CWB reports solid third quarter earnings on record total revenues
Outlook for continued improvements in net interest margin
Economic uncertainty expected to continue
Dividends declared on both common and preferred shares
EDMONTON, Sept. 3 /CNW/ - Canadian Western Bank (CWB on TSX) today
announced solid third quarter results in a recessionary and uncertain economic
environment. CWB's results were highlighted by record total revenues and the
achievement of its 85th consecutive profitable quarter. Third quarter net
income of $28.7 million increased 9% compared to the same quarter last year
reflecting the positive contribution from strong 12% year-over-year loan
growth and very strong other income, offset by a net interest margin that was
12 basis points lower. Diluted earnings per common share of $0.38 were down 7%
and reflect the net impact of the preferred shares issued in March 2009. Total
loans increased 1% in the quarter, 6% year-to-date and 12% over one year ago.
Compared to the prior quarter, revenues and overall profitability were
positively affected by a marked 20 basis point improvement in net interest
margin to 2.13%, on a taxable equivalent basis (teb - see definition following
Financial Highlights table). Year-to-date net income of $75.9 million was 2%
lower compared to the same period last year, while diluted earnings per common
share decreased 10% to $1.08, reflecting the net impact of the preferred
shares issued.
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Third Quarter Highlights:
(three months ended July 31, 2009 compared with three months ended
July 31, 2008 unless otherwise noted)
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- Net income of $28.7 million, up 9%.
- Diluted earnings per common share of $0.38, down 7%.
- Record total revenues (teb(1)) of $85.5 million, up 12%.
- Net interest margin (teb) of 2.13%, down 12 basis points; up 20 basis
points from the previous quarter.
- Tier 1 capital ratio of 11.2% and total capital ratio of 15.4%; up
from 11.0% and 15.2% respectively in the previous quarter.
- Loan growth of 1% in the quarter, 6% year-to-date and 12% over the
past twelve months.
- Record quarterly net income from the insurance segment of
$3.2 million, up 30%.
- Appointment of Canadian Western Trust Company as trustee for a major
Canadian investment dealer.
- Introduction of a dividend reinvestment plan subsequent to quarter
end.
(1) Taxable equivalent basis. See definition following
Financial Highlights table.
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On September 2, 2009, CWB's Board of Directors declared a cash dividend
of $0.11 per common share, payable on October 1, 2009 to shareholders of
record on September 17, 2009. This quarterly dividend is unchanged from both
the previous quarter and one year ago. The Board of Directors also declared a
cash dividend of $0.453125 per Series 3 Preferred Share payable on October 31,
2009 to shareholders of record on October 22, 2009. On August 13, 2009,
subsequent to quarter end, CWB introduced a dividend reinvestment plan. Under
the plan, CWB has currently elected to issue common shares from treasury at a
2% discount from the average market price (further details on the dividend
reinvestment plan are available at
http://www.cwbankgroup.com/investor_relations/drip.htm).
Banking and trust earnings of $25.5 million were up 7% compared to one
year ago as earnings due to strong loan growth and a 29% increase in other
income, including an additional $5.4 million of gains on sale of securities,
more than offset the impact from the compressed net interest margin and higher
non-interest expenses. Quarterly net income from insurance operations was a
record $3.2 million, up 30% compared to a year earlier. On a year-to-date
basis, banking and trust earnings of $69.7 million were down 2% from 2008,
while net income from insurance operations was unchanged at $6.2 million.
"We are pleased with both our third quarter and year-to-date results,
particularly given the impact from margin compression and a recessionary
environment," said Larry Pollock, President and CEO. "While positive signs are
clearly evident, economic uncertainties remain. We are committed to prudently
managing through these challenging times while continuing to support the needs
of our customers. Based on our current view, overall credit quality is
relatively stable. The level of gross impaired loans will fluctuate as we
progress through the current cycle, but we expect actual write-offs will
remain within our range of acceptable levels. As expected, net interest margin
showed good improvement over the prior quarter and we believe this trend will
continue."
"CWB's performance through the most difficult markets in decades for
financial institutions underscores the value of our disciplined strategies.
Our employees must also be commended, as they continue to do an excellent job.
Achieving robust asset growth has not recently been the primary focus for us,
but CWB still has tremendous growth potential. We are very well positioned in
our primary markets, which should be poised for solid economic recovery once
major global economies begin to expand. We also continue to evaluate the
potential to grow via acquisition. While there are many buying opportunities
in today's markets, high quality assets or businesses that are accretive and
fit strategically are more difficult to identify. Our strong capital position
provides us flexibility and we believe that patience is important for both the
Bank and our shareholders at this time," added Pollock.
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Financial Highlights
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For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except July 31 April 30 July 31 July 31
per share amounts) 2009 2009 2008 2008
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Results of Operations
Net interest income
(teb - see below) $ 60,934 $ 52,812 $ 57,290 6%
Less teb adjustment 2,189 1,675 1,442 52
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Net interest income
per financial
statements 58,745 51,137 55,848 5
Other income 24,604 22,570 19,085 29
Total revenues (teb) 85,538 75,382 76,375 12
Total revenues 83,349 73,707 74,933 11
Net income 28,729 21,580 26,327 9
Earnings per common
share
Basic(1) 0.39 0.30 0.42 (7)
Diluted(2) 0.38 0.30 0.41 (7)
Return on common
shareholders'
equity(3) 13.4% 11.0% 16.0% (260)bp(4)
Return on assets(5) 0.87 0.70 1.03 (16)
Efficiency ratio(6)
(teb) 47.0 53.1 45.2 180
Efficiency ratio 48.2 54.3 46.1 210
Net interest margin
(teb)(7) 2.13 1.93 2.25 (12)
Net interest margin 2.05 1.87 2.19 (14)
Provision for credit
losses as a
percentage of
average loans 0.15 0.15 0.15 -
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Per Common Share
Cash dividends $ 0.11 $ 0.11 $ 0.11 -%
Book value 11.87 11.42 10.47 13
Closing market value 18.19 13.35 25.00 (27)
Common shares
outstanding
(thousands) 63,738 63,589 63,342 1
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Balance Sheet and
Off-Balance Sheet
Summary
Assets $11,331,377 $11,450,625 $10,056,644 13%
Loans 9,137,763 9,041,518 8,168,748 12
Deposits 9,393,809 9,713,334 8,686,336 8
Subordinated
debentures 375,000 375,000 410,000 (9)
Shareholders' equity 966,232 935,753 663,401 46
Assets under
administration 4,751,886 4,472,060 4,498,545 6
Assets under
management 835,613 816,600 - nm
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Capital Adequacy(8)
Tangible common equity
to risk-weighted
assets(9) 7.9% 7.6% 8.0% (10)bp
Tier 1 ratio 11.2 11.0 9.2 200
Total ratio 15.4 15.2 14.0 140
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For the nine months ended
(unaudited) ------------------------- Change from
($ thousands, except July 31 July 31 July 31
per share amounts) 2009 2008 2008
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Results of Operations
Net interest income
(teb - see below) $ 168,342 $ 169,995 (1)%
Less teb adjustment 5,450 4,131 32
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Net interest income
per financial
statements 162,892 165,864 (2)
Other income 69,525 54,803 27
Total revenues (teb) 237,867 224,798 6
Total revenues 232,417 220,667 5
Net income 75,928 77,534 (2)
Earnings per common
share
Basic(1) 1.10 1.23 (11)
Diluted(2) 1.08 1.20 (10)
Return on common
shareholders'
equity(3) 13.0% 16.3% (330)bp(4)
Return on assets(5) 0.84 1.05 (21)
Efficiency ratio(6)
(teb) 49.0 44.4 460
Efficiency ratio 50.2 45.2 500
Net interest margin
(teb)(7) 2.02 2.29 (27)
Net interest margin 1.95 2.24 (29)
Provision for credit
losses as a
percentage of
average loans 0.15 0.15 -
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Per Common Share
Cash dividends $ 0.33 $ 0.31 6%
Book value 11.87 10.47 13
Closing market value 18.19 25.00 (27)
Common shares
outstanding
(thousands) 63,738 63,342 1
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Balance Sheet and
Off-Balance Sheet
Summary
Assets
Loans
Deposits
Subordinated
debentures
Shareholders' equity
Assets under
administration
Assets under
management
------------------------------------------------------------
Capital Adequacy(8)
Tangible common equity
to risk-weighted
assets(9)
Tier 1 ratio
Total ratio
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nm - not meaningful.
(1) Basic earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding.
(2) Diluted earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding adjusted for the dilutive effects of stock options,
warrants and other common stock equivalents.
(3) Return on common shareholders' equity is calculated as annualized net
income after preferred share dividends divided by average common
shareholders' equity.
(4) bp - basis point change.
(5) Return on assets is calculated as annualized net income after
preferred share dividends divided by average total assets.
(6) Efficiency ratio is calculated as non-interest expenses divided by
total revenues.
(7) Net interest margin is calculated as annualized net interest income
divided by average total assets.
(8) Capital adequacy is calculated in accordance with guidelines issued
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).
(9) Tangible common equity to risk-weighted assets is calculated as
shareholders' equity less subsidiary goodwill divided by
risk-weighted assets, calculated in accordance with guidelines issued
by OSFI.
Taxable Equivalent Basis (teb)
Most financial institutions analyze revenue on a taxable equivalent basis
to permit uniform measurement and comparison of net interest income. Net
interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly lower
than would apply to a loan or security of the same amount. The adjustment to
taxable equivalent basis increases interest income and the provision for
income taxes to what they would have been had the tax-exempt securities been
taxed at the statutory rate.
Non-GAAP Measures
Taxable equivalent basis, return on common shareholders' equity, return
on assets, efficiency ratio, net interest margin, provisions for credit losses
as a percentage of average loans and tangible common equity to risk-weighted
assets do not have standardized meanings prescribed by generally accepted
accounting principles (GAAP) and therefore may not be comparable to similar
measures presented by other financial institutions.
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Message to Shareholders
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Canadian Western Bank (CWB or the Bank) reported solid third quarter
results amidst a recessionary environment and an uncertain economic outlook.
Highlights included the achievement of record total revenues and the 85th
consecutive profitable quarter, a period spanning more than 21 years.
Third quarter net income of $28.7 million was up 9% ($2.4 million)
compared to the prior year, while diluted earnings per common share were down
7% ($0.03) to $0.38, and reflects the net impact of the preferred shares
issued in March 2009 estimated at $0.04 per diluted common share. Record total
revenues, on a taxable equivalent basis (teb - see definition following
Financial Highlights table), of $85.5 million increased 12% ($9.2 million) on
strong loan growth and a 29% ($5.5 million) increase in other income, offset
by a lower net interest margin.
Compared to last quarter, consolidated net income increased 33% as the
combined positive impact from a marked 20 basis point improvement in net
interest margin (teb) to 2.13%, strong other income and three additional
revenue earning days more than offset slightly higher non-interest expenses.
Diluted earnings per common share were up 27% from last quarter reflecting the
items already noted. On a year-to-date basis, net income declined 2% from the
same period last year to $75.9 million, while diluted earnings per share
decreased 10% to $1.08.
The Bank's very strong Tier 1 and total capital ratios at July 31, 2009
of 11.2% and 15.4%, respectively, remained well above regulatory minimums and
are also higher than CWB's targeted capital thresholds. While these very
strong ratios have a negative impact on overall profitability, they provide
considerable flexibility to pursue accretive growth opportunities. Management
continues to evaluate opportunities to deploy capital for the long-term
benefit of CWB shareholders.
Third quarter return on equity of 13.4% decreased 260 basis points
compared to a year earlier, but was up 240 basis points over the prior
quarter. Return on assets of 0.87% declined 16 basis points from a year
earlier, but increased 17 basis points from the previous quarter. Compared to
last year, lower profitability ratios are mainly attributed to the compressed
net interest margin and the net impact from the preferred shares issued in
March 2009.
Common Share Price Performance
CWB shares ended the third quarter at $18.19, compared to $25.00 a year
earlier. Including reinvested dividends, the total return for shareholders
over the one year holding period ended July 31, 2009 was negative 25%. This
compares to a nil change for the Total Return S&P/TSX Financials Index of over
the same one year period.
Dividends
On September 2, 2009, CWB's Board of Directors declared a cash dividend
of $0.11 per common share, payable on October 1, 2009 to shareholders of
record on September 17, 2009. This quarterly dividend is unchanged from both
the previous quarter and one year ago. The Board of Directors also declared a
cash dividend of $0.453125 per Series 3 Preferred Share payable on October 31,
2009 to shareholders of record on October 22, 2009.
On August 13, 2009, subsequent to quarter end, CWB introduced a dividend
reinvestment plan (the "Plan"). The Plan provides holders of the Bank's common
shares and holders of any other class of shares deemed eligible by the Bank's
Board of Directors (together being "Eligible Shares"), with the opportunity to
direct cash dividends paid on any class of their Eligible Shares toward the
purchase of common shares. Currently, holders of the Bank's common shares and
Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 are eligible to
participate in the Plan. Details and an application form for the Plan are
available on the Bank's website at
http://www.cwbankgroup.com/investor_relations/drip.htm. At the current time,
for the purposes of the Plan, the Bank has elected to issue common shares from
treasury at a 2% discount from the average market price (as defined in Section
7(a) of the Plan).
Loan Growth
Loan growth of 1% in the quarter, 6% year-to-date and 12% over the past
year confirms the Bank's strategies to expand market presence while
proactively managing the impact of moderated economic activity. Reflecting the
recessionary environment and ongoing economic uncertainties, new deal flow has
slowed since the first quarter of this year, and we expect activity will be
constrained until major global economies start to recover. As always, we
remain committed to supporting businesses and individuals within our markets
while maintaining our focus on strong credit discipline and funding quality
assets that offer a fair and profitable return for our shareholders. Current
economic conditions coupled with the Bank's exceptional 6% loan growth in the
fourth quarter last year will challenge our ability to achieve the 10% fiscal
2009 loan growth target, unless we are successful in acquiring quality loan
portfolios from other lenders. Organic growth will likely be further
constrained by expected loan repayments in the Bank's interim construction
portfolio.
Credit Quality
Overall credit quality remained relatively stable in a challenging
operating environment for all lending sectors. The level of gross impaired
loans decreased slightly from the prior quarter as the dollar value of
resolved accounts exceeded new formations. As in prior quarters, the majority
of larger accounts classified as impaired are interim construction loans -
mainly in smaller markets - that display common characteristics associated
with a softened real estate market, cost escalations during construction and
the inability for borrowers to access additional capital. The Bank is in
varying stages of enforcing its security to recoup its loans on these
projects. Estimated write-offs from all existing loans classified as impaired
are reflected in the specific provisions for credit losses and have been
established based on current assessments of security held against these
accounts. The quarterly provision for credit losses of $3.4 million was
unchanged from last quarter and is in line with our fiscal 2009 performance
target range of 15 to 18 basis points of average loans. Based on our present
view of credit quality, while the level of gross impaired loans is likely to
fluctuate up or down as we progress through the current cycle, actual losses
are expected to remain within the Bank's historic range of acceptable levels.
CWB's proven history of strong underwriting discipline and secured lending
practices further support our expectation in this regard.
Branch Deposit Growth
Deposits raised through our branch network and Canadian Western Trust
Company were up 1% over last quarter but decreased 6% compared to a year
earlier. The decline in total branch deposits compared to 2008 reflects a
reduction in larger commercial balances, which are subject to greater
fluctuation, and was more than offset by an increase in retail term deposits
raised through the Bank's deposit broker network. The demand and notice
component within branch-raised deposits was up 5% in the quarter and 7%
compared to a year earlier. Growth in notice and demand deposits substantiates
our strategies to further diversify the Bank's deposit base, which remains a
key priority. We continue to evaluate opportunities to expand and/or enhance
our existing base of retail deposits, which includes the ongoing development
of the Internet-based division of the Bank named Canadian Direct Financial(TM)
(www.canadiandirectfinancial.com).
Net Interest Margin
The Bank's compressed net interest margin compared to the same quarter
last year was mainly attributed to consecutive reductions in the prime lending
rate and lower yields on securities, partially offset by lower deposit costs,
more favourable spreads on both new and renewal loans and an improved mix in
the securities portfolio. Margin compression continued to have a significant
negative impact on growth in both total revenues and overall profitability.
However, in comparison to the prior quarter, the expected combination of a
more stable interest rate environment, easing deposit costs and improved
market spreads contributed to a 20 basis point improvement in net interest
margin (teb) to 2.13%. Given current market conditions and the Bank's overall
financial position, we anticipate that net interest margin will continue to
improve and gradually return to historic levels. To the extent possible,
without foregoing overall investment quality and future income, we will look
for further opportunities to augment the Bank's financial results by realizing
gains on sale of securities and improving investment yields.
Trust and Wealth Management Services
Canadian Western Trust Company (CWT) posted solid financial performance
while continuing to expand its market presence. CWT was also very pleased to
announce its appointment during the quarter as trustee for all self-directed
registered and education savings plans administered by a major Canadian
investment dealer, effective August 2009. Valiant Trust Company's revenues
declined reflecting the considerable slowdown in capital markets activity, but
we do foresee increasing opportunities for this business moving forward. Both
of our trust companies are now operating in Ontario, and we believe this
market provides strong growth potential.
Insurance
Our insurance subsidiary, Canadian Direct Insurance Incorporated
(Canadian Direct or CDI), reported record quarterly earnings with net income
of $3.2 million. Profitability improved for the auto lines in both Alberta and
British Columbia (BC). Policy growth, aided by higher retention rates, was
also up significantly from the same quarter last year. Quarterly results
included a positive $0.6 million before tax contribution from the Alberta auto
risk sharing pools reflecting a favorable adjustment, based on revised
assumptions, to the Minor Injury Regulation claims reserves.
Outlook
The Bank's third quarter and year-to-date results reflect solid
performance despite the significant impact on results from margin compression
and the uncertain economic environment. We expect net interest margin will
continue to improve into fiscal 2010, maintaining the positive trend that was
apparent over the past quarter. Improved margin will positively impact
revenues, earnings and the efficiency ratio (teb), but the net impact from our
preferred share offerings make it unlikely we will meet our fiscal 2009
performance targets for common shareholders' returns on assets and equity.
Economic activity has slowed in our markets much more than expected at the
beginning of the year and asset growth will likely continue to be constrained
as a result. That said, there are opportunities to grow via acquisition and
our solid balance sheet and strong capital base put us in an excellent
position to take advantage of opportunities that meet our investment
objectives. We are currently evaluating potential investments, but will remain
prudent and continue our focus on creating value and growth over the
long-term. Despite current challenges, our overall outlook remains positive
and we are very confident that the Bank will emerge from this cycle stronger
than ever.
We look forward to reporting our fourth quarter and fiscal 2009 results
on December 3, 2009.
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Q3 Results Conference Call
CWB's third quarter results conference call is scheduled for Thursday,
September 3, 2009 at 3:00 p.m. ET (1:00 p.m. MT). The Bank's executives
will comment on financial results and respond to questions from analysts
and institutional investors.
The conference call may be accessed on a listen-only basis by dialing
416-644-3414 or toll-free 1-800-733-7571. The call will also be webcast
live on the Bank's website, www.cwbankgroup.com. The webcast will be
archived on the Bank's website for 60 days.
A replay of the conference call will be available until September 17,
2009 by dialing 416-640-1917 (Toronto) or 1-877-289-8525 (toll-free) and
entering passcode 21311921, followed by the pound sign.
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About Canadian Western Bank
Canadian Western Bank offers highly personalized service through 36
branch locations and is the largest publicly traded Schedule I chartered bank
headquartered in Western Canada. The Bank, with total balance sheet assets of
more than $11 billion, assets under administration of over $5 billion and
assets under management approaching $1 billion, specializes in mid-market
commercial lending and offers a full range of retail banking services. Trust
services to independent financial advisors, corporations, income trusts and
individuals are provided through the Bank's subsidiaries, Canadian Western
Trust Company and Valiant Trust Company. Canadian Direct Insurance
Incorporated is a subsidiary that offers personal auto and home insurance to
customers in BC and Alberta. Subsidiary Adroit Investment Management Ltd.
provides wealth management services to individuals, corporations and
institutional clients. The common shares of Canadian Western Bank are listed
on the Toronto Stock Exchange under the trading symbol 'CWB'. The Bank's
Series 3 preferred shares and common share purchase warrants trade on the
Toronto Stock Exchange under the trading symbols 'CWB.PR.A' and 'CWB.WT'
respectively. Refer to www.cwbankgroup.com for additional information.
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Management's Discussion and Analysis
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This management's discussion and analysis (MD&A) should be read in
conjunction with Canadian Western Bank's (CWB or the Bank) unaudited interim
consolidated financial statements for the period ended July 31, 2009, as well
as the audited consolidated financial statements and MD&A for the year ended
October 31, 2008, available on SEDAR at www.sedar.com and the Bank's website
at www.cwbankgroup.com. Except as discussed below, the factors discussed and
referred to in the MD&A for fiscal 2008 remain substantially unchanged.
Overview
CWB recorded solid third quarter financial results in a recessionary and
uncertain economic environment reflecting good performance from both business
segments. Quarterly net income from banking and trust operations of $25.5
million was up 7% ($1.7 million) compared to one year ago as positive earnings
contributions from strong 12% loan growth and a $5.4 million increase in gains
on sale of securities more than offset a lower net interest margin, measured
on a taxable equivalent basis (teb - see definition following Financial
Highlights table), and a 16% ($5.2 million) increase in non-interest expenses.
Gains on the sale of securities reflect strategies that allowed the Bank to
capitalize on favourable prices on certain short-term investments. Canadian
Direct Insurance Incorporated (Canadian Direct or CDI) posted record quarterly
net income of $3.2 million, up 30% ($0.7 million) compared to a year earlier.
Consolidated third quarter net income increased 9% from one year ago to $28.7
million, representing $0.38 ($0.39 basic) per diluted common share, which
reflects the net impact from the preferred shares issued in March 2009.
Compared to the previous quarter, consolidated net income was up 33%
($7.1 million) reflecting a marked improvement in net interest margin, a 9%
($2.0 million) increase in other income and three more revenue earning days.
Diluted earnings per common share increased 27% ($0.08) over the prior
quarter. Consolidated net income year-to-date of $75.9 million was down 2%
($1.6 million) compared to the same period in 2008. Lower net income
year-to-date reflects the impact of a significantly lower net interest margin
and a 17% ($16.8 million) increase in non-interest expenses, offset by the
positive impact from strong 12% loan growth and 27% ($14.7 million) higher
other income. Other income year-to-date included gains on sale of securities
that were $17.3 million higher than the same period in 2008 while credit
related fee income declined $4.6 million mainly due to comparatively slower
loan volumes. Year-to-date earnings per diluted common share of $1.08 were
down 10% ($0.12 per diluted common share) compared to last year and reflect
the net impact of the preferred shares issued.
Third quarter return on common shareholders' equity of 13.4% decreased
from 16.0% a year earlier, but was up from 11.0% last quarter. Return on
assets was 0.87%, compared to 1.03% a year earlier and 0.70% in the prior
quarter. Year-to-date return on common shareholders' equity of 13.0%
represented a 330 basis point decline compared to the same period in 2008,
while return on assets was down 21 basis points to 0.84%. Although partially
offset by strong growth in other income, quarterly and year-to-date
profitability ratios were negatively impacted by both constrained total
revenues due to a significantly lower net interest margin and higher
non-interest expenses. Compared to 2008, the net impact from CWB's preferred
share offerings completed in March 2009 further reduced profitability ratios.
The preferred share capital will support considerable future growth and is
expected to become accretive to earnings over time.
Total Revenues (teb)
Total revenues (teb), comprised of net interest income and other income,
of $85.5 million were up 12% ($9.2 million) compared to the same quarter last
year reflecting the positive impact from strong loan growth and a 29% ($5.5
million) increase in other income, partially offset by a lower net interest
margin. Compared to last quarter, total revenues (teb) were up 13% ($10.2
million) reflecting a 15% ($8.1 million) increase in net interest income (teb)
and improved other income. Higher net interest income (teb) compared to last
quarter was primarily attributed to a more stable interest rate environment,
lower deposit costs, three additional days this quarter and the Bank's ongoing
success in pricing new and renewal loans to reflect the current market
environment. Year-to-date total revenues (teb) of $237.9 million were up 6%
($13.1 million) over the same period last year as earnings attributed to
continued loan growth and increased other income more than offset the impact
of the significantly lower net interest margin and one less revenue earning
day this year.
Net Interest Income (teb)
Quarterly net interest income (teb) of $60.9 million was up 6% ($3.6
million) compared to the same period last year as the positive revenue impact
from strong loan growth more than offset a 12 basis point decline in net
interest margin (teb) to 2.13%. Third quarter net interest margin compared to
last year was mainly affected by consecutive reductions in the prime lending
interest rate and lower yields on investments held in the securities
portfolio, partially offset by lower deposit costs, more favourable spreads on
both new and renewal loans and an improved mix in the securities portfolio.
Generally, reductions in the prime interest rate negatively impact net
interest margin because deposits do not reprice as quickly as prime-based
loans, which subsequently compresses the interest spread earned on the Bank's
assets. Also, the marginal benefit attributed to the Bank's lower cost demand
and notice deposits is significantly reduced as interest rates approach zero.
Net interest income (teb) was up 15% ($8.1 million) compared to the
previous quarter reflecting a marked 20 basis point increase in net interest
margin (teb) and three additional interest earnings days in the third quarter.
The improved net interest margin compared to the prior quarter mainly reflects
lower deposit costs and the positive effects from loan pricing actions in
prior periods, partially offset by a reduction in the average prime lending
rate. Year-to-date net interest income (teb) of $168.3 million represented a
1% decline from the first nine months of fiscal 2008 as the positive earnings
impact from strong loan growth was more than offset by a significant 27 basis
point decline in net interest margin (teb) to 2.02%. The lower year-to-date
net interest margin compared to last year was mainly attributed to the factors
already noted.
Note 13 to the unaudited interim consolidated financial statements
summarizes the Bank's exposure to interest rate risk as at July 31, 2009.
Interest rate risk or sensitivity is defined as the impact on net interest
income, both current and future, resulting from a change in market interest
rates. Based on the interest rate gap position at July 31, 2009, it is
estimated that a one-percentage point increase in all interest rates would
increase net interest income by approximately 3.8% ($9.5 million) and decrease
other comprehensive income $20.7 million, net of tax, over the following
twelve months. It is estimated that a one-percentage point decrease in all
interest rates would increase net interest income by approximately 5.2% ($13.1
million) and increase other comprehensive income $20.7 million, net of tax,
over the following twelve months. The positive earnings impact when all
interest rates decrease one-percentage point reflects the potential for a zero
percent Bank of Canada overnight interest rate that effectively puts a floor
on the prime lending rate. At April 30, 2009, it was estimated that a
one-percentage point increase in all interest rates would have increased net
interest income by approximately 5.6% ($12.4 million) and decreased other
comprehensive income $23.4 million, net of tax, over the following twelve
months and, that a one-percentage point decrease in all interest rates at
April 30, 2009 would have increased net interest income by approximately 4.8%
($10.5 million) and increased other comprehensive income $23.4 million, net of
tax, over the following twelve months. The potential earnings variance due to
changes in all interest rates was high compared to most prior periods and
internal target levels reflecting near zero interest rates, including the
effective floor on the prime lending rate, and abnormal market spreads for
conventional financial instruments used to hedge the Bank's loan portfolio
against interest rate risk. Now that interest rates appear to have reached the
bottom of the current cycle, certain interest rate hedges have been unwound to
maximize returns when rates begin to trend upwards. Management will continue
to actively manage interest rate sensitivity and related risks.
Other Income
Quarterly other income of $24.6 million was up 29% ($5.5 million) from a
year earlier as $5.6 million higher gains on sale of securities and a 24%
($1.1 million) improvement in net insurance revenues more than offset a 22%
($1.7 million) decline in credit related fee income. Gains on sale of
securities reflect strategies that allowed the Bank to capitalize on
favourable pricing for certain short-term investments. The combined
contribution from trust services and fee income from newly acquired Adroit
Investment Management Ltd. (Adroit) was up $0.2 million, while foreign
exchange gains and other categories increased $0.1 million in the aggregate.
Compared to the previous quarter, other income was up 9% ($2.0 million)
mainly reflecting a $1.6 million increase in net insurance revenues and 16%
($0.8 million) higher credit related fee income. On a year-to-date basis,
other income improved 27% ($14.7 million) reflecting a $17.3 million increase
in gains on sale of securities, 15% ($1.4 million) higher trust and wealth
management fee income and a $0.6 million improvement in foreign exchange gains
and other, offset by 21% ($4.6 million) lower credit related fee income,
consistent with decreased loan volumes. Net insurance revenues year-to-date
were relatively unchanged compared to 2008 and include the impact of high
first quarter claims experience this year in the British Columbia (BC) home
product line due to severe weather.
Credit Quality
Overall credit quality remained relatively stable given the recessionary
environment, an uncertain economic outlook and lower commodity prices. The
Bank's primary markets continue to be materially impacted by global economic
turmoil, particularly as it relates to demand for commodities, but management
believes that Western Canada is well positioned to manage through these
challenges. Measured as a percentage of average loans, the provision for
credit losses of 15 basis points remained unchanged from both the previous
quarter and one year ago.
For the three months ended
-------------------------------------- Change from
(unaudited) July 31 April 30 July 31 July 31
($ thousands) 2009 2009 2008 2008
-------------------------------------------------------------------------
Gross impaired loans,
beginning of period $ 107,017 $ 107,785 $ 43,018 149%
New formations 25,111 29,378 14,708 71
Reductions, impaired
accounts paid down
or returned to
performing status (22,444) (27,387) (10,054) 123
Write-offs (4,455) (2,759) (133) 3,249
-------------------------------------------------------------------------
Total(3) $ 105,229 $ 107,017 $ 47,539 121%
-------------------------------------------------------------------------
Balance of the ten
largest impaired
accounts $ 54,990 $ 56,478 $ 24,528 124%
Total number of
accounts classified
as impaired 211 204 138 53
Total number of
accounts classified
as impaired under
$1 million 195 188 127 54
Gross impaired loans
as a percentage of
total loans(1) 1.14% 1.17% 0.58% 56 bp(2)
(1) Total loans do not include an allocation for credit losses or
deferred revenue and premiums.
(2) bp - basis point change.
(3) Gross impaired loans includes foreclosed real estate with a carrying
value of $4,756 (April 30, 2009 - $3,505 and July 31, 2008 - $nil)
which is held for sale.
Gross impaired loans at July 31, 2009 were $105.2 million, compared to
$107.0 million last quarter and $47.5 million a year earlier. The increased
dollar level of gross impaired loans compared to 2008 is largely attributed to
a number of interim construction loans mainly located in smaller markets. A
softened real estate market, cost escalations during construction and the
inability of borrowers to access additional capital are common characteristics
for these accounts. The Bank is in various stages of enforcing its security to
recoup its loans on these projects. The ten largest accounts classified as
impaired measured by dollars outstanding represented approximately 52% of the
total gross impaired loans at quarter end, compared to 53% in the prior
quarter and 52% a year earlier.
The dollar level of gross impaired loans fluctuates as loans become
impaired and are subsequently resolved and does not directly reflect the
dollar value of expected write-offs given the tangible security held against
the Bank's lending positions. Existing loans classified as impaired are well
structured and current estimates of expected write-offs are reflected in the
specific provisions for credit losses. Current estimates include detailed
analyses of both the overall quality and ultimate marketability of the
security held against impaired accounts. In certain cases, the timeframe
required to recover balances on loans classified as impaired has been
lengthened due to the presence of other lenders with charges subordinated to
CWB and slow foreclosure processes on residential real estate in the western
provinces.
Gross impaired loans represented 1.14% of total loans at quarter end,
compared to 1.17% last quarter and 0.58% one year ago. At the end of fiscal
2008, the ten year average for gross impaired loans measured against total
loans was 0.83%, with a high of 1.69% in 1999 and a low of 0.18% in 2006. The
average net new specific provisions for credit losses over the same ten year
period noted above was 13 basis points of average loans (including fiscal 2006
when recoveries exceeded losses). As noted above, the level of impaired loans
will fluctuate up or down until the economic cycle runs its course, but actual
losses in consideration of today's operating environment are expected to
remain within the Bank's range of acceptable levels. Based on current credit
quality, management expects the fiscal 2009 provisions for credit losses will
remain in the targeted range of 15 - 18 basis points of average loans. The
targeted provisions for credit losses and other performance targets for fiscal
2010 will be published in December of this year along with the Bank's fiscal
2009 financial results.
The total allowance for credit losses (general and specific) represented
71% of gross impaired loans at quarter end, compared to 70% last quarter and
147% one year ago. The total allowance for credit losses (general and
specific) was $74.2 million at July 31, 2009, compared to $75.1 million last
quarter and $70.0 million a year earlier. The general allowance as a
percentage of risk-weighted loans was 73 basis points, down from 74 basis
points in the previous quarter and 80 basis points a year earlier. The Bank's
long-standing strategy with respect to managing the allowance for credit
losses has been to maintain consistent provisions to cover both identified and
unidentified losses. The purpose of the general allowance for credit losses is
to mitigate the timing impact of unidentified losses in the portfolio. It is
expected that the level of the general allowance will fluctuate up or down as
specific losses are recognized and subsequently charged off.
Non-interest Expenses
Effective execution of CWB's strategic plan which is focused on
sustainable growth has necessitated increased spending in some areas.
Significant expenditures include additional staff complement, as well as
expanded premises and technology upgrades. Spending in these areas is an
integral part of management's commitment to maximize shareholder value over
the long-term and is expected to provide material benefits in future periods.
Previously announced plans for three new full service branches (Saskatoon,
Kamloops and Surrey) are proceeding with expected opening dates in 2009 and
2010. The Bank also expects to open an additional new branch in the Edmonton
area (Sherwood Park) with a tentative opening date in 2010.
Compared to last year, third quarter non-interest expenses increased 16%
($5.7 million) to $40.2 million. Within non-interest expenses, salary and
benefit costs were up 20% ($4.5 million) with the increase mainly attributed
to additional stock-based compensation charges, increased staff complement and
annual salary increments. Total third quarter stock-based compensation charges
of $3.2 million were up $1.7 million over the same period in 2008 reflecting
the recognition of expense related to the Bank's third quarter granting of
Restricted Share Units (RSUs) associated with a revised long-term incentive
plan. Salary expense for RSUs is recognized evenly over the vesting period
except where the employee is eligible to retire prior to the vesting date, in
which case the expense is recognized between the grant date and the date the
employee is eligible to retire. Because there are a number of CWB employees
currently deemed eligible to retire, salary expense recognized for RSUs is
highest in the same quarter as the grant date. Of the amount expensed in the
third quarter, approximately $1.6 million related to the recognition of the
eligible to retire liability. Premises and equipment expenses were up $1.0
million in the aggregate over the same quarter last year. Other expenses
increased $0.2 million. Third quarter non-interest expenses related to newly
acquired Adroit were $0.7 million, including the associated amortization of
intangible assets.
Non-interest expenses were up $0.2 million compared to the prior quarter
as a $0.4 million increase in salary and benefit costs was offset by lower
premises, equipment and other expenses. Year-to-date non-interest expenses of
$116.6 million were up 17% ($16.8 million) over the same period last year
reflecting $12.6 million higher salary and benefit costs due to increased
staff complement, stock-based compensation charges and annual salary
increments. Total year-to-date stock-based compensation charges of $7.8
million represented a $3.6 million increase over the same period in 2008 and
included $2.2 million of expense recognized for RSUs and $1.7 million of
additional non-cash, stock-based compensation expense reflecting required
accounting treatment for stock options voluntarily forfeited by certain CWB
management in the prior quarter. Premises and equipment expenses, including
depreciation, increased 16% ($2.7 million) mainly resulting from ongoing
business growth and capital investment. Year-to-date non-interest expenses
related to Adroit were $2.1 million, including amortization of intangible
assets.
The third quarter efficiency ratio (teb), which measures non-interest
expenses as a percentage of total revenues (teb), was 47.0%, compared to 45.2%
last year and 53.1% in the previous quarter. The deterioration of this measure
compared to the same quarter last year reflects the negative impact on total
revenues from the compressed net interest margin coupled with higher
non-interest expenses, offset by the positive impact from strong loan growth
and increased other income, including gains on sale of securities. Compared to
the prior quarter, the considerable improvement in the efficiency ratio
reflects the combined positive impact from the higher net interest margin,
increased other income and three additional revenue earning days. The
year-to-date efficiency ratio (teb) of 49.0% represented a 460 basis point
deterioration from the same period last year and was within the Bank's fiscal
2009 targeted range of 46 - 49%. A positive trend for net interest margin and
ongoing discipline with regard to discretionary spending should support
further modest improvement to this measure for the year.
Income Taxes
The income tax rate (teb) for the first nine months of 2009 was 31.5%,
down 180 basis points from one year ago, while the tax rate before the teb
adjustment was 28.0%, or 280 basis points lower. The income tax provision in
the first nine months of 2008 included $1.0 million of additional tax expense
that resulted from the write-down of future tax assets to reflect lower future
federal corporate income tax rates. Excluding this additional fiscal 2008 tax
expense, the current year's income tax rate (teb) was 90 basis points lower
than a year earlier.
Effective July 1, 2008, the corporate provincial income tax rates in BC,
Saskatchewan and Manitoba each decreased 100 basis points to 11%, 12% and 13%
respectively. The federal corporate income tax rate was reduced from 19.5% to
19.0%, effective January 1, 2009. The corporate income tax rate in Manitoba
decreased from 13% to 12% effective July 1, 2009. On April 1, 2009, the
capital tax rate in BC applicable to CWB decreased to 0.33%, down from 0.67%,
and is expected to be eliminated completely by April 1, 2010.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income (OCI) all net of income taxes, and totaled $39.3 million for the third
quarter, compared to $22.4 million in the same period last year. As previously
noted, net income was up 9% ($2.4 million) compared to one year ago. In
addition, OCI increased due to higher unrealized gains on available-for-sale
cash and securities and on derivative instruments designated as cash flow
hedges, which reflects market value fluctuations related to changes in market
credit spreads, interest rates and shifts in the interest rate curve. These
increases were partially offset by higher realized gains on sale of securities
reclassified to other income and higher amounts reclassified to net interest
income related to derivatives designated as cash flow hedges in the third
quarter of 2009, compared to a year earlier.
Balance Sheet
Total assets were down 1% ($119 million) in the quarter and up 13%
($1,275 million) in the past year to reach $11,331 million at July 31, 2009.
Lower total assets compared to the prior quarter reflects lower cash and
securities balances, partially offset by loan growth.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled
$1,997 million at July 31, 2009, compared to $2,222 million last quarter and
$1,725 million one year ago. The unrealized gain recorded on the balance sheet
at July 31, 2009 was $25.6 million, compared to $10.8 million last quarter and
an unrealized loss of $17.8 million as at October 31, 2008. The change in
unrealized gains and losses compared to last quarter and October 31, 2008 is
primarily attributed to a market value improvement in the Bank's preferred
share portfolio; unrealized gains in this portfolio totaled $8.4 million as at
July 31, 2009, compared to unrealized losses of $14.6 million last quarter and
$17.8 million as at October 31, 2008. The cash and securities portfolio is
mainly comprised of high quality debt instruments that are not held for
trading purposes and, where applicable, are typically held until maturity.
Fluctuations in fair value are generally attributed to changes in interest
rates, market credit spreads and shifts in the interest rate curve.
Realized gains on sale of securities in the third quarter were $6.4
million, compared to $6.6 million in the previous quarter and $0.8 million in
the same quarter last year. The difference in realized gains on sale of
securities compared to the prior year mainly resulted from transactions
related to favourable pricing on certain investment grade, short-term debt
investments. Where the sale of securities was not directed to reducing CWB's
overall liquidity position, investment strategies allowed the Bank to
capitalize on opportunities to realize gains while maintaining relatively
comparable yields on reinvestment in other high quality investment grade
securities. The Bank has no direct exposure to any troubled asset backed
commercial paper, collateralized debt obligations, credit default swaps, U.S.
subprime lending or monoline insurers.
Treasury Management
High liquidity levels have been maintained since August 2007 in response
to disruptions and related uncertainties in financial markets. Although this
strategy has a negative impact on net interest margin, it reflects the Bank's
conservative risk tolerance and augments its strong position to manage future
unexpected events. Average liquidity balances, net of securities purchased
under reverse resale agreements, were higher compared to the same quarter last
year reflecting proceeds from the Bank's preferred share offerings completed
in March 2009. Comparatively slower loan growth also contributed to increased
liquidity compared to 2008. Average liquidity, net of securities purchased
under reverse resale agreements, declined compared to the prior quarter. The
Bank has implemented improved methodologies for measuring and monitoring
liquidity and has also enhanced its deposit monitoring capabilities. This has
enabled management to better assess risks under various scenarios and provides
flexibility to decrease the level of liquid asset coverage on a general basis.
Overall liquidity is expected to decrease in future periods, although elevated
levels will be maintained compared to what would be held under more normal
market conditions. Management intends to maintain this strategy until economic
uncertainties subside further.
Loans
Total loans grew 1% ($96 million) in the quarter, 6% ($514 million)
year-to-date and 12% ($969 million) in the past twelve months to reach $9,138
million. Quarterly loan growth reflects lending activity in Alberta and
Saskatchewan, as both BC and Manitoba showed marginal declines compared to
last quarter. Measured by lending sector, quarterly growth was attributed to
equipment financing, energy, personal lending and the general commercial
lending sectors. Real estate loans showed a marginal decline in the quarter,
which was not unexpected. All lending sectors have realized positive
year-to-date growth led by activity in Alberta and BC. Looking forward, loan
growth is expected to remain constrained compared to prior periods. The
recessionary environment, including moderated residential construction
activity in Western Canada, will continue to have an adverse impact on growth
in certain lending areas, particularly in the Bank's real estate construction
and equipment financing portfolios. Construction loans are relatively short in
duration and there are now far fewer quality lending opportunities in this
area. The equipment financing portfolio also has a short duration with loans
fully repaid over a period of three-to-five years. Ongoing challenges related
to softness in the forestry and natural gas services industries are expected
to persist and this will have a continued negative impact on portfolio
performance related to these areas. The near-term outlook for crude oil and
natural gas production is also uncertain and subject to fluctuations
correlated with the underlying resource prices and drilling activity. The
foregoing factors coupled with last year's exceptional fourth quarter loan
growth of 6% will challenge the Bank's ability to meet the fiscal 2009 loan
growth target of 10% unless quality loan portfolios are acquired from other
lenders. Despite these challenges, management believes Western Canada is in a
good position to manage through ongoing economic uncertainty and the
recessionary environment. Management also believes Western Canada's
resource-based economies will be poised for a comparatively faster recovery
than the rest of Canada once major global economies begin to expand.
Loans in the Bank's alternative mortgage business, Optimum Mortgage
(Optimum), increased 4% in the quarter, 6% year-to-date and 14% over the past
twelve months to reach $494 million. Residential sales activity in Western
Canada improved considerably compared to recent prior quarters, partially due
to seasonal factors, and the level of applications received by Optimum
increased accordingly. There are signs that real estate values have begun to
stabilize across all of the Bank's markets, although growth opportunities will
likely continue to be constrained in this business line until recessionary
impacts subside. As an alternative source of growth, Optimum recently
commenced offering, through select mortgage brokers, higher ratio mortgages
insured by either the Canada Mortgage and Housing Corporation (CMHC) or
Genworth Financial Canada. This endeavour has shown positive results to date
and management expects insured mortgages will become a larger component of
Optimum's total portfolio over time. Improved residential sales activity also
positively impacted marketing time for homes in foreclosure and had a
stabilizing effect on the overall level of delinquent loans in the quarter.
For uninsured mortgages, the Bank remains well secured via conventional
residential first mortgages carrying a weighted average underwritten
loan-to-value ratio at initiation of approximately 70%. The vast majority of
all Optimum mortgages carry a fixed interest rate with the principal amortized
over 25 years or less. Management remains committed to grow this business over
time as it continues to produce strong returns while maintaining an acceptable
risk profile.
Deposits
Total branch deposits were up 1% from the previous quarter, but down 6%
compared to a year earlier. The demand and notice component within branch
deposits was up 5% from last quarter and 7% compared to the same time last
year. Reflecting CWB's business banking focus, a material portion of total
branch deposits are attributed to larger commercial balances that are subject
to greater fluctuation. The recently introduced Internet-based division of the
Bank named Canadian Direct Financial(TM) (www.canadiandirectfinancial.com) has
shown promising success to date and is still in the early stages of
development as management determines the most effective strategies to raise
deposits through this channel. Consistent with last quarter, more normalized
financial markets and reduced competitive influences have continued to ease
overall deposit costs for both branch-generated deposits and those raised
through the deposit broker network. If interest rates remain at current
levels, this will have a positive impact on net interest margin going forward.
Also, a significant component of comparatively higher cost one-year deposits
that were raised in the latter part of calendar year 2008, largely to increase
liquidity, will be maturing. These deposits will either be replaced at much
more favourable current rates or paid out at maturity due to reduced liquidity
requirements.
Total deposits at quarter end were $9,394 million, down 3% ($320 million)
from the previous quarter and up 8% ($707 million) over the past year. Total
branch deposits measured as a percentage of total deposits were 58% at July
31, 2009 compared to 56% in the previous quarter and 67% a year earlier.
Compared to a year earlier, the reduction in branch-raised deposits as a
percentage of total deposits reflects both an increase in fixed rate term
deposits raised through the deposit broker network and a reduction in larger
commercial term deposits. Demand and notice deposits represented 28% of total
deposits, compared to 26% in the previous quarter and 28% at the same time
last year. Total notice deposits will increase in the fourth quarter this year
due to CWT's recent appointment as trustee for a major Canadian investment
dealer.
Other Assets and Other Liabilities
Other assets at July 31, 2009 totaled $196 million, compared to $187
million last quarter and $163 million one year ago. Other liabilities at
quarter end were $596 million, compared to $427 million the previous quarter
and $297 million last year. The increase in other liabilities compared to
prior quarters mainly reflects the use of reverse resale agreements for asset
funding.
Off-Balance Sheet
Off-balance sheet items include trust assets under administration and
assets under management. Trust assets under administration totaled $4,752
million at July 31, 2009, compared to $4,472 million last quarter and $4,499
million one year ago. Assets under management were $836 million at quarter
end, compared to $817 million last quarter and nil one year ago reflecting the
acquisition of Adroit, which was effective November 1, 2008. Other off-balance
sheet items are composed of standard industry credit instruments (guarantees,
standby letters of credit and commitments to extend credit), and the
non-consolidated variable interest entity. CWB does not utilize, nor does it
have exposure to, collateralized debt obligations or credit default swaps. For
additional information regarding other off-balance sheet items refer to Notes
14 and 20 to the audited consolidated financial statements on pages 76 and 80
respectively in the Bank's 2008 Annual Report.
Capital Management
At July 31, 2009, CWB's total capital adequacy ratio, which measures
regulatory capital as a percentage of risk-weighted assets, was 15.4%, up from
15.2% last quarter and 14.0% a year earlier. The Tier 1 ratio at quarter end
was 11.2%, compared to 11.0% last quarter and 9.2% at the same time last year.
Compared to one year ago, CWB's total regulatory capital increased with the
issuance of $209.8 million Preferred Units, the retention of earnings, net of
dividends, and a higher general allowance for credit losses, slightly offset
by strong asset growth and the redemption of $35.0 million of subordinated
debentures. The higher Tier 1 and total capital ratios compared to the prior
quarter reflect the retention of earnings, net of dividends, slightly offset
by ongoing growth in risk weighted assets.
During the second quarter of fiscal 2009, the Bank issued 2,990,000
Preferred Units (the "Public Offering Preferred Units") for total proceeds of
$74.8 million. The Public Offering Preferred Units each consist of one
Non-Cumulative 5-Year Rate Reset Preferred Share, Series 3 (the "Series 3
Preferred Shares") in the capital of the Bank with an issue price of $25.00
per share and 1.78 common share purchase warrants (each whole warrant a
"Warrant"). Each Warrant is exercisable at a price of $14.00 to purchase one
common share in the capital of the Bank until March 3, 2014. The Bank also
issued 5,400,000 Preferred Units (the "Private Placement Preferred Units") by
way of a private placement to institutional investors for total proceeds of
$135.0 million. The Private Placement Preferred Units consist of one Series 3
Preferred Share and 1.7857 Warrants. The Warrants have the same terms as those
issued under the public offering.
Based on a $25.00 issue price, the Series 3 Preferred Shares yield 7.25%
annually, payable quarterly, as and when declared by the Board of Directors of
CWB for an initial period ending April 30, 2014. Thereafter, the dividend rate
will reset every five years at a level of 500 basis points over the then
current five-year Government of Canada bond yield. Holders of Series 3
Preferred Shares will, subject to certain conditions, have the option to
convert their shares to Non-Cumulative Floating Rate Preferred Shares, Series
4 (the "Series 4 Preferred Shares") on April 30, 2014 and on April 30 every
five years thereafter. Holders of the Series 4 Preferred Shares will be
entitled to a floating quarterly dividend rate equal to the then current
90-day Canadian Treasury Bill Rate plus 500 basis points, as and when declared
by the Board of Directors of CWB. The Series 3 Preferred Shares and Series 4
Preferred Shares are redeemable at the option of CWB on April 30, 2014, and
every fifth anniversary thereafter at a price of $25.00 per share. In
addition, the Series 4 Preferred Shares are redeemable at the option of CWB at
any other time, on or after April 30, 2014, at a price of $25.50 per share.
The Preferred Shares Series 3 and the Preferred Shares Series 4 qualify
as Tier 1 capital for the Bank. Both the Series 3 Preferred Shares and the
Warrants commenced trading on the Toronto Stock Exchange on March 2, 2009
under the trading symbols CWB.PR.A and CWB.WT, respectively. As at July 31,
2009, the closing market price of the Series 3 Preferred Shares and Warrants
was $27.99 and $6.20, respectively.
Further information relating to the Bank's capital position is provided
in Note 15 to the quarterly financial statements as well as the audited
consolidated financial statements and MD&A for the year ended October 31,
2008.
Book value per common share at July 31, 2009 was $11.87 compared to
$11.42 last quarter and $10.47 one year ago.
Common shareholders received a quarterly cash dividend of $0.11 per
common share on July 2, 2009. On September 2, 2009, the Board of Directors
declared a quarterly cash dividend of $0.11 per common share payable on
October 1, 2009 to shareholders of record on September 17, 2009. The Board of
Directors also declared a cash dividend of $0.453125 per Series 3 Preferred
Share payable on October 31, 2009 to shareholders of record on October 22,
2009.
On August 13, 2009, subsequent to quarter end, the Bank announced the
introduction of dividend reinvestment plan. Further details on CWB's dividend
reinvestment plan, including an application form, are available at
http://www.cwbankgroup.com/investor_relations/drip.htm.
Changes in Accounting Policies
Goodwill and Intangible Assets
Effective November 1, 2008, the Bank adopted the CICA new accounting
standard, Section 3064, Goodwill and Intangible Assets. Section 3064, which
replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450,
Research and Development Costs, provides clarifying guidance on the criteria
that must be satisfied in order for an intangible asset to be recognized,
including internally developed intangible assets. The new guidance did not
have a material effect on the financial position or earnings of the Bank.
Credit Risk and Fair Value
Effective November 1, 2008, the Bank adopted EIC 173, Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities. The abstract
clarifies how the Bank's own credit risk and the credit risk of the
counterparty should be taken into account in determining the fair value of
financial assets and financial liabilities, including derivatives. The new
guidance did not have a material effect on the financial position or earnings
of the Bank.
Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable entities
to International Financial Reporting Standards (IFRS). The Bank's consolidated
financial statements will be prepared in accordance with IFRS for the fiscal
year commencing November 1, 2011 and will include comparative information for
the prior year.
The Bank has embarked on a four stage project to identify and evaluate
the impact of the transition to IFRS on the consolidated financial statements
and develop a plan to complete the transition. The project plan includes the
following phases - diagnostic, design and planning, solution development, and
implementation. The diagnostic phase is complete and the design and planning
phase is underway and expected to be completed by the end of fiscal 2009.
The impact of the transition to IFRS on the Bank's consolidated financial
statements is not yet determinable. Additional information regarding the
Bank's plan and the expected impact of the transition will be provided as the
project moves forward.
Controls and Procedures
There were no changes in the Bank's internal controls over financial
reporting that occurred during the quarter ended July 31, 2009 that have
materially affected, or are reasonably likely to materially affect, internal
controls over financial reporting.
Prior to its release, this quarterly report to shareholders was reviewed
by the Audit Committee and, on the Audit Committee's recommendation, approved
by the Board of Directors of Canadian Western Bank, consistent with prior
quarters.
Updated Common Share Information
As at August 31, 2009, there were 63,795,762 common shares outstanding
and employee stock options, which are or will be exercisable for up to
4,558,905 common shares for maximum proceeds of $84.3 million. Also
outstanding were 14,964,356 warrants that are each exercisable at a price of
$14.00 to purchase one common share in the Bank until March 3, 2014.
Summary of Quarterly Financial Information
2009 2008
-------------------------------------- ------------
($ thousands) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Total revenues (teb) $ 85,538 $ 75,382 $ 76,947 $ 74,059
Total revenues 83,349 73,707 75,361 72,519
Net income 28,729 21,580 25,619 24,485
Earnings per
common share
Basic 0.39 0.30 0.40 0.39
Diluted 0.38 0.30 0.40 0.38
Total assets
($ millions) 11,331 11,450 10,907 10,601
-------------------------------------------------------------------------
2008 2007
-------------------------------------- ------------
($ thousands) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Total revenues (teb) $ 76,375 $ 73,754 $ 74,669 $ 74,359
Total revenues 74,933 72,402 73,332 72,863
Net income 26,327 25,302 25,905 29,572
Earnings per
common share
Basic 0.42 0.40 0.41 0.47
Diluted 0.41 0.39 0.40 0.46
Total assets
($ millions) 10,057 10,038 9,865 9,525
-------------------------------------------------------------------------
The financial results for each of the last eight quarters are summarized
above. In general, CWB's performance reflects a relatively consistent trend
although the second quarter contains three fewer revenue earning days, or two
fewer days in a leap year such as 2008.
The Bank's quarterly financial results are subject to some fluctuation
due to its exposure to property and casualty insurance. Insurance operations,
which are primarily reflected in other income (refer to Results by Business
Segment - Insurance), are subject to seasonal weather conditions, cyclical
patterns of the industry and natural catastrophes. Mandatory participation in
the Alberta auto risk sharing pools can also result in unpredictable quarterly
fluctuations.
Quarterly results can also fluctuate due to the recognition of periodic
income tax items. Net income in the first quarter of 2008 included $1.0
million ($0.01 per diluted share) of tax expense resulting from the write-down
of future tax assets to reflect lower future federal corporate income tax
rates. Net income in the fourth quarter of 2007 included the recognition of
previously unrecorded tax benefits related to certain prior period
transactions of $2.9 million ($0.04 per diluted share).
For details on variations between the prior quarters see the summary of
quarterly results section of the Bank's MD&A for the year ended October 31,
2008 and the individual quarterly reports to shareholders which are available
on SEDAR at www.sedar.com and on CWB's website at www.cwbankgroup.com. The
2008 Annual Report and audited consolidated financial statements for the year
ended October 31, 2008 are available on both SEDAR and the Bank's website.
Results by Business Segment
CWB operates in two business segments: 1) banking and trust and 2)
insurance. Segmented information is also provided in Note 14 of the unaudited
interim consolidated financial statements.
Banking and trust
Operations of the banking and trust segment include commercial and retail
banking services, as well as personal and corporate trust services provided
through CWB's subsidiaries, Canadian Western Trust Company (CWT) and Valiant
Trust Company (Valiant). Effective November 1, 2008, the banking and trust
segment also includes wealth management services provided through CWB's 72.5%
ownership interest in subsidiary, Adroit Investment Management Ltd.
Third quarter net income of $25.5 million increased 7% ($1.7 million)
compared to last year as positive earnings contributions from strong 12% loan
growth and 29% ($4.2 million) higher other income, including an additional
$5.4 million of gains on sale of securities, more than offset the impact of a
12 basis point decline in net interest margin (teb), to 2.11%, and a 16% ($5.2
million) increase in non-interest expenses. The lower net interest margin
(teb) compared to a year earlier mainly resulted from consecutive reductions
in the prime lending interest rate and lower yields on securities, partially
offset by lower deposit costs, more favourable spreads on both new and renewal
loans, and an improved securities mix. The change in non-interest expenses
reflects higher salary and benefit costs - mainly related to increased staff
complement and stock-based compensation expense - continued business growth
and investment in future development initiatives, including the addition of
Adroit. Credit related fee income was down 22% ($1.7 million) while trust and
wealth management services fee income increased 5% ($0.2 million). The
quarterly efficiency ratio (teb), which measures non-interest expense as a
percentage of total revenues (teb), was 47.8%, compared to 45.7% one year ago.
The deterioration in the efficiency ratio (teb) reflects constrained growth in
net interest income attributed to the compressed net interest margin (teb) and
higher non-interest expenses, partially offset by the positive earnings impact
from continued loan growth and a 29% ($4.2 million) increase in other income.
Quarterly earnings were up 31% ($6.1 million) from the previous period
reflecting the combined positive impact of a marked 20 basis point improvement
in net interest margin, three additional revenue earnings days, a 3% ($0.5
million) increase in other income and a slight decline in non-interest
expenses. The quarterly efficiency ratio (teb) improved 600 basis points
compared to last quarter. On a year-to-date basis, net income was 2% ($1.6
million) lower than 2008 as strong loan growth and a 33% ($14.2 million)
increase in other income, largely attributed to gains on sale of securities,
were more than offset by a significant 28 basis point drop in net interest
margin and a 17% ($15.7 million) increase in non-interest expenses. The
year-to-date efficiency ratio (teb) of 49.2% deteriorated 470 basis points
from the same time in 2008.
For the three months ended
------------------------------------- Change from
July 31 April 30 July 31 July 31
($ thousands) 2009 2009 2008 2008
-------------------------------------------------------------------------
Net interest
income (teb) $ 59,340 $ 51,399 $ 55,877 6%
Other income 18,651 18,125 14,415 29
-------------------------------------------------------------------------
Total revenues (teb) 77,991 69,524 70,292 11
Provision for
credit losses 3,369 3,369 3,038 11
Non-interest expenses 37,283 37,381 32,124 16
Provision for
income taxes (teb) 11,809 9,313 11,306 4
Non-controlling
interest
in subsidiary 50 56 - nm
-------------------------------------------------------------------------
Net income $ 25,480 $ 19,405 $ 23,824 7%
-------------------------------------------------------------------------
Efficiency ratio (teb) 47.8% 53.8% 45.7% 210 bp
Efficiency ratio 49.1 55.0 46.6 250
Net interest margin
(teb) 2.11 1.91 2.23 (12)
Net interest margin 2.04 1.86 2.18 (14)
Average loans
(millions)(1) $ 9,028 $ 8,982 $ 7,981 13%
Average assets
(millions)(1) 11,142 11,024 9,927 12
-------------------------------------------------------------------------
For the nine months ended
------------------------- Change from
July 31 July 31 July 31
($ thousands) 2009 2008 2008
------------------------------------------------------------
Net interest
income (teb) $ 163,840 $ 165,844 (1)%
Other income 56,994 42,758 33
------------------------------------------------------------
Total revenues (teb) 220,834 208,602 6
Provision for
credit losses 10,107 8,813 15
Non-interest expenses 108,574 92,835 17
Provision for
income taxes (teb) 32,273 35,617 (9)
Non-controlling
interest
in subsidiary 173 - nm
------------------------------------------------------------
Net income $ 69,707 $ 71,337 (2)%
------------------------------------------------------------
Efficiency ratio (teb) 49.2% 44.5% 470 bp
Efficiency ratio 50.3 45.3 500
Net interest margin
(teb) 2.00 2.28 (28)
Net interest margin 1.94 2.23 (29)
Average loans
(millions)(1) $ 8,955 $ 7,775 15%
Average assets
(millions)(1) 10,959 9,695 13
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following
Financial Highlights table.
nm - not meaningful.
(1) Assets are disclosed on an average daily balance basis.
Insurance
The insurance segment is comprised of the operations of CWB's subsidiary,
Canadian Direct Insurance Incorporated (Canadian Direct or CDI), which
provides auto and home insurance to individuals in BC and Alberta.
Canadian Direct reported record quarterly earnings with net income of
$3.2 million. This represented a $0.7 million increase compared to the same
quarter last year and included a positive $0.6 million before tax contribution
from the Alberta auto risk sharing pools ("the Pools"). Third quarter net
income, excluding the impact of the Pools, was up $0.3 million compared to
last year mainly due to an 8% increase in net earned premiums. Profitability
improved for the auto lines in both Alberta and BC. Policy growth, aided by
higher retention rates, was also up significantly from the same quarter last
year. Excluding the impact of the Pools, the loss ratio was 2% higher than
last year. The higher loss ratio was mostly due to fire-related home claims.
The Pools' results reflected a favorable adjustment, based on revised
assumptions, to the Minor Injury Regulation claims reserves.
Net income was up $1.1 million compared to the previous quarter. Absent
the impact of the Pools, after tax income was up $0.7 million due to a 7%
improvement in net earned premiums coupled with a 1% improvement in the loss
ratio. Net earned premiums were up in all product lines reflecting policy
growth and three additional days this quarter.
Year-to-date net income of $6.2 million was relatively unchanged compared
to a year earlier. Excluding the Pools' results, net earned premiums were up
6%, offset by a 2% deterioration in the loss ratio. The higher loss ratio was
attributed to first quarter losses in the BC home product line which was
materially impacted by severe weather.
On June 12, 2009, the Alberta Court of Appeal unanimously overturned the
February 2008 Court of Queen's Bench decision suspending the cap on minor
injuries, thereby reinstating the cap on minor injuries sustained in an
automobile accident in Alberta. However, this ruling is being appealed to the
Supreme Court of Canada. Management believes it has adequately provided for
the cost of these claims without regard to the cap and will continue to
monitor the situation closely.
On July 29, 2009, the Alberta Insurance Rate Board mandated a 5% rate
reduction on basic coverage on private passenger vehicles. The order will go
into effect November 1, 2009 and will have a negative impact on revenues for
this line of business. This decision reflects the reinstatement of the cap on
minor injuries by the Alberta Court of Appeal.
For the three months ended
------------------------------------- Change from
July 31 April 30 July 31 July 31
($ thousands) 2009 2009 2008 2008
-------------------------------------------------------------------------
Net interest
income (teb) $ 1,594 $ 1,413 $ 1,413 13%
-------------------------------------------------------------------------
Other income (net)
Net earned premiums 26,895 24,880 25,030 7
Commissions and
processing fees 741 760 734 1
Net claims and
adjustment expenses (16,660) (16,126) (15,612) 7
Policy acquisition
costs (5,181) (5,316) (5,466) (5)
-------------------------------------------------------------------------
Insurance revenue (net) 5,795 4,198 4,686 24
Gains on sale
of securities 158 247 (16) nm
-------------------------------------------------------------------------
Total revenues
(net) (teb) 7,547 5,858 6,083 24
Non-interest expenses 2,927 2,613 2,406 22
Provision for
income taxes (teb) 1,371 1,070 1,174 17
-------------------------------------------------------------------------
Net income $ 3,249 $ 2,175 $ 2,503 30%
-------------------------------------------------------------------------
Policies outstanding
(No.) 172,979 170,433 167,150 3
Gross written
premiums $ 33,067 $ 29,120 $ 30,020 10
Claims loss ratio(1) 62% 65% 62% - bp
Expense ratio(2) 27 29 29 (200)
Combined ratio(3) 89 94 91 (200)
Alberta auto risk
sharing pools impact
on net income
before tax $ 557 $ 31 $ (30) nm%
Average total assets
(millions) 200 192 185 8
-------------------------------------------------------------------------
For the nine months ended
------------------------- Change from
July 31 July 31 July 31
($ thousands) 2009 2008 2008
------------------------------------------------------------
Net interest
income (teb) $ 4,502 $ 4,151 8%
------------------------------------------------------------
Other income (net)
Net earned premiums 76,990 73,066 5
Commissions and
processing fees 2,155 2,134 1
Net claims and
adjustment expenses (51,437) (47,816) 8
Policy acquisition
costs (15,603) (15,361) 2
------------------------------------------------------------
Insurance revenue (net) 12,105 12,023 1
Gains on sale
of securities 426 22 nm
------------------------------------------------------------
Total revenues
(net) (teb) 17,033 16,196 5
Non-interest expenses 8,035 6,972 15
Provision for
income taxes (teb) 2,777 3,027 (8)
------------------------------------------------------------
Net income $ 6,221 $ 6,197 -%
------------------------------------------------------------
Policies outstanding
(No.) 172,979 167,150 3
Gross written
premiums $ 85,290 $ 78,278 9
Claims loss ratio(1) 67% 65% 200 bp
Expense ratio(2) 28 28 -
Combined ratio(3) 95 93 200
Alberta auto risk
sharing pools impact
on net income
before tax $ 430 $ 87 394%
Average total assets
(millions) 193 181 7
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following
Financial Highlights table.
nm - not meaningful.
(1) Net claims and adjustment expenses as a percentage of net earned
premiums.
(2) Policy acquisition costs and non-interest expenses net of commissions
and processing fees as a percentage of net earned premiums.
(3) Sum of the claims loss and expense ratios.
Fiscal 2009 Target Ranges and Performance
The performance target ranges established for the 2009 fiscal year are
presented in the table below together with CWB's actual performance to date.
-------------------------------
2009 2009
Target Ranges Performance(1)
-------------------------------------------------------------------------
Net income growth(2) 2% to 5% (2)%
-------------------------------------------------------------------------
Total revenue (teb) growth 5% to 8% 6%
-------------------------------------------------------------------------
Loan growth 10% 12%
-------------------------------------------------------------------------
Provision for credit losses as a
percentage of average loans 0.15% - 0.18% 0.15%
-------------------------------------------------------------------------
Efficiency ratio (teb) 46% - 49% 49.0%
-------------------------------------------------------------------------
Return on common equity 14% - 16% 13.0%(3)
-------------------------------------------------------------------------
Return on assets 0.90% - 1.05% 0.84%(4)
-------------------------------------------------------------------------
(1) 2009 performance for earnings and revenue growth is the current year
results over the same period in the prior year, loan growth is the
increase over the past twelve months and performance for ratio
targets is the current year-to-date results annualized.
(2) Net income, before preferred share dividends.
(3) Return on common equity calculated as annualized year-to-date net
income after preferred share dividends divided by average common
shareholders' equity.
(4) Return on assets calculated as annualized year-to-date net income
after preferred share dividends divided by average total assets.
While the recessionary environment and uncertain economic outlook have
impacted results more than anticipated when the fiscal 2009 performance target
ranges were first established, management is now cautiously optimistic that
the Bank could still achieve most of these benchmarks. Both total revenue
growth and the efficiency ratio (teb) are currently within the respective
target ranges and a positive outlook for net interest margin will further
benefit these measures. Ongoing discipline with regard to discretionary
spending will further support modest improvements in the efficiency ratio. The
provision for credit losses as a percentage of average loans is also on
target. The target for net income growth is still within reach, as realized
gains on the sale of securities have helped offset the financial impact of
margin pressures. These gains do not represent a sustainable source of income
over the long-term, but the positive outlook for continued margin improvement
will help mitigate this. The net impact on the return on equity and return on
assets ratios from the preferred share offerings completed in March 2009 was
not considered when the above targets were established at the end of fiscal
2008. Reflecting the exceptional 6% loan growth in the fourth quarter of 2008,
slower economic activity and anticipated loan repayments, particularly for
interim construction accounts, CWB will be challenged to meet its 10% loan
growth target unless loan portfolios are acquired from other lenders.
A stable prime lending interest rate, lower deposit costs and more normal
market spreads, combined with CWB's pricing actions on new and renewal lending
accounts, have all positively impacted net interest margin and this trend is
expected to continue. Effective execution of strategies to prudently leverage
capital from the preferred share units should also increase earnings over
time. Despite an expectation for ongoing challenges due to uncertain market
conditions, management is very optimistic about the Bank's overall financial
strength. CWB is well positioned to capitalize on market opportunities,
including strategic acquisitions, and will maintain its focus on creating
value and growth over the long-term.
This management's discussion and analysis is dated September 2, 2009.
Taxable Equivalent Basis (teb)
Most financial institutions analyze revenue on a taxable equivalent basis
to permit uniform measurement and comparison of net interest income. Net
interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly lower
than would apply to a loan or security of the same amount. The adjustment to
taxable equivalent basis increases interest income and the provision for
income taxes to what they would have been had the tax-exempt securities been
taxed at the statutory rate.
Non-GAAP Measures
Taxable equivalent basis, return on common shareholders' equity, return
on assets, efficiency ratio, net interest margin, tangible common equity to
risk-weighted assets, Tier 1 and total capital adequacy ratios, average
balances, claims loss ratio, expense ratio and combined ratio do not have
standardized meanings prescribed by generally accepted accounting principles
(GAAP) and therefore may not be comparable to similar measures presented by
other financial institutions. The non-GAAP measures used in this MD&A are
calculated as follows:
- taxable equivalent basis - described above;
- return on common shareholders' equity - net income less preferred
share dividends divided by average shareholder's equity;
- return on assets - net income less preferred share dividends divided
by average total assets;
- efficiency ratio - non-interest expenses divided by total revenues
(net interest income plus other income);
- net interest margin - net interest income divided by average total
assets;
- tangible common equity to risk-weighted assets - shareholders' equity
less subsidiary goodwill divided by risk-weighted assets, calculated
in accordance with guidelines issued by the Office of the
Superintendent of Financial Institutions Canada (OSFI);
- Tier 1 and total capital adequacy ratios - in accordance with
guidelines issued by OSFI;
- average balances - average daily balances;
- claims loss ratio - net insurance claims and adjustment expenses as a
percentage of net earned premiums;
- expense ratio - policy acquisition costs and non-interest expenses
net of commissions and processing fees as a percentage of net earned
premiums; and
- combined ratio - sum of the claims loss and expense ratios.
Forward-looking Statements
From time to time, Canadian Western Bank (the Bank) makes written and
verbal forward-looking statements. Statements of this type are included in the
Annual Report and reports to shareholders and may be included in filings with
Canadian securities regulators or in other communications such as press
releases and corporate presentations. Forward-looking statements include, but
are not limited to, statements about the Bank's objectives and strategies,
targeted and expected financial results and the outlook for the Bank's
businesses or for the Canadian economy. Forward-looking statements are
typically identified by the words "believe", "expect", "anticipate", "intend",
"estimate", "may increase", "may impact" and other similar expressions, or
future or conditional verbs such as "will", "should", "would" and "could".
By their very nature, forward-looking statements involve numerous
assumptions. A variety of factors, many of which are beyond the Bank's
control, may cause actual results to differ materially from the expectations
expressed in the forward-looking statements. These factors include, but are
not limited to, general business and economic conditions in Canada including
the volatility and lack of liquidity in financial markets, fluctuations in
interest rates and currency values, changes in monetary policy, changes in
economic and political conditions, regulatory and legal developments, the
level of competition in the Bank's markets, the occurrence of weather-related
and other natural catastrophes, changes in accounting standards and policies,
the accuracy of and completeness of information the Bank receives about
customers and counterparties, the ability to attract and retain key personnel,
the ability to complete and integrate acquisitions, reliance on third parties
to provide components of the Bank's business infrastructure, changes in tax
laws, technological developments, unexpected changes in consumer spending and
saving habits, timely development and introduction of new products, and
management's ability to anticipate and manage the risks associated with these
factors. It is important to note that the preceding list is not exhaustive of
possible factors.
These and other factors should be considered carefully and readers are
cautioned not to place undue reliance on these forward-looking statements as a
number of important factors could cause the Bank's actual results to differ
materially from the expectations expressed in such forward looking statements.
Unless required by securities law, the Bank does not undertake to update any
forward-looking statement, whether written or verbal, that may be made from
time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2009 and how
it will affect CWB's businesses are material factors the Bank considers when
setting its objectives. In setting performance target ranges for fiscal 2009,
management's expectations assumed prolonged economic uncertainty that included
significantly challenged global economies and troubled markets; moderated
economic activity in Western Canada; a declining interest rate environment
supported by stable inflation partially attributed to lower energy and
commodity prices; sound credit quality with actual losses remaining within the
Bank's historic range of acceptable levels; and, a compressed net interest
margin consistent with elevated deposit costs, reduced prime lending rates,
comparatively lower investment returns reflecting high quality assets held in
the securities portfolio and the Bank's higher liquidity levels maintained in
response to disruptions in financial markets, partially offset by expectations
for higher credit spreads and a corresponding increase in loan yields on both
new lending facilities and renewal accounts. As stated at the end of the
second quarter, interest rates have fallen much more than management
anticipated at the onset of fiscal 2009 and a recessionary environment in
Western Canada was confirmed.
-------------------------------------------------------------------------
Consolidated Statements of Income
-------------------------------------------------------------------------
For the three months ended
(unaudited) ------------------------------------- Change from
($ thousands, except July 31 April 30 July 31 July 31
per share amounts) 2009 2009 2008 2008
-------------------------------------------------------------------------
Interest Income
Loans $ 112,275 $ 107,828 $ 120,455 (7)%
Securities 11,124 10,462 13,058 (15)
Deposits with
regulated financial
institutions 3,103 3,770 4,490 (31)
-------------------------------------------------------------------------
126,502 122,060 138,003 (8)
-------------------------------------------------------------------------
Interest Expense
Deposits 62,490 65,824 76,506 (18)
Subordinated
debentures 5,267 5,099 5,649 (7)
-------------------------------------------------------------------------
67,757 70,923 82,155 (18)
-------------------------------------------------------------------------
Net Interest Income 58,745 51,137 55,848 5
Provision for Credit
Losses (Note 6) 3,369 3,369 3,038 11
-------------------------------------------------------------------------
Net Interest Income
after Provision
for Credit Losses 55,376 47,768 52,810 5
-------------------------------------------------------------------------
Other Income
Credit related 6,155 5,321 7,876 (22)
Insurance, net
(Note 3) 5,795 4,198 4,686 24
Trust and wealth
management
services 3,557 3,869 3,385 5
Retail services 1,781 1,913 1,906 (7)
Gains on sale
of securities 6,399 6,580 765 736
Foreign exchange
gains 876 667 467 88
Other 41 22 - nm
-------------------------------------------------------------------------
24,604 22,570 19,085 29
-------------------------------------------------------------------------
Net Interest and
Other Income 79,980 70,338 71,895 11
-------------------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 26,977 26,587 22,508 20
Premises and
equipment 6,478 6,528 5,454 19
Other expenses 6,263 6,330 6,021 4
Provincial
capital taxes 492 549 547 (10)
-------------------------------------------------------------------------
40,210 39,994 34,530 16
-------------------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 39,770 30,344 37,365 6
Income Taxes 10,991 8,708 11,038 -
-------------------------------------------------------------------------
28,779 21,636 26,327 9
Non-Controlling
Interest in
Subsidiary 50 56 - nm
-------------------------------------------------------------------------
Net Income $ 28,729 $ 21,580 $ 26,327 9%
-------------------------------------------------------------------------
Preferred share
dividends (Note 9) $ 3,802 $ 2,458 $ - nm%
Net income available
to common
shareholders $ 24,927 $ 19,122 $ 26,327 (5)
-------------------------------------------------------------------------
Average number of
common shares
(in thousands) 63,654 63,503 63,279 1
Average number of
diluted common
shares (in thousands) 65,439 63,559 64,438 2
-------------------------------------------------------------------------
Earnings Per
Common Share
Basic $ 0.39 $ 0.30 $ 0.42 (7)
Diluted $ 0.38 $ 0.30 $ 0.41 (7)
-------------------------------------------------------------------------
For the nine months ended
(unaudited) ------------------------- Change from
($ thousands, except July 31 July 31 July 31
per share amounts) 2009 2008 2008
------------------------------------------------------------
Interest Income
Loans $ 339,371 $ 368,799 (8)%
Securities 32,798 42,111 (22)
Deposits with
regulated financial
institutions 10,410 13,990 (26)
------------------------------------------------------------
382,579 424,900 (10)
------------------------------------------------------------
Interest Expense
Deposits 204,054 242,538 (16)
Subordinated
debentures 15,633 16,498 (5)
------------------------------------------------------------
219,687 259,036 (15)
------------------------------------------------------------
Net Interest Income 162,892 165,864 (2)
Provision for Credit
Losses (Note 6) 10,107 8,813 15
------------------------------------------------------------
Net Interest Income
after Provision
for Credit Losses 152,785 157,051 (3)
------------------------------------------------------------
Other Income
Credit related 17,219 21,772 (21)
Insurance, net
(Note 3) 12,105 12,023 1
Trust and wealth
management
services 11,339 9,901 15
Retail services 5,538 5,726 (3)
Gains on sale
of securities 21,122 3,777 459
Foreign exchange
gains 2,098 1,286 63
Other 104 318 (67)
------------------------------------------------------------
69,525 54,803 27
------------------------------------------------------------
Net Interest and
Other Income 222,310 211,854 5
------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 77,401 64,799 19
Premises and
equipment 19,034 16,339 16
Other expenses 18,742 17,124 9
Provincial
capital taxes 1,432 1,545 (7)
------------------------------------------------------------
116,609 99,807 17
------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 105,701 112,047 (6)
Income Taxes 29,600 34,513 (14)
------------------------------------------------------------
76,101 77,534 (2)
Non-Controlling
Interest in
Subsidiary 173 - nm
------------------------------------------------------------
Net Income $ 75,928 $ 77,534 (2)%
------------------------------------------------------------
Preferred share
dividends (Note 9) $ 6,260 $ - nm%
Net income available
to common
shareholders $ 69,668 $ 77,534 (10)
------------------------------------------------------------
Average number of
common shares
(in thousands) 63,541 63,146 1
Average number of
diluted common
shares (in thousands) 64,222 64,535 -
------------------------------------------------------------
Earnings Per
Common Share
Basic $ 1.10 $ 1.23 (11)
Diluted $ 1.08 $ 1.20 (10)
------------------------------------------------------------
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Balance Sheets
-------------------------------------------------------------------------
Change
As at As at As at As at from
(unaudited) July 31 April 30 October 31 July 31 July 31
($ thousands) 2009 2009 2008 2008 2008
-------------------------------------------------------------------------
Assets
Cash Resources
Cash and
non-interest
bearing deposits
with financial
institutions $ 38,297 $ 14,739 $ 8,988 $ 23,903 60%
Interest bearing
deposits with
regulated
financial
institutions
(Note 4) 357,057 557,313 464,193 409,882 (13)
Cheques and other
items in transit - - 18,992 2,172 (100)
-------------------------------------------------------------------------
395,354 572,052 492,173 435,957 (9)
-------------------------------------------------------------------------
Securities (Note 4)
Issued or
guaranteed
by Canada 611,644 585,320 347,777 313,986 95
Issued or
guaranteed by a
province or
municipality 334,370 545,032 452,045 473,414 (29)
Other securities 656,029 519,283 429,142 492,706 33
-------------------------------------------------------------------------
1,602,043 1,649,635 1,228,964 1,280,106 25
-------------------------------------------------------------------------
Securities Purchased
Under Resale Agreements - - 77,000 9,001 (100)
-------------------------------------------------------------------------
Loans (Notes 5 and 7)
Residential
mortgages 2,100,432 2,239,023 2,134,327 1,974,285 6
Other loans 7,111,545 6,877,594 6,565,280 6,264,472 14
-------------------------------------------------------------------------
9,211,977 9,116,617 8,699,607 8,238,757 12
Allowance for
credit losses
(Note 6) (74,214) (75,099) (75,538) (70,009) 6
-------------------------------------------------------------------------
9,137,763 9,041,518 8,624,069 8,168,748 12
-------------------------------------------------------------------------
Other
Land, buildings
and equipment 31,738 30,369 31,893 26,258 21
Goodwill 9,360 9,360 6,933 6,933 35
Other intangible
assets 6,801 7,089 2,155 2,274 199
Insurance related 55,500 52,283 52,943 53,514 4
Derivative related
(Note 8) 4,081 4,524 9,980 3,529 16
Other assets 88,737 83,795 74,622 70,324 26
-------------------------------------------------------------------------
196,217 187,420 178,526 162,832 21
-------------------------------------------------------------------------
Total Assets $11,331,377 $11,450,625 $10,600,732 $10,056,644 13%
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Payable on
demand $ 395,128 $ 360,989 $ 383,083 $ 366,725 8%
Payable after
notice 2,239,682 2,139,361 2,010,039 2,096,550 7
Payable on a
fixed date 6,653,999 7,107,984 6,747,597 6,118,061 9
Deposit from
Canadian
Western Bank
Capital Trust 105,000 105,000 105,000 105,000 -
-------------------------------------------------------------------------
9,393,809 9,713,334 9,245,719 8,686,336 8
-------------------------------------------------------------------------
Other
Cheques and other
items in transit 27,472 44,039 29,036 27,045 2
Insurance related 138,996 135,563 134,769 131,504 6
Derivative related
(Note 8) 164 852 163 285 (42)
Securities
purchased under
reverse resale
agreements 246,794 83,468 - - 100
Other liabilities 182,910 162,616 136,897 138,073 32
-------------------------------------------------------------------------
596,336 426,538 300,865 296,907 101
-------------------------------------------------------------------------
Subordinated
Debentures
-------------------------------------------------------------------------
Conventional 375,000 375,000 375,000 410,000 (9)
-------------------------------------------------------------------------
Shareholders' Equity
Preferred shares
(Note 9) 209,750 209,750 - - 100
Common shares
(Note 9) 224,405 223,062 221,914 221,103 1
Contributed
surplus 18,708 18,060 14,234 12,909 45
Retained
earnings 492,274 474,353 448,203 430,697 14
Accumulated other
comprehensive
income (loss) 21,095 10,528 (5,203) (1,308) nm
-------------------------------------------------------------------------
966,232 935,753 679,148 663,401 46
-------------------------------------------------------------------------
Total Liabilities
and Shareholders'
Equity $11,331,377 $11,450,625 $10,600,732 $10,056,644 13%
-------------------------------------------------------------------------
Contingent
Liabilities and
Commitments
(Note 11)
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
-------------------------------------------------------------------------
For the nine months ended
--------------------------
(unaudited) July 31 July 31
($ thousands) 2009 2008
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 448,203 $ 372,739
Net income 75,928 77,534
Dividends - Preferred shares (6,260) -
- Common shares (20,969) (19,576)
Issuance costs on preferred units (4,628) -
-------------------------------------------------------------------------
Balance at end of period 492,274 430,697
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period (5,203) (5,931)
Other comprehensive income 26,298 4,623
-------------------------------------------------------------------------
Balance at end of period 21,095 (1,308)
-------------------------------------------------------------------------
Total retained earnings and accumulated
other comprehensive income (loss) 513,369 429,389
-------------------------------------------------------------------------
Preferred Shares (Note 9)
Balance at beginning of period - -
Issued during the period 209,750 -
-------------------------------------------------------------------------
Balance at end of period 209,750 -
-------------------------------------------------------------------------
Common Shares (Note 9)
Balance at beginning of period 221,914 219,004
Issued on exercise of employee stock options 1,306 1,086
Transferred from contributed surplus on
exercise or exchange of options 1,185 1,013
-------------------------------------------------------------------------
Balance at end of period 224,405 221,103
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 14,234 9,681
Amortization of fair value of
employee stock options 5,659 4,241
Transferred to common shares on exercise
or exchange of options (1,185) (1,013)
-------------------------------------------------------------------------
Balance at end of period 18,708 12,909
-------------------------------------------------------------------------
Total Shareholders' Equity $ 966,232 $ 663,401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
-------------------------------------------------------------------------
For the For the
three months ended nine months ended
------------------------ -------------------------
(unaudited) July 31 July 31 July 31 July 31
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net Income $ 28,729 $ 26,327 $ 75,928 $ 77,534
-------------------------------------------------------------------------
Other Comprehensive
Income, net of tax
Available-for-sale
securities:
Gains from change
in fair value(1) 14,904 (2,906) 45,452 5,523
Reclassification
to other income(2) (4,504) (600) (14,884) (2,634)
-------------------------------------------------------------------------
10,400 (3,506) 30,568 2,889
-------------------------------------------------------------------------
Derivatives
designated as cash
flow hedges:
Gains from change
in fair value(3) 2,596 566 8,564 3,904
Reclassification
to net interest
income(4) (2,429) (965) (7,424) (1,232)
Reclassification
to other
liabilities for
derivatives
terminated prior
to maturity(5) - - (5,410) (938)
-------------------------------------------------------------------------
167 (399) (4,270) 1,734
-------------------------------------------------------------------------
10,567 (3,905) 26,298 4,623
-------------------------------------------------------------------------
Comprehensive Income
for the Period $ 39,296 $ 22,422 $ 102,226 $ 82,157
-------------------------------------------------------------------------
(1) Net of income tax expense of $6,267 and $19,047 for the three and
nine months ended July 31, 2009, respectively (2008 - tax benefit of
$1,260 and tax expense of $2,394).
(2) Net of income tax benefit of $1,895 and $6,267 for the three and nine
months ended July 31, 2009, respectively (2008 - tax benefit of $260
and $1,142).
(3) Net of income tax expense of $1,087 and $3,584 for the three and nine
months ended July 31, 2009, respectively (2008 - tax expense of $187
and $1,714).
(4) Net of income tax benefit of $1,016 and $3,107 for the three and nine
months ended July 31, 2009, respectively (2008 - tax benefit of $411
and $534).
(5) Net of income tax benefit of nil and $2,264 for the three and nine
months ended July 31, 2009, respectively (2008 - tax benefit nil and
$429).
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Cash Flow
-------------------------------------------------------------------------
For the For the
three months ended nine months ended
------------------------ -------------------------
(unaudited) July 31 July 31 July 31 July 31
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash Flows from
Operating Activities
Net income $ 28,729 $ 26,327 $ 75,928 $ 77,534
Adjustments to
determine net
cash flows
Provision for
credit losses 3,369 3,038 10,107 8,813
Depreciation and
amortization 2,156 1,761 6,441 5,116
Amortization of
fair value of
employee stock
options 1,078 1,537 5,659 4,241
Future income
taxes, net (6,651) 372 (10,963) 899
Gain on sale of
securities, net (6,399) (765) (21,122) (3,777)
Accrued interest
receivable and
payable, net 14,970 (3,274) 30,031 6,326
Current income
taxes payable,
net 8,993 816 6,946 (1,068)
Other items, net 2,676 4,087 10,204 (4,963)
-------------------------------------------------------------------------
48,921 33,899 113,231 93,121
-------------------------------------------------------------------------
Cash Flows from
Financing Activities
Deposits, net (319,525) 7,312 148,090 429,418
Securities purchased
under reverse
resale agreements,
net 163,326 (19,896) 246,794 -
Debentures issued - 50,000 - 50,000
Debentures redeemed - (30,000) - (30,000)
Common shares issued
(Note 9) 913 186 1,306 1,086
Preferred units
issued (Note 9) - - 209,750 -
Issuance costs on
preferred units (2) - (4,628) -
Dividends (10,806) (6,959) (27,229) (19,576)
-------------------------------------------------------------------------
(166,094) 643 574,083 430,928
-------------------------------------------------------------------------
Cash Flows from
Investing Activities
Interest bearing
deposits with
regulated financial
institutions, net 198,030 65,595 116,202 (2,950)
Securities, purchased (803,484) (658,402) (2,319,758) (2,057,270)
Securities,
sale proceeds 705,305 187,183 1,694,881 936,939
Securities, matured 160,298 452,649 291,876 1,192,159
Securities purchased
under resale
agreements, net - 146,147 77,000 197,924
Loans, net (99,614) (229,150) (523,801) (771,981)
Land, buildings
and equipment (3,237) (2,088) (5,352) (5,231)
Business acquisitions
(Note 2) - - (6,481) -
-------------------------------------------------------------------------
157,298 (38,066) (675,433) (510,410)
-------------------------------------------------------------------------
Change in Cash and
Cash Equivalents 40,125 (3,524) 11,881 13,639
Cash and Cash
Equivalents at
Beginning of Period (29,300) 2,554 (1,056) (14,609)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at
End of Period(*) $ 10,825 $ (970) $ 10,825 $ (970)
-------------------------------------------------------------------------
(*) Represented by:
Cash and
non-interest
bearing deposits
with financial
institutions $ 38,297 $ 23,903 $ 38,297 $ 23,903
Cheques and other
items in transit
(included in Cash
Resources) - 2,172 - 2,172
Cheques and other
items in transit
(included in Other
Liabilities) (27,472) (27,045) (27,472) (27,045)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at
End of Period $ 10,825 $ (970) $ 10,825 $ (970)
-------------------------------------------------------------------------
Supplemental
Disclosure of
Cash Flow
Information
Amount of interest
paid in the
period $ 57,240 $ 87,589 $ 190,201 $ 254,032
Amount of income
taxes paid in
the period 8,649 9,850 33,617 34,682
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements
-------------------------------------------------------------------------
(unaudited)
($ thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
These unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles (GAAP), including the accounting requirements of the
Office of the Superintendent of Financial Institutions Canada (OSFI),
using the same accounting policies as the audited consolidated
financial statements for the year ended October 31, 2008, except as
disclosed below. Under Canadian GAAP, additional disclosures are
required in annual financial statements and accordingly, these
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for
the year ended October 31, 2008 as set out on pages 61 to 91 of the
Bank's 2008 Annual Report.
Changes in Accounting Policies
Goodwill and Intangible Assets
Effective November 1, 2008, the Bank adopted the CICA new accounting
standard, Section 3064, Goodwill and Intangible Assets. Section 3064,
which replaces Section 3062, Goodwill and Other Intangible Assets,
and Section 3450, Research and Development Costs, provides clarifying
guidance on the criteria that must be satisfied in order for an
intangible asset to be recognized, including internally developed
intangible assets. The new guidance did not have a material effect on
the financial position or earnings of the Bank.
Credit Risk and Fair Value
Effective November 1, 2008, the Bank adopted EIC 173, Credit Risk and
the Fair Value of Financial Assets and Financial Liabilities. The
abstract clarifies how the Bank's own credit risk and the credit risk
of a counterparty should be taken into account in determining the
fair value of financial assets and financial liabilities, including
derivatives. The new guidance did not have a material effect on the
financial position or earnings of the Bank.
2. Business Acquisition
Effective November 1, 2008 the Bank acquired 72.5% of the outstanding
shares of Adroit Investment Management Ltd. (Adroit). Adroit is an
Edmonton, Alberta based firm specializing in wealth management for
individuals, corporations and institutional clients. The results of
operations for Adroit have been included in the Bank's consolidated
financial statements since the effective acquisition date. The
initial $6,481 acquisition cost was paid in cash. Additional
contingent consideration, to a maximum of $1,675, will be paid in
cash if earnings targets are achieved over a two year period. Any
future contingent payment will be recorded when the liability has
been incurred and will increase goodwill.
The following table summarizes the fair value of the assets acquired
and liabilities assumed:
Net assets acquired
Other assets $ 90
Other intangible assets 3,964
Goodwill 2,427
---------------------------------------------------------------------
$ 6,481
---------------------------------------------------------------------
Other intangible assets include customer relationships, non-
competition agreements and a trade name. The trade name, which has an
estimated value of $280, is not subject to amortization. Adroit's
financial results, the goodwill and other intangible assets related
to the acquisition are included in the banking and trust segment. The
total amount of goodwill and intangible assets are not deductible for
income tax purposes.
3. Insurance Revenues, Net
Insurance revenues, net, as reported in other income on the
consolidated statement of income is presented net of net claims and
adjustment expenses and policy acquisition costs.
For the nine
For the three months ended months ended
------------------------------------------------------
July 31 April 30 July 31 July 31 July 31
2009 2009 2008 2009 2008
---------------------------------------------------------------------
Net earned
premiums $ 26,895 $ 24,880 $ 25,030 $ 76,990 $ 73,066
Commissions
and processing
fees 741 760 734 2,155 2,134
Net claims and
adjustment
expenses (16,660) (16,126) (15,612) (51,437) (47,816)
Policy
acquisition
costs (5,181) (5,316) (5,466) (15,603) (15,361)
---------------------------------------------------------------------
Total, net $ 5,795 $ 4,198 $ 4,686 $ 12,105 $ 12,023
---------------------------------------------------------------------
4. Securities
Net unrealized gains (losses) reflected on the balance sheet follow:
As at As at As at
July 31 April 30 October 31
2009 2009 2008
---------------------------------------------------------------------
Interest bearing deposits with
regulated financial institutions $ 10,006 $ 12,231 $ 940
Securities
Issued or guaranteed by Canada 490 3,090 1,417
Issued or guaranteed by a province
or municipality 3,900 10,509 1,214
Other securities 11,166 (15,039) (21,386)
---------------------------------------------------------------------
Unrealized gain (losses), net $ 25,562 $ 10,791 $ (17,815)
---------------------------------------------------------------------
The securities portfolio is primarily comprised of high quality debt
instruments and preferred shares that are not held for trading
purposes and, where applicable, are typically held until maturity.
Fluctuations in value are generally attributed to changes in market
credit spreads, interest rates and shifts in the interest rate curve.
Unrealized losses are considered to be other than permanent in
nature.
5. Loans
The composition of the Bank's loan portfolio by geographic region and
industry sector follow:
British Saskat-
($ millions) Columbia Alberta chewan Manitoba Other Total
-------------------------------------------------------------------------
Loans to
Individuals
Residential
mort-
gages(2) $ 1,013 $ 854 $ 103 $ 77 $ 54 $ 2,101
Other loans 119 222 26 4 1 372
-------------------------------------------------------------------------
1,132 1,076 129 81 55 2,473
-------------------------------------------------------------------------
Loans to
Businesses
Commercial 742 1,245 115 84 287 2,473
Construction
and real
estate(3) 1,020 1,454 112 64 165 2,815
Equipment
financing 327 828 51 16 55 1,277
Energy - 174 - - - 174
-------------------------------------------------------------------------
2,089 3,701 278 164 507 6,739
-------------------------------------------------------------------------
Total
Loans(1) $ 3,221 $ 4,777 $ 407 $ 245 $ 562 $ 9,212
-------------------------------------------------------------------------
Composition
Percentage
July 31,
2009 35% 52% 4% 3% 6% 100%
April 30,
2009 36% 52% 4% 2% 6% 100%
October 31,
2008 36% 53% 4% 2% 5% 100%
-------------------------------------------------------------------------
July 31 April 30 October
2009 2009 31 2008
Composi- Composi- Composi-
tion tion tion
Percent- Percent Percent-
($ millions) age age age
-------------------------------------------
Loans to
Individuals
Residential
mort-
gages(2) 23% 24% 24%
Other loans 4 4 4
-------------------------------------------
27 28 28
-------------------------------------------
Loans to
Businesses
Commercial 27 27 27
Construction
and real
estate(3) 30 30 29
Equipment
financing 14 13 14
Energy 2 2 2
-------------------------------------------
73 72 72
-------------------------------------------
Total
Loans(1) 100% 100% 100%
-------------------------------------------
Composition
Percentage
July 31,
2009
April 30,
2009
October 31,
2008
-------------------------------------------
(1) This table does not include an allocation for credit losses or
deferred revenue and premiums.
(2) Includes single- and multi-unit residential mortgages and project
(interim) mortgages on residential property.
(3) Includes commercial term mortgages and project (interim) mortgages
for non-residential property.
6. Allowance for Credit Losses
The following table shows the changes in the allowance for credit
losses:
For the three months ended
July 31, 2009
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 14,084 $ 61,015 $ 75,099
Provision for credit losses 3,168 201 3,369
Write-offs (4,455) - (4,455)
Recoveries 201 - 201
---------------------------------------------------------------------
Balance at end of period $ 12,998 $ 61,216 $ 74,214
---------------------------------------------------------------------
For the three months ended
April 30, 2009
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 13,554 $ 60,922 $ 74,476
Provision for credit losses 3,276 93 3,369
Write-offs (2,759) - (2,759)
Recoveries 13 - 13
---------------------------------------------------------------------
Balance at end of period $ 14,084 $ 61,015 $ 75,099
---------------------------------------------------------------------
For the three months ended
July 31, 2008
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 10,787 $ 56,304 $ 67,091
Provision for credit losses 117 2,921 3,038
Write-offs (133) - (133)
Recoveries 13 - 13
---------------------------------------------------------------------
Balance at end of period $ 10,784 $ 59,225 $ 70,009
---------------------------------------------------------------------
For the nine months ended
July 31, 2009
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 15,011 $ 60,527 $ 75,538
Provision for credit losses 9,418 689 10,107
Write-offs (11,678) - (11,678)
Recoveries 247 - 247
---------------------------------------------------------------------
Balance at end of period $ 12,998 $ 61,216 $ 74,214
---------------------------------------------------------------------
For the nine months ended
July 31, 2008
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 7,414 $ 55,608 $ 63,022
Provision for credit losses 5,196 3,617 8,813
Write-offs (1,872) - (1,872)
Recoveries 46 - 46
---------------------------------------------------------------------
Balance at end of period $ 10,784 $ 59,225 $ 70,009
---------------------------------------------------------------------
7. Impaired and Past Due Loans
Outstanding gross loans and impaired loans, net of allowances for
credit losses, by loan type, are as follows:
As at July 31, 2009
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,348,362 $ 16,706 $ 1,306 $ 15,400
Real estate(1) 3,892,443 63,999 5,513 58,486
Industrial 1,449,319 23,223 5,494 17,729
Commercial 2,521,853 1,301 685 616
---------------------------------------------------------------------
Total(3) $ 9,211,977 $ 105,229 $ 12,998 92,231
--------------------------------------------------------
General
allowance(2) (61,216)
---------------------------------------------------------------------
Net impaired loans after general allowance $ 31,015
---------------------------------------------------------------------
As at April 30, 2009
----------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,317,270 $ 17,809 $ 862 $ 16,947
Real estate(1) 3,929,189 65,515 7,566 57,949
Industrial 1,359,937 20,709 3,675 17,034
Commercial 2,510,221 2,984 1,981 1,003
---------------------------------------------------------------------
Total(3) $ 9,116,617 $ 107,017 $ 14,084 92,933
--------------------------------------------------------
General
allowance(2) (61,015)
---------------------------------------------------------------------
Net impaired loans after general allowance $ 31,918
---------------------------------------------------------------------
As at October 31, 2008
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,288,160 $ 11,462 $ 305 $ 11,157
Real estate(1) 3,673,158 51,909 2,948 48,961
Industrial 1,391,287 20,456 5,647 14,809
Commercial 2,347,002 7,809 6,111 1,698
---------------------------------------------------------------------
Total $ 8,699,607 $ 91,636 $ 15,011 76,625
--------------------------------------------------------
General allowance(2) (60,527)
---------------------------------------------------------------------
Net impaired loans after general allowance $ 16,098
---------------------------------------------------------------------
(1) Multi-family residential mortgages are included in real estate
loans.
(2) The general allowance for credit risk is not allocated by loan
type.
(3) Gross impaired loans includes foreclosed real estate with a
carrying value of $4,756 (April 30, 2009 - $3,505 and October 31,
2008 - $901) which is held for sale.
Outstanding impaired loans, net of allowance for credit losses, by
provincial location of security, are as follows:
As at July 31, 2009
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 50,553 $ 5,178 $ 45,375
British Columbia 52,477 6,737 45,740
Saskatchewan 1,424 618 806
Manitoba 498 336 162
Other 277 129 148
---------------------------------------------------------------------
Total $ 105,229 $ 12,998 92,231
--------------------------------------------------------
General allowance(1) (61,216)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 31,015
---------------------------------------------------------------------
As at April 30, 2009
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 46,534 $ 4,424 $ 42,110
British Columbia 58,171 8,568 49,603
Saskatchewan 1,565 620 945
Manitoba 402 402 -
Other 345 70 275
---------------------------------------------------------------------
Total $ 107,017 $ 14,084 92,933
--------------------------------------------------------
General allowance(1) (61,015)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 31,918
---------------------------------------------------------------------
As at October 31, 2008
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 48,436 $ 9,204 $ 39,232
British Columbia 40,656 4,626 36,030
Saskatchewan 2,155 792 1,363
Manitoba 389 389 -
Other - - -
---------------------------------------------------------------------
Total $ 91,636 $ 15,011 76,625
--------------------------------------------------------
General allowance(1) (60,527)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 16,098
---------------------------------------------------------------------
(1) The general allowance for credit risk is not allocated by
province.
During the three and nine months ended July 31, 2009, interest
recognized as income on impaired loans totaled $468 and $1,400
respectively (2008 - $126 and $304).
Gross impaired loans exclude certain past due loans where payment of
interest or principal is contractually in arrears, which are not
classified as impaired. Details of such past due loans that have not
been included in the gross impaired amount are as follows:
As at July 31, 2009
------------------------------------------------------
1 - 30 31 - 60 61 - 90 More than
days days days 90 days Total
---------------------------------------------------------------------
Residential
mortgages $ 4,610 $ 6,833 $ 2,556 $ - $ 13,999
Other loans 11,332 38,273 3,291 - 52,896
---------------------------------------------------------------------
$ 15,942 $ 45,106 $ 5,847 $ - $ 66,895
---------------------------------------------------------------------
---------------------------------------------------------------------
Total as at
April 30,
2009 $ 55,152 $ 2,111 $ 8,898 $ - $ 66,161
---------------------------------------------------------------------
Total as at
October 31,
2008 $ 18,949 $ 12,560 $ 689 $ - $ 32,198
---------------------------------------------------------------------
8. Derivative Financial Instruments
For the three and nine months ended July 31, 2009, a net unrealized
after tax gain of $2,596 and $8,564 respectively (2008 - $566 and
$3,904) was recorded in other comprehensive income for changes in
fair value of the effective portion of derivatives designated as cash
flow hedges, and $nil (2008 - $nil) was recorded in other income for
changes in fair value of the ineffective portion of derivatives
classified as cash flow hedges. Amounts accumulated in other
comprehensive income are reclassified to net income in the same
period that interest on certain floating rate loans (i.e. the hedged
items) affect income. For the three and nine months ended July 31,
2009, a net gain after tax of $2,429 and $7,424 respectively (2008 -
$965 and $1,232) was reclassified to net income. A net gain of $2,958
(2008 - $247) after tax recorded in accumulated other comprehensive
income (loss) as at July 31, 2009 is expected to be reclassified to
net income in the next 12 months and will offset variable cash flows
from floating rate loans.
The following table shows the notional value outstanding for
derivative financial instruments and the related fair value:
As at July 31, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 235,000 $ 3,922 $ -
Equity contracts(2) 2,000 - 40
Foreign exchange contracts(3) 2,234 128 124
Embedded derivatives in
equity-linked deposits(2) n/a 31 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 4,081 $ 164
---------------------------------------------------------------------
As at April 30, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 328,000 $ 4,422 $ 737
Equity contracts(2) 2,000 - 100
Foreign exchange contracts(3) 3,007 5 15
Embedded derivatives in
equity-linked deposits(2) n/a 97 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 4,524 $ 852
---------------------------------------------------------------------
As at October 31, 2008
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges $ 593,000 $ 9,827 $ -
Equity contracts 4,400 - 139
Foreign exchange contracts 2,600 2 24
Embedded derivatives in
equity-linked deposits n/a 151 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 9,980 $ 163
---------------------------------------------------------------------
(1) Interest rate swaps outstanding at July 31, 2009 mature between
November 2009 and June 2010.
(2) Equity contracts and equity-linked deposits outstanding at
July 31, 2009 mature between March 2010 and March 2011.
(3) Foreign exchange contracts outstanding at July 31, 2009 mature
between August and December 2009.
n/a - not applicable.
There were no forecasted transactions that failed to occur during the
nine months ended July 31, 2009.
9. Capital Stock
Share Capital
For the three months ended
---------------------------------------------------
July 31, 2009 July 31, 2008
---------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Preferred Shares
- Series 3
Outstanding at
beginning of
period 8,390,000 $ 209,750 - $ -
Issued during
the period - - - -
---------------------------------------------------------------------
Outstanding at
end of period 8,390,000 209,750 - -
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,588,520 223,062 63,234,450 220,634
Issued on
exercise or
exchange of
options 149,593 913 107,499 186
Transferred from
contributed
surplus on
exercise or
exchange of
options - 430 - 283
---------------------------------------------------------------------
Outstanding at
end of period 63,738,113 224,405 63,341,949 221,103
---------------------------------------------------------------------
Share Capital $ 434,155 $ 221,103
---------------------------------------------------------------------
For the nine months ended
---------------------------------------------------
July 31, 2009 July 31, 2008
---------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Preferred Shares -
Series 3
Outstanding at
beginning of
period - $ - - $ -
Issued during
the period 8,390,000 209,750 - -
---------------------------------------------------------------------
Outstanding at
end of period 8,390,000 209,750 - -
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,457,142 221,914 62,836,189 219,004
Issued on
exercise or
exchange of
options 280,971 1,306 505,760 1,086
Transferred
from
contributed
surplus on
exercise or
exchange of
options - 1,185 - 1,013
---------------------------------------------------------------------
Outstanding at
end of period 63,738,113 224,405 63,341,949 221,103
---------------------------------------------------------------------
Share Capital $ 434,155 $ 221,103
---------------------------------------------------------------------
In March 2009, the Bank issued 8.4 million Preferred Units at $25 per
unit, for total proceeds of $209.8 million. Of the total, 5.4 million
Preferred Units were issued by way of a private placement for total
proceeds of $135.0 million, and 3.0 million were issued under a
public offering for total proceeds of $74.8 million.
The Preferred Units issued by way of the private placement and the
public offering each consist of one Non-Cumulative 5-Year Rate Reset
Preferred Share, Series 3 (Series 3 Preferred Shares) in the capital
of the Bank with an issue price of $25.00 per share and 1.7857 and
1.7800 common share purchase warrants, respectively. Each warrant is
exercisable at a price of $14.00 to purchase one common share in the
capital of the Bank until March 3, 2014.
Holders of the Series 3 Preferred Shares are entitled to receive non-
cumulative quarterly fixed dividends for the initial five-year period
ending April 30, 2014 of 7.25% per annum, payable quarterly, as and
when declared by the Board of Directors. The dividend rate on Series
3 Preferred Shares will reset May 1, 2014 and every five years
thereafter at a level of 500 basis points over the then current five-
year Government of Canada bond yield. On April 30, 2014, and every
five years thereafter, holders of Series 3 Preferred Shares will,
subject to certain conditions, have the option to convert their
shares to Non-Cumulative Floating Rate Preferred Shares, Series 4
(Series 4 Preferred Shares). Holders of the Series 4 Preferred Shares
will be entitled to a floating quarterly dividend rate equal to the
90-day Canadian treasury bill rate plus 500 basis points, as and when
declared by the Board of Directors.
The Series 3 Preferred Shares are not redeemable prior to April 30,
2014. Subject to the provisions of the Bank Act, the prior consent of
OSFI and the provisions described in the prospectus for the public
offering, on April 30, 2014 and on April 30 every five years
thereafter, the Bank may redeem all or any part of the then
outstanding Series 3 Preferred Shares at the Bank's option without
the consent of the holder, by the payment of an amount in cash for
each such share so redeemed of $25.00 together with all declared and
unpaid dividends to the date fixed for redemption.
Subject to the provisions of the Bank Act, the prior consent of OSFI
and the provisions described in the prospectus for the public
offering, on not more than 60 nor less than 30 days' notice, the Bank
may redeem all or any part of the then outstanding Series 4 Preferred
Shares at the Bank's option without the consent of the holder by the
payment of an amount in cash for each such share so redeemed of: (i)
$25.00 together with all declared and unpaid dividends to the date
fixed for redemption in the case of redemptions on April 30, 2019 and
on April 30 every five years thereafter; or (ii) $25.50 together with
all declared and unpaid dividends to the date fixed for redemption in
the case of redemptions on any other date on or after April 30, 2014.
Warrants to Purchase Common Shares
For the nine months ended
---------------------------------------------------
July 31, 2009 July 31, 2008
---------------------------------------------------------------------
Number of Exercise Number of Exercise
Warrants Price Warrants Price
---------------------------------------------------------------------
Outstanding at
beginning of
period - $ - - $ -
Issued during the
period 14,964,980 14.00
---------------------------------------------------------------------
Outstanding at
end of period 14,964,980 $ 14.00 - $ -
---------------------------------------------------------------------
The warrants issued in March 2009 were part of the Preferred Unit
issuance discussed in the section above.
10. Stock-Based Compensation
Stock Options
For the three months ended
---------------------------------------------------
July 31, 2009 July 31, 2008
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 4,444,255 $ 18.05 4,941,242 $ 19.50
Granted 458,500 16.89 614,900 26.10
Exercised or
exchanged (259,300) 10.29 (156,450) 8.89
Forfeited (17,050) 17.65 (39,850) 25.08
---------------------------------------------------------------------
Balance at end of
period 4,626,405 $ 18.37 5,359,842 $ 20.53
---------------------------------------------------------------------
For the nine months ended
---------------------------------------------------
July 31, 2009 July 31, 2008
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------------------------------------------------------------
Options
Balance at
beginning of
period 5,204,882 $ 20.83 4,911,277 $ 16.96
Granted 1,465,035 13.33 1,216,242 28.57
Exercised or
exchanged (725,300) 10.14 (685,977) 8.90
Forfeited (1,318,212) 27.00 (81,700) 23.73
---------------------------------------------------------------------
Balance at end of
period 4,626,405 $ 18.37 5,359,842 $ 20.53
---------------------------------------------------------------------
Exercisable at end
of period 1,940,700 $ 17.53 1,263,100 $ 10.68
---------------------------------------------------------------------
The terms of the share incentive plan allow the holders of vested
options a cashless settlement alternative whereby the option holder
can either (a) elect to receive shares by delivering cash to the Bank
in the amount of the option exercise price or (b) elect to receive
the number of shares equivalent to the excess of the market value of
the shares under option over the exercise price. Of the 725,300
options (2008 - 685,977) exercised or exchanged in the nine months
ended July 31, 2009, option holders exchanged the rights to 602,300
options (2008 - 558,527) and received 157,971 shares (2008 - 378,310)
in return under the cashless settlement alternative.
For the nine months ended July 31, 2009, salary expense of $5,659
(2008 - $4,241) was recognized relating to the estimated fair value
of options granted since November 1, 2002, which included the stock
option forfeiture discussed below. The fair value of options granted
was estimated using a binomial option pricing model with the
following variables and assumptions: (i) risk-free interest rate of
2.2% (2008 - 3.8%), (ii) expected option life of 4.0 years (2008 -
4.0 years), (iii) expected volatility of 38% (2008 - 23%), and (iv)
expected dividends of 3.6% (2008 - 1.3%). The weighted average fair
value of options granted was estimated at $2.94 (2008 - $5.88) per
share.
In March 2009, certain employees voluntarily and irrevocably
released, without consideration, all right, title and interest in
1,283,062 stock options. The unamortized fair value of these
forfeited options ($1,696) was recognized at that time as additional
non-tax deductible salary expense with an offsetting increase to
contributed surplus.
Further details relating to stock options outstanding and exercisable
at July 31, 2009 follow:
Options Outstanding Options Exercisable
------------------------------------------------------
Weighted
Average
Remaining
Contrac- Weighted Weighted
tual Average Average
Range of Exercise Number of Life Exercise Number of Exercise
Prices Options (years) Price Options Price
-------------------------------------------------------------------------
$ 8.58 to $10.84 165,000 0.5 $ 9.91 148,500 $ 10.06
$11.18 to $13.78 1,226,635 3.6 12.16 250,500 13.71
$15.46 to $17.58 1,248,700 2.5 16.60 790,200 16.43
$19.16 to $21.46 1,066,290 2.4 21.45 751,500 21.44
$22.29 to $26.38 693,000 3.0 25.64 - -
$28.11 to $31.18 226,780 3.4 31.13 - -
-------------------------------------------------------------------------
Total 4,626,405 2.8 $ 18.37 1,940,700 $ 17.53
-------------------------------------------------------------------------
Restricted Share Units
During the quarter, the Bank adopted a plan to grant Restricted Share
Units (RSUs) as part of its long-term incentive plan. Under this
plan, certain employees received an award in the form of RSUs. Each
RSU entitles the holder to receive the cash equivalent of the market
value of the Bank's common shares at the vesting date and an amount
equivalent to the dividends paid on the common shares during the
vesting period. RSUs vest on each anniversary of the grant in equal
one-third installments over a vesting period of three years. Salary
expense is recognized evenly over the vesting period except where the
employee is eligible to retire prior to the vesting date, in which
case the expense is recognized between the grant date and the date
the employee is eligible to retire.
For the three and nine months ended July 31, 2009, salary expense of
$2,159 ($1,501, net of tax) was recognized related to RSUs. As at
July 31, 2009, the liability for the RSUs held under this plan was
$2,159. At the end of each period, the liability and salary expense
are adjusted to reflect changes in the market value of the Bank's
common shares.
Number of
For the three and nine months ended July 31, 2009 RSUs
---------------------------------------------------------------------
Restricted Share Units
Balance at beginning of period -
Granted 286,929
Vested -
Forfeited -
---------------------------------------------------------------------
Balance at end of period 286,929
---------------------------------------------------------------------
11. Contingent Liabilities and Commitments
Significant contingent liabilities and commitments, including
guarantees provided to third parties, are discussed in Note 20 of the
Bank's audited consolidated financial statements for the year ended
October 31, 2008 (see pages 80 to 81 of the 2008 Annual Report) and
include:
As at As at As at
July 31 April 30 October 31
2009 2009 2008
---------------------------------------------------------------------
Guarantees and standby letters
of credit
Balance outstanding $ 208,166 $ 218,269 $ 232,649
Business credit cards
Total approved limit 10,610 10,753 11,503
Balance outstanding 2,357 2,204 2,778
---------------------------------------------------------------------
---------------------------------------------------------------------
In the ordinary course of business, the Bank and its subsidiaries are
party to legal proceedings. Based on current knowledge, management
does not expect the outcome of any of these proceedings to have a
material effect on the consolidated financial position or results of
operations.
12. Financial Instruments
As a financial institution, most of the Bank's balance sheet is
comprised of financial instruments and the majority of net income
results from gains, losses, income and expenses related to the same.
Financial instrument assets include cash resources, securities,
securities purchased under resale agreements, loans and derivative
financial instruments. Financial instrument liabilities include
deposits, securities purchased under reverse resale agreements,
derivative financial instruments and subordinated debentures.
The use of financial instruments exposes the Bank to credit,
liquidity and market risk. A discussion of how these and other risks
are managed can be found in the 2008 consolidated annual financial
statements.
The value of financial assets recorded on the consolidated balance
sheet at July 31, 2009 at fair value (cash, securities, securities
purchased under resale agreements and derivatives) was determined
using published market prices quoted in active markets for 86% (2008
- 97%) of the portfolio and estimated using a valuation technique
based on observable market data for 14% (2008 - 3%) of the portfolio.
The value of liabilities recorded on the consolidated balance sheet
at fair value (derivatives and securities purchased under reverse
resale agreements) was determined for the entire portfolio using a
valuation technique based on observable market data.
The table below sets out the fair values of financial instruments
(including certain derivatives) using the valuation methods and
assumptions outlined in the 2008 consolidated annual financial
statements. The table does not include assets and liabilities that
are not considered financial instruments.
July 31, 2009
---------------------------------------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 395,354 $ 395,354 $ -
Securities 1,602,043 1,602,043 -
Securities purchased
under resale agreements - - -
Loans(1) 9,217,247 9,269,295 52,048
Other assets(2) 88,053 88,053 -
Derivative related 4,081 4,081 -
Liabilities
Deposits(1) 9,410,200 9,540,803 130,603
Other liabilities(3) 263,307 263,307 -
Securities purchased under
reverse resale agreements 246,794 246,794 -
Subordinated debentures 375,000 377,036 2,036
Derivative related 164 164 -
---------------------------------------------------------------------
October 31, 2008
---------------------------------------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 492,173 $ 492,173 $ -
Securities 1,228,964 1,228,964 -
Securities purchased
under resale agreements 77,000 77,000 -
Loans(1) 8,700,672 8,635,811 (64,861)
Other assets(2) 82,782 82,782 -
Derivative related 9,980 9,980 -
Liabilities
Deposits(1) 9,258,776 9,247,017 (11,759)
Other liabilities(3) 232,678 232,678 -
Securities purchased under
reverse resale agreements - - -
Subordinated debentures 375,000 387,774 12,774
Derivative related 163 163 -
---------------------------------------------------------------------
(1) Loans and deposits exclude deferred premiums and deferred
revenue, which are not financial instruments.
(2) Other assets exclude land, buildings and equipment, goodwill
and other intangible assets, reinsurers' share of unpaid claims
and adjustment expenses, future income tax asset, prepaid and
deferred expenses, financing costs and other items that are not
financial instruments.
(3) Other liabilities exclude future income tax liability, deferred
revenue, unearned insurance premiums and other items that are
not financial instruments.
(4) For further information on interest rates associated with
financial assets and liabilities, including derivative
instruments, refer to Note 13.
13. Interest Rate Sensitivity
The Bank's exposure to interest rate risk as a result of a difference
or gap between the maturity or repricing behavior of interest
sensitive assets and liabilities, including derivative financial
instruments, is discussed in Note 28 of the audited consolidated
financial statements for the year ended October 31, 2008 (see page 86
of the 2008 Annual Report). The following table shows the gap
position for selected time intervals.
Asset Liability Gap Positions
Floating
Rate and Total
Within 1 to 3 3 Months Within
($ millions) 1 Month Months to 1 Year 1 Year
---------------------------------------------------------------------
July 31, 2009
Assets
Cash resources and
securities $ 103 $ 100 $ 201 $ 404
Loans 4,937 586 935 6,458
Other assets - - - -
Derivative financial
instruments(1) - - 239 239
---------------------------------------------------------------------
Total 5,040 686 1,375 7,101
---------------------------------------------------------------------
Liabilities and Equity
Deposits 3,324 948 1,759 6,031
Other liabilities 250 6 26 282
Debentures - - 60 60
Shareholders' equity - - - -
Derivative financial
instruments(1) 239 - - 239
---------------------------------------------------------------------
Total $ 3,813 $ 954 $ 1,845 $ 6,612
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 1,227 $ (268) $ (470) $ 489
---------------------------------------------------------------------
Cumulative Gap $ 1,227 $ 959 $ 489 $ 489
---------------------------------------------------------------------
Cumulative Gap as a
percentage of total
assets 10.6 % 8.3 % 4.2 % 4.2 %
---------------------------------------------------------------------
April 30, 2009
Assets $ 5,247 $ 927 $ 1,329 $ 7,503
Liabilities and equity 3,744 884 2,260 6,888
---------------------------------------------------------------------
Interest rate
sensitive gap $ 1,503 $ 43 $ (931) $ 615
---------------------------------------------------------------------
Cumulative gap $ 1,503 $ 1,546 $ 615 $ 615
---------------------------------------------------------------------
Cumulative gap as
a Percentage of
total assets 12.8 % 13.1 % 5.2 % 5.2 %
---------------------------------------------------------------------
October 31, 2008
Cumulative gap $ 1,068 $ 963 $ 234 $ 234
---------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 9.5 % 8.6 % 2.1 % 2.1 %
---------------------------------------------------------------------
Non-
1 Year to More than interest
($ millions) 5 Years 5 Years Sensitive Total
---------------------------------------------------------------------
July 31, 2009
Assets
Cash resources and
securities $ 1,468 $ 64 $ 61 $ 1,997
Loans 2,655 104 (79) 9,138
Other assets - - 196 196
Derivative financial
instruments(1) - - - 239
---------------------------------------------------------------------
Total 4,123 168 178 11,570
---------------------------------------------------------------------
Liabilities and Equity
Deposits 3,275 105 (17) 9,394
Other liabilities 35 8 271 596
Debentures 240 75 - 375
Shareholders' equity - - 966 966
Derivative financial
instruments(1) - - - 239
---------------------------------------------------------------------
Total $ 3,550 $ 188 $ 1,220 $ 11,570
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 573 $ (20) $ (1,042) $ -
---------------------------------------------------------------------
Cumulative Gap $ 1,062 $ 1,042 $ - $ -
---------------------------------------------------------------------
Cumulative Gap as a
percentage of total
assets 9.2 % 9.0 % - % - %
---------------------------------------------------------------------
April 30, 2009
Assets $ 3,974 $ 159 $ 145 $ 11,781
Liabilities and equity 3,520 188 1,185 11,781
---------------------------------------------------------------------
Interest rate
sensitive gap $ 454 $ (29) $ (1,040) $ -
---------------------------------------------------------------------
Cumulative gap $ 1,069 $ 1,040 $ - $ -
---------------------------------------------------------------------
Cumulative gap as
a Percentage of
total assets 9.1 % 8.8 % - % - %
---------------------------------------------------------------------
October 31, 2008
Cumulative gap $ 818 $ 770 $ - $ -
---------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 7.3 % 6.9 % - % - %
---------------------------------------------------------------------
(1) Derivative financial instruments are included in this table at
the notional amount.
(2) Accrued interest is excluded in calculating interest sensitive
assets and liabilities.
(3) Potential prepayments of fixed rate loans and early redemption
of redeemable fixed term deposits have not been estimated.
Redemptions of fixed term deposits where depositors have this
option are not expected to be material. The majority of fixed
rate loans, mortgages and leases are either closed or carry
prepayment penalties.
The effective, weighted average interest rates for each class of
financial assets and liabilities are shown below:
Floating
Rate and 3 Months Total 1 Year More
July 31, Within 1 to 3 to 1 Within to than
2009 1 Month Months Year 1 Year 5 Years 5 Years Total
-------------------------------------------------------------------------
Total assets 3.7 % 2.5 % 4.6 % 3.8 % 5.1 % 6.1 % 4.3 %
Total
liabilities 0.6 3.1 3.3 1.7 3.9 5.8 2.5
-------------------------------------------------------------------------
Interest
rate
sensitive
gap 3.1 % (0.6)% 1.3 % 2.1 % 1.2 % 0.3 % 1.8 %
-------------------------------------------------------------------------
April 30,
2009
-------------------------------------------------------------------------
Total assets 3.5 % 2.6 % 4.8 % 3.6 % 5.0 % 6.6 % 4.1 %
Total
liabilities 0.8 2.7 3.6 1.9 4.0 5.8 2.7
-------------------------------------------------------------------------
Interest
rate
sensitive
gap 2.7 % (0.1) % 1.2 % 1.7 % 1.0 % 0.8 % 1.4 %
-------------------------------------------------------------------------
October 31,
2008
-------------------------------------------------------------------------
Total assets 4.7 % 4.2 % 5.1 % 4.8 % 5.4 % 5.8 % 5.0 %
Total
liabilities 2.2 3.6 4.0 2.9 4.2 5.7 3.4
-------------------------------------------------------------------------
Interest
rate
sensitive
gap 2.5 % 0.6 % 1.1 % 1.9 % 1.2 % 0.1 % 1.6 %
-------------------------------------------------------------------------
Based on the current interest rate gap position, it is estimated that
a one-percentage point increase in all interest rates would increase
net interest income by approximately 3.8% or $9.5 million (April 30,
2009 - 5.6% or $12.4 million) and decrease other comprehensive income
$20,689 (April 30, 2009 - $23,383) net of tax, respectively over the
following twelve months. A one-percentage point decrease in all
interest rates would increase net interest income by approximately
5.2% or $13.1 million (April 30, 2009 - 4.8% or $10.5 million) and
increase other comprehensive income $20,689 (April 30, 2009 -
$23,383) net of tax.
14. Segmented Information
The Bank operates principally in two industry segments - banking and
trust, and insurance. These two segments differ in products and
services but are both within the same geographic region. The banking
and trust segment provides banking, trust and wealth management
services to personal clients, small to medium-sized commercial
business clients and institutional clients primarily in Western
Canada. The insurance segment provides home and auto insurance to
individuals in British Columbia and Alberta.
Banking and Trust Insurance
-----------------------------------------------------------
Three months ended Three months ended
-----------------------------------------------------------
July 31 April 30 July 31 July 31 April 30 July 31
2009 2009 2008 2009 2009 2008
-------------------------------------------------------------------------
Net interest
income
(teb)(1) $ 59,340 $ 51,399 $ 55,877 $ 1,594 $ 1,413 $ 1,413
Less teb
adjustment 2,018 1,528 1,326 171 147 116
-------------------------------------------------------------------------
Net interest
income per
financial
statements 57,322 49,871 54,551 1,423 1,266 1,297
Other income(2) 18,651 18,125 14,415 5,953 4,445 4,670
-------------------------------------------------------------------------
Total revenues 75,973 67,996 68,966 7,376 5,711 5,967
Provision for
credit losses 3,369 3,369 3,038 - - -
Non-interest
expenses 37,283 37,381 32,124 2,927 2,613 2,406
Provision for
income taxes 9,791 7,785 9,980 1,200 923 1,058
Non-controlling
interest in
subsidiary 50 56 - - - -
-------------------------------------------------------------------------
Net income $ 25,480 $ 19,405 $ 23,824 $ 3,249 $ 2,175 $ 2,503
-------------------------------------------------------------------------
Total average
assets ($
millions)(3) $ 11,142 $ 11,024 $ 9,927 $ 200 $ 192 $ 185
-------------------------------------------------------------------------
Total
------------------------------
Three months ended
------------------------------
July 31 April 30 July 31
2009 2009 2008
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 60,934 $ 52,812 $ 57,290
Less teb adjustment 2,189 1,675 1,442
-------------------------------------------------------------------------
Net interest income per financial
statements 58,745 51,137 55,848
Other income 24,604 22,570 19,085
-------------------------------------------------------------------------
Total revenues 83,349 73,707 74,933
Provision for credit losses 3,369 3,369 3,038
Non-interest expenses 40,210 39,994 34,530
Provision for income taxes 10,991 8,708 11,038
Non-controlling interest in subsidiary 50 56 -
-------------------------------------------------------------------------
Net income $ 28,729 $ 21,580 $ 26,327
-------------------------------------------------------------------------
Total average assets ($ millions)(3) $ 11,342 $ 11,216 $ 10,112
-------------------------------------------------------------------------
Banking and Trust Insurance Total
-----------------------------------------------------------
Nine months ended Nine months ended Nine months ended
-----------------------------------------------------------
July 31 July 31 July 31 July 31 July 31 July 31
2009 2008 2009 2008 2009 2008
-------------------------------------------------------------------------
Net interest
income
(teb)(1) $163,840 $165,844 $ 4,502 $ 4,151 $168,342 $169,995
Less teb
adjustment 4,984 3,816 466 315 5,450 4,131
-------------------------------------------------------------------------
Net interest
income per
financial
statements 158,856 162,028 4,036 3,836 162,892 165,864
Other
income(2) 56,994 42,758 12,531 12,045 69,525 54,803
-------------------------------------------------------------------------
Total revenues 215,850 204,786 16,567 15,881 232,417 220,667
Provision for
credit losses 10,107 8,813 - - 10,107 8,813
Non-interest
expenses 108,574 92,835 8,035 6,972 116,609 99,807
Provision for
income taxes 27,289 31,801 2,311 2,712 29,600 34,513
Non-controlling
interest in
subsidiary 173 - - - 173 -
-------------------------------------------------------------------------
Net income $ 69,707 $ 71,337 $ 6,221 $ 6,197 $ 75,928 $ 77,534
-------------------------------------------------------------------------
Total average
assets ($
millions)(3) $ 10,959 $ 9,695 $ 193 $ 181 $ 11,152 $ 9,876
-------------------------------------------------------------------------
(1) Taxable Equivalent Basis (teb) - Most financial institutions
analyze revenue on a taxable equivalent basis to permit uniform
measurement and comparison of net interest income. Net interest
income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income
is not taxable, the rate of interest or dividends received is
significantly lower than would apply to a loan or security of the
same amount. The adjustment to taxable equivalent basis increases
interest income and the provision for income taxes to what they would
have been had the tax-exempt securities been taxed at the statutory
rate. The taxable equivalent basis does not have a standardized
meaning prescribed by generally accepted accounting principles and
therefore may not be comparable to similar measures presented by
other financial institutions.
(2) Other income for the insurance segment is presented net of net
claims, adjustment expenses and policy acquisition expenses and
includes gains on sale of securities.
(3) Assets are disclosed on an average daily balance basis as this
measure is most relevant to a financial institution and is the
measure reviewed by management.
15. Capital Management
Capital for Canadian financial institutions is managed and reported
in accordance with a capital management framework specified by OSFI
commonly called Basel II.
Capital funds are managed in accordance with policies and plans that
are regularly reviewed and approved by the Board of Directors and
take into account forecasted capital needs and markets. The goal is
to maintain adequate regulatory capital to be considered well
capitalized, protect customer deposits and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the public capital markets, all while
providing a satisfactory return for shareholders.
During March 2009, the Bank issued 8.4 million Preferred Units for
total proceeds of $209.8 million, which qualify as Tier 1 capital
(refer to Note 9). The Preferred Units, issued by way of the private
placement and the public offering, each consist of one Non-Cumulative
5-Year Rate Reset Preferred Share, Series 3 (Series 3 Preferred
Shares) in the capital of the Bank with an issue price of $25.00 per
share and 1.7857 and 1.7800 common share purchase warrants,
respectively. Each warrant is exercisable at a price of $14.00 to
purchase one common share in the capital of the Bank until March 3,
2014 (refer to Note 9).
Additional information about the Bank's capital management practices
is provided in Note 31 to the 2008 audited financial statements
beginning on page 89 of the 2008 Annual Report.
Capital Structure and Regulatory Ratios
As at As at As at
July 31 April 30 July 31
2009 2009 2008
---------------------------------------------------------------------
Capital
Tier 1 $ 1,040,753 $ 1,013,204 $ 760,597
Total 1,432,146 1,403,487 1,149,434
---------------------------------------------------------------------
Capital ratios
Tier 1 11.2 % 11.0 % 9.2 %
Total 15.4 15.2 14.0
Assets to capital multiple 8.0 x 8.2 x 8.8 x
---------------------------------------------------------------------
During the three and nine months ended July 31, 2009, the Bank
complied with all internal and external capital requirements.
16. Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable
entities to International Financial Reporting Standards (IFRS). The
Bank's consolidated financial statements will be prepared in
accordance with IFRS for the fiscal year commencing November 1, 2011
and will include comparative information for the prior year.
The Bank has embarked on a four stage project to identify and
evaluate the impact of the transition to IFRS on the consolidated
financial statements and develop a plan to complete the transition.
The project plan includes the following phases - diagnostic, design
and planning, solution development, and implementation. The
diagnostic phase is complete and the design and planning phase is
underway and expected to be completed by the end of fiscal 2009.
The impact of the transition to IFRS on the Bank's consolidated
financial statements is not yet determinable. Additional information
regarding the Bank's plan and the expected impact of the transition
will be provided as the project moves forward.
-------------------------------------------------------------------------
Shareholder Information
-------------------------------------------------------------------------
Head Office Transfer Agent and Registrar
Canadian Western Bank & Trust Valiant Trust Company
Suite 3000, Canadian Western Suite 310, 606 - 4th Street S.W.
Bank Place Calgary, AB T2P 1T1
10303 Jasper Avenue Telephone: (403) 233-2801
Edmonton, AB T5J 3X6 Fax: (403) 233-2857
Telephone: (780) 423-8888 Website: www.valianttrust.com
Fax: (780) 423-8897 E-mail: inquiries@valianttrust.com
Website: www.cwbankgroup.com
Eligible Dividends Designation
Subsidiary Offices
CWB designates all dividends for both
Canadian Western Trust Company common and preferred shares paid to
Suite 600, 750 Cambie Street Canadian residents as "eligible
Vancouver, BC V6B 0A2 dividends", as defined in the Income
Toll-free: 1-800-663-1124 Tax Act (Canada), unless otherwise
Fax: (604) 669-6069 noted.
Website: www.cwt.ca Investor Relations
Canadian Direct Insurance For further financial information
Incorporated contact:
Suite 600, 750 Cambie Street Kirby Hill, CFA
Vancouver, BC V6B 0A2 Assistant Vice President, Investor
Telephone: (604) 699-3678 and Public Relations
Fax: (604) 699-3851 Canadian Western Bank
Website: www.canadiandirect.com Telephone: (780) 441-3770
Toll-free: 1-800-836-1886
Valiant Trust Company Fax: (780) 423-8899
Suite 310, 606 - 4th Street S.W. E-mail:
Calgary, AB T2P 1T1 InvestorRelations@cwbank.com
Toll-free: 1-866-313-1872
Fax: (403) 233-2857 Online Investor Information
Website: www.valianttrust.com
Additional investor information
Adroit Investment Management Ltd. including supplemental financial
Suite 2020 information and a corporate
10060 Jasper Avenue presentation is available on
Edmonton, AB T5J 3R8 CWB's website at www.cwbankgroup.com.
Telephone: (780) 429-3500
Fax: (780) 429-9680 Quarterly Conference Call and Webcast
Website:
www.adroitinvestments.ca CWB's quarterly conference call and
live audio webcast will take place
Stock Exchange Listings on September 3, 2009 at 3:00 p.m. ET.
The webcast will be archived on the
The Toronto Stock Exchange Bank's website at www.cwbankgroup.com
Common Shares: CWB for sixty days. A replay of the
Series 3 Preferred Shares: conference call will be available
CWB.PR.A until September 17, 2009 by dialing
Common Share Purchase Warrants: (416) 640-1917 or toll free
CWB.WT (877) 289-8525 and entering
passcode 21311921, followed by
the pound sign.
For further information: Larry M. Pollock, President and Chief Executive
Officer, Canadian Western Bank, Phone: (780) 423-8888; Kirby Hill, CFA,
Assistant Vice President, Investor and Public Relations, Canadian Western
Bank, Phone: (780) 441-3770, E-mail: kirby.hill@cwbank.com
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