Total revenues and profitability adversely affected by ongoing margin
compression
Dividend of $0.11 per common share declared
First dividend on Series 3 preferred shares declaredEDMONTON, March 5 /CNW/ - Canadian Western Bank (CWB on TSX) today
announced the achievement of its 83rd consecutive profitable quarter in a very
difficult operating environment for the global financial services sector.
First quarter net income of $25.6 million decreased 1% compared to last year
while diluted earnings per common share remained unchanged at $0.40. Despite
very strong loan growth of 4% in the quarter and 17% over the past twelve
months, revenues and overall profitability continued to be adversely affected
by a significantly lower net interest margin. Consecutive reductions in the
prime lending interest rate and elevated deposit costs related to ongoing
market disruptions both served to compress margin. Gains on the sale of
securities mitigated the financial impact from reduced margin and were mainly
attributed to extraordinary market demand for government debt investments.
Compared to the prior quarter, net income and diluted earnings per share both
increased 5%.-------------------------------------------------------------------------
First Quarter Highlights:
(three months ended January 31, 2009 compared with three months ended
January 31, 2008 unless otherwise noted)
-------------------------------------------------------------------------
- Net income of $25.6 million, down 1%.
- Diluted earnings per share of $0.40, unchanged.
- Loan growth of 4% in the quarter and 17% over the past twelve months.
- Total revenues (teb(1)) of $76.9 million, up 3%.
- Closed the acquisition of 72.5% of Adroit Investment Management Ltd.,
an Edmonton-based firm specializing in wealth management for
individuals, corporations and institutional clients.
- Recognized for a third consecutive year as one of the "50 Best
Employers in Canada" as reported by the Globe and Mail Report on
Business Magazine.
- On March 2, 2009, subsequent to quarter end, completed offerings for
a total of eight million preferred share units for gross proceeds of
$200 million. Each preferred unit consisted of one Non-Cumulative 5-
Year Rate Reset Preferred Share, Series 3, yielding 7.25% based on a
$25.00 issue price and 1.78 purchase warrants. Each purchase warrant
is exercisable over a period of five years and provides the holder
the option to purchase one CWB common share at a price of $14.00.
(1) Taxable equivalent basis. See definition following Financial
Highlights table.
-------------------------------------------------------------------------On March 4, 2009, CWB's Board of Directors declared a cash dividend of
$0.11 per common share, payable on April 2, 2009 to shareholders of record on
March 19, 2009. This quarterly dividend is unchanged from the previous quarter
and 10% higher than the quarterly dividend declared one year ago. The Board of
Directors also declared an initial cash dividend of $0.292979 per preferred
share payable on April 30, 2009 to shareholders of record on April 22, 2009.
This payment will represent CWB's first dividend on the recently issued Series
3 preferred shares.
Banking and trust earnings of $24.8 million were up 2% compared to one
year ago as very strong loan growth and a 40% increase in other income offset
the combined impact of a significantly compressed net interest margin and
higher non-interest expenses. First quarter net income from insurance
operations of $0.8 million represented a 46% decline compared to a year
earlier reflecting high frequency and severity of claims in the British
Columbia (BC) home product line due to severe weather.
"The successful closing earlier this week of our preferred share unit
offering was very gratifying," said Larry Pollock, President and CEO. "We are
pleased to welcome Fairfax Financial and AIMCo as new investors, and look
forward to developing these strategic relationships further. CWB now has among
the strongest capital ratios of all Canadian banks and is also much less
levered. With chaos comes opportunity and our executive management is
committed to effectively deploying the capital for the benefit of all CWB
stakeholders. We are aware the market's recent sell-off has impacted investor
morale, but I assure our shareholders that we are proactively seeking and
reviewing opportunities that should further confirm CWB's significant
potential. That said, we have to remain focused on building sustainable value
over the long-term; this requires discipline and sticking to the fundamentals
of our proven business plan."
"Not unlike other financial institutions around the globe, CWB continued
to be significantly impacted by ongoing market disruptions and a deteriorating
economic outlook," added Mr. Pollock. "However, our position is different in
that the bulk of our challenges are centered on net interest margin. While
this circumstance is inflicting considerable pain as it relates to our current
revenue and profit growth, margins will return to more normal levels over time
and we're actively developing strategies to help accelerate this process. As
one example of our success in this area, we currently have over $315 million
of floating rate loans that have been negotiated with an interest rate floor."
"Western Canada is not immune to a global recession and we are
undoubtedly facing more tough times ahead, but I can't think of a place I'd
rather be situated than Western Canada," continued Mr. Pollock. "Provincial
governments in the west have very low debt levels - zero in Alberta - and have
been managing surpluses for some time. We also have the lowest unemployment
levels in the country. While we have seen a considerable increase in the
dollar level of gross impaired loans, I remain confident that our secured
lending practices and disciplined underwriting, coupled with effective
stimulus from government to manage our economies, should keep our actual
write-offs within acceptable levels."-------------------------------------------------------------------------
Financial Highlights
-------------------------------------------------------------------------
For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except January 31 October 31 January 31 January 31
per share amounts) 2009 2008 2008 2008
-------------------------------------------------------------------------
Results of Operations
Net interest income
(teb - see below) $ 54,596 $ 58,622 $ 57,046 (4)%
Less teb adjustment 1,586 1,540 1,337 19
-------------------------------------------------------------------------
Net interest income
per financial
statements 53,010 57,082 55,709 (5)
Other income 22,351 15,437 17,623 27
Total revenues (teb) 76,947 74,059 74,669 3
Total revenues 75,361 72,519 73,332 3
Net income 25,619 24,485 25,905 (1)
Earnings per
common share
Basic 0.40 0.39 0.41 (2)
Diluted 0.40 0.38 0.40 -
Return on
shareholders'
equity(1) 14.7% 14.4% 16.9% (220) bp(2)
Return on assets(3) 0.93 0.96 1.07 (14)
Efficiency
ratio(4) (teb) 47.3 47.7 42.6 470
Efficiency ratio 48.3 48.8 43.4 490
Net interest
margin (teb)(5) 1.99 2.30 2.36 (37)
Net interest margin 1.93 2.24 2.30 (37)
Provision for credit
losses as a
percentage of
average loans 0.15 0.15 0.15 -
-------------------------------------------------------------------------
Per Common Share
Cash dividends $ 0.11 $ 0.11 $ 0.10 10%
Book value 11.10 10.70 9.88 12
Closing market
value 11.93 18.44 29.40 (59)
Common shares
outstanding
(thousands) 63,468 63,457 63,146 1
-------------------------------------------------------------------------
Balance Sheet and
Off-Balance
Sheet Summary
Assets $10,907,072 $10,600,732 $ 9,864,640 11%
Loans 8,993,453 8,624,069 7,706,981 17
Deposits 9,523,097 9,245,719 8,560,346 11
Subordinated
debentures 375,000 375,000 390,000 (4)
Shareholders'
equity 704,603 679,148 623,969 13
Assets under
administration 4,141,064 4,347,723 4,174,481 (1)
Assets under
management 809,500 - - nm
-------------------------------------------------------------------------
Capital Adequacy(6)
Tangible common
equity to risk-
weighted assets(7) 7.5% 7.7% 7.9% (40) bp
Tier 1 ratio 8.7 8.9 9.2 (50)
Total ratio 13.0 13.5 13.9 (90)
-------------------------------------------------------------------------
nm - not meaningful
(1) Return on shareholders' equity is calculated as annualized net income
divided by average shareholders' equity.
(2) bp - basis point change.
(3) Return on assets is calculated as annualized net income divided by
average total assets.
(4) Efficiency ratio is calculated as non-interest expenses divided by
total revenues.
(5) Net interest margin is calculated as annualized net interest income
divided by average total assets.
(6) Capital adequacy is calculated in accordance with guidelines issued
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).
(7) 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 analyse 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 shareholders' equity, return on
assets, efficiency ratio, net interest margin 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.-------------------------------------------------------------------------
Message to Shareholders
-------------------------------------------------------------------------Canadian Western Bank (CWB or the Bank) reported good first quarter
results in a very challenging period for the entire global financial sector.
Highlights for CWB included the achievement of its 83rd consecutive profitable
quarter, loan growth of 4% in the quarter and 17% over the past twelve months,
and the acquisition of 72.5% ownership of Adroit Investment Management Ltd.,
an Edmonton-based firm specializing in wealth management for individuals,
corporations and institutional clients. CWB was also proud to be recognized
for a third consecutive year as as one of Canada's "50 Best Employers" in a
national survey sponsored by the Globe and Mail Report on Business Magazine.
Net income for the first quarter of $25.6 million was down 1% compared to
a year earlier while diluted earnings per common share remained unchanged at
$0.40. Total revenues (teb) increased 3% as the positive impact of very strong
loan growth and a 27% increase in other income was offset by a significantly
lower net interest margin. Compared to the previous quarter, net income and
diluted earnings per share both increased 5% as higher other income and
continued loan growth mitigated the impact of the significantly lower net
interest margin.
First quarter return on equity (ROE) of 14.7% was down 220 basis points
compared to the same period last year, but up 30 basis points over the prior
quarter. Return on assets of 0.93% declined 14 basis points from a year
earlier and three basis points from the previous quarter. Lower profitability
ratios are attributed to the significantly compressed net interest margin,
which continued to be impacted by consecutive reductions in the the prime
lending interest rate and higher deposit costs arising from the fallout in
global financial and credit markets. CWB has no direct exposure to any
troubled asset backed commercial paper, collateralized debt obligations,
credit default swaps, U.S. subprime mortgages or monoline insurers.
On March 2, 2009, subsequent to quarter end, the Bank completed offerings
for a total of eight million preferred share units for gross proceeds of $200
million. The success of these public and private placements significantly
augments the Bank's strong balance sheet and provides considerable flexibility
to pursue accretive growth opportunities. The publicly placed preferred share
units (2.4 million) were comprised of one Non-Cumulative 5-Year Rate Reset
Preferred Share, Series 3 (the "Series 3 Preferred Share"), yielding 7.25%
based on a $25.00 issue price, and 1.78 common share purchase warrants. The
privately placed preferred units (5.6 million) were comprised of one Series 3
Preferred Share and 1.7857 common share purchase warrants. Each warrant is
exercisable until March 3, 2014 at a price of $14.00 to purchase one common
share in the capital of the Bank. Both the Series 3 Preferred Shares and the
warrants commenced trading on Toronto Stock Exchange on the closing date under
the trading symbols CWB.PR.A and CWB.WT respectively.
Share Price Performance
CWB shares ended the first quarter at $11.93, compared to $29.40 a year
earlier. Including reinvested dividends, the total return for shareholders
over the one year holding period ended January 31, 2009 was negative 58%. This
compares to the total return for the S&P/TSX financials index of negative 38%
over the same one year period.
Dividends
On March 4, 2009, CWB's Board of Directors declared a cash dividend of
$0.11 per common share, payable on April 2, 2009 to shareholders of record on
March 19, 2009. This quarterly dividend is unchanged from the previous quarter
and 10% higher than the quarterly dividend declared one year ago. The Board of
Directors also declared an initial cash dividend of $0.292979 per Series 3
Preferred Share payable on April 30, 2009 to shareholders of record on April
22, 2009.
Loan Growth
The Bank continued to expand its market presence achieving strong loan
growth of 4%. Growth was achieved across all four western provinces with
Alberta showing the best quarterly performance. Moderated economic activity
and increased uncertainties underscore the importance of maintaining our
strong credit discipline and our focus will remain centered on working with
our clients and funding quality assets that offer a fair and profitable
return. Reflecting current economic conditions, new deal flow has slowed
considerably compared to recent prior periods, but there are ongoing
opportunities to increase market share and we believe our fiscal 2009 loan
growth target of 10% is still attainable.
Optimum Mortgage (Optimum), our alternative mortgage business, showed
solid quarterly performance with total loans increasing 4% in the quarter and
30% over the past year to reach $489 million. Despite moderated residential
sales activity in our markets, Optimum continued to post strong profitability
while maintaining a good overall risk profile. This business shows strong
growth potential and we will maintain our efforts to selectively enhance the
Bank's position in this segment of the market.
Credit Quality
Overall credit quality remained sound in an environment of slower
economic growth, moderated residential sales activity and elevated market
uncertainties. Eight interim construction loans at quarter end represented
approximately 59% of the total $107.8 million of gross impaired loans. A
softening real estate market, escalated construction costs and an inability to
access additional capital are common themes in these accounts. The Bank is in
varying stages of enforcing its security in these projects to recoup its
investments. Systemic softness in the forestry industry continued to pose
challenges for some clients. The general level of activity related to Western
Canada's oil and gas industries is subject to fluctuations correlated with
underlying resource prices, which are down substantially compared to levels
observed in the first half of 2008. 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 our current assessment of
security held against these accounts. The quarterly provision for credit
losses of $3.4 million increased in line with our fiscal 2009 performance
target range of 15 to 18 basis points of average loans. Based on our current
view for credit quality, taking into consideration CWB's strong underwriting
discipline and secured lending practices, loan losses are expected to remain
within the Bank's historic range of acceptable levels.
Branch Deposit Growth
Deposits raised through our branch network and Canadian Western Trust
Company decreased 5% compared to the previous quarter, but were up 1% in the
past twelve months. The decline in total branch deposits was more than offset
by an increase in insured, retail term deposits raised through the Bank's
deposit broker network. The demand and notice component within branch-raised
deposits was down 2% in the quarter, but remained relatively unchanged
compared to a year earlier. We continued to note a shift in client preference
towards fixed rate term deposits due to a modestly steeper yield curve.
Further diversifying our funding mix remains a key strategic priority and we
are optimistic about several opportunities in this regard. Our recent
introduction of an Internet-based division of the Bank named Canadian Direct
Financial(TM) (www.canadiandirectfinancial.com) is still in the early stages
of development as we continue to determine the most beneficial strategies to
raise deposits through this source.
Net Interest Margin
Consecutive reductions in the prime lending rate and elevated deposit
costs continued to compress net interest margin which has had a significant
negative impact on growth in total revenues and overall profitability. Based
on the Bank's financial position at quarter end, it is estimated that every
one basis point deterioration in net interest margin (teb) decreases annual
net interest income (teb) by approximately $1.0 million, all else being equal.
First quarter net interest margin (teb) was 1.99%, down 37 basis points
compared to a year earlier and 31 basis points from the previous quarter.
While we have had good success pricing new and renewal loan accounts to ensure
a fair and profitable return in the context of today's markets, it will still
take considerable time to realize the full benefit of these efforts. As
demonstrated above, the rapid decline in yields on floating loans and
investment portfolios due to falling interest rates, coupled with the fact
that CWB's loans reprice more quickly than its deposit liabilities (the
opposite effect occurs when interest rates rise), has a very material impact
on our overall financial performance. To date, the impact from ongoing margin
compression has been partially mitigated by gains on the sale of securities
and, to the extent possible, we will look for continued opportunities in this
regard without foregoing overall investment quality and future yields.
Pressures on net interest margin are expected to continue until interest rates
bottom, overall deposit costs ease and market spreads return to more normal
levels. In addition, the incremental margin earned on lower cost notice and
demand deposits is reduced as the prime rate decreases to historically low
levels.
Trust and Wealth Management Services
Canadian Western Trust Company (CWT) maintained prior period momentum
posting strong financial performance and growth. CWT also completed the
successful launch of its new self-directed tax free savings account (TFSA).
While Valiant Trust Company (Valiant) continues to manage a reduction in total
revenues attributed to a marked slow down in capital markets activity, its
strong marketing efforts combined with a focus on offering exceptional
customer experiences are providing excellent opportunities to secure new
business, particularly in BC. We are very pleased this quarter to officially
welcome Adroit Investment Management Ltd. (Adroit) to the CWB Group. Based in
Edmonton, Adroit represents a welcome new line of business for CWB.
Insurance
Our insurance subsidiary, Canadian Direct Insurance Incorporated
(Canadian Direct), was impacted this quarter by a high level of claims in its
BC Home product line resulting from severe snowstorms and the melt that
followed. Barring the occurrence of further severe weather or other
catastrophe type events, we expect the contribution from insurance operations
will improve over the balance of the year.
Outlook
CWB's first quarter results represent a good start for fiscal 2009 in
view of a deteriorating economic environment and continued market disruptions.
We believe our primary markets in Western Canada are better positioned to
weather current uncertainties than other parts of the country and remain
comfortable with both the quality of our portfolio and the underlying security
held against these loans. Our strategies to grow other income and diversify
funding sources remain important components in achieving both our short- and
long-term objectives, particularly in the face of ongoing margin compression.
Maintaining responsible cost control while ensuring we have a sound platform
for sustained, high quality growth also remains a key strategy. Subsequent to
quarter end, management was very pleased to close the Bank's $200 million
offering of preferred share units. The successful placement of these units
augments our strong balance sheet and positions CWB to capitalize on the
significant opportunities we are seeing as result of ongoing market turmoil.
CWB is proud to be recognized for a third consecutive year as one of
Canada's "50 Best Employers". Our success in enhancing the Bank's position as
an employer of choice benefits all stakeholders and we will continue efforts
to offer employees a rewarding work environment that enables and challenges
them to achieve their full potential.
We look forward to reporting our fiscal 2009 second quarter results on
June 4, 2009.-------------------------------------------------------------------------
Q1 Results Conference Call
CWB's first quarter results conference call is scheduled for Thursday,
March 5, 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
416-644-3420 or toll-free 1-800-732-1073. 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 March 19, 2009 by
dialing 416-640-1917 (Toronto) or 1-877-289-8525 (toll-free) and entering
passcode 21297397, followed by the pound sign.
-------------------------------------------------------------------------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
almost $11 billion, assets under administration of over $4 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 providing 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 Series 3 preferred shares and
warrants commenced trading on the Toronto Stock Exchange on March 2, 2009
under the trading symbols CWB.PR.A and CWB.WT respectively. Refer to
www.cwbankgroup.com for additional information.-------------------------------------------------------------------------
Management's Discussion and Analysis
-------------------------------------------------------------------------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 January 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 posted good overall results in a very challenging operating
environment for the financial services industry. Quarterly net income from
banking and trust operations of $24.8 million was up 2% ($0.4 million)
compared to one year ago as the positive earnings contributions from strong
17% loan growth, a $7.1 million increase in gains on sale of securities and a
lower effective tax rate offset the impact of a significantly lower net
interest margin, measured on a taxable equivalent basis (teb - see definition
following Financial Highlights table), and a 14% ($4.6 million) increase in
non-interest expenses. Gains on the sale of securities were realized due to
unusual market conditions, including extraordinary demand for government debt,
and represented a major component of first quarter other income. Canadian
Direct Insurance Incorporated (Canadian Direct or CDI) recorded net income of
$0.8 million, a 46% decline compared to a year earlier reflecting unusually
high claims experience for the British Columbia (BC) home product line due to
severe weather. Consolidated first quarter net income decreased 1% from a year
earlier to $25.6 million, representing $0.40 ($0.40 basic) per diluted share.
Compared to the previous quarter, consolidated net income increased 5%
($1.1 million) mainly reflecting $7.2 million higher gains on sale of
securities and strong loan growth, offset by a significantly compressed net
interest margin (teb) and a 45% ($1.7 million) decrease in net insurance
revenues.
First quarter return on equity of 14.7% decreased from 16.9% a year
earlier and was up from 14.4% last quarter. Return on assets was 0.93%,
compared to 1.07% a year earlier and 0.96% in the prior quarter. Profitability
ratios were negatively impacted by both constrained total revenues due to a
significantly lower net interest margin and higher non-interest expenses,
partially offset by strong growth in other income.
Total Revenues (teb)
Total revenues (teb), comprised of net interest income and other income,
of $76.9 million were up 3% compared to the same quarter last year as the
positive impact from strong loan growth and a 27% ($4.7 million) increase in
other income was largely offset by a significantly lower net interest margin.
Compared to last quarter, total revenues (teb) were up 4% ($2.9 million)
reflecting a 45% ($6.9 million) increase in other income and continued loan
growth, largely offset by a 7% ($4.0 million) decline in net interest income
(teb) due to consecutive decreases in the prime lending interest rate and
elevated deposit costs related to ongoing turmoil in financial markets.
Net Interest Income (teb)
Quarterly net interest income (teb) of $54.6 million was down 4% ($2.5
million) compared to the same period last year as the positive revenue impact
from strong loan growth was more than offset by a 37 basis point decline in
net interest margin (teb) to 1.99%. Compared to last year, first quarter net
interest margin was mainly affected by consecutive reductions in the prime
lending interest rate, lower yields on investments held in the securities
portfolio and elevated deposit costs related to ongoing disruptions in
financial markets, partially offset by lower average liquidity levels and
improved interest spreads on both new and renewal accounts. Reductions in the
prime interest rate negatively impact net interest margin because deposits do
not reprice as quickly as prime-based loans. Also, the marginal benefit
attributed to the Bank's lower cost demand and notice deposits is
significantly reduced as all interest rates approach zero.
Net interest income (teb) was down 7% ($4.0 million) compared to the
previous quarter reflecting a 31 basis point decline in net interest margin
(teb), partially offset by strong quarterly loan growth. Compared to the prior
quarter, the significantly lower net interest margin was mainly attributed to
the factors already noted.
Note 12 to the unaudited interim consolidated financial statements
provides a summary of the Bank's exposure to interest rate risk as at January
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 January 31, 2009,
it is estimated that a one-percentage point increase in all interest rates
would increase net interest income by approximately 5.8% and decrease other
comprehensive income $21.4 million, net of tax, over the following twelve
months. It is estimated that a one-percentage point decrease in all interest
rates would decrease net interest income by approximately 7.0% and increase
other comprehensive income $21.4 million, net of tax, over the following
twelve months. This compares to October 31, 2008, when a one-percentage point
increase in all interest rates would have increased net interest income by
approximately 4.8% and decreased other comprehensive income $20.0 million, net
of tax, over the following twelve months; the opposite effect would have
occurred if all interest rates decreased. Interest sensitivity was high
compared to both prior periods and internal target levels reflecting abnormal
market spreads for conventional financial instruments used to hedge the Bank's
loan portfolio against interest rate risk. Management will look to actively
reduce this sensitivity as market spreads return to more normal historic
levels and as market uncertainties decrease. The Bank's overall strategy
remains relatively neutral with respect to taking specific positions on
interest rate risk.
Other Income
Quarterly other income of $22.4 million was up 27% ($4.7 million) from a
year earlier reflecting a $7.1 million increase in gains on sale of
securities, a solid contribution from trust services and fee income attributed
to newly acquired Adroit Investment Management Ltd. (Adroit), offset by 21%
($1.6 million) lower credit related fee income and a 34% ($1.1 million)
decline in net insurance revenues. Gains on the sale of securities were
realized due to very favourable pricing on certain high quality, short-term
debt investments. Reflecting unusual market conditions, including
extraordinary demand for government bonds, the Bank capitalized on
opportunities to realize gains on certain securities while maintaining
comparable yields on reinvestment in other high quality fixed income
investments. The year-over-year decline in net insurance revenues reflects
high frequency and severity of claims in the BC home product line due to
severe weather. Loss results for Canadian Direct's other lines of business
compared favourably with the prior year. Retail services fee income was down
6% ($0.1 million) while foreign exchange gains and other were relatively
unchanged.
Compared to the previous quarter, other income was up 45% ($6.9 million)
reflecting $7.2 million higher gains on securities sales, a 10% ($0.5 million)
improvement in credit related fee income and a 15% increase attributed to
trust service and wealth management revenues, partially offset by a 45% ($1.7
million) decline in net insurance revenues.
Credit Quality
Overall credit quality remained sound in view of ongoing market
uncertainties and slower economic growth. It is clearly evident that the
Bank's primary markets have been impacted by ongoing global economic turmoil,
but management believes that Western Canada is better positioned than the rest
of the country 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. The quarterly
dollar provision of $3.4 million was $0.2 million higher than last quarter and
up from $2.8 million a year earlier with the increase reflecting ongoing
portfolio growth.
Gross impaired loans at January 31, 2009 were $107.8 million, compared to
$91.6 million last quarter and $38.9 million a year earlier. While the
increased level of gross impaired loans is partially due to moderated
residential sales activity and the resulting pressure on the Bank's
alternative mortgage business, approximately 59% of the total amount at
quarter end was attributed to eight interim construction loans. A softening
real estate market, escalated construction costs and an inability to access
additional capital are common themes in these accounts. The Bank is in varying
stages of enforcing its security in these projects to recoup its investments.
The dollar level of gross impaired loans is expected to fluctuate as loans
become impaired and are subsequently resolved and does not accurately 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. The timeframe required to
recover balances on certain lending facilities classified as impaired has been
extended due to the presence of other lenders with charges subordinated to
CWB, but management remains confident with regard to both the current quality
and marketability of the security held against these accounts.
Measured against total loans, gross impaired loans remain within the
Bank's historic range of acceptable levels. Gross impaired loans represented
1.20% of total loans at quarter end, compared to 1.06% last quarter and 0.51%
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). While
the dollar level of gross impaired loans will likely increase further if
adverse economic conditions persist, losses in consideration of the current
operating environment are expected to remain within CWB's historic range of
acceptable levels. Tangible benefits from CWB's disciplined credit
underwriting and secured lending practices will become increasingly important
in the event of a more significant and long-lasting deterioration of Western
Canada's economies. Based on current credit quality, management expects the
fiscal 2009 provisions for credit losses will remain in a range of 15 - 18
basis points of average loans.
The total allowance for credit losses (general and specific) represented
69% of gross impaired loans at quarter end, compared to 82% last quarter and
167% one year ago. The general allowance as a percentage of risk-weighted
loans was 74 basis points, compared to 77 basis points in the previous quarter
and 79 basis points a year earlier. The purpose of the general allowance for
credit losses is to mitigate the impact of unidentified losses in the
portfolio. Given changes in the credit cycle, it is expected that the level of
the general allowance will fluctuate up or down as specific losses are
identified and subsequently charged off.
Non-interest Expenses
First quarter non-interest expenses of $36.4 million increased 14% ($4.6
million) over one year ago and 3% ($1.0 million) over the prior quarter.
Management is committed to strong fiscal responsibility, but effective
execution of CWB's strategic focus on people, process, infrastructure and
business enhancement has necessitated increased spending in some areas. These
expenditures are mainly correlated with enhancements to the Bank's growth
platform including additional staff complement, expanded premises and
technology upgrades to increase operating efficiencies over time. 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 significant
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, while the planned branch for Airdrie will not
go ahead due to location restrictions within that community.
Higher non-interest expenses compared to one year ago reflect a 16% ($3.2
million) increase in salary and benefit costs mainly related to increased
staff complement and annual salary increments. Non-cash, stock-based
compensation charges represented $1.6 million of total non-interest expenses
in the first quarter, compared to $1.3 million in the same quarter last year.
While this expense has historically been an efficient and cost effective
employee compensation and retention incentive, it currently represents a
material non-cash expense that is no longer adding value for shareholders due
to CWB's significantly depressed share price. Given the foregoing, the Board
of Directors is currently in the process of reviewing viable alternatives
and/or enhancements for the Bank's existing employee compensation programs.
Premises and equipment expenses including depreciation were up $0.6 million
while other expenses increased $0.8 million. Compared to the prior quarter,
almost the entire $1.0 million difference in non-interest expenses was
attributed to increased salary and benefit costs reflecting annual salary
increments and the addition of Adroit. Premiums expensed for Employment
Insurance and the Canada Pension Plan are also notably higher in the first
month of the calendar year.
The first quarter efficiency ratio (teb), which measures non-interest
expenses as a percentage of total revenues (teb), was 47.3%, compared to 42.6%
last year and 47.7% in the previous quarter. The considerable deterioration in
this measure compared to the first quarter last year reflects the negative
impact on total revenues due to the significantly compressed net interest
margin, coupled with higher non-interest expenses, partially offset by the
positive impact from robust loan growth and increased other income. Compared
to the prior quarter, the efficiency ratio was positively impacted by strong
loan growth and increased other income, largely offset by the negative impact
from the compressed net interest margin.
Income Taxes
The first quarter income tax rate (teb) was 30.9%, down 440 basis points
from one year ago, while the tax rate before the teb adjustment was 27.8%, or
530 basis points lower. For comparison purposes, the quarterly provision in
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 tax expense, the current year's
income tax rate (teb) was 190 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
will decrease from 13% to 12% effective July 1, 2009. Looking forward, the
reductions in income tax rates will have a positive impact on overall tax
rates and cash tax paid on future earnings.
On April 1, 2009, CWB's capital tax rate in BC is expected to decrease to
0.33%, down from 0.67%, and to be eliminated completely by April 1, 2010.
Comprehensive Income
Comprehensive income is composed of net income and other comprehensive
income (OCI) all net of income taxes, and totaled $30.8 million for the first
quarter, compared to $32.8 million in the same period last year. As previously
noted, net income was down 1% ($0.3 million) compared to one year ago. CWB's
OCI includes unrealized gains and losses on available-for-sale cash and
securities, and on derivative instruments designated as cash flow hedges.
First quarter OCI included a gain of $5.2 million, compared to a gain of $6.9
million a year earlier. Changes in OCI primarily reflect market value
fluctuations related to changes in market credit spreads, interest rates and
shifts in the interest rate curve, 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.
Balance Sheet
Total assets increased 3% ($306 million) in the quarter and 11% ($1,042
million) in the past year to reach $10,907 million at January 31, 2009.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled
$1,724 million at January 31, 2009, compared to $1,798 million last quarter
and $1,993 million one year ago. The unrealized loss recorded on the balance
sheet at January 31, 2009 was $13.2 million, compared to $17.8 million last
quarter and $1.7 million one year ago. The increase in unrealized losses
compared to a year earlier is primarily attributed to a market value reduction
in the Bank's preferred share portfolio. Unrealized losses in the Bank's
preferred share portfolio totaled $25.8 million as at January 31, 2009,
compared to $17.8 million at October 31, 2008 and $4.8 million a year earlier.
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 first quarter were $8.1
million, compared to $0.9 million in the previous quarter and $1.0 million in
the same quarter last year. The difference in realized gains on sale of
securities mainly resulted from transactions related to favourable pricing on
certain government grade, short-term debt investments. Reflecting unusual
market conditions, the Bank capitalized on opportunities to realize gains on
these securities while maintaining comparable yields on reinvestment in other
high quality fixed income investments. 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 in the first quarter were lower
than both the prior period and the same quarter last year with the decrease
reflecting strong loan demand and improved methodology for measuring and
monitoring liquidity. Enhanced liquidity and deposit monitoring capabilities
have enabled management to better assess risks under various scenarios and to
decrease the level of liquid asset coverage on a general basis. Elevated
liquidity levels compared to what would be held under more normal market
conditions are expected to be maintained until disruptions in financial
markets subside.
Loans
Total loans grew 4% ($369 million) in the quarter and 17% ($1,286
million) in the past twelve months to reach $8,993 million. Solid growth was
achieved across all four western provinces with lending activity in Alberta
showing the strongest quarterly performance in dollar terms. Measured by
lending sector, the best quarterly performance was in real estate and general
commercial lending, while the personal lending and equipment financing sectors
also showed solid quarterly results. Looking forward, quarterly loan growth is
expected to slow considerably compared to the current 4%. Moderated
residential sales and construction activity in Western Canada will have an
adverse impact on growth in several lending areas, most prominently being the
Bank's real estate construction portfolio. Construction loans are relatively
short in duration and there are now far fewer quality lending opportunities in
this area. Challenges related to softness in the forestry and natural gas
services industries are expected to persist, which will have a continued
negative impact on demand for equipment financing. The outlook related to
crude oil and natural gas production is also uncertain and subject to
fluctuations correlated with the underlying resource prices and drilling
activity. Opportunities to increase market share across all lending sectors
underpin management's expectations that CWB will achieve its published 10%
annual loan growth target. Despite increased challenges, management still
believes Western Canada is in a good position relative to the rest of the
country to manage through ongoing economic turbulence.
The Bank's alternative mortgage business, Optimum Mortgage (Optimum),
showed strong growth with total loans increasing 4% in the quarter and 30%
over the past twelve months to reach $489 million. Total deal activity was
solid, although the percentage of loan applications that fell within the
Bank's underwriting criteria was down compared to prior periods. While
moderated residential sales activity has resulted in fewer mortgage
applications, it also impacts marketing time for homes in foreclosure. Longer
marketing time has contributed to a higher level of delinquent loans, but 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. This
business continues to show strong growth potential and provides opportunities
to produce solid returns while maintaining an acceptable risk profile.
Deposits
Total branch deposits were down 5% compared to the previous quarter, but
up 1% in the past year. The demand and notice component within branch deposits
was down 2% from last quarter and was relatively unchanged compared to a year
earlier. Reflecting the Bank's commercial focus, a considerable portion of the
quarterly decline in total branch deposits was attributed to larger commercial
balances that can be subject to greater fluctuation. Also, some customers have
chosen to take advantage of modest shifts in the yield curve by moving towards
fixed term deposits to enhance returns, which has a moderate negative
influence on the Bank's overall funding costs. The recently introduced
Internet-based division of the Bank named Canadian Direct Financial(TM)
(www.canadiandirectfinancial.com) is still in the early stages of development
as management determines the most beneficial strategies to raise deposits
through this source. Disruptions in financial markets and related competitive
influences have led to significantly increased costs for both branch-generated
deposits and those raised through the deposit broker network. While improved
conditions in financial and credit markets should help stabilize and lower
deposit costs over time, it is difficult to predict when this will occur.
Total deposits at year end were $9,523 million, up 3% ($277 million) from
the previous quarter and 11% ($963 million) over the past year. Total branch
deposits measured as a percentage of total deposits were 58% at January 31,
2009 down from 63% in the previous quarter and 64% one year ago. Compared to
prior periods, the reduction in branch-raised deposits as a percentage of
total deposits mainly reflects a marked increase in insured, fixed rate term
deposits raised through the deposit broker network. Demand and notice deposits
represented 25% of total deposits, down from 26% in the previous quarter and
28% at the same time last year with the decrease again reflecting insured
deposits raised through the deposit broker network.
Other Assets and Other Liabilities
Other assets at January 31, 2009 totaled $190 million, compared to $179
million last quarter and $164 million one year ago. Other liabilities at
quarter end were $304 million, compared to $301 million the previous quarter
and $290 million last year.
Off-Balance Sheet
Off-balance sheet items include trust assets under administration and
assets under management held in trust by Adroit. Trust assets under
administration totaled $4,141 million at January 31, 2009, compared to $4,348
million last quarter and $4,174 million one year ago. Assets under management
were $810 million at quarter end, compared to nil in prior periods. 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 January 31, 2009, CWB's total capital adequacy ratio, which measures
regulatory capital as a percentage of risk-weighted assets, was 13.0%, down
from 13.5% last quarter and 13.9% a year earlier. The Tier 1 ratio at quarter
end was 8.7%, compared to 8.9% last quarter and 9.2% at the same time last
year. Compared to one year ago, CWB's total regulatory capital increased with
the retention of earnings, the placement of $50 million of subordinated
debentures in June 2008 and a higher general allowance for credit losses,
offset by robust asset growth and the redemption of $30 million and $35
million of subordinated debentures in July and October 2008, respectively. The
lower Tier 1 ratio reflects robust asset growth, an increase of $9.9 million
in the capital deduction arising from unrealized after-tax losses in the
Bank's preferred share securities portfolio and $2.4 million of goodwill
attributed to the acquisition of Adroit, offset by the retention of earnings
and the positive impact of a $5.0 million dividend declared and paid in the
fourth quarter of 2008 by CDI to the Bank. Compared to the prior quarter, the
Tier 1 ratio reflects strong asset growth, a $5.4 million higher capital
deduction from unrealized after-tax losses in the Bank's preferred share
securities portfolio and increased goodwill attributed to Adroit, partially
offset by the retention of earnings.
On March 2, 2009, subsequent to quarter end, the Bank issued 2,600,000 of
Preferred Units (the "Public Offering Preferred Units") for total proceeds of
$65 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
granted the underwriters an option to purchase, on the same terms, up to an
additional 390,000 Public Offering Preferred Units. This option is exercisable
in whole or in part by the underwriters at any time up to April 1, 2009. The
maximum gross proceeds raised under the public offering would be $74.75
million should the underwriters' exercise their option in full. 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 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.
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. On the assumption
that the underwriters fully exercise their option to purchase the additional
390,000 Public Offering Preferred Units, CWB's pro forma Tier 1 and total
capital ratios as of January 31, 2009 would be approximately 11.0% and 15.3%,
respectively. On the assumption this option is not exercised, CWB's pro forma
Tier 1 and total capital ratios as of January 31, 2009 would be approximately
10.9% and 15.2%, respectively.
Further information relating to the Bank's capital position is provided
in Note 14 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 January 31, 2009 was $11.10 compared to
$10.70 last quarter and $9.88 one year ago.
Common shareholders received a quarterly cash dividend of $0.11 per
common share on January 2, 2009. On March 4, 2009, the Board of Directors
declared a quarterly cash dividend of $0.11 per common share payable on April
2, 2009 to shareholders of record on March 19, 2009. This quarterly dividend
represents a 10% increase over the quarterly dividend declared one year ago.
The Board of Directors also declared an initial cash dividend of $0.292979 per
Series 3 Preferred Share payable on April 30, 2009 to shareholders of record
on April 22, 2009.
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.
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 January 31, 2009 that have
materially affected, or are reasonably likely to materially affect, internal
controls over financial reporting.
With the recent acquisition of Adroit, the Bank's certifying officers
have limited the scope of design of disclosure controls and procedures (DC&P)
and internal control over financial reporting (ICFR) to exclude Adroit
controls, policies and procedures. With the work currently underway, it is
expected that the limitation will be removed for the next quarter.
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 Share Information
As at February 28, 2009, there were 63,488,554 common shares outstanding.
Also outstanding were employee stock options, which are or will be exercisable
for up to 6,223,992 common shares for maximum proceeds of $128.9 million.Summary of Quarterly Financial Information
2009 2008
---------- ---------------------------------------
($ thousands) Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Total revenues (teb) $ 76,947 $ 74,059 $ 76,375 $ 73,754 $ 74,669
Total revenues 75,361 72,519 74,933 72,402 73,332
Net income 25,619 24,485 26,327 25,302 25,905
Earnings per
common share
Basic 0.40 0.39 0.42 0.40 0.41
Diluted 0.40 0.38 0.41 0.39 0.40
Total assets
($ millions) 10,907 10,601 10,057 10,038 9,865
-------------------------------------------------------------------------
2007
------------------------------
($ thousands) Q4 Q3 Q2
-----------------------------------------------------
Total revenues (teb) $ 74,359 $ 70,665 $ 66,804
Total revenues 72,863 69,242 65,477
Net income 29,572 24,033 22,219
Earnings per
common share
Basic 0.47 0.39 0.36
Diluted 0.46 0.37 0.35
Total assets
($ millions) 9,525 8,881 8,022
-----------------------------------------------------The financial results for each of the last eight quarters are summarized
above. In general, CWB's performance reflects a consistent growth 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 13 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.
First quarter net income of $24.8 million increased 2% ($0.4 million)
compared to last year reflecting the positive earnings impact of strong 17%
loan growth and $7.2 million higher gains on the sale of securities, offset by
the impact of a 37 basis point decline in net interest margin (teb) to 1.97%.
The significant reduction in net interest margin (teb) compared to a year
earlier resulted from consecutive decreases in the prime lending interest
rate, lower yields on investments held in the securities portfolio and
elevated deposit costs related to ongoing disruptions in financial markets,
partially offset by lower average liquidity levels and improved interest
spreads on both new and renewal accounts. Credit related fee income was down
21% ($1.6 million) while trust and wealth management services fee income,
including revenue contributions from Adroit, increased 10% ($0.3 million).
Retail services fee income was $0.2 million lower while foreign exchange and
other was up $0.5 million in the aggregate. The quarterly efficiency ratio
(teb), which measures non-interest expense as a percentage of total revenues
(teb), was 46.2%, compared to 42.1% one year ago. The deterioration in the
efficiency ratio (teb) reflects constrained growth in net interest income
attributed to a compressed net interest margin (teb) and a 15% ($4.4 million)
increase in non-interest expenses mainly resulting from continued business
growth and investment in future development initiatives, partially offset by
the positive impact of continued loan growth and a 40% ($5.8 million) increase
in other income.
Quarterly earnings were up 11% ($2.5 million) from the previous period
reflecting a $7.1 million increase in gains on the sale of securities, strong
4% loan growth and $0.5 million increases for both credit related fee income
and trust and wealth management services, offset by a 31 basis point decline
in net interest margin (teb) and a $1.0 million increase in non-interest
expenses. The net interest margin was affected by the same factors noted above
while the quarterly increase in non-interest expenses was attributed to
increased salary and benefit costs mainly associated with annual salary
increments, increased staff complement reflecting the addition of Adroit and,
higher premiums expensed for Employment Insurance and the Canada Pension Plan
due to the onset of the calendar year. The quarterly efficiency ratio (teb)
improved 180 basis points compared to last quarter.For the three months ended
-------------------------------------- Change from
January 31 October 31 January 31 January 31
($ thousands) 2009 2008 2008 2008
-------------------------------------------------------------------------
Net interest income
(teb) $ 53,101 $ 56,993 $ 55,642 (5)%
Other income 20,218 11,580 14,395 40
-------------------------------------------------------------------------
Total revenues (teb) 73,319 68,573 70,037 5
Provision for
credit losses 3,369 3,187 2,813 20
Non-interest expenses 33,910 32,913 29,504 15
Provision for income
taxes (teb) 11,151 10,163 13,280 (16)
Non-controlling
interest in
subsidiary 67 - - nm
-------------------------------------------------------------------------
Net income $ 24,822 $ 22,310 $ 24,440 2%
-------------------------------------------------------------------------
Efficiency
ratio (teb) 46.2% 48.0% 42.1% 410 bp
Efficiency ratio 47.2 49.0 42.9 430
Net interest
margin (teb) 1.97 2.28 2.34 (37)
Net interest margin 1.91 2.23 2.29 (38)
Average loans
(millions)(1) $ 8,855 $ 8,317 $ 7,545 17%
Average assets
(millions)(1) 10,711 9,902 9,428 14
-------------------------------------------------------------------------
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's net income of $0.8 million was 46% ($0.7 million) lower
than the same quarter last year due to high frequency and severity of claims
in the BC home product line. Severe snowstorms and the melt that followed
increased the overall loss ratio to 74%, from 70% last year. In the BC home
product, the first quarter loss ratio was 109%, compared with 73% a year
earlier. Loss results for the other lines of business compared favourably with
the prior year. Net earned premiums grew 4% ($0.9 million) reflecting growth
in policies outstanding and a higher average premium per policy sold. Canadian
Direct's share of the Alberta Risk Sharing Pools (the Pools) had a $0.2
million negative impact on net income before tax, compared to a $0.1 million
positive before tax earnings contribution in the same quarter last year.
In comparison to the previous quarter, Canadian Direct's net income
decreased 63% ($1.4 million) primarily due to the impact on claims from the
severe weather related events in BC, offset by a $0.9 million improvement in
the before tax losses attributed to Canadian Direct's share of the Pools. The
seasonal aspect of the business where new policy growth is traditionally slow
in the first quarter is reflected in the decrease in gross written premiums.
Barring any further severe weather or other catastrophe type events, the
combination of expected improved claims experience and a higher volume of
policy sales during the busier spring and summer seasons should allow for
better results through the remainder of fiscal 2009.For the three months ended
-------------------------------------- Change from
January 31 October 31 January 31 January 31
($ thousands) 2009 2008 2008 2008
-------------------------------------------------------------------------
Net interest income
(teb) $ 1,495 $ 1,629 $ 1,404 6%
-------------------------------------------------------------------------
Other income (net)
Net earned premiums 25,215 24,877 24,299 4
Commissions and
processing fees 654 742 662 (1)
Net claims and
adjustment
expenses (18,651) (16,564) (17,069) 9
Policy acquisition
costs (5,106) (5,212) (4,683) 9
-------------------------------------------------------------------------
Insurance
revenue (net) 2,112 3,843 3,209 (34)
Gains on sale of
securities 21 14 19 11
-------------------------------------------------------------------------
Total revenues
(net) (teb) 3,628 5,486 4,632 (22)
Non-interest
expenses 2,495 2,446 2,320 8
Provision for income
taxes (teb) 336 865 847 (60)
-------------------------------------------------------------------------
Net income $ 797 $ 2,175 $ 1,465 (46)%
-------------------------------------------------------------------------
Policies
outstanding (No.) 168,642 168,071 165,314 2%
Gross written
premiums $ 23,103 $ 28,776 $ 21,616 7
Claims loss ratio(1) 74% 67% 70% 400 bp
Expense ratio(2) 28 27 26 200
Combined ratio(3) 102 94 96 600
Alberta auto risk
sharing pools
impact on net
income before tax $ (158) $ (1,060) $ 120 nm%
Average total
assets (millions) 188 191 180 4
-------------------------------------------------------------------------
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
Target 2009
Ranges Performance(1)
-------------------------------------------------------------------------
Net income growth 2% to 5% (1%)
-------------------------------------------------------------------------
Total revenue (teb) growth 5% to 8% 3%
-------------------------------------------------------------------------
Loan growth 10% 17%
-------------------------------------------------------------------------
Provision for credit losses as a
percentage of average loans 0.15% - 0.18% 0.15%
-------------------------------------------------------------------------
Efficiency ratio (teb) 46% - 49% 47.3%
-------------------------------------------------------------------------
Return on equity 14% - 16% 14.7%
-------------------------------------------------------------------------
Return on assets 0.90% - 1.05% 0.93%
-------------------------------------------------------------------------
(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.The combined impact of quickly falling interest rates, persistent
elevated deposit costs due to disruptions in financial markets and a
deteriorating economic picture has been more severe than anticipated when the
Bank initially established its fiscal 2009 performance target ranges. The 100
basis point drop in the prime lending interest rate in the first quarter was
greater than expected and the corresponding reduction in net interest margin
continued to significantly affect both total revenues and overall
profitability. While realized gains on the sale of securities have helped
alleviate the full financial impact of margin pressures, this does not
represent a sustainable source of income over the long-term. First quarter
results are within all but two of the established target ranges, but increased
economic uncertainties make it very difficult to offer concrete expectations
for the ultimate achievement of these. Also unknown is the specific timeframe
that will be required to effectively employ capital from the Series 3
Preferred Share offerings. The ongoing relevance of published performance
target ranges as they relate to actual expectations should become more clear
at the end of the second quarter when management is better able to assess the
likely impact of prevailing economic and market environments, particularly as
they relate to net interest margin. Based on its current view, management
believes the provisions for credit losses will remain within the target range
of 15-18 basis points of average loans. Management also believes the Bank can
still attain its 10% annual loan growth target.
On the assumption that the group of underwriters fully exercise their
option to purchase the additional 390,000 Public Offering Preferred Units,
future preferred dividend obligations for each full quarter are estimated at
$3.8 million (or approximately $0.06 per common share). On a net basis, using
a highly conservative assumption that the Bank temporarily invests 100% of the
estimated $209.75 million proceeds from the offerings in high quality,
short-term debt investments yielding 2%, the after tax difference for future
preferred dividend obligations for each full quarter would be approximately
$3.0 million (or approximately $0.05 per common share), all else equal. As a
result of the preferred share offerings, commencing in the second quarter, CWB
will report both "return on common equity" and "net income available to common
shareholders" as additional line items within its financial reporting
framework.
This management's discussion and analysis is dated March 4, 2009.
Taxable Equivalent Basis (teb)
Most financial institutions analyse 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 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 shareholders' equity - net income divided by average
shareholder's equity;
- return on assets - net income 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 assume prolonged economic uncertainty that includes
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.Consolidated Statement of Income
For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except January 31 October 31 January 31 January 31
per share amounts) 2009 2008 2008 2008
-------------------------------------------------------------------------
Interest Income
Loans $ 119,268 $ 123,192 $ 126,751 (6)%
Securities 11,212 10,818 15,191 (26)
Deposits with
regulated financial
institutions 3,537 3,857 4,957 (29)
-------------------------------------------------------------------------
134,017 137,867 146,899 (9)
-------------------------------------------------------------------------
Interest Expense
Deposits 75,740 75,016 85,707 (12)
Subordinated
debentures 5,267 5,769 5,483 (4)
-------------------------------------------------------------------------
81,007 80,785 91,190 (11)
-------------------------------------------------------------------------
Net Interest Income 53,010 57,082 55,709 (5)
Provision for Credit
Losses (Note 6) 3,369 3,187 2,813 20
-------------------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 49,641 53,895 52,896 (6)
-------------------------------------------------------------------------
Other Income
Credit related 5,743 5,226 7,309 (21)
Insurance, net
(Note 3) 2,112 3,843 3,209 (34)
Trust and wealth
management services 3,913 3,398 3,564 10
Retail services 1,844 1,963 1,959 (6)
Gains on sale of
securities 8,143 948 1,014 703
Foreign exchange
gains (losses) 555 (61) 383 45
Other 41 120 185 (78)
-------------------------------------------------------------------------
22,351 15,437 17,623 27
-------------------------------------------------------------------------
Net Interest and
Other Income 71,992 69,332 70,519 2
-------------------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 23,837 22,861 20,617 16
Premises and equipment 6,028 6,022 5,382 12
Other expenses 6,149 6,020 5,256 17
Provincial capital
taxes 391 456 569 (31)
-------------------------------------------------------------------------
36,405 35,359 31,824 14
-------------------------------------------------------------------------
Net Income Before
Provision for Income
Taxes and Non-Controlling
Interest in Subsidiary 35,587 33,973 38,695 (8)
Provision for Income
Taxes 9,901 9,488 12,790 (23)
-------------------------------------------------------------------------
25,686 24,485 25,905 (1)
Non-Controlling Interest
in Subsidiary 67 - - nm
-------------------------------------------------------------------------
Net Income $ 25,619 $ 24,485 $ 25,905 (1)%
-------------------------------------------------------------------------
Weighted average common
shares outstanding 63,465,292 63,417,993 62,975,022 1%
Earnings per Common
Share
Basic $ 0.40 $ 0.39 $ 0.41 (2)%
Diluted 0.40 0.38 0.40 -
-------------------------------------------------------------------------
nm - not meaningful
The accompanying notes are an integral part of the interim consolidated
financial statements.
Consolidated Balance Sheet
As at As at As at Change from
(unaudited) January 31 October 31 January 31 January 31
($ thousands) 2009 2008 2008 2008
-------------------------------------------------------------------------
Assets
Cash Resources
Cash and non-interest
bearing deposits
with financial
institutions $ 31,984 $ 8,988 $ 9,161 249%
Interest bearing
deposits with
regulated financial
institutions (Note 4) 430,594 464,193 475,902 (10)
Cheques and other
items in transit 7,461 18,992 5,262 42
-------------------------------------------------------------------------
470,039 492,173 490,325 (4)
-------------------------------------------------------------------------
Securities (Note 4)
Issued or guaranteed
by Canada 338,844 347,777 417,735 (19)
Issued or guaranteed
by a province or
municipality 455,759 452,045 396,492 15
Other securities 444,166 429,142 479,806 (7)
-------------------------------------------------------------------------
1,238,769 1,228,964 1,294,033 (4)
-------------------------------------------------------------------------
Securities Purchased
Under Resale Agreements 15,000 77,000 209,000 (93)
-------------------------------------------------------------------------
Loans (Notes 5 and 7)
Residential
mortgages 2,233,841 2,134,327 1,865,102 20
Other loans 6,834,088 6,565,280 5,907,067 16
-------------------------------------------------------------------------
9,067,929 8,699,607 7,772,169 17
Allowance for credit
losses (Note 6) (74,476) (75,538) (65,188) 14
-------------------------------------------------------------------------
8,993,453 8,624,069 7,706,981 17
-------------------------------------------------------------------------
Other
Land, buildings and
equipment 31,195 31,893 25,793 21
Goodwill 9,360 6,933 6,933 35
Other intangible
assets 7,412 2,155 2,545 191
Insurance related 52,011 52,943 53,891 (3)
Derivative related
(Note 8) 12,852 9,980 3,701 247
Other assets 76,981 74,622 71,438 8
-------------------------------------------------------------------------
189,811 178,526 164,301 16
-------------------------------------------------------------------------
Total Assets $10,907,072 $10,600,732 $ 9,864,640 11%
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Payable on demand $ 362,394 $ 383,083 $ 391,776 (7)%
Payable after notice 1,982,001 2,010,039 1,960,857 1
Payable on a
fixed date 7,073,702 6,747,597 6,102,713 16
Deposit from Canadian
Western Bank Capital
Trust 105,000 105,000 105,000 -
-------------------------------------------------------------------------
9,523,097 9,245,719 8,560,346 11
-------------------------------------------------------------------------
Other
Cheques and other
items in transit 30,432 29,036 25,525 19
Insurance related 135,565 134,769 126,022 8
Derivative related
(Note 8) 97 163 329 (70)
Other liabilities 138,278 136,897 138,449 -
-------------------------------------------------------------------------
304,372 300,865 290,325 5
-------------------------------------------------------------------------
Subordinated Debentures
Conventional 375,000 375,000 390,000 (4)
-------------------------------------------------------------------------
Shareholders' Equity
Retained earnings 466,841 448,203 392,345 19
Accumulated other
comprehensive income
(loss) (7) (5,203) 961 nm
Capital stock (Note 9) 222,010 221,914 220,217 1
Contributed surplus 15,759 14,234 10,446 51
-------------------------------------------------------------------------
704,603 679,148 623,969 13
-------------------------------------------------------------------------
Total Liabilities and
Shareholders'
Equity $10,907,072 $10,600,732 $ 9,864,640 11%
-------------------------------------------------------------------------
Contingent Liabilities and Commitments (Note 10)
nm - not meaningful
The accompanying notes are an integral part of the interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders' Equity
For the three months ended
-----------------------------
(unaudited) January 31 January 31
($ thousands) 2009 2008
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 448,203 $ 372,739
Net income 25,619 25,905
Dividends (6,981) (6,299)
-------------------------------------------------------------------------
Balance at end of period 466,841 392,345
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period (5,203) (5,931)
Other comprehensive income 5,196 6,892
-------------------------------------------------------------------------
Balance at end of period (7) 961
-------------------------------------------------------------------------
Total retained earnings and accumulated other
comprehensive income (loss) 466,834 393,306
-------------------------------------------------------------------------
Capital Stock (Note 9)
Balance at beginning of period 221,914 219,004
Issued on exercise of employee stock options 60 650
Transferred from contributed surplus on
exercise or exchange of options 36 563
-------------------------------------------------------------------------
Balance at end of period 222,010 220,217
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 14,234 9,681
Amortization of fair value of employee
stock options 1,561 1,328
Transferred to capital stock on exercise or
exchange of options (36) (563)
-------------------------------------------------------------------------
Balance at end of period 15,759 10,446
-------------------------------------------------------------------------
Total Shareholders' Equity $ 704,603 $ 623,969
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
For the three months ended
-----------------------------
(unaudited) January 31 January 31
($ thousands) 2009 2008
-------------------------------------------------------------------------
Net Income $ 25,619 $ 25,905
-------------------------------------------------------------------------
Other Comprehensive Income, net of tax
Available-for-sale securities:
Gains from change in fair value(1) 9,020 4,486
Reclassification to other income(2) (5,750) 685
-------------------------------------------------------------------------
3,270 5,171
-------------------------------------------------------------------------
Derivatives designated as cash flow hedges:
Gains from change in fair value(3) 3,436 1,809
Reclassification to net interest income(4) (1,510) (88)
-------------------------------------------------------------------------
1,926 1,721
-------------------------------------------------------------------------
5,196 6,892
-------------------------------------------------------------------------
Comprehensive Income for the Period $ 30,815 $ 32,797
-------------------------------------------------------------------------
(1) Net of income tax expense of $3,753 for the three months ended
January 31, 2009 (2008 - $2,108).
(2) Net of income tax benefit of $2,393 for the three months ended
January 31, 2009 (2008 - tax expense $329).
(3) Net of income tax expense of $1,550 for the three months ended
January 31, 2009 (2008 - $833).
(4) Net of income tax benefit of $681 for the three months ended
January 31, 2009 (2008 - $41).
The accompanying notes are an integral part of the interim consolidated
financial statements.
Consolidated Statement of Cash Flow
For the three months ended
-----------------------------
(unaudited) January 31 January 31
($ thousands) 2009 2008
-------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 25,619 $ 25,905
Adjustments to determine net cash flows
Provision for credit losses 3,369 2,813
Depreciation and amortization 2,126 1,669
Amortization of fair value of employee stock
options 1,561 1,328
Future income taxes, net (1,625) 726
Gain on sale of securities, net (8,143) (1,014)
Accrued interest receivable and payable, net 11,800 11,815
Current income taxes payable, net (3,978) (1,801)
Other items, net (7,562) (18,681)
-------------------------------------------------------------------------
23,167 22,760
-------------------------------------------------------------------------
Cash Flows from Financing Activities
Deposits, net 277,378 303,428
Common shares issued 60 650
Dividends (6,981) (6,299)
-------------------------------------------------------------------------
270,457 297,779
-------------------------------------------------------------------------
Cash Flows from Investing Activities
Interest bearing deposits with regulated
financial institutions, net 39,200 (68,719)
Securities, purchased (739,636) (553,008)
Securities, sale proceeds 627,894 298,287
Securities, matured 107,326 314,287
Securities purchased under resale agreements, net 62,000 (2,075)
Loans, net (372,753) (304,214)
Land, buildings and equipment (1,105) (1,590)
Business acquisitions (Note 2) (6,481) -
-------------------------------------------------------------------------
(283,555) (317,032)
-------------------------------------------------------------------------
Change in Cash and Cash Equivalents 10,069 3,507
Cash and Cash Equivalents at Beginning of Period (1,056) (14,609)
-------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period(*) $ 9,013 $ (11,102)
-------------------------------------------------------------------------
(*) Represented by:
Cash and non-interest bearing deposits with
financial institutions $ 31,984 $ 9,161
Cheques and other items in transit
(included in Cash Resources) 7,461 5,262
Cheques and other items in transit
(included in Other Liabilities) (30,432) (25,525)
-------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 9,013 $ (11,102)
-------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Amount of interest paid in the period $ 70,216 $ 80,664
Amount of income taxes paid in the period 15,504 13,865
-------------------------------------------------------------------------
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. 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.
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 will be included in the banking and trust segment.
The total amount of goodwill and intangible assets will not be
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 three months ended
--------------------------------------
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Net earned premiums $ 25,215 $ 24,877 $ 24,299
Commissions and processing fees 654 742 662
Net claims and adjustment
expenses (18,651) (16,564) (17,069)
Policy acquisition costs (5,106) (5,212) (4,683)
---------------------------------------------------------------------
Total, net $ 2,112 $ 3,843 $ 3,209
---------------------------------------------------------------------
4. Securities
Net unrealized gains (losses) reflected on the balance sheet follow:
As at As at As at
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Interest bearing deposits with
regulated financial
institutions $ 6,540 $ 940 $ 992
Securities
Issued or guaranteed by Canada 2,452 1,417 1,471
Issued or guaranteed by a
province or municipality 7,112 1,214 1,967
Other securities (29,288) (21,386) (6,102)
---------------------------------------------------------------------
Unrealized losses, net $ (13,184) $ (17,815) $ (1,672)
---------------------------------------------------------------------
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
($ millions) Columbia Alberta Saskatchewan
---------------------------------------------------------------------
Loans to Individuals
Residential mortgages(2) $ 1,128 $ 846 $ 128
Other loans 112 214 24
---------------------------------------------------------------------
1,240 1,060 152
---------------------------------------------------------------------
Loans to Businesses
Commercial 727 1,265 94
Construction and real
estate(3) 956 1,415 78
Equipment financing 316 826 36
Energy - 155 -
---------------------------------------------------------------------
1,999 3,661 208
---------------------------------------------------------------------
Total Loans(1) $ 3,239 $ 4,721 $ 360
---------------------------------------------------------------------
Composition Percentage
January 31, 2009 36% 52% 4%
October 31, 2008 36% 53% 4%
January 31, 2008 36% 54% 4%
---------------------------------------------------------------------
($ millions) Manitoba Other Total
---------------------------------------------------------------------
Loans to Individuals
Residential mortgages(2) $ 75 $ 57 $ 2,234
Other loans 3 1 354
---------------------------------------------------------------------
78 58 2,588
---------------------------------------------------------------------
Loans to Businesses
Commercial 78 249 2,413
Construction and real
estate(3) 61 164 2,674
Equipment financing 13 47 1,238
Energy - - 155
---------------------------------------------------------------------
152 460 6,480
---------------------------------------------------------------------
Total Loans(1) $ 230 $ 518 $ 9,068
---------------------------------------------------------------------
Composition Percentage
January 31, 2009 2% 6% 100%
October 31, 2008 2% 5% 100%
January 31, 2008 2% 4% 100%
---------------------------------------------------------------------
January 31 October 31 January 31
2009 2008 2008
Composition Composition Composition
($ millions) Percentage Percentage Percentage
---------------------------------------------------------------------
Loans to Individuals
Residential mortgages(2) 24% 24% 24%
Other loans 4 4 3
---------------------------------------------------------------------
28 28 27
---------------------------------------------------------------------
Loans to Businesses
Commercial 27 27 25
Construction and real
estate(3) 29 29 27
Equipment financing 14 14 17
Energy 2 2 4
---------------------------------------------------------------------
72 72 73
---------------------------------------------------------------------
Total Loans(1) 100% 100% 100%
---------------------------------------------------------------------
(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
January 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 2,974 395 3,369
Write-offs (4,464) - (4,464)
Recoveries 33 - 33
---------------------------------------------------------------------
Balance at end of period $ 13,554 $ 60,922 $ 74,476
---------------------------------------------------------------------
For the three months ended
October 31, 2008
--------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
---------------------------------------------------------------------
Balance at beginning of period $ 10,784 $ 59,225 $ 70,009
Provision for credit losses 1,885 1,302 3,187
Write-offs (705) - (705)
Recoveries 3,047 - 3,047
---------------------------------------------------------------------
Balance at end of period $ 15,011 $ 60,527 $ 75,538
---------------------------------------------------------------------
For the three months ended
January 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 2,481 332 2,813
Write-offs (674) - (674)
Recoveries 27 - 27
---------------------------------------------------------------------
Balance at end of period $ 9,248 $ 55,940 $ 65,188
---------------------------------------------------------------------
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 January 31, 2009
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,323,201 $ 12,700 $ 534 $ 12,166
Real estate(1) 3,864,064 75,092 4,698 70,394
Industrial 1,416,287 16,115 5,963 10,152
Commercial 2,464,377 3,878 2,360 1,518
---------------------------------------------------------------------
Total $ 9,067,929 $ 107,785 $ 13,555 94,230
---------------------------------------------------------
General
allowance(2) (60,922)
---------------------------------------------------------------------
Net impaired loans
after general
allowance $ 33,308
---------------------------------------------------------------------
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
---------------------------------------------------------------------
As at January 31, 2008
---------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
---------------------------------------------------------------------
Consumer and
personal $ 1,093,034 $ 5,197 $ 528 $ 4,669
Real estate(1) 3,126,745 7,815 918 6,897
Industrial 1,643,847 12,260 3,377 8,883
Commercial 1,908,543 13,675 4,425 9,250
---------------------------------------------------------------------
Total $ 7,772,169 $ 38,947 $ 9,248 29,699
---------------------------------------------------------
General
allowance(2) (55,940)
---------------------------------------------------------------------
Net impaired loans
after general allowance $ (26,241)
---------------------------------------------------------------------
(1) Multi-family residential mortgages are included in real estate
loans.
(2) The general allowance for credit risk is not allocated by loan
type.
Outstanding impaired loans, net of allowance for credit losses, by
provincial location of security, are as follows.
As at January 31, 2009
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 54,925 $ 5,205 $ 49,720
British Columbia 50,166 7,134 43,032
Saskatchewan 1,801 609 1,192
Manitoba 388 388 -
Other 505 219 286
---------------------------------------------------------------------
Total $ 107,785 $ 13,555 94,230
---------------------------------------------------------
General allowance(1) (60,922)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 33,308
---------------------------------------------------------------------
As at October 31, 2008
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 48,133 $ 9,005 $ 39,128
British Columbia 40,656 4,626 36,030
Saskatchewan 2,155 792 1,363
Manitoba 389 389 -
Other 303 199 104
---------------------------------------------------------------------
Total $ 91,636 $ 15,011 76,625
---------------------------------------------------------
General allowance(1) (60,527)
---------------------------------------------------------------------
Net impaired loans after
general allowance $ 16,098
---------------------------------------------------------------------
As at January 31, 2008
--------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
---------------------------------------------------------------------
Alberta $ 20,028 $ 6,050 $ 13,978
British Columbia 15,648 1,622 14,026
Saskatchewan 3,095 1,480 1,615
Manitoba 96 56 40
Other 80 40 40
---------------------------------------------------------------------
Total $ 38,947 $ 9,248 29,699
---------------------------------------------------------
General allowance(1) (55,940)
---------------------------------------------------------------------
Net impaired loans after general allowance $ (26,241)
---------------------------------------------------------------------
(1) The general allowance for credit risk is not allocated by
province.
During the three months ended January 31, 2009, interest recognized
as income on impaired loans totaled $206 (2008 - $63).
Gross impaired loans exclude certain past due loans which are loans
where payment of interest or principal is contractually in arrears
but 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 January 31, 2009
--------------------------------------
1 - 30 days 31 - 60 days 61 - 90 days
---------------------------------------------------------------------
Residential mortgages $ 7,866 $ 10,985 $ 2,597
Other loans 12,863 14,005 892
---------------------------------------------------------------------
$ 20,729 $ 24,990 $ 3,489
---------------------------------------------------------------------
As at
October 31,
As at January 31, 2009 2008
--------------------------------------
More than
90 days Total Total
---------------------------------------------------------------------
Residential mortgages $ - $ 21,448 $ 16,114
Other loans - 27,760 16,084
---------------------------------------------------------------------
$ - $ 49,208 $ 32,198
---------------------------------------------------------------------
Certain process changes were required to compile the above
information and comparative figures for January 31, 2008 are not
available.
8. Derivative Financial Instruments
For the three months ended January 31, 2009, a net unrealized after
tax gain of $3,436 (2008 - $1,809) 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 months
ended January 31, 2009, a net gain after tax of $1,510 (2008 - $88)
was reclassified to net income. A net gain of $5,801 (2008 - $1,054)
after tax recorded in accumulated other comprehensive income (loss)
as at January 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 January 31, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 513,000 $ 12,848 $ 75
Equity contracts(2) 4,440 - 169
Foreign exchange contracts(3) 4,280 4 37
Embedded derivatives in
equity-linked deposits(2) n/a 184 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 13,036 $ 281
---------------------------------------------------------------------
As at October 31, 2008
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges(1) $ 593,000 $ 9,978 $ -
Equity contracts(2) 4,400 - 139
Foreign exchange contracts(3) 2,600 2 175
Embedded derivatives in
equity-linked deposits(2) n/a 151 -
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 10,131 $ 314
---------------------------------------------------------------------
As at January 31, 2008
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
---------------------------------------------------------------------
Interest rate swaps designated
as cash flow hedges $ 560,000 $ 3,010 $ 53
Equity contracts 6,000 178 -
Foreign exchange contracts 89,752 513 6
Embedded derivatives in
equity-linked deposits n/a - 270
Other forecasted transactions - - -
---------------------------------------------------------------------
Derivative related amounts $ 3,701 $ 329
---------------------------------------------------------------------
(1) Interest rate swaps outstanding at January 31, 2009 mature
between February 2009 and January 2013.
(2) Equity contracts and equity-linked deposits outstanding at
January 31, 2009 mature between February 2009 and March 2011.
(3) Foreign exchange contracts outstanding at January 31, 2009 mature
between February 2009 and December 2009.
n/a - not applicable.
There were no forecasted transactions that failed to occur during the
three months ended January 31, 2009.
9. Capital Stock and Share Incentive Plan
Capital Stock
For the three months ended
---------------------------------------------------
January 31, 2009 January 31, 2008
---------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------
Common Shares
Outstanding at
beginning of
period 63,457,142 $ 221,914 62,836,189 $ 219,004
Issued on exercise
or exchange of
options 10,990 60 309,888 650
Transferred from
contributed
surplus on exercise
or exchange of
options - 36 - 563
---------------------------------------------------------------------
Outstanding at end
of period 63,468,132 $ 222,010 63,146,077 $ 220,217
---------------------------------------------------------------------
Employee Stock Options
For the three months ended
---------------------------------------------------
January 31, 2009 January 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 990,035 11.76 595,842 31.18
Exercised or
exchanged (21,000) 10.08 (409,050) 8.88
Forfeited - - (10,800) 24.99
---------------------------------------------------------------------
Balance at end
of period 6,173,917 $ 19.41 5,087,269 $ 19.26
---------------------------------------------------------------------
Exercisable at end
of period 1,895,500 $ 13.24 1,287,527 $ 9.58
---------------------------------------------------------------------
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 21,000
options (2008 - 409,050) exercised or exchanged in the three months
ended January 31, 2009, option holders exchanged the rights to 15,000
options (2008 - 324,600) and received 4,990 shares (2008 - 225,438)
in return under the cashless settlement alternative.
In the three months ended January 31, 2009, salary expense of $1,561
(2008 - $1,328) was recognized relating to the estimated fair value
of options granted since November 1, 2002. 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
2.1% (2008 - 4.1%), (ii) expected option life of 4.0 years (2008 -
4.0 years), (iii) expected volatility of 35% (2008 - 21%), and (iv)
expected dividends of 4.0% (2008 - 1.3%). The weighted average fair
value of options granted was estimated at $1.90 (2007 - $6.69) per
share.
During the first quarter of 2009, 990,035 options were granted. Of
this amount, 750,000 options are subject to shareholder and TSX
approval.
10. 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
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Guarantees and standby letters
of credit
Balance outstanding $ 217,270 $ 232,649 $ 196,670
Business credit cards
Total approved limit 11,763 11,503 10,040
Balance outstanding 2,703 2,778 2,308
---------------------------------------------------------------------
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.
11. 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 January 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
98% (2008 - 87%) of the portfolio and estimated using a valuation
technique based on observable market data for 2% (2008 - 13%) of the
portfolio. The value of liabilities recorded on the consolidated
balance sheet at fair value (derivatives) 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.
January 31, 2009
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 470,039 $ 470,039 $ -
Securities 1,238,769 1,238,769 -
Securities purchased
under resale agreements 15,000 15,000 -
Loans(1) 9,069,187 9,066,945 (2,242)
Other assets(2) 83,885 83,885 -
Derivative related 12,852 12,852 -
Liabilities
Deposits(1) 9,537,951 9,630,012 92,061
Other liabilities(3) 242,895 242,895 -
Subordinated debentures 375,000 379,288 4,288
Derivative related 97 97 -
---------------------------------------------------------------------
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 -
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 12.
12. 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 1 to 3 3 Months Within 1
($ millions) Month Months to 1 Year Year
---------------------------------------------------------------------
January 31, 2009
Assets
Cash resources
and securities $ 56 $ 123 $ 359 $ 538
Loans 5,171 563 803 6,537
Other assets - - - -
Derivative
financial
instruments(1) 26 31 183 240
---------------------------------------------------------------------
Total 5,253 717 1,345 7,315
---------------------------------------------------------------------
Liabilities
and Equity
Deposits 3,438 635 2,197 6,270
Other liabilities 3 6 27 36
Debentures - - 60 60
Shareholders' equity - - - -
Derivative financial
instruments(1) 517 - - 517
---------------------------------------------------------------------
Total $ 3,958 $ 641 $ 2,284 $ 6,883
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 1,295 $ 76 $ (939) $ 432
---------------------------------------------------------------------
Cumulative Gap $ 1,295 $ 1,371 $ 432 $ 432
---------------------------------------------------------------------
Cumulative Gap
as a percentage
of total assets 11.3% 12.0% 3.8% 3.8%
---------------------------------------------------------------------
October 31, 2008
Assets $ 5,140 $ 784 $ 1,263 $ 7,187
Liabilities
and equity 4,072 889 1,992 6,953
---------------------------------------------------------------------
Interest rate
sensitive gap $ 1,068 $ (105) $ (729) $ 234
---------------------------------------------------------------------
Cumulative gap $ 1,068 $ 963 $ 234 $ 234
---------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 9.5% 8.6% 2.1% 2.1%
---------------------------------------------------------------------
January 31, 2008
Cumulative gap $ 496 $ 368 $ 366 $ 366
---------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 4.8% 3.5% 3.5% 3.5%
---------------------------------------------------------------------
Non-
1 Year to More than interest
($ millions) 5 Years 5 Years Sensitive Total
---------------------------------------------------------------------
January 31, 2009
Assets
Cash resources
and securities $ 1,068 $ 69 $ 49 $ 1,724
Loans 2,467 80 (91) 8,993
Other assets - - 190 190
Derivative
financial
instruments(1) 277 - - 517
---------------------------------------------------------------------
Total 3,812 149 148 11,424
---------------------------------------------------------------------
Liabilities
and Equity
Deposits 3,163 105 (15) 9,523
Other liabilities 36 8 224 304
Debentures 240 75 - 375
Shareholders' equity - - 705 705
Derivative financial
instruments(1) - - - 517
---------------------------------------------------------------------
Total $ 3,439 $ 188 $ 914 $ 11,424
---------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 373 $ (39) $ (766) $ -
---------------------------------------------------------------------
Cumulative Gap $ 805 $ 766 $ - $ -
---------------------------------------------------------------------
Cumulative Gap
as a percentage
of total assets 7.0% 6.7% -% -%
---------------------------------------------------------------------
October 31, 2008
Assets $ 3,749 $ 141 $ 120 $ 11,197
Liabilities
and equity 3,165 189 890 11,197
---------------------------------------------------------------------
Interest rate
sensitive gap $ 584 $ (48) $ (770) $ -
---------------------------------------------------------------------
Cumulative gap $ 818 $ 770 $ - $ -
---------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 7.3% 6.9% -% -%
---------------------------------------------------------------------
January 31, 2008
Cumulative gap $ 729 $ 705 $ - $ -
---------------------------------------------------------------------
Cumulative gap
as a percentage
of total assets 7.0% 6.8% -% -%
---------------------------------------------------------------------
(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 liability are shown below:
Floating
Rate and Total
Within 1 1 to 3 3 Months Within 1
January 31, 2009 Month Months to 1 Year Year
---------------------------------------------------------------------
Total assets 3.9% 3.1% 5.0% 4.0%
Total liabilities 1.3 2.5 3.9 2.3
---------------------------------------------------------------------
Interest rate
sensitive gap 2.6% 0.6% 1.1% 1.7%
---------------------------------------------------------------------
October 31, 2008
---------------------------------------------------------------------
Total assets 4.7% 4.2% 5.1% 4.8%
Total liabilities 2.2 3.6 4.0 2.9
---------------------------------------------------------------------
Interest rate
sensitive gap 2.5% 0.6% 1.1% 1.9%
---------------------------------------------------------------------
January 31, 2008
---------------------------------------------------------------------
Total assets 6.1% 4.9% 5.2% 5.8%
Total liabilities 3.5 4.3 4.2 3.8
---------------------------------------------------------------------
Interest rate
sensitive gap 2.6% 0.6% 1.0% 2.0%
---------------------------------------------------------------------
1 Year to More than
January 31, 2009 5 Years 5 Years Total
--------------------------------------------------------
Total assets 5.4% 6.4% 4.5%
Total liabilities 4.2 5.8 2.9
--------------------------------------------------------
Interest rate
sensitive gap 1.2% 0.6% 1.6%
--------------------------------------------------------
October 31, 2008
--------------------------------------------------------
Total assets 5.4% 5.8% 5.0%
Total liabilities 4.2 5.7 3.4
--------------------------------------------------------
Interest rate
sensitive gap 1.2% 0.1% 1.6%
--------------------------------------------------------
January 31, 2008
--------------------------------------------------------
Total assets 5.9% 5.7% 5.8%
Total liabilities 4.3 5.7 3.9
--------------------------------------------------------
Interest rate
sensitive gap 1.6% 0.0% 1.9%
--------------------------------------------------------
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 5.8% (October 31, 2008 - 4.8%)
and decrease other comprehensive income $21,444 (October 31, 2008 -
$19,982) net of tax, respectively over the following twelve months.
A one-percentage point decrease in all interest rates would decrease
net interest income by approximately 7.0% (October 31, 2008 - 4.8%)
and increase other comprehensive income $21,444 (October 31, 2008 -
$19,982) net of tax.
13. 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
--------------------------------------
Three months ended
--------------------------------------
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Net interest income (teb)(1) $ 53,101 $ 56,993 $ 55,642
Less teb adjustment 1,438 1,375 1,238
---------------------------------------------------------------------
Net interest income per
financial statements 51,663 55,618 54,404
Other income(2) 20,218 11,580 14,395
---------------------------------------------------------------------
Total revenues 71,881 67,198 68,799
Provision for credit losses 3,369 3,187 2,813
Non-interest expenses 33,910 32,913 29,504
Provision for income taxes 9,713 8,788 12,042
Non-controlling interest
in subsidiary 67 - -
---------------------------------------------------------------------
Net income $ 24,822 $ 22,310 $ 24,440
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 10,711 $ 9,902 $ 9,428
---------------------------------------------------------------------
Insurance
--------------------------------------
Three months ended
--------------------------------------
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Net interest income (teb)(1) $ 1,495 $ 1,629 $ 1,404
Less teb adjustment 148 165 99
---------------------------------------------------------------------
Net interest income per
financial statements 1,347 1,464 1,305
Other income(2) 2,133 3,857 3,228
---------------------------------------------------------------------
Total revenues 3,480 5,321 4,533
Provision for credit losses - - -
Non-interest expenses 2,495 2,446 2,320
Provision for income taxes 188 700 748
Non-controlling interest
in subsidiary - - -
---------------------------------------------------------------------
Net income $ 797 $ 2,175 $ 1,465
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 188 $ 191 $ 180
---------------------------------------------------------------------
Total
--------------------------------------
Three months ended
--------------------------------------
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Net interest income (teb)(1) $ 54,596 $ 58,622 $ 57,046
Less teb adjustment 1,586 1,540 1,337
---------------------------------------------------------------------
Net interest income per
financial statements 53,010 57,082 55,709
Other income 22,351 15,437 17,623
---------------------------------------------------------------------
Total revenues 75,361 72,519 73,332
Provision for credit losses 3,369 3,187 2,813
Non-interest expenses 36,405 35,359 31,824
Provision for income taxes 9,901 9,488 12,790
Non-controlling interest
in subsidiary 67 - -
---------------------------------------------------------------------
Net income $ 25,619 $ 24,485 $ 25,905
---------------------------------------------------------------------
Total average assets
($ millions)(3) $ 10,899 $ 10,093 $ 9,608
---------------------------------------------------------------------
(1) Taxable Equivalent Basis (teb) - Most financial institutions
analyse 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.
14. Capital Management
Capital for Canadian financial institutions is managed and reported
in accordance with a capital management framework specified by OSFI
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.
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
January 31 October 31 January 31
2009 2008 2008
---------------------------------------------------------------------
Capital
Tier 1 $ 787,859 $ 775,445 $ 718,600
Total 1,180,204 1,168,272 1,087,805
---------------------------------------------------------------------
Capital ratios
Tier 1 8.7% 8.9% 9.2%
Total 13.0 13.5 13.9
Assets to capital multiple 9.3 x 9.2 x 9.1 x
---------------------------------------------------------------------
During the three months ended January 31, 2009, the Bank complied
with all internal and external capital requirements.
15. Subsequent Event
On March 2, 2009, the Bank issued 8.0 million Preferred Units at
$25 per share, for total proceeds of $200 million. Of the total,
5.4 million Preferred Units were issued by way of a private placement
for total proceeds of $135 million, and 2.6 million were issued under
a public offering for total proceeds of $65 million. The Bank granted
the underwriters an option, exercisable in whole or in part up to
April 1, 2009, to purchase up to an additional 390 thousand Preferred
Units at the same offering price, for maximum additional proceeds of
$9.75 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
will be 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 of CWB. 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 of CWB.
The Series 3 Preferred Shares will not be redeemable prior to April
30, 2014. Subject to the provisions of the Bank Act, to the prior
consent of the Superintendent of OSFI and to 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, to the prior consent of
the Superintendent of OSFI and to 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.
16. Comparative Figures
Certain comparative figures have been reclassified to conform to the
current period's presentation.
17. 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 2300, 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
Dividends
Subsidiary Offices
Cash dividends paid to Canadian
Canadian Western Trust Company residents are "eligible dividends"
Suite 600, 750 Cambie Street as defined in the Income Tax Act.
Vancouver, BC V6B 0A2
Toll-free: 1-800-663-1124 Investor Relations
Fax: (604) 669-6069
Website: www.cwt.ca For further financial information
contact:
Canadian Direct Insurance Kirby Hill, CFA
Incorporated Assistant Vice President, Investor
Suite 600, 750 Cambie Street and Public Relations
Vancouver, BC V6B 0A2 Canadian Western Bank
Telephone: (604) 699-3678 Telephone: (780) 441-3770
Fax: (604) 699-3851 Toll-free: 1-800-836-1886
Website: www.canadiandirect.com Fax: (780) 423-8899
E-mail:
Valiant Trust Company InvestorRelations@cwbankgroup.com
Suite 310, 606 - 4th Street S.W.
Calgary, AB T2P 1T1 Online Investor Information
Toll-free: 1-866-313-1872
Fax: (403) 233-2857 Additional investor information
Website: www.valianttrust.com including supplemental financial
information and a corporate
Adroit Investment Management Ltd. presentation is available on
2020 Scotia Place CWB's website at www.cwbankgroup.com.
10060 Jasper Avenue
Edmonton, AB T5J 3R8 Quarterly Conference Call and Webcast
Telephone: (780) 429-3500
Fax: (780) 429-9680 CWB's quarterly conference call and
Website: live audio webcast will take place
www.adroitinvestments.ca on March 5, 2009 at 3:00 p.m. ET.
The webcast will be archived on the
Bank's website at www.cwbankgroup.com
for sixty days. A replay of the
conference call will be available
until March 18, 2009 by dialing
(416) 640-1917 or toll free
(877) 289-8525 and entering
passcode 21297397, followed by
the pound sign.
Stock Exchange Listings
The Toronto Stock Exchange
Common Shares: CWB
Series 3 Preferred Shares: CWB.PR.A
Common Share Purchase Warrants: CWB.WT
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
