Laurentian Bank of Canada

Welcome to the Laurentian Bank Financial Results Conference call. Please note that this call is being recorded. I would now like to turn the meeting over to Raphael Ambo, Vice President, Finance and Investor Relations. Please go ahead, Raphael.

Bonjour à tous. Good morning and thank you for joining us. Today's opening remarks will be delivered by Éric Provost, President and CEO, and the review of the fourth quarter and annual financial results will be presented by Yvan Deschamps, Executive Vice President and CFO, after which we'll invite questions from the phone. Also joining us for the question period is Christian Debroux, Executive Vice President and CRO. All documents pertaining to the quarter can be found on our website in the Investor Relations section. I'd like to remind you that during this conference call, forward-looking statements may be made, and it is possible that actual results may differ materially from those projected in such statements. For the complete cautionary note regarding forward-looking statements, please refer to our press release or to slide 2 of the presentation. I would also like to remind listeners that the Bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Eric and Yvan will be referring to adjusted results in their remarks unless otherwise noted as reported. I will now turn the call over to Eric.

Good morning. Thanks for being with us today. Our roadmap for 2025 was ambitious. We are proud to report that we delivered against our plan, achieving several transformational milestones. Notably, the deployment of cloud-based systems has significantly improved our operational efficiency resilience, and customer experience. These investments are foundational to building a bank that is agile, secure, and well positioned for the future. Operational resiliency and redundancy were also meaningfully enhanced, enabling the bank to respond swiftly to change, maintain stability, and ensure consistent service delivery to our clients. Elevated interest rates and moderated economic activity influence other income streams, notably lending fees. Despite these headwinds, net interest income increased year over year, reflecting a more favorable business mix and an improved net interest margin. Credit performance remained stable at 17 bps, with slightly lower allowances for credit losses compared to 2024, supported by resilient asset quality and disciplined risk management. In line with the spending levels outlined in our strategic plan, we continue to make targeted investments in IT infrastructure during the fourth quarter. These planned and essential initiatives are designed to simplify operations, strengthen resiliency, and deliver long-term efficiency gains for both our clients and shareholders. As a result, we closed the year with an adjusted efficiency ratio of 75.2%, aligned with our guidance. The bank divestitures of assets under administration from the full service and discount brokerage division earlier in the fiscal year contributed to lower non-interest expenses through reduced ad count and broker commissions. while also driving higher other income from the associated gain on the sale of the division on a reported basis. Our capital and liquidity positions remain consistently strong throughout the year, reinforcing the bank's financial resilience and ability to navigate the current microeconomic environment. This solid foundation provides the stability and flexibility required to support growth while staying firmly focused on executing our strategic priorities. Throughout the year, we have achieved steady progress in strengthening our portfolio by increasing the proportion of commercial loans from 47% to 50%. Notably, commercial loan balances grew by 2% on a quarter-over-quarter basis and by 8% year-over-year. This strategic shift in our business mix contributed to an improvement in our net interest margin, which rose from 1.79% in the prior year to 1.83% in 2025. Turning to the composition of our commercial growth, our key specialization delivered strong results. Inventory financing closed at $4.2 billion, making an impressive 12% year-over-year increase. This performance was supported by an expansion of our dealer base of more than 3% and continued diversification into new segments, areas where we see meaningful opportunities for further growth. In commercial real estate, activities started the year slowly, but interest rate reductions later in the year resulted in a notable improvement, particularly in rental construction. This momentum allowed us to expand our unfunded pipeline by 13% and grow our loan book by 11% year-over-year. On the personal banking front, our continued engagement with customers allowed us to maintain a relatively stable deposit base within the retail segment while simultaneously building positive momentum in broker-sourced deposits. The agreements we announced earlier this week are aligned with the acceleration of our commercial specialization and the partnership strategy we had announced as part of our strategic plan. In recent years, we have assessed multiple approaches for our retail and SME banking services. However, the substantial investments needed to sustain a competitive position in the Canadian banking landscape coupled with the evolving regulatory requirements and rising customer expectations, have made it increasingly difficult to compete effectively. Joining forces with Fairstone Bank will allow us to grow our specialized commercial business even further while maintaining our brand identity and head office in Montreal, where we were founded over 175 years ago. Partnering with National Bank, a leading Quebec-based institution, will provide our customers with access to a broader suite of services and enhance modern technology. The press release regarding this announcement is available in the news release section of our website and includes detailed information. As the special shareholder meeting to vote on these agreements is scheduled for the first quarter of 2026, the proxy circular will be published in early January. With that, I'll turn it over to Yvan.

Merci, Eric, et bonjour à tous. I would like to begin by turning to slide six, which highlights the bank's financial performance for 2025. Total reported revenue for the year was $983.7 million, down 3% compared to last year. On a reported basis, net income in diluted EPS were $139.9 million and $2.85, respectively. On an adjusted basis, the bank generated net income of $147.2 million in fiscal 2025, or $3 per share. Adjusting items after taxes include restructuring and other impairment charges of $8 million, and a profit on sale of assets under administration of $0.6 million. Additional details are available on slide 21 and in the 2025 annual report. The remainder of my comments will be on an adjusted basis and focus on the fourth quarter. Total revenue as displayed on slide 7 was $244.7 million, up 3% year-over-year, mainly from higher net interest income. driven by favorable business mix and the growth of average earning assets. Diluted EPS of 73 cents was down 18% year-over-year and down 6% quarter-over-quarter. Net income of $34.2 million was down by 16% compared to last year and down 14% compared to last quarter. The bank's efficiency ratio increased by 60 basis points compared to last year, but declined by 10 basis points compared to last quarter. Increase year-over-year reflects our ongoing investments in strategic priorities. Our ROE for the fourth quarter stood at 5%, down by 40 basis points from last quarter. Slide 8 displays net interest income up by $8.8 million, or 5% year-over-year, mainly driven by favorable shifts in the bank's business mix. notably with respect to the commercial loan mix. On a sequential basis, net interest income was down by $3.2 million, or 2%, reflecting a seasonal decline in average inventory financing loan volumes during the quarter. Early signs of the build-up season appeared late in Q4, while real estate growth partially offset residential mortgage headwinds. Our net interest margin was up by two basis points year-over-year and down three basis points sequentially at 1.79%, essentially for the same reasons. Slide 9 highlights the bank's funding position. We manage our funding in line with our loan book. On a quarterly basis, total funding was down by $100 million. Lower wholesale deposits largely contributed to this decrease due to the maturity of a $340 million senior deposit note. The $400 million increase in deposits sourced from the advisors and brokers channel was offset by a reduction in partnership deposits. Just efficient long-term debt related to securitization activities increased by $200 million over the quarter. The bank maintained a healthy liquidity coverage ratio, remaining at the high end of the industry. Slide 10 presents other income of $62.1 million, which was 1% lower compared to last year and 2% higher compared to last quarter. Quarterly increase in other income is driven primarily by higher lending fees, and reflects the stronger momentum in commercial real estate activity towards the end of the fourth quarter. Slide 11 shows non-interest expenses of $185.1 million, up 4% compared to last year, mainly due to higher salaries and employee benefits together with higher technology costs as the banks pursue investments in infrastructure and strategic objectives. On a sequential basis, non-interest expenses were down 1% primarily due to lower employee benefits costs. On slide 12, you will observe that our CT1 ratio remains stable at 11.3%. We are maintaining a solid capital position, and we are well positioned to redeploy capital. Slide 13 highlights our commercial loan portfolio, which was up $1.3 billion. or 8% year-over-year, and up $400 million, or 2% on a sequential basis, both of which were mainly driven by the growth of commercial real estate pipeline. Slide 14 provides details of our inventory financing portfolio. This quarter, utilization rates were 41%, remaining below historical averages, normally in the high 40s. Slide 15 illustrates that most of our commercial real estate portfolio is focused on multi-residential housing, with our exposure to the office segment at around 4% of our commercial loan portfolio. As noted in previous quarters, the bulk of our portfolio consists of multi-tenant properties with minimal exposure to single tenant buildings. Slide 16 presents the bank's residential mortgage portfolio, Residential mortgage loans were down 2% year-over-year and down 1% on a sequential basis. We adhered to cautious underwriting standards and are confident in the quality of our portfolio. This was reflected in our 63% proportion of insured mortgages and a low loan-to-value ratio of 50% on the uninsured portion. Allowances for credit losses on slide 17 total $189 million, down $15 million compared to last year, and $1.1 million compared to last quarter, mainly due to lower allowances on performing loans, partly offset by an increase in allowances on impaired loans, notably commercial loans. Turning to slide 18, the provisions for credit losses was $18 million, an increase of $7.6 million from a year ago, impacted by higher provisions on impaired loans, partly offset by higher releases on performing loans. Sequentially, PCLs were up $6.9 million, mainly from higher provisions on impaired commercial loans. As a percentage of average loans and acceptances, PCLs increased by 8 basis points year-over-year and quarter-over-quarter to 20 basis points. Slide 19 provides an overview of impaired loans. On a year-over-year basis, gross impaired loans increased by $47.1 million or by $6.5 million sequentially. Thanks to our prudent underwriting standards and the strong credit quality of our portfolio, about 95% of which is collateralized, we're able to manage credit migration effectively with minimal impact on our ACL and PCL outcomes. We remain committed to a prudent and disciplined approach to risk management. I will now turn the call back to the operator.

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by the two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Thank you. Please go ahead and press star one now if you have any questions. And your first question will be from Stephen Boland at Raymond James.

Good morning, everybody. Maybe, Eric, if you could just talk about the evolution of the transaction. We all know you went through a formal kind of process a couple years ago before you took over. I'm just wondering how this transaction started and got to this point.

Yeah, good morning, Stephen. Well, actually, as per our strategic plan released in May 2024, we clearly made it a priority to seek out partnership and to try to explore avenues for all business lines. And as you can see, we took actions throughout the year, but it was definitely through various interactions that we landed in terms of discussions, engaging with Fairstone and And you're going to have way more details when we publish a proxy in the upcoming weeks.

Okay, that's great. Second question, which you're probably getting a lot of, can you just talk about the dividend sustainability here until closing? Is there any thoughts of closing or reducing the dividend? Is there anything in the purchase agreement about that? And I'll add a third here just on the same topic kind of thing. Do you expect any issues on closing the branches? I know Quebec can be very, I know they're not your regulator, but Certainly the government is always protective of employment. Maybe just touch on those two things.

Thank you, Stephen. And thank you for raising the question on dividend. We also did receive a lot of questions on it. So I'll answer that portion and Eric will step in for your last question. So on the dividend side, as you see this morning, we declared the 47 cents dividend on the common shares. So there is no restrictions on paying dividend in the agreement. The only restriction is that we're not allowed to increase the dividend going forward.

Stephen, I'll take the branches and employees. This is the artist's part of the decision we took because it impacts colleagues and people that have been working with us for some time, a very long time. In terms of branches like this, this is physical presence. The fact that we're going to National Bank, they have an extended network across the province, which we believe will be well received in terms of point of service for our customers. And in terms of employment, we announced the fact that National Bank has offered a post-transition service to actually prioritize posting and opportunities for the employees that will be impacted and terminated by this announcement. So I feel good about our approach towards the regulatory approvals, and we're confident we're going to get the right levels of support.

Appreciate that. I'll pass the line. Thank you.

Ladies and gentlemen, as a reminder, It is star one if you have any questions. We'll go next to Saurabh Maveti at BMO Capital Markets. Please go ahead.

Thank you. I just wanted to confirm that you intend to continue with your investment agenda here, Eric and Yvonne, and to the extent that you continue to make the investments, if it's going to I suppose, portion it out as to how much of investments to date have been more in favor of the commercial franchise as opposed to the retail and SME and what the split may look like on a go-forward basis as well.

Yeah, it's a great question, Salabh. And our number one goal is to execute on conversion, getting to closing, like the migration towards national bank will become definitely our priority. So there's a portion that's going to go there. And yes, we've been working throughout the last year and a half on improving foundational and making sure that we create the right resiliency and redundancy. And part of it is focused and will be focused towards keeping the momentum towards our specialized groups. So it's going to be really a split, but big focus will be on conversion.

Okay. And Eric, as obviously, I mean, you're in the midst of something and we'll learn more about the details when the proxy becomes available, but is the bank now mostly focused on ensuring that, are you more managing the downside risk or are you still trying to deploy capital and, I don't know, grow the bank and the loan book and all of that? Well, yeah.

So first and foremost, like our customers from a retail standpoint is our focus in terms of maintaining level of services. making sure that our people are taken care of and that we have a clear game plan towards executing our path towards national bank migration. But for the rest, this is the future path in terms of being a specialized bank. So we're fully engaged with our customer base on a commercial front, our specialized group, inventory financing, equipment financing, and commercial real estate. the instructions to our team is definitely to continue and grow and seek out business that we want to continue into. So that continues.

Okay. So not to belabor the point, but it is possible then, I suppose, like I assume, I mean, let me ask the question a little bit directly. Do you have capital for SME growth or is that more in a controlled amortization mode until the deal closes.

Yeah, I'll be clear, Saurabh. So we're still in business and we want to grow this bank. So as mentioned by Eric, definitely the future is on the commercial side. But we're going to work with National to support our customers as well. That includes the retail and the SME. And we want to make sure that those customers are well treated and we're going to keep them. And definitely the focus of the bank going forward is going to be on the commercial side. But we've mentioned for the last many quarters that we have a lot of liquidity and capital, and we still have resources that we can redeploy.

Thank you. Thank you, Sarah.

And a final reminder, ladies and gentlemen, if you have a question or comment, it's a star one.

Seeing we have no other questions registered, this concludes the Q&A session. I will now hand the meeting over to Eric Proveau for closing remarks.

Thank you. This week marks the beginning of a new chapter for Laurentian Bank. As we look to the months ahead, our priorities are clear. We will work relentlessly and diligently to close the agreements with Fairstone Bank and National Bank while having our customers' and employees' best interests at heart. Our priority is to ensure uninterrupted excellent service for our customers during this transition. Wishing you all a wonderful holiday season. Thank you. Thank you, sir.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and ask that you please disconnect your lines. Thank you.