Laurentian Bank of Canada

Good morning, and thank you for joining us. Today’s opening remarks will be delivered by Rania Llewellyn, President and CEO; and the review of our fourth quarter and 2020 financial results will be presented by Francois Laurin, Executive Vice President and Chief Financial Officer; after which we will invite questions from the phone.

Thank you, Susan, and good morning. Today Laurentian Bank reported its fourth quarter and fiscal 2020 financial results.

Before Francois provides us with an overview of our performance, I would like to share some impressions of my first few weeks at the bank, and how I plan to approach the next few months. Since October 30, my first official day in this role, one of my priorities has been to meet with and listen to as many employees as possible from across the bank.

I want to take a moment to convey my personal thanks and immense appreciation to everyone for sharing their time and ideas with me, and especially their efforts in serving our customers and this organization, during what has been an unprecedented year of change. In my conversations with them, it has become clear to me that they share a commitment to reshaping Laurentian to become more relevant to our customers.

But, I've also heard that they are craving a new strategy and clarity around the path this organization will chart to achieve greater success in the future. To that end, we've launched a series of initiatives in three key areas.

First, work is underway to strengthen our organization, beginning with a reassessment of our current priorities. We are in the process of conducting a thorough review of the bank's operations and assessing key projects, including all the previously announced transformation-related activities.

This focused effort will continue over the next few months. It is an important step that will help validate that the foundation we are building upon is strong, and that we are taking the right action to position ourselves well for future growth.

I'll provide a detailed overview of our strategic plan as soon as our work is completed. Second, as we reassess our long-term strategy, we are examining ways to enhance our cost discipline across the organization, with a view to improving our overall efficiency.

Third, we are making several important changes to our executive team and organization, including implementing the reorganization of commercial and personal banking into two operating units.

Thank you, Rania, and good morning and bonjour. I would like to begin by turning to Slide 5 which highlights the bank’s financial performance for 2020.

Adjusted EPS and ROE for the year were $2.93 and 5.5%, a decrease of 31% and 240 basis points, respectively compared to 2019. The variation in profitability was mainly due to the higher provision for credit losses, primarily driven by the severe economic conditions resulting from the global pandemic.

Financial highlights for the fourth quarter of 2020 are presented on Slide 6. Adjusted EPS and ROE for the quarter were $0.91 and 6.8%, a decrease of 13% and 100 basis points respectively, compared to the fourth quarter of 2019.

The higher provision for credit losses was also the most significant factor accounting for the variation in profitability, as well a reduction and higher margin inventory financing volumes impacted net interest income. This was mostly the result of COVID-19, which caused an increase in demand for boats and other recreational vehicles and disrupted the supply chain.

In addition, other income was stronger mostly as a result of the contribution for capital market activity. Compared to the third quarter of 2020, adjusted EPS and ROE decreased 11% and 90 basis points, respectively.

As outlined on Slide 7, reported earnings for the fourth quarter included adjusting items totaling $5.5 million after tax or $0.13 per share. For 2020 adjusting items totaled $24.1 million after tax, or $0.56 per share, restructuring charges, mostly related to severance costs and lease terminations.

The rest of my remarks will focus on sequential variations as the third and fourth quarters of 2020 were both impacted by COVID-19. Turning to Slide 8, total revenue for the fourth quarter was $243.5 million or 2% lower than the prior period.

Net interest income declined by 2%, largely due to the impact of a decrease in higher yielding loans to business customers. As just mentioned, the pandemic negatively impacted inventory financing volumes.

The average utilization rate of the dealer’s facilities during the fourth quarter was about 30%, compared to the pre-pandemic rate a year ago of over 55%. The lower level of higher margin loans to business customer also impacted net interest margin, as shown on Slide 9, which stood at 1.82% compared to 1.80% in the third quarter.

The diversified revenue streams included in other income as presented on Slide 10, totaled $74.2 million, slightly lower sequentially, mainly as a result of the record contribution of capital markets in the third quarter. Higher commercial lending fees and a net gain of $1.1 million on the securitization also contributed positively to fourth quarter results.

Thanks, Francois. At this point, I'd like to turn the call over to the conference call operator for the question-and-answer session.

Munish?

Hi, good morning. Just wondering if you could give us some direction in terms of what to expect for the PCL ratio for fiscal '21, and specifically, how you see the interplay between impaired and performing playing out?

Thank you.

Good morning, Meny. In terms of our expectations for PCL, we expect that impaired loans and write-offs will increase and peak in mid-2021.

Post-COVID, we will return to our traditional run rate of PCL adjusted for the business mix, based on our strong credit discipline and underwriting practices. Based on the gross impaired loans, we're seeing very stable pattern versus last quarter.

And we're not seeing new adverse credit formations at this time.

In terms of the 29 basis points that you put up this quarter as you look to '21, is it likely to be higher than that over the next few quarters?

It depends Meny, how it plays out, how the pandemic plays out with the vaccine. As I said, we expect an uptick in gross impaired loans.

But we're very comfortable with our reserves. Right now, we’ve taken an appropriately prudent provisioning approach.

There may be some timing differences in terms of realization versus release of ACLs. But we feel very comfortable with where we are today.

Okay. And just to clarify, do you foresee reserve releases in the performing bucket?

Well, if you look at the breakdown of our ACLs this quarter, in terms of the increase, the ACL increase of $16 million, $11 million are due to Stage 1 and Stage 2 and $5 million is due to Stage 3. Depending on how those Stage 2 credits evolve, we could see releases, but this is our best estimate given the economic scenarios we have today.

Okay, thanks. And then if I could just have more on the strategic direction, I was looking through some of the material, I thought there was a reference to the next phase of the core banking system being evaluated, given management change.

And I just wondered if this is one area where I would have thought it would just be something that that would go through, just curious what the considerations are to pause something like that? It seems to be sort of an important systems upgrade and probably also important for future ARB transition.

So, I'll take that question. What I would say is as part of our thorough review of all the key projects, we're doing conducting a review of all of the previously announced transformation-related activities.

We really need to help validate that the foundation we're building upon is strong. As you know, Phase 1 was completed, and so we need to ensure that we have the right foundation, and it's going to support the right strategy going forward.

And so, we'll be providing more details of the overview as soon as that work is completed.

Sounds good. And then just the last one on the same vein.

So I know the strategic sort of evaluation is ongoing. But are there any sort of sacred cows?

Are there any parts of the previous strategy that are clearly not up for discussion? And one area specifically that I'm thinking about is the brand strategy, how much of sort of the advice-only the model is -- is that up for debate, I guess is the question?

Could there be any change there in terms of the strategy on the branches?

So I would say everything is currently under review. So there are no sacred cows.

When it comes to the retail network, though, the advice model is really where most financial institutions are moving towards. So as part of the strategic review and by hiring a new leader to come in and set the new strategy and direction for the retail bank, it's looking at how well our digital strategy and some of the other support functions support our advice model.

Okay. Thank you.

Good morning. My first question is for Ms.

Llewellyn, new CEO in the job, I guess, couple months now. What are your first impressions of the organization?

You're moving from a big bank to a smaller bank. And what do you like?

What do you like about the new bank? What do you think needs work?

So it's actually six weeks officially today that I've joined the institution. So some of my early impressions is, I've had 10 roundtables, met with hundreds of employees.

And I would say that the employees and talents in the organization, they're extremely committed, extremely passionate, and are excited about the new strategic vision and direction and are framing that rallying cry. I would say the size is definitely an advantage.

I've had the pleasure of running midsize operations within the large institution that I came from. And I would say that size is an advantage where we can become a lot more agile and nimble.

So I do definitely see opportunities for us to be able to pivot faster, execute more efficiently. The commercial growth, the commercial business is definitely a growth engine.

And we have deep relationships with our customers, as well as expertise in that business. So both from a talent perspective, as well as relationships with our clients, and they're highly valued.

Our capital markets business has had a really good run this year under Kelsey’s leadership. And so I'm optimistic in terms of managing that business.

And on the personal side, the personal banking side, as I said, many of these institutions and banking in general, given what's happened, COVID has really been a catalyst to driving digital adoption. And so the advice model is definitely the right model.

So I'm looking forward to working with the leadership team ensuring that, that strategy supports that advice model. So those are kind of some of my early impressions at this point.

A very thorough overview, I appreciate that. Maybe I'll ask with the right word, or is the right word, but some challenges I see for the organization and relevance in the market might be the wrong way to put it.

But along those lines, I'm looking at the deposit line, branch raise, business deposits. If I combine them and treat those as core deposits, if you will, kind of flat growth year-over-year.

There has also been a declining trajectory over the past few years. This is coming at a time when we're seeing massive increases in deposits of other banks.

So that tells me that your customers are not coming to you to deposit their money and then down the road when things get better take those deposits and spend on stuff and borrow and things like that. The right model is intended to change that, I guess, how are you planning on approaching that particular challenge?

So again, it's early days, but deposits are absolutely core to any financial institution and so we're going to be looking at ways to optimize it. We definitely currently have a diversified pool of default deposits.

And we're constantly looking to align deposits and loans to ensure that they're kind of matched up. And so, we will be looking at other opportunities, whether it be through the digital or our commercial book of business, as well as our retail network to continue to draw deposits into the institution.

Okay. Sorry, Gabriel.

If I may add, Francois here. I would like to point out that in the past year, despite the merger of the summer branches, the increase in demand deposits by over 13.5% year-over-year, and the term deposits obviously, we always seek to optimize our funding.

And in the past quarter, you saw a decrease in term deposits, but we've increased securitization funding. So, we're always on the lookout and match the assets and liabilities, as Rania mentioned, but seeking the best source of funding.

So those are all elements that we manage, and the term deposits is basically delayed, we term deposit that we not our last -- not last reserve, but a reserve we use whenever we need it.

All right. .

When you look at total deposit -- thank you.

All right. Thanks.

Hi, good morning. My first question for Rania is, I totally understand the need to take time to reassess.

Absolutely, makes sense. But you've already announced a reorganization and that struck me as a bit.

So I wonder if you can speak to the reorganization. And, simplistically when I think of Laurentian Bank, I think of sort of four businesses.

I think of commercial banking, maybe equipment financing, stuff like that’s in there. When I think of the retail bank, I think of B2B Bank, and I think of capital markets.

Not just me simplistically thinking. I'm trying to understand the rationale for the new organization, why you sort of decided to have it reorganized so quickly?

And why it's organized in a manner that it is?

So, maybe I can just kind of clarify in terms of the what the organization, so that's exactly what we're doing. But rather than just have, with Stéphane’s retirement, it was just really an opportunity to kind of create more focus on those two units.

So, we used to have Stéphane, he used to be part of the Interim CEO has both the P&C together, reporting in to the CEO. But to make sure that we have the focus on commercial independent retail that's why we decided to create two independent operating units.

And so, it's not a net new strategy. It's just creating two positions and leadership there to ensure that we can set it up for success and focus on growing it going forward.

So, the business units will continue to be commercial, which includes our equipment financing, our commercial real estate, our North capital, as well as -- then personal will have the B2B and digital and retail distribution, and then we've got capital markets. So, those are the three distinct business units.

Okay, fair enough. And my second question is one of the things that you've inherited with this bank is a relatively high payout ratio.

And I look at the dividend payout ratio is one, I measure it against reported and I don't really measure it against adjusted. Is that also up for discussion with the Board over the next three or four months?

Francois?

Darko, Francois here. Yes, I’ll take that one.

Darko, on a reported basis our policy is 40% to 50%. This quarter on the reported basis was 51%.

So we're basically in line with our policy. And this is discussed on a quarterly basis with the Board, not just because of the NA review we're doing and a strategic review with every quarter this is being discussed.

Okay.

And we feel comfortable with the level today, Darko.

Okay. All right, fair enough.

And then I think I'll save more of my strategic questions for the conference later on. So I'll stop there.

Just a quick question, a numbers question, with respect to the net interest margin, my sense is that many banks talk about excess liquidity as something that could help margin going forward. Francois, can you speak to that will there be any help and can you quantify for us?

What we see going forward Darko is that, for the moment to be relatively stable, but as our mix continues to change and the return of growth in the business services, whether real estate or inventory financing, we see the improvement in the NIM as the mix changes over the next few quarters. In terms of liquidity, we have strong liquidity.

We've always maintained strong liquidity, but we managed very well our cost of funding with different initiatives. And we’ll continue to do this on a go forward basis.

So we're always seeking opportunities, but the main driver next year to improve the NIM would be growth in business services and the asset mix change.

Okay. Thank you very much.

You’re welcome.

Hi. Good morning.

Francois, I've always had a lot of problems for I guess modeling on adjusted non-interest expenses bounced around quite a bit over the years. Just trying to get a sense in what you think is reasonable over the next few years.

And I know there's a lot of variables that go on and I know there's a lot of reviews that are being done right now. But $170 million is that something that's reasonable?

What is that something you should be thinking about growth rate off of? And then severance and restructuring charges have always been a big part here, as I look historically, when will we stop seeing that?

Okay. First part of the question, your referencing non-interest expenses, we feel that the non-interest expenses level that we have at the moment will be relatively stable in the next quarter or so.

And as we mentioned earlier, we're undertaking an exercise of reviewing our cross structure and optimizing our efficiency. So you should see improvement going forward as we evolve in that analysis and move forward over the next quarters, not just one, but over next quarters.

That's the first bit of your question. The second part of the question on restructuring charges, if you take this quarter, for example, we have $5.5 million of restructuring.

$3.1 million of them related to restructuring. And most of it basically, half of it is severance related reduction of workforce that we have already announced earlier in Q2.

And they were affected in Q4. And $1.4 million is really a termination of lease contracts as we merge a few branches in this quarter.

And you have $2.4 million, which is related to business combinations. So if I take that first portion that $3.1 million, as we move forward in the strategic review, obviously we'll always look at what's our best footprint forward, but most likely going forward it will be as leases expire so you will see less.

We should incur less restructuring charges to that effect. In terms of the second part, the $2.4 million that we have as adjusting items, they relate to business combinations.

So there are multi-implication so they'll be there for years to come, because they're static from previous acquisitions. Does that answer your question, Doug?

Yes, it does. It's more about the $3.1 million that has been elevated in the past and it feels like that there could be more maybe as part of a strategic review, but that’s the number that you would hope eventually just kind of comes off of.

Yes. The idea is it should be lower going forward for the merger of branches going in the near future.

So the only thing I would add to that is obviously… sorry, I was just going to say that, yes. So what I would add is again, what Francois was saying, based on our current operations, yes it will likely not be increasing.

But as we have mentioned, we are doing a thorough review. And so, we'll be back to the market with what that strategic roadmap means and what impacts it has.

Well. I think Francois as well I think you spent $250 million I think in terms of the new core banking system, correct me if I got the number wrong.

You're reviewing I guess the new system as part of the review process. Is there any risk of any of that be written down over the near-term?

First, we’re the earliest, nobody's talking about writing down or stopping or not doing any core banking. What's been done?

What’s been done is being used. So while we're looking at going forward is that thing for what's not being done for products that are not being loaded yet on core banking.

That's what's left to be analyzed, the best way to go forward to do it. Not necessarily to revisit what has been done in the past for the products we have into '24.

Okay.

Yes, as I mentioned in my comments, we just need to validate that the foundation we're building upon is strong. And so, we just want to take the right action to really position ourselves for future growth.

And so, that's part of the detailed review.

Okay, perfect. And then just on the Stage 1, Stage 2, Stage 3 loans.

And as I look at the percentages across the different buckets, it doesn't feel it didn’t work like there's been a huge amount of migration from Stage 1 to Stage 2. And you can correct me if I'm wrong.

And I am just trying to get a sense of how we should be thinking about that migration over the next year or so? And how do you anticipated migration in performing loan ACLs?

And how that would flow through both the performing loan and ACLs but even if you can touch on what the implications of migration could be? Your thoughts out there.

So thanks. Thanks for the question.

I think a couple of notes on this, I would note that year-on-year, loans class in Stage 2 have actually gone down by about 21%. And that's largely driven by federal levels in the mortgage and personal sectors.

If you recall, last quarter I did talk about setting up our ACLs for migration based on the deferrals. We've taken some increased ACLs at that time.

What I would say overall on our ACL levels and the stage ratings is that our ACL models are very sensitive to expected increase in risk due to the economic outcomes. Whereas our models used to transfer loans amongst the stages are more reflective of the current risk rating, rather than expected increase in risk from the economic scenario.

So that's right. An ACL that you'll see is very sensitive, but our shifts between stages are less sensitive.

It's something that's driven by our modeling approach. But I would -- I feel very comfortable with where we are on our reserving.

We feel our stages reflect where we are right now. And we’re looking forward to how the pandemic will play out.

That will be all. Thank you very much for the insight.

You're welcome.

That's my alter ego. And Rania, congratulations on your appointment.

And when -- I appreciate it's only been six weeks, but when you think about shareholder value creation at Laurentian Bank is the opportunity more on the revenue side or on the expense side?

Thanks Sohrab, and look forward to meeting you in-person. And did you say your alter ego?

In terms of, I would say and as we all know there are really two levers, there’s revenue and expenses. And so, we are going to be examining ways to enhance our cross discipline for sure and that has to be part of our longer-term strategy for improving our efficiency.

Efficiency is a key ratio and it's something that we are going to have heightened focus on, particularly during the pandemic, because the pandemic is not over yet. So it's still a long road ahead.

And there's a lot of uncertainty there. So heightened cost discipline is definitely one of them.

But our focus is also on our organic growth. And so, we need to focus on the businesses that we can grow, being cautiously optimistic, depending on the outlook.

But we will be looking at growth in all of our various businesses as well.

So growth of the topline, as you think about your various businesses, is that essentially just going to be an adjustment on the risk appetite? Or are you looking to add new revenue line items?

So, I would say for fiscal ’21 it's really hard to forecast, because as I said, the pandemic is not over yet. So where we can and Liam had mentioned in terms of where our PCLs will be, they'll kind of level off in the first-half of the year.

And again, it’s all dependent on how this pandemic and the second wave maps out and impacts all of our customers. So the key thing that we can focus on in the meantime is a heightened cost discipline.

Now, we do know that, for example, in some of our businesses, we're beginning to see an uptick, for example, in our NPS business. And so, from an inventory financing perspective, there has been a recent uptick, and we do expect growth.

But again, it's all dependent on how things pan out over the next few months with the pandemic.

Okay. Thank you.

So thank you, I wanted to thank Susan, Francois, Liam and Kelsey and all of today's call participants. I want to reemphasize a few key points before we close the call.

Number one, we are actively engaged in an effort to strengthen our organization, including your review of current priorities, and longer-term strategic objectives. I look forward to sharing the details of our strategic plan with you when our work is completed.

Number two, our cost optimization initiatives will result in near-term actions on cost discipline and ongoing expense management, with a view to improving our overall efficiency. Number three, we are refocusing our efforts on meeting the needs of our customers and are determined to become much more customer centric in everything we do.

The creation of two operating units for commercial and personal banking will help us prioritize these businesses and position them for future growth. Thank you again, and I look forward to meeting as many of you as possible over the next year, as well as many of our shareholders in our efforts to enhance our outreach to the investment community.

Thank you for joining us today. Should you have any further questions, our contact information is included at the end of the investor presentation.

Our first quarter 2021 earnings call will be held on March 5, and we look forward to speaking with you then. Wishing you a safe and happy holiday season.