trends. Adjusting items are included in the B2B Bank business segment's results. The Bank assesses performance on a GAAP basis and on an adjusted basis and considers both 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. 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] [2]                            
  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except per share amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Impact on net income                            
Reported net income $ 30,989     $ 35,525     $ 33,839     $ 66,514     $ 66,627  
Adjusting items, net of income taxes                            
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration                            
  Amortization of net premium on purchased financial instruments 1,026     836     902     1,862     1,680  
  Revaluation of contingent consideration 4,100             4,100      
Costs related to business combinations [3]                            
  MRS Companies integration related costs     474     1,332     474     5,650  
  AGF Trust integration related costs 3,260     2,426     3,174     5,686     4,406  
  8,386     3,736     5,408     12,122     11,736  
Adjusted net income $ 39,375     $ 39,261     $ 39,247     $ 78,636     $ 78,363  
                             
Impact on diluted earnings per share                            
Reported diluted earnings per share $ 0.99     $ 1.16     $ 1.05     $ 2.15     $ 2.13  
Adjusting items 0.29     0.13     0.19     0.42     0.42  
Adjusted diluted earnings per share [4] $ 1.29     $ 1.29     $ 1.24     $ 2.57     $ 2.54  
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits . Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] Refer to the Non-GAAP Financial Measures section.
[3] Also referred to as Transaction and Integration Costs (T&I Costs).
[4] The impact of adjusting items on a per share basis does not add due to rounding for the three months ended April 30, 2014 and six months ended April 30, 2013.


Three months ended April 30, 2014 compared with the three months ended April 30, 2013

Net income was $31.0 million or $0.99 diluted per share for the second quarter of 2014, compared with $33.8 million or $1.05 diluted per share for the second quarter of 2013.

Adjusted net income was $39.4 million for the second quarter ended April 30, 2014, up marginally from $39.2 million for the same quarter of 2013, while adjusted diluted earnings per share was $1.29, compared with $1.24 diluted per share in 2013. The calculation of diluted earnings per share in the second quarter of 2013 included a final $1.5 million dividend on the Series 9 preferred shares redeemed in March 2013.

Total revenue

Total revenue increased by $2.0 million or 1% to $216.9 million in the second quarter of 2014, compared with $214.9 million in the second quarter of 2013, as 5% year-over-year growth in other income was partly offset by slightly lower net interest income.

Net interest income decreased by $1.7 million to $138.7 million for the second quarter of 2014, from $140.4 million in the second quarter of 2013. In the second quarter of 2014, the revenue impact of a lower level of personal loans was partially offset by interest recoveries resulting from favourable settlements in the commercial loan portfolio. Overall, margins were unchanged at 1.68% in the quarter, as the unfavourable repricing of maturing loans and deposits in the very low interest rate environment over the last twelve months was offset by the higher interest recoveries mentioned above and a better asset mix.

Other income increased by $3.7 million or 5% and amounted to $78.2 million in the second quarter of 2014, compared with $74.4 million in the second quarter of 2013. Higher income from brokerage operations, particularly in the small-cap equity markets, as well as continued solid mutual fund commissions mainly contributed to the year-over-year increase. These strong results were partly offset by lower income from treasury and financial market operations, mainly due to lower income from trading activities. Furthermore, consistent with its syndication strategy, the Bank completed the sale of $102.4 million of commercial mortgage loans during the second quarter of 2014. This led to the recognition of a $3.7 million gain in other income, including $1.2 million reported in the Personal & Commercial business segment results and $2.5 million in the Other sector. In a similar transaction, a $3.7 million gain on sale of a $94.7 million commercial mortgage loan portfolio had been recorded during the second quarter of 2013.

Amortization of net premium on purchased financial instruments and revaluation of contingent consideration

For the second quarter of 2014, the line-item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" amounted to $5.5 million, compared with $1.2 million in the second quarter of 2013. Results for the second quarter of 2014 include an additional $4.1 million non tax-deductible charge to reflect the impact of an agreement reached on May 30, 2014 with AGF Management Limited to settle the $20.0 million maximum contingent consideration, which was based on the credit performance of the acquired AGF Trust loan portfolio, for a lower total amount of $10.0 million. This amount will represent the final payment for the purchase of AGF Trust. The amortization of net premium on purchased financial instruments amounted to $1.4 million in the second quarter of 2014, essentially unchanged from the second quarter of 2013. Refer to Note 13 to the unaudited condensed interim consolidated financial statements.

Provision for loan losses

The provision for loan losses increased by $1.5 million to $10.5 million in the second quarter of 2014 from $9.0 million in the second quarter of 2013 as the Bank maintained its prudent approach to loan loss provisioning. Nonetheless, loan losses remained at a low level reflecting the overall underlying quality of the loan portfolios. Refer to the Risk Management section for additional information.

Non-interest expenses

Non-interest expenses decreased by $1.7 million to $159.9 million for the second quarter of 2014, compared with $161.6 million for the second quarter of 2013, mainly reflecting lower T&I Costs. The Bank's other non-interest expenses were held unchanged through tight cost control, acquisition synergies and process reviews.

Salaries and employee benefits decreased by $2.6 million or 3% to $84.4 million for the second quarter of 2014, compared with the second quarter of 2013, mainly due to lower headcount from acquisition synergies over the last twelve months and the optimization of certain activities in the fourth quarter of 2013. Regular salary increases, higher performance-based compensation and slightly higher expenses related to group insurance programs partly offset this decrease year-over-year.

Premises and technology costs increased by $3.0 million to $45.6 million compared with the second quarter of 2013. The increase mostly stems from higher IT costs related to ongoing business growth, regulatory requirements and enhanced on-line services. Higher amortization expenses related to completed regulatory IT projects and rental costs for IT development teams also contributed to the increase.

Other non-interest expenses decreased by $0.5 million to $25.4 million for the second quarter of 2014, compared with the second quarter of 2013. The decrease mainly reflects cost synergies in B2B Bank as well as the continued disciplined control over discretionary expenses throughout the Bank in light of a slower growth environment.

T&I Costs for the second quarter of 2014 totalled $4.4 million compared with $6.1 million a year ago, and mainly related to IT systems conversion costs, salaries, professional fees and other expenses as integration activities of AGF Trust operations are winding down.

The adjusted efficiency ratio was 71.7% in the second quarter of 2014, compared with 72.4% in the second quarter of 2013, mainly due to higher other income, integration synergies, continued rigorous cost control and efforts to streamline operations. The Bank continues to invest in strategic initiatives to ensure growth and efficiency in each of its business segments.

Income taxes

For the quarter ended April 30, 2014, the income tax expense was $10.0 million and the effective tax rate was 24.4%. 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, 2013, the income tax expense was $9.2 million and the effective tax rate was 21.3%. Year-over-year, the higher effective tax rate for the quarter ended April 30, 2014 resulted from a $4.1 million non tax-deductible charge recorded as a result of the final settlement of the contingent consideration related to the AGF Trust acquisition. On an adjusted basis, the effective tax rate was 22.7% for the second quarter of 2014 compared with 22.1% for the second quarter of 2013.

Six months ended April 30, 2014 compared with the six months ended April 30, 2013

Net income was $66.5 million or $2.15 diluted per share for the six months ended April 30, 2014, compared with $66.6 million or $2.13 diluted per share for the six months ended April 30, 2013. Adjusted net income was $78.6 million for the six months ended April 30, 2014, essentially unchanged compared with $78.4 million in 2013, while adjusted diluted earnings per share was $2.57, compared with $2.54 diluted per share in 2013.

Total revenue

Total revenue increased by $4.2 million or 1% to $433.0 million in the six months ended April 30, 2014, compared with $428.8 million in the six months ended April 30, 2013. The year-over-year growth of 5% in other income was partly offset by lower net interest income.

Net interest income decreased by $3.2 million to $279.6 million for the six months ended April 30, 2014, from $282.8 million in the six months ended April 30, 2013, mainly reflecting a reduced level of personal loans and lower prepayment penalties on residential mortgage loans, partly offset by improved margins. When compared with the six months ended April 30, 2013, margins increased by 1 basis point to 1.67% for the six months ended April 30, 2014.

Other income increased by $7.4 million or 5% and amounted to $153.4 million in the six months ended April 30, 2014, compared with $146.0 million in the six months ended April 30, 2013. Higher lending fees stemming from increased business activity and loan prepayment penalties in the commercial portfolios amounting to $1.8 million in the first quarter of 2014 contributed to the year-over-year increase. Solid mutual funds commissions as well as higher insurance income and income from brokerage operations also contributed to the year-over-year increase. These strong improvements were partly offset by lower income from treasury and financial market operations mainly due to trading activities in the six months ended April 30, 2014. In addition, as noted above, the Bank recognized a $3.7 million gain on sale of a commercial mortgage portfolio during the second quarter of 2014, compared to a similar $3.7 million gain in the second quarter of 2013.

Amortization of net premium on purchased financial instruments and revaluation of contingent consideration

For the six months ended April 30, 2014, the line item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" amounted to $6.6 million, compared with $2.3 million in the six months ended April 30, 2013. As noted above, an additional $4.1 million non tax-deductible charge was recorded in the second quarter of 2014 as a result of the final settlement of the contingent consideration for an amount of $10.0 million related to the AGF Trust acquisition. The amortization of net premium on purchased financial instruments amounted to $2.5 million in the six months ended April 30, 2014, essentially unchanged compared with the six months ended April 30, 2013. Refer to Note 13 to the unaudited condensed interim consolidated financial statements.

Provision for loan losses

The provision for loan losses increased by $4.0 million to $21.0 million in the six months ended April 30, 2014 from $17.0 million in the six months ended April 30, 2013. While still comparatively low, this reflects a return to more normalized overall loan losses from the 2013 levels. Refer to the Risk Management section for additional information.

Non-interest expenses

Non-interest expenses decreased by $5.7 million to $319.0 million for the six months ended April 30, 2014, compared with $324.7 million for the six months ended April 30, 2013. This mainly reflects lower T&I Costs while the Bank's other non-interest expenses were held unchanged through tight cost control and process reviews.

Salaries and employee benefits decreased by $8.2 million or 5% to $169.9 million for the six months ended April 30, 2014, compared with the six months ended April 30, 2013, mainly due to lower headcount from acquisition synergies over the last twelve months and the optimization of certain activities in the fourth quarter of 2013, partly offset by regular salary increases. Lower pension costs and lower performance-based compensation expense also contributed to the decrease year-over-year.

Premises and technology costs increased by $10.1 million to $91.6 million compared with the six months ended April 30, 2013. As noted above, the increase mostly stems from higher IT costs related to ongoing business growth, regulatory requirements and enhanced on-line services. Higher amortization expenses related to completed regulatory IT projects and rental costs also contributed to the increase.

Other non-interest expenses decreased by $2.3 million to $49.1 million for the six months ended April 30, 2014, from $51.4 million for the six months ended April 30, 2013. As cost synergies are being realized, the Bank continued to exercise disciplined control over discretionary expenses in light of a slower growth environment.

T&I Costs for the six months ended April 30, 2014 totalled $8.4 million compared with $13.7 million a year ago. They mainly related to IT systems conversion costs, salaries, professional fees, employee relocation costs and other expenses mostly for the integration of AGF Trust operations.

The adjusted efficiency ratio was 71.7% in the six months ended April 30, 2014, compared with 72.5% in the six months ended April 30, 2013. On the same basis, the Bank generated positive operating leverage of 1.1% year-over-year, mainly due to higher other income, integration synergies, continued rigorous cost control and efforts to streamline its operations.

Income taxes

For the six months ended April 30, 2014, the reported income tax expense was $19.8 million and the effective reported tax rate was 23.0%. 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 six months ended April 30, 2013, the income tax expense was $18.1 million and the effective tax rate was 21.4%. Year-over-year, the higher income tax rate for the six months ended April 30, 2014 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. On an adjusted basis, the effective tax rate was 22.4% for the six months ended April 30, 2014 compared with 22.2% for the same period in 2013.

Three months ended April 30, 2014 compared with the three months ended January 31, 2014

Net income was $31.0 million or $0.99 diluted per share for the second quarter of 2014 compared with $35.5 million or $1.16 diluted per share for the first quarter of 2014. Adjusted net income was $39.4 million or $1.29 diluted per share, compared with $39.3 million or $1.29 diluted per share for the first quarter of 2014.

Total revenue increased to $216.9 million in the second quarter of 2014, compared with $216.1 million in the previous quarter. Net interest income decreased by $2.1 million sequentially to $138.7 million in the second quarter of 2014, mainly due to three less days in the second quarter. Net interest income for the second quarter also included interest recoveries resulting from favourable settlements in the commercial loan portfolio. Net interest margin increased sequentially by 2 basis points to 1.68% in the second quarter of 2014, compared with 1.66% in the first quarter of 2014. This increase mainly resulted from interest recoveries, which more than compensated for modest loan and deposit margin tightening.

Other income increased by $2.9 million sequentially, largely due to a $3.7 million gain on sale of a $102.4 million commercial mortgage loan portfolio during the second quarter, as well as higher income from brokerage operations, partly offset by lower income from treasury and financial market operations. Other income for the first quarter of 2014 also included loan prepayment penalties in the commercial portfolios amounting to $1.8 million.

The line-item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" amounted to $5.5 million in the second quarter of 2014, compared with $1.1 million for the last quarter mainly due to the final $4.1 million contingent consideration charge noted above. Refer to Note 13 to the unaudited condensed interim consolidated financial statements for additional information.

The provision for loan losses remained low at $10.5 million for the second quarter of 2014, unchanged from the first quarter of 2014, reflecting the continued high quality of the portfolio. Refer to the Risk Management section for additional information.

Non-interest expenses amounted to $159.9 million for the second quarter of 2014, compared with $159.1 million for the first quarter of 2014. T&I Costs increased to $4.4 million in the second quarter of 2014, compared with $3.9 million in the first quarter of 2014. Excluding T&I Costs, non-interest expenses were unchanged sequentially, mainly due to three less days in the second quarter which was partly offset by a full quarter of regular salary increases, as the Bank continued to carefully control costs.

Financial condition

CONDENSED BALANCE SHEET [1]                
In thousands of Canadian dollars (Unaudited) AS AT APRIL 30
2014
  AS AT OCTOBER 31
2013
  AS AT APRIL 30
2013
                 
ASSETS                
  Cash and deposits with other banks $ 215,508     $ 208,838     $ 317,013  
  Securities 4,532,598     4,480,525     5,756,762  
  Securities purchased under reverse repurchase agreements 1,582,181     1,218,255     545,974  
  Loans and acceptances, net 27,110,647     27,113,107     26,920,674  
  Other assets 820,062     890,301     939,178  
  $ 34,260,996     $ 33,911,026     $ 34,479,601  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
  Deposits $ 23,758,753     $ 23,927,350     $ 23,808,825  
  Other liabilities 3,557,742     3,129,918     3,347,240  
  Debt related to securitization activities 4,896,007     4,974,714     5,473,470  
  Subordinated debt 446,485     445,473     444,469  
  Liability related to preferred shares 120,946          
  Shareholders' equity 1,481,063     1,433,571     1,405,597  
  $ 34,260,996     $ 33,911,026     $ 34,479,601  
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits . Refer to Note 2 in the unaudited condensed interim consolidated financial statements.


Balance sheet assets amounted to $34.3 billion at April 30, 2014, up $0.3 billion or 1% from year-end 2013. Over the last twelve months, balance sheet assets decreased by $0.2 billion.

Liquid assets

Liquid assets, including cash, deposits with other banks, securities and securities purchased under reverse repurchase agreements, totalled $6.3 billion as at April 30, 2014, an increase of $422.7 million or 7% compared with October 31, 2013. This higher level supports loan growth, particularly in the commercial loan portfolios, while maintaining diverse funding sources. Liquid assets as a percentage of total assets remained relatively unchanged at 18% compared with October 31, 2013. The Bank continues to prudently manage the level of liquid assets and to hold sufficient cash resources in order to meet its current and future financial obligations, under both normal and stressed conditions.

Loans

Loans and bankers' acceptances, net of allowances, stood at $27.1 billion as at April 30, 2014, unchanged compared with October 31, 2013. On a gross basis, continued organic growth in the higher-margin commercial loan portfolios more than offset the decrease in the personal loan and residential mortgage loan portfolios. Commercial loans, including bankers' acceptances, increased by $192.9 million or 7% since October 31, 2013, and commercial mortgage loans increased by $47.1 million or 2% over the same period as the Bank maintained its efforts to develop these growth engines. The sale of $102.4 million commercial mortgage loans during the second quarter of 2014 partially muted the growth in the underlying portfolio. Personal loans decreased by $166.1 million or 2% since October 31, 2013, mainly reflecting attrition in the investment loan portfolio. Residential mortgage loans decreased marginally by $69.8 million from October 31, 2013, mainly due to the combined effect of a slower growth environment in 2014 and the B2B Bank business segment's current focus on integration to build the foundation for future growth.

Deposits

Personal deposits stood at $19.2 billion as at April 30, 2014, relatively unchanged from October 31, 2013. Business and other deposits, which include institutional deposits decreased slightly by $0.1 billion or 1% since October 31, 2013 to $4.6 billion as at April 30, 2014. This is in line with the modest growth in the Bank's loan portfolio during the six-month period. Moreover, the Bank continues to focus on personal deposit gathering and maintaining this solid retail funding base. Personal deposits represented 81% of total deposits as at April 30, 2014, unchanged from year-end 2013.

Other Liabilities

Debt related to securitization activities and subordinated debt remained essentially unchanged compared with October 31, 2013 and stood at $4.9 billion and $0.4 billion respectively as at April 30, 2014.

On April 3, 2014, the Bank issued 5,000,000 Basel III-compliant Non-Cumulative Class A Preferred Shares, Series 13 (the "Preferred Shares Series 13"), at a price of $25.00 per share for gross proceeds of $125.0 million, $120.9 million net of issuance costs of $4.1 million, and yielding 4.3% annually. The Preferred Shares Series 13 are recorded as liabilities as the Bank may be required to convert any or all of the preferred shares into a variable number of common shares upon the occurrence of a non-viability trigger event. When declared, dividends on these preferred shares will be recorded in equity directly through retained earnings. Refer to Note 7 to the unaudited condensed interim consolidated financial statements for additional information.

Shareholders' equity

Shareholders' equity stood at $1,481.1 million as at April 30, 2014, compared with $1,433.6 million as at October 31, 2013. This increase resulted mainly from the net income contribution for the first six months, net of declared dividends. In addition, the issuance of 210,733 new common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan further contributed to the increase in shareholders' equity. The Bank's book value per common share 1 appreciated to $44.61 as at April 30, 2014 from $43.19 as at October 31, 2013. There were 28,743,230 common shares and 20,000 share purchase options outstanding as at May 29, 2014.

Capital Management

Regulatory capital

The regulatory capital calculation is determined based on the guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) originating from the Basel Committee on Banking Supervision (BCBS) regulatory risk based capital framework, " Basel III: A global regulatory framework for more resilient banks and banking systems ". Under OSFI's Capital Adequacy Requirements Guideline (the CAR Guideline), transitional requirements for minimum Common Equity Tier 1, Tier 1 and Total capital ratios were set at 4.0%, 5.5% and 8.0% respectively for 2014, which, for the Bank, will be fully phased-in to 7.0%, 8.5% and 10.5% by 2019, including the effect of capital conservation buffers.

In its CAR Guideline, OSFI indicated that it expected deposit-taking institutions to attain target capital ratios without transition arrangements equal to or greater than the 2019 minimum capital ratios plus conservation buffer levels (the "all-in" basis). 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 page 39 of the Bank's 2013 Annual Report under the title "Capital Management" for additional information on the Bank's implementation of Basel III.

In August 2013, OSFI issued a guideline clarifying the application of the Credit Valuation Adjustment (CVA). The CVA capital charge took effect as of January 1, 2014 and will be phased-in over a five-year period beginning in 2014. This had no significant impact on the regulatory capital ratios for the Bank.

As detailed in the table below, on an "all-in" basis, the Common Equity Tier 1, Tier 1 and Total capital ratios stood at 7.6%, 10.0% and 13.3%, respectively, as at April 30, 2014. These ratios meet all current requirements.

________________________________
1   Effective November 1, 2013, the Bank has modified its definition of common shareholders' equity, which is now better aligned with regulatory requirements. Book value per common share and return on common shareholders' equity measures for the quarters ended in 2013 have been amended accordingly. Refer to the Non-GAAP financial measures section for further information.


REGULATORY CAPITAL [1]                
In thousands of Canadian dollars, except percentage amounts (Unaudited) AS AT APRIL 30
2014
  AS AT OCTOBER 31
2013
  AS AT APRIL 30
2013
                 
Regulatory capital                
  Common Equity Tier 1 capital (A) $ 1,030,263     $ 1,017,659     $ 1,018,515  
  Tier 1 capital (B) $ 1,356,413     $ 1,222,863     $ 1,223,661  
  Total capital (C) $ 1,811,191     $ 1,694,167     $ 1,698,448  
                 
Total risk-weighted assets (D) [2] $ 13,576,578     $ 13,379,834     $ 13,428,594  
                 
Regulatory capital ratios                
  Common Equity Tier 1 capital ratio (A/D) 7.6 %   7.6 %   7.6 %
  Tier 1 capital ratio (B/D) 10.0 %   9.1 %   9.1 %
  Total capital ratio (C/D) 13.3 %   12.7 %   12.6 %
[1] The amounts are presented on an "all-in" basis. Regulatory capital for 2013 is presented as filed with OSFI and has not been adjusted to include the impact of the adoption of amendments to IAS 19, Employee Benefits .
[2] Using the Standardized Approach in determining credit risk capital and to account for operational risk.


The Common Equity Tier 1 capital ratio held stable at 7.6% as at April 30, 2014, unchanged compared with October 31, 2013. As mentioned previously, effective November 1, 2013, the Bank adopted an amended version of IAS 19, Employee Benefits which reduced the Common Equity Tier 1 capital ratio by approximately 0.2%. This impact was essentially offset by internal capital generation during the six months ended April 30, 2014, including actuarial net losses on employee benefit plans, and re-invested dividends, which overall increased total equity, while risk-weighted assets only increased marginally.

On April 3, 2014, the Bank issued 5,000,000 Preferred Shares, Series 13 for net proceeds of $120.9 million. These preferred shares fully qualify as Additional Tier 1 capital under the Basel III capital adequacy framework and the CAR Guideline as they include mandatory non-viability contingency capital provisions. These preferred shares are classified as liabilities on the balance sheet.

On May 5, 2014, the Bank announced that it will redeem, on June 15, 2014, all of its 4,400,000 outstanding Non-Cumulative Class A Preferred Shares Series 10. Such preferred shares will be redeemed at a redemption price of $25.00 per share, together with the final declared dividends.

Basel leverage ratio requirement

The Basel III capital reforms introduced a non-risk based leverage ratio requirement to act as a supplementary measure to the risk-based capital requirements. The leverage ratio is currently defined as the Tier 1 capital divided by on-balance sheet assets and off-balance sheet commitments, derivatives and securities financing transactions, as defined within the requirements. It differs from OSFI's current Asset to Capital Multiple (ACM) requirement in that it includes more off-balance-sheet exposures and a narrower definition of capital (Tier 1 Capital instead of Total Capital).

In January 2014, the BCBS issued the full text of Basel III leverage ratio framework and disclosure requirements following endorsement by its governing body. OSFI indicated that it will replace the ACM with the new Basel III leverage test as of January 1, 2015 and is expected to issue a new leverage guideline later this year. Federally regulated deposit-taking institutions will be expected to have Basel III leverage ratios that exceed 3%.

Dividends

On May 21, 2014, the Board of Directors declared the regular dividend on the Preferred Shares  Series 11, the final dividend on the Preferred Shares Series 10, as well as the initial dividend on the Preferred Shares Series 13, to shareholders of record on June 6, 2014. Concurrent impact of these dividends will be recorded in the third quarter of 2014. At its meeting on June 4, 2014, given the Bank's solid results, solid balance sheet and capital position, the Board of Directors approved an increase of $0.01 per share, or 2%, to the quarterly dividend and declared a dividend of $0.52 per common share, payable on August 1, 2014, to shareholders of record on July 2, 2014.

COMMON SHARE DIVIDENDS AND PAYOUT RATIO [1]                              
      FOR THE SIX
MONTHS
ENDED
                 
  FOR THE THREE MONTHS ENDED     FOR THE YEARS ENDED
In Canadian dollars, except payout ratios (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  OCTOBER 31
2013
  OCTOBER 31
2012
  OCTOBER 31
2011
                                         
Dividends declared per common share $ 0.51     $ 0.51     $ 0.49     $ 1.02     $ 1.98     $ 1.84     $ 1.62  
Dividend payout ratio [2] 51.3 %   44.1 %   46.5 %   47.4 %   52.0 %   37.0 %   34.8 %
Adjusted dividend payout ratio [2] 39.6 %   39.6 %   39.3 %   39.6 %   40.3 %   36.9 %   32.9 %
[1] Comparative figures for 2013 reflect the adoption of amendments to IAS 19, Employee benefits . Comparative figures for 2012 and 2011 have not been restated. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] 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 2013 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
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Provision for loan losses                            
  Personal loans $ 8,003     $ 4,473     $ 7,455     $ 12,476     $ 15,513  
  Residential mortgage loans 922     648     872     1,570     2,279  
  Commercial mortgage loans (2,508)     2,892     48     384     1,149  
  Commercial and other loans (including acceptances) 4,083     2,487     625     6,570     (1,941)  
  $ 10,500     $ 10,500     $ 9,000     $ 21,000     $ 17,000  
As a % of average loans and acceptances 0.16 %   0.15 %   0.14 %   0.16 %   0.13 %


The provision for loan losses amounted to $10.5 million in the second quarter of 2014, unchanged from the first quarter of 2014 and up $1.5 million compared to the same quarter a year ago. For the six months ended April 30, 2014, provisions for loan losses increased by $4.0 million and amounted to $21.0 million compared with $17.0 million for the same period in 2013. Despite the gradual increase from the 2013 very low levels, the provision for loan losses remains low and reflects the strong credit quality of the Bank's loan portfolios and prolonged favourable credit conditions in the Canadian market.

Loan losses on personal loans slightly increased by $0.5 million compared with the second quarter of 2013. For the six months ended April 30, 2014, loan losses on personal loans decreased by $3.0 million, reflecting lower provisions in the investment loan and point-of-sale financing portfolios compared to last year due to the reduced exposure. On a sequential basis, loan losses on personal loans increased by $3.5 million, mostly explained by higher losses at B2B Bank in the second quarter of 2014 from the unsustainable low losses level in the first quarter.

Loan losses on residential mortgage loans were up marginally from the second quarter of 2013 and sequentially. For the six months ended April 30, 2014, loan losses on residential mortgage loans decreased slightly by $0.7 million year-over-year.

Loan losses on commercial mortgages and commercial loans remained very low and cumulatively amounted to $1.6 million in the second quarter of 2014, a year-over-year increase of $0.9 million. Favourable settlements and improvements in the commercial mortgage loan portfolio were offset by losses on commercial loans. On a sequential basis, loan losses in these portfolios decreased by a combined $3.8 million, mainly explained by favourable settlements and improvements on a limited number of impaired loans. For the six months ended April 30, 2014, loan losses on commercial mortgages and commercial loans totalled $7.0 million compared with a negative amount of $0.8 million for the same period in 2013. The year-over-year increase in loan losses mainly results from growth in the underlying portfolios, a higher amount of favourable settlements and improvements of commercial loans in 2013, which led to a net credit of $1.9 million in loan losses in the commercial loan portfolio last year.

IMPAIRED LOANS                
In thousands of Canadian dollars, except percentage amounts (Unaudited) AS AT APRIL 30
2014
  AS AT OCTOBER 31
2013
  AS AT APRIL 30
2013
                 
Gross impaired loans                
  Personal $ 28,476     $ 13,971     $ 21,243  
  Residential mortgages 31,794     32,651     21,972  
  Commercial mortgages 13,360     14,082     32,251  
  Commercial and other (including acceptances) 33,653     38,687     42,200  
  107,283     99,391     117,666  
                 
Allowances for loan losses against impaired loans                
  Individual allowances (27,440)     (34,266)     (39,487)  
  Collective allowances (16,896)     (12,049)     (12,802)  
  (44,336)     (46,315)     (52,289)  
                 
Net impaired loans $ 62,947     $ 53,076     $ 65,377  
                 
Collective allowances against other loans $ (77,767)     $ (69,275)     $ (62,079)  
                 
Impaired loans as a % of loans and acceptances                
  Gross 0.39 %   0.37 %   0.44 %
  Net 0.23 %   0.19 %   0.24 %


Gross impaired loans amounted to $107.3 million as at April 30, 2014, down sequentially from $113.9 million as at January 31, 2014, while up from $99.4 million as at October 31, 2013, as continued improvement in the commercial loan portfolio was more than offset by increases in impaired loans in the personal loan portfolio. Despite the increase, gross impaired loans remain historically low and borrowers continue to benefit from the favourable low interest rate environment and good business conditions in Canada.

Since the beginning of the year, individual allowances decreased by $6.8 million to $27.4 million mainly explained by favourable settlements on a limited number of impaired commercial loans. Collective allowances against impaired loans increased by $4.8 million over the same period, in-line with the higher impaired loans level. Net impaired loans, calculated as gross impaired loans less individual allowances and collective allowances against impaired loans, amounted to $62.9 million as at April 30, 2014, compared with $53.1 million as at October 31, 2013. At 0.23% of loans and acceptances as at April 30, 2014 and 0.19% as at October 31, 2013, net impaired loans continue to be at a low level and reflect management's continued prudent approach to provisioning of impaired loans.

Liquidity and funding risk

Liquidity and funding risk represents the possibility that the Bank may not be able to gather sufficient cash resources, when required and on reasonable conditions, to meet its financial obligations. There have been no material changes to the Bank's liquidity and funding risk management framework from year-end 2013. 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 regulatory liquidity framework, " Basel III: International framework for liquidity risk measurement, standards and monitoring" , which mainly outlines two new liquidity requirements. This document prescribes the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as minimum regulatory standards effective January 2015 and January 2018, respectively. Further updates regarding these new requirements were also published in 2013 and 2014.

In addition, in January 2014, the BCBS issued its final paper on " Liquidity coverage ratio disclosure standards ". Banks are expected to comply with the BCBS LCR disclosure standards beginning in the first full fiscal quarter of calendar 2015 (expected to be the second quarter of 2015 for Canadian banks).

In May 2014, OSFI issued a comprehensive domestic Liquidity Adequacy Requirements Guideline that reflects the aforementioned BCBS liquidity standards and monitoring tools and formalized the use of the Net Cumulative Cash Flow (NCCF) supervisory tool. At this stage, it is still too early to determine their definitive impact on liquidity management. The Bank is presently developing its liquidity data and reporting systems to meet the upcoming liquidity requirements. Based on its preliminary review of the recently published regulatory requirements and prior analyses, management expects that the Bank will meet the upcoming standards.

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, 2014, 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
2014
  AS AT OCTOBER 31
2013
           
Effect of a 1% increase in interest rates          
  Increase in net interest income before taxes over the next 12 months $ 4,455     $ 9,984  
  Decrease in the economic value of common shareholders' equity (Net of income taxes) $ (30,004)     $ (22,746)  


As shown in the table above, the sensitivity to changes in interest rates remained low as at April 30, 2014. 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 three following business segments: Personal & Commercial, B2B Bank, and Laurentian Bank Securities & Capital Markets. The Bank's other activities are grouped into the Other sector.

Realignment of reportable segments

Commencing November 1, 2013, the Bank reports its retail and commercial activities, which were previously reported in the Retail & SME-Québec and Real Estate & Commercial business segments, in the newly formed Personal & Commercial segment. The new business segment better reflects the interdependencies associated with these activities. In addition, the new segments more closely align the Bank's reporting to the industry practice. The B2B Bank and Laurentian Bank Securities & Capital Markets segments are not affected by this realignment. Furthermore, certain restructurings implemented in the fourth quarter of 2013 resulted in small adjustments to segment allocations. Comparative figures were reclassified to conform to the current presentation.

Personal & Commercial [1]

  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except percentage amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Net interest income $ 97,592     $ 98,054     $ 92,572     $ 195,646     $ 190,673  
Other income 49,110     48,630     48,768     97,740     92,297  
Total revenue 146,702     146,684     141,340     293,386     282,970  
Provision for loan losses 7,436     10,254     5,850     17,690     10,452  
Non-interest expenses 99,947     99,809     103,156     199,756     206,036  
Income before income taxes 39,319     36,621     32,334     75,940     66,482  
Income taxes 9,037     8,343     7,500     17,380     15,112  
Net income $ 30,282     $ 28,278     $ 24,834     $ 58,560     $ 51,370  
                             
Efficiency ratio [2] 68.1 %   68.0 %   73.0 %   68.1 %   72.8 %
[1] Comparative figures reflect the realignment of reportable segments and the adoption of amendments to IAS 19, Employee Benefits . Refer to Notes 2 and 12 in the unaudited condensed interim consolidated financial statements.
[2] Refer to the non-GAAP financial measures section.


The Personal & Commercial business segment's contribution to net income was $30.3 million in the second quarter of 2014 compared with $24.8 million in the second quarter of 2013.

Total revenue increased by $5.4 million from $141.3 million in the second quarter of 2013 to $146.7 million in the second quarter of 2014, mainly driven by higher net interest income, which increased by $5.0 million to $97.6 million. This increase reflects interest recoveries resulting from favourable settlements in the commercial loan portfolio, good volume growth in the commercial portfolios and improved margins. Other income increased by $0.3 million to $49.1 million in the second quarter of 2014, mainly due to higher mutual fund commissions and lending fees, offset by lower gains on loan sales. Consistent with the Bank's syndication strategy, the sale of a $102.4 million commercial mortgage loan portfolio was completed during the second quarter of 2014, which led to the recognition of a $3.7 million gain of which $1.2 million was recorded in the Personal & Commercial business segment. In a similar transaction, a $3.7 million gain on the sale of a $94.7 million commercial mortgage loan portfolio had been recorded during the second quarter of 2013 of which $3.1 million was recorded in Personal & Commercial.

Loan losses increased by $1.6 million from $5.9 million in the second quarter of 2013 to $7.4 million in the second quarter of 2014. Higher losses on personal and commercial loans compared to the 2013 low levels were partly offset by favourable settlements in the commercial mortgage loan portfolio. Non-interest expenses decreased by $3.2 million, from $103.2 million in the second quarter of 2013 to $99.9 million in the second quarter of 2014, mainly due to lower headcount from the optimization of certain activities in the fourth quarter of 2013 and disciplined control over discretionary expenses.

Compared with the first quarter of 2014, net income increased by $2.0 million, mainly as a result of interest recoveries, favourable settlements and improvement on a limited number of impaired loans, which more than offset the revenue impact of the three less days in the second quarter.

For the six months ended April 30, 2014, net income increased from $51.4 million to $58.6 million. Growth in commercial loan volumes of 18% year-over-year, a strong increase in other income and lower non-interest expenses contributed to this performance and compensated for higher loan losses. The efficiency ratio was 68.1% for the six months ended April 30, 2014, compared with 72.8% for the six months ended April 30, 2013. The segment generated positive operating leverage of 6.7% year-over-year, reflecting the Bank's priorities to diversify other income, grow commercial businesses and control costs rigorously.

B2B Bank [1]

...
  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except percentage amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Net interest income $ 43,377     $46,197     $ 47,195     $ 89,574     $ 96,607  
Other income 9,107     9,102     8,884     18,209     17,940  
Total revenue 52,484     55,299     56,079     107,783     114,547  
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration 5,498     1,136     1,224     6,634     2,280  
Provision for loan losses 3,064     246     3,150     3,310     6,548  
Non-interest expenses [2] 30,971     31,576     33,196     62,547     67,181  
Costs related to business combinations [3] 4,437     3,949     6,136     8,386     13,693  
Income before income taxes 8,514     18,392     12,373     26,906     24,845  
Income taxes 3,432     4,959     3,283     8,391     6,564  
Net income $ 5,082     $ 13,433     $ 9,090     $ 18,515     $ 18,281  
                             
Efficiency ratio [4] 67.5 %   64.2 %   70.1 %   65.8 %   70.6 %
                             
Adjusted net income [4] $ 13,468     $ 17,169     $ 14,498     $ 30,637     $ 30,017  
Adjusted efficiency ratio [4] 59.0 %   57.1 %   59.2 %   58.0 %   58.6 %
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] During the first quarter of 2014, the Bank retroactively adjusted its corporate expenses allocation methodology. As a result, non-interest expenses amounting to $1.0 million ($0.7 million net of income taxes) per quarter in 2013, which were previously reported in the Other sector, were reclassified to the B2B Bank business segment.
[3] Integration costs related to the integration of the MRS Companies and AGF Trust (T&I Costs).
[4] Refer to the non-GAAP financial measures section.


The B2B Bank business segment's contribution to adjusted net income was $13.5 million for the second quarter of 2014, down $1.0 million from $14.5 million for the second quarter of 2013. Reported net income for the second quarter of 2014 was $5.1 million compared with $9.1 million a year ago.

Total revenue decreased to $52.5 million in the second quarter of 2014 from $56.1 million in the second quarter of 2013. Net interest income decreased by $3.8 million to $43.4 million in the second quarter of 2014 compared with the corresponding period in 2013. This decrease resulted from the reduced level of investment loans as investors continue to deleverage, as well as margin compression on mortgage loans. Other income amounted to $9.1 million in the second quarter of 2014, up $0.2 million from the second quarter of 2013.

As shown above, the line item "Amortization of net premium on purchased financial instruments and revaluation of contingent consideration" increased by $4.3 million and amounted to $5.5 million in the second quarter of 2014 compared with $1.2 million for the second quarter of 2013. This increase mainly resulted from the additional $4.1 million non tax-deductible charge to reflect the impact of an agreement reached on May 30, 2014 with AGF Management Limited to settle the $20.0 million maximum contingent consideration related to the AGF Trust acquisition for a lower total amount of $10.0 million. Refer to Note 13 to the unaudited condensed interim consolidated financial statements.

Loan losses decreased by $0.1 million compared with the second quarter of 2013 and amounted to $3.1 million in the second quarter of 2014. Lower provisions in the investment loan portfolios due to the reduced exposure compared to last year were mostly offset by higher provisions on other personal loans.

Excluding T&I Costs, non-interest expenses decreased by $2.2 million or 7% to $31.0 million in the second quarter of 2014, compared with $33.2 million in the second quarter of 2013. As integration activities are winding down, T&I Costs for the second quarter of 2014 decreased to $4.4 million and mainly related to IT systems conversion costs, salaries, professional fees and other expenses for the integration of former AGF Trust operations.

Compared with the first quarter of 2014, adjusted net income decreased by $3.7 million, mainly resulting from lower net interest income, which was impacted by the fewer number of days in the quarter and higher loan losses. These items, combined with the final contingent consideration charge mentioned above and slightly higher T&I Costs contributed to the $8.4 million decrease in reported net income over the same period.

For the six months ended April 30, 2014, adjusted net income was $30.6 million, $0.6 million higher than the same period of 2013, as the items impacting revenues, as detailed above, were compensated by higher spread earned on deposits year-over-year and lower loan losses. Reported net income for the six months ended April 30, 2014 remained relatively stable over the same period in 2013, mainly due to the same factors mentioned above and as a result of lower T&I Costs year-over-year.

Laurentian Bank Securities & Capital Markets [1]

  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except percentage amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Total revenue $ 17,590     $ 16,165     $ 16,967     $ 33,755     $ 34,050  
Non-interest expenses 14,059     13,087     12,959     27,146     26,433  
Income before income taxes 3,531     3,078     4,008     6,609     7,617  
Income taxes 947     826     1,033     1,773     1,961  
Net income $ 2,584     $ 2,252     $ 2,975     $ 4,836     $ 5,656  
                             
Efficiency ratio [2] 79.9 %   81.0 %   76.4 %   80.4 %   77.6 %
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] Refer to the non-GAAP financial measures section.


Laurentian Bank Securities & Capital Markets business segment's contribution to net income decreased to $2.6 million in the second quarter of 2014, compared with $3.0 million in the second quarter of 2013. Total revenue increased by $0.6 million to $17.6 million in the second quarter of 2014 compared with $17.0 million in the second quarter of 2013, mainly as a result of higher underwriting fees in the small-cap equity markets. Non-interest expenses increased by $1.1 million to $14.1 million in the second quarter of 2014, mainly due to higher performance-based compensation, commissions and transaction fees, in-line with higher market-driven income.

For the six months ended April 30, 2014, net income decreased by $0.8 million compared with the same period last year. Total revenue decreased by $0.3 million to $33.8 million in the six months ended April 30, 2014, mainly as a result of lower underwriting fees in the fixed income market compared to strong results for the six months ended April 30, 2013, mainly during the first quarter of 2013. Non-interest expenses increased by $0.7 million to $27.1 million for the six months ended April 30, 2014, mainly due to higher performance-based compensation, commissions and transaction fees.

Other sector [1]

  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Net interest income $ (2,749)     $ (4,078)     $ (407)     $ (6,827)     $ (6,257)  
Other income 2,863     2,039     871     4,902     3,454  
Total revenue 114     (2,039)     464     (1,925)     (2,803)  
Non-interest expenses [2] 10,490     10,712     6,183     21,202     11,380  
Loss before income taxes (10,376)     (12,751)     (5,719)     (23,127)     (14,183)  
Income taxes recovery (3,417)     (4,313)     (2,659)     (7,730)     (5,503)  
Net loss $ (6,959)     $ (8,438)     $ (3,060)     $ (15,397)     $ (8,680)  
[1] Comparative figures reflect the realignment of reportable segments and the adoption of amendments to IAS 19, Employee Benefits. Refer to Notes 2 and 12 in the unaudited condensed interim consolidated financial statements.
[2] During the first quarter of 2014, the Bank retroactively adjusted its corporate expenses allocation methodology. As a result, non-interest expenses amounting to $1.0 million ($0.7 million net of income taxes) per quarter in 2013, which were previously reported in the Other sector, were reclassified to the B2B Bank business segment.


The Other sector posted a negative contribution to net income of $7.0 million in the second quarter of 2014 compared with a negative contribution of $3.1 million in the second quarter of 2013.

Net interest income decreased to negative $2.7 million in the second quarter of 2014, compared with negative $0.4 million in the second quarter of 2013, mainly as a result of less favourable market conditions compared to a year ago impacting balance sheet management. Other income increased to $2.9 million in the second quarter of 2014, compared with $0.9 million in the second quarter of 2013, mainly as a result of the $2.5 million of the total $3.7 million gain related to the sale of $102.4 million of commercial mortgage loans during the second quarter of 2014, compared with a similar gain of $0.6 million in the second quarter of 2013. Non-interest expenses increased to $10.5 million in the second quarter of 2014 compared with $6.2 million in the second quarter of 2013, mainly due to higher unallocated technology expenses related to new initiatives aimed at improving IT infrastructure and on-line services.

On a sequential basis, net income improved by $1.5 million from the previous quarter due to higher total revenue, which includes the positive impact of the gain on the sale of commercial mortgage loans as discussed above.

For the six months ended April 30, 2014, the negative contribution to net income was $15.4 million, compared to negative $8.7 million for the six months ended April 30, 2013, mainly explained by non-interest expenses which increased by $9.8 million compared to 2013. The increase in non-interest expenses essentially results from unallocated costs related to systems for regulatory requirements as well as the new IT initiatives mentioned above.

Additional Financial Information - Quarterly Results [1]

In thousands of Canadian dollars, except per share and percentage amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  OCTOBER 31
2013
  JULY 31
2013
  APRIL 30
2013
  JANUARY 31
2013
  OCTOBER 31
2012
  JULY 31
2012
                                               
Net interest income $ 138,726     $ 140,856     $ 141,437     $ 144,549     $ 140,430     $ 142,344     $ 142,411     $ 129,664  
Other income 78,164     75,253     74,094     76,493     74,420     71,570     67,985     64,169  
Total revenue 216,890     216,109     215,531     221,042     214,850     213,914     210,396     193,833  
Gain on acquisition, amortization of net premium on purchased financial instruments and revaluation of contingent consideration 5,498     1,136     1,006     1,140     1,224     1,056     (23,795)      
Provision for loan losses 10,500     10,500     10,000     9,000     9,000     8,000     8,000     7,500  
Non-interest expenses 159,904     159,133     172,651     176,705     161,630     163,093     165,377     148,955  
Income before income taxes 40,988     45,340     31,874     34,197     42,996     41,765     60,814     37,378  
Income taxes 9,999     9,815     6,008     7,213     9,157     8,977     15,129     7,380  
Net income $ 30,989     $ 35,525     $ 25,866     $ 26,984     $ 33,839     $ 32,788     $ 45,685     $ 29,998  
                                               
Earnings per share                                              
  Basic $ 0.99     $ 1.16     $ 0.82     $ 0.86     $ 1.05     $ 1.07     $ 1.51     $ 1.06  
  Diluted $ 0.99     $ 1.16     $ 0.82     $ 0.86     $ 1.05     $ 1.07     $ 1.51     $ 1.06  
Return on common shareholders' equity [2] 9.2 %   10.5 %   7.6 %   8.1 %   10.4 %   10.3 %   14.2 %   10.1 %
Balance sheet assets (in millions of Canadian dollars) $ 34,261     $ 33,631     $ 33,911     $ 33,758     $ 34,480     $ 34,252     $ 34,937     $ 31,416  
                                               
Adjusted measures                                              
  Adjusted net income [2] $ 39,375     $ 39,261     $ 33,919     $ 38,547     $ 39,247     $ 39,116     $ 36,186     $ 35,253  
  Adjusted diluted earnings per share [2] $ 1.29     $ 1.29     $ 1.10     $ 1.27     $ 1.24     $ 1.30     $ 1.17     $ 1.27  
  Adjusted return on common shareholders' equity [2] 11.9 %   11.7 %   10.2 %   12.0 %   12.2 %   12.5 %   10.9 %   12.1 %
[1] Comparative figures for 2013 reflect the adoption of amendments to IAS 19, Employee Benefits. 2012 results have not been restated. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] Refer to the non-GAAP financial measures section.


Accounting Policies

A summary of the Bank's significant accounting policies is presented in Notes 2 and 3 of the 2013 audited annual consolidated financial statements. Pages 58 to 61 of the 2013 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 judgement. The unaudited condensed interim consolidated financial statements for the second quarter of 2014 have been prepared in accordance with these accounting policies, except for accounting changes detailed below.

Accounting changes

Effective November 1, 2013, the Bank adopted new standards and amendments to existing standards on employee benefits, consolidation, fair value measurement, and disclosure of offsetting arrangements. 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 and offsetting. These future accounting changes will be applicable for the Bank in various annual periods beginning on November 1, 2014 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, 2014, 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

Effective November 1, 2013, the Bank has modified its definition of common shareholders' equity, as detailed below. All financial measures for the quarters and for the year ended in 2013 have been amended accordingly.

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. This definition is now better aligned with regulatory requirements.

Return on common shareholders' equity

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

Book value per common share

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

Net interest margin

Net interest margin is the ratio of net interest income to total average 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. Quarterly growth rates are calculated sequentially (i.e. current period versus the immediately preceding period). Year-to-date growth rates are calculated year-over-year (i.e. current period versus the corresponding prior year period).

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 presented in the table in the Adjusting Items section.

Most of the adjusting items relate to gains and expenses that arise as a result of acquisitions. The gain on acquisition and ensuing amortization of net premium on purchased financial instruments are considered adjusting items since they represent, according to management, significant non-cash adjustments and due to their non-recurrence. The revaluation of the contingent consideration related to the AGF Trust acquisition, transaction and integration-related costs in respect of the MRS Companies and AGF Trust have been designated as adjusting items due to the significance of the amounts and their non-recurrence.

About Laurentian Bank

Laurentian Bank of Canada is a banking institution whose activities extend across Canada. Recognized for its excellent service, proximity and simplicity, the Bank serves one and a half million clients throughout the country. Founded in 1846, the Bank is among the 2014 edition of the Montréal's Top Employers competition, which showcases the city's top 25 companies offering enviable places to work. It currently employs some 3,800 people whose talent and dedication has made it a major player in numerous market segments.

Laurentian Bank distinguishes itself through the excellence of its execution and its agility. Catering to the needs of retail clients via its extensive branch network and constantly evolving virtual offerings, the Bank has also earned a solid reputation among SMEs, larger businesses and real estate developers thanks to its growing presence across Canada and its specialized teams in Ontario, Québec, Alberta and British Columbia. For its part, the organization's B2B Bank subsidiary is a Canadian leader in providing banking and investment products and services to financial advisors and brokers, while Laurentian Bank Securities is an integrated broker that is also widely known for its expert and effective services nationwide. The institution has more than $34 billion in balance sheet assets and more than $41 billion in assets under administration.

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 4, 2014. The live, listen-only, toll-free, call-in number is 416 642-5212 or 1 866 321-6651.

You can listen to the call on a delayed basis at any time from 5:00 p.m. on Wednesday, June 4, 2014 until 5:00 p.m. on July 3, 2014, by dialing the following playback number: 647 436-0148 or 1 888 203-1112 Code 5653302#. 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 quarter ended April 30, 2014, 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
2014
  AS AT OCTOBER 31
2013
  AS AT APRIL 30
2013
                 
ASSETS                
Cash and non-interest-bearing deposits with other banks $ 92,282     $ 82,836     $ 83,512  
Interest-bearing deposits with other banks 123,226     126,002     233,501  
Securities                
  Available-for-sale 2,027,794     1,679,067     2,151,551  
  Held-to-maturity 390,045     648,874     1,030,366  
  Held-for-trading 2,114,759     2,152,584     2,574,845  
  4,532,598     4,480,525     5,756,762  
Securities purchased under reverse repurchase agreements 1,582,181     1,218,255     545,974  
Loans                
  Personal 7,079,386     7,245,474     7,605,244  
  Residential mortgage 14,665,381     14,735,211     14,499,292  
  Commercial mortgage 2,535,881     2,488,826     2,434,514  
  Commercial and other 2,651,025     2,488,137     2,239,842  
  Customers' liabilities under acceptances 301,077     271,049     256,150  
  27,232,750     27,228,697     27,035,042  
  Allowances for loan losses (122,103)     (115,590)     (114,368)  
  27,110,647     27,113,107     26,920,674  
Other                
  Premises and equipment 74,535     73,261     72,108  
  Derivatives 126,777     126,617     156,308  
  Goodwill 64,077     64,077     64,077  
  Software and other intangible assets 208,779     197,594     165,225  
  Deferred tax assets 12,882     21,588     32,470  
  Other assets 333,012     407,164     448,990  
  820,062     890,301     939,178  
  $ 34,260,996     $ 33,911,026     $ 34,479,601  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
Deposits                
  Personal $ 19,168,273     $ 19,282,042     $ 19,535,193  
  Business, banks and other 4,590,480     4,645,308     4,273,632  
  23,758,753     23,927,350     23,808,825  
Other                
  Obligations related to securities sold short 1,436,150     1,464,269     1,679,095  
  Obligations related to securities sold under repurchase agreements 887,384     339,602     394,725  
  Acceptances 301,077     271,049     256,150  
  Derivatives 101,494     102,041     96,626  
  Deferred tax liabilities 1,884     9,845     19,264  
  Other liabilities 829,753     943,112     901,380  
  3,557,742     3,129,918     3,347,240  
Debt related to securitization activities 4,896,007     4,974,714     5,473,470  
Subordinated debt 446,485     445,473     444,469  
Liability related to preferred shares 120,946          
Shareholders' equity                
  Preferred shares 205,204     205,204     205,146  
  Common shares 456,032     446,496     438,454  
  Share-based payment reserve 91     91     136  
  Retained earnings 812,229     776,256     732,032  
  Accumulated other comprehensive income 7,507     5,524     29,829  
  1,481,063     1,433,571     1,405,597  
  $ 34,260,996     $ 33,911,026     $ 34,479,601  
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.


Consolidated Statement of Income [1]

  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars, except per share amounts (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Interest income                            
  Loans $ 260,326     $ 269,084     $ 264,704     $ 529,410     $ 541,574  
  Securities 10,136     10,321     16,178     20,457     33,306  
  Deposits with other banks 194     181     499     375     1,413  
  Other, including derivatives 10,167     10,188     11,193     20,355     24,646  
  280,823     289,774     292,574     570,597     600,939  
Interest expense                            
  Deposits 108,811     114,020     112,525     222,831     233,948  
  Debt related to securitization activities 29,140     30,529     35,163     59,669     75,388  
  Subordinated debt 3,933     4,031     3,927     7,964     7,951  
  Other 213     338     529     551     878  
  142,097     148,918     152,144     291,015     318,165  
Net interest income 138,726     140,856     140,430     279,582     282,774  
Other income                            
  Fees and commissions on loans and deposits 32,964     34,755     31,724     67,719     63,054  
  Income from brokerage operations 16,992     15,207     14,523     32,199     31,045  
  Income from investment accounts 8,343     8,027     7,894     16,370     15,752  
  Income from sales of mutual funds 7,151     6,580     5,415     13,731     10,555  
  Income from treasury and financial market operations 2,766     4,339     4,601     7,105     9,942  
  Insurance income, net 4,744     4,633     4,415     9,377     7,810  
  Other income 5,204     1,712     5,848     6,916     7,832  
  78,164     75,253     74,420     153,417     145,990  
Total revenue 216,890     216,109     214,850     432,999     428,764  
Amortization of net premium on purchased financial instruments and revaluation of contingent consideration 5,498     1,136     1,224     6,634     2,280  
Provision for loan losses 10,500     10,500     9,000     21,000     17,000  
Non-interest expenses                            
  Salaries and employee benefits 84,407     85,540     86,977     169,947     178,136  
  Premises and technology 45,642     45,940     42,626     91,582     81,507  
  Other 25,418     23,704     25,891     49,122     51,387  
  Costs related to business combinations 4,437     3,949     6,136     8,386     13,693  
  159,904     159,133     161,630     319,037     324,723  
Income before income taxes 40,988     45,340     42,996     86,328     84,761  
Income taxes 9,999     9,815     9,157     19,814     18,134  
Net income $ 30,989     $ 35,525     $ 33,839     $ 66,514     $ 66,627  
Preferred share dividends, including applicable taxes 2,501     2,501     4,059     5,002     6,592  
Net income available to common shareholders $ 28,488     $ 33,024     $ 29,780     $ 61,512     $ 60,035  
Average number of common shares outstanding (in thousands)                            
  Basic 28,677     28,570     28,287     28,622     28,227  
  Diluted 28,684     28,577     28,297     28,630     28,239  
Earnings per share                            
  Basic $ 0.99     $ 1.16     $ 1.05     $ 2.15     $ 2.13  
  Diluted $ 0.99     $ 1.16     $ 1.05     $ 2.15     $ 2.13  
Dividends declared per share                            
  Common share $ 0.51     $ 0.51     $ 0.49     $ 1.02     $ 0.98  
  Preferred share - Series 9 n.a.   n.a.   $ 0.38     n.a.   $ 0.75  
  Preferred share - Series 10 $ 0.33     $ 0.33     $ 0.33     $ 0.66     $ 0.66  
  Preferred share - Series 11 $ 0.25     $ 0.25     $ 0.25     $ 0.50     $ 0.41  
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.


Consolidated Statement of Comprehensive Income [1]

  FOR THE THREE MONTHS ENDED   FOR THE SIX MONTHS ENDED
In thousands of Canadian dollars (Unaudited) APRIL 30
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Net income $ 30,989     $ 35,525     $ 33,839     $ 66,514     $ 66,627  
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 5,941     758     1,484     6,699     2,600  
  Reclassification of net (gains) losses on available-for-sale securities to net income (1,236)     (1,061)     (427)     (2,297)     (1,885)  
  Net change in value of derivatives designated as cash flow hedges (4,965)     2,546     4,929     (2,419)     (5,114)  
  (260)     2,243     5,986     1,983     (4,399)  
Items that may not be subsequently reclassified to the statement of income                            
  Actuarial gains (losses) on employee benefit plans (2,012)     5,634     (6,638)     3,622     (4,290)  
Comprehensive income $ 28,717     $ 43,402     $ 33,187     $ 72,119     $ 57,938  


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
2014
  JANUARY 31
2014
  APRIL 30
2013
  APRIL 30
2014
  APRIL 30
2013
                             
Income tax expense (recovery) on:                            
  Unrealized net gains (losses) on available-for-sale securities $ 2,103     $ 243     $ 508     $ 2,346     $ 941  
  Reclassification of net (gains) losses on available-for-sale securities to net income (449)     (390)     (157)     (839)     (693)  
  Net change in value of derivatives designated as cash flow hedges (1,808)     925     1,799     (883)     (1,871)  
  Actuarial gains (losses) on employee benefit plans (738)     2,066     (2,434)     1,328     (1,573)  
  $ (892)     $ 2,844     $ (284)     $ 1,952     $ (3,196)
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.


Consolidated Statement of Changes in Shareholders' Equity [1]

                          FOR THE SIX MONTHS ENDED APRIL 30, 2014
                          AOCI RESERVES                
In thousands of Canadian dollars (Unaudited) PREFERRED
SHARES [2]
  COMMON
SHARES
  RETAINED
EARNINGS
  AVAILABLE-
FOR-SALE
SECURITIES
  CASH
FLOW
HEDGES
  TOTAL     SHARE-
BASED
PAYMENT
RESERVE
      TOTAL
SHARE-
HOLDERS'
EQUITY
 
                                               
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 (net of income taxes)                                              
  Unrealized net gains (losses) on available-for-sale securities                   6,699           6,699           6,699  
  Reclassification of net (gains) losses 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 (losses) on employee benefit plans             3,622                             3,622  
Comprehensive income             70,136     4,402     (2,419)     1,983           72,119  
Issuance of share capital       9,536                                   9,536  
Dividends                                              
  Preferred shares, including applicable taxes             (5,002)                             (5,002)  
  Common shares             (29,161)                             (29,161)  
Balance as at April 30, 2014 $ 205,204     $ 456,032     $ 812,229     $ 13,938     $ (6,431)     $ 7,507     $ 91     $ 1,481,063  
                                               
                          FOR THE SIX MONTHS ENDED APRIL 30, 2013
                            AOCI RESERVES                
In thousands of Canadian dollars (Unaudited) PREFERRED
SHARES
  COMMON
SHARES
  RETAINED
EARNINGS
  AVAILABLE-
FOR-SALE
SECURITIES
  CASH
FLOW
HEDGES
  TOTAL     SHARE-
BASED
PAYMENT
RESERVE
      TOTAL
SHARE-
HOLDERS'
EQUITY
 
                                               
Balance as at November 1, 2012 $ 303,249     $ 428,526     $ 706,035     $ 12,201     $ 22,027     $ 34,228     $ 227     $ 1,472,265  
Net income             66,627                             66,627  
Other comprehensive income (net of income taxes)                                              
  Unrealized net gains (losses) on available-for-sale securities                   2,600           2,600           2,600  
  Reclassification of net (gains) losses on available-for-sale securities to net income                   (1,885)           (1,885)           (1,885)  
  Net change in value of derivatives designated as cash flow hedges                         (5,114)     (5,114)           (5,114)  
Actuarial gains (losses) on employee benefit plans             (4,290)                             (4,290)  
Comprehensive income             62,337     715     (5,114)     (4,399)           57,938  
Issuance of share capital (218)     9,928                             (91)     9,619  
Repurchase of share capital (97,885)           (2,115)                             (100,000)  
Dividends                                              
  Preferred shares, including applicable taxes             (6,592)                             (6,592)  
  Common shares             (27,633)                             (27,633)  
Balance as at April 30, 2013 $ 205,146     $ 438,454     $ 732,032     $ 12,916     $ 16,913     $ 29,829     $ 136     $ 1,405,597  
[1] Comparative figures reflect the adoption of amendments to IAS 19, Employee Benefits. Refer to Note 2 in the unaudited condensed interim consolidated financial statements.
[2] Excluding preferred shares presented as liabilities. Refer to Note 7 in the unaudited condensed interim consolidated financial statements.

 

 

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